Foreign Direct Investment (FDI) in Bangladesh
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Transcript of Foreign Direct Investment (FDI) in Bangladesh
An Interesting Topic
(Foreign Direct Investment)
Example: Telenor Group invest in Bangladesh as
Grameenphone Ltd and started its operations on March
1997.
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Bangladeshi Labor migrant
USD 9774.09 Million (2015-2016)
More than 7 million
Nationals
Representing 12% of
the GDP of the year
67% of all labor work in one of the Gulf Cooperation
Council (GCC). countries: Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia
or UAE (ILO).
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Economies of scale are the cost advantages that enterprises obtain, by decreasing cost per unit of output with increasing scale as fixed costs are spread out over more units of output.
Example: The printer quotes a price of $5,000 for 500 books, and $10,000 for 2,500 copies. While 500 books will cost you $10 per book, 2,500 will only cost you $4 per book.
Example: Experience Clothing Company Ltd. Of UK invests in Bangladesh garments sector for cheaper labor cost of production.
Knitting & other Textile producer of Italy A-One (BD) Ltd. invests in Bangladesh Textile industries for lower production cost.
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Marico Ltd. started its operation in Bangladesh as Marico Bangladesh Ltd. in 2000 to produce different types of oil using the cheaper raw materials (coconut).
Maruti-Suzuki “A Japanese company” started its operation in India in 1981 in that contract that the Japanese owner control the business for a certain period and then it sold its substantial portion of share to the Indian owner as a result the Indian owner would get the control. In 2007, the Indian owner got the whole ownership of Suzuki company.
For Example: Wal-Mart has not only diversified internationally but has spread its business into many emerging markets as well. Because foreign expansion diversifies Wal-Mart's sources of revenue and thus reduces its reliance on the U.S. economy
Between 1997-1998, A currency devaluation occurred in Thailand and the Baht per dollar was jumped 28 to 48. American businessman take advantages from this opportunity and they bought land and establish plant
there. When the Baht came
into the flexible situation
then the American Business
men commenced their
operation.
Various inputs-including natural resources
Technologies,
Skilled personnel,
Physical infrastructures and materials
Market size and per capita income
Size of GNP and projected rate of growth
Access to regional and global markets
Country specific customer preferences
Structure of the markets
AN MNC can be motivated to FDI by analysing the geographic factors including-
The proximity of size to export markets
Availability of local raw materials
Availability of power, water and gas.
Form and stability of Government
attitude toward private and foreign investment by Government
customers and competition
Degree of anti-foreign discrimination
MNC companies always try to invest those countries where tax advantages are available
Tax rate trends
Joint tax treaties with home country and others
Availability of tariff protections
Foreign Direct Investments open a wide spectrum of opportunities in the trading of goods and services both in terms of import and export production.
Integration into global economy
Raising the Level of Investment
Trade
Example: South Korea's Samsung Electronics Co Ltd has applied for a license to invest $3 billion in building a second smartphone factory in northern Vietnam. This project will gear the wheel of economy in Vietnam both in terms of export and import of production.
Technology diffusion and knowledge transfer:
Developing countries by inviting FDI can introduce world-class technology and technical expertise and processes to their existing working process.
For example: In February 2011, Bangladesh reached an agreement with Russia to build the 2,000 megawatt (MW) Ruppur Nuclear Power Plant with two reactors, each of which will generate 1,200 MW of power to meet electricity shortages.
Increased competition
Overall development of a country is not possible without creating employment for unemployed citizens. In this regard FDI is working as a great helping hand of that particular host country’s which cordially invites FDI.
Despite having lot of contributions in the economic growth of a country, FDI is not free from limitations. The Barriers of FDI are..
Fall in domestic savings
Less corporate tax
Dualistic socio-economic structure
Control over Political Decision
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Independent variables:
Market Attractivness
Trade Openness
Environment Risk
Energy Price
Dependable Variable:
FDI
Market attractiveness, openness to trade and energy prices have a significant and positive association with FDI flows
High FDI flows are associated with low levels of institutional risk, as measured by a country‘s ratings for Bureaucracy Quality, Democratic Accountability and Law and Order.
High levels of several Economic and Financial risks are associated with high FDI flows like Budget and Trade Balance
Countries that earn large reserves of foreign currency from oil and gas revenues have found it not desirable to open up their markets to foreign investors
Countries that earn large reserves of foreign currency from oil and gas revenues have found it not desirable to open up their markets to foreign investors
For Example: Generally high level of restrictions to foreign ownership in OPEC countries compared to non-OPEC
fdi = α0 + α1gro + α2inf + α3 logcost + α4 logtel + α5 op + α6 risk + α7 tax + ε
fdi = FDI net inflows as a percentage of Gross Domestic Product (GDP)
inf = the rate of inflation measured by annual percentage change of consumer prices
Gro = growth rate of per capita GDP
Logtel = telephone main lines per 1,000 people
Logcost = labour cost per worker
Op = the degree of openness
FDI inflows are positively associated with a country‘s GDP per capita.
FDI inflows are positively associated with a country‘s manufacturing exports
FDI inflows in are negatively associated with a country‘s level of environmental risk
Political risk Economic risk Financial risk
Hymer (1976) explained the theories of FDI by comparing the difference between foreign direct investment and portfolio investment
Hymer also analyzed that there are two reasons why investors seek control
1. To make sure their investment is safe
2. To eliminate competition in foreign countries and other countries.
Hymer stated that multinational companies are motivated to invest in foreign countries due to certain advantages .
For example: Getting factors of production at a lower cost
Where market imperfection exists multinational companies prefer to engage in direct investments
Raymond Vernon (1966) product life cycle theory has analyzed four production stages beginning with invention of new product.
Vernon tried to understand the shift of
international trade and international
investment.
• Stage 1- The enterprises are more focused on the domestic market
• Stage 2- When the product matures, enterprises start
exporting to developed countries. • Stage 3- When the product is standardized, the
enterprises would think less developed countries could be good production place
• Stage 4- The home countries will be an importer since
the production decreases
The Uppsala model is a theory that explains how firms gradually intensify their activities in foreign markets • Step i- gain experience from the domestic market before
they move to foreign markets • Step ii- start their foreign operations from culturally and/or
geographically close countries and move gradually to culturally and geographically more distant countries
• Step iii start their foreign operations by using traditional
exports and gradually move to using more intensive and demanding operation modes
0
50
100
150
200
250
300 273.55
224.21
135.21 131.1
120.3 107.01
97.32 93.12
82.42 77.54 69.56 55.25 49.45
40.32
,237.92
FDI I
nfl
ow
s (N
et)
(In
mill
ion
US$
)
Country
FDI:
BANGLADESH
PERSPECTIVE
Rapidly developing market-based economy
According to IMF, Bangladesh ranked as the
44th largest economy in the world in 2011.
But still it’s a developing countries with the
numerous potential of foreign investment
Exports of textiles and garments are
the largest source of foreign exchange
earnings
GDP total: $223.941b(2015-2016)
GDP per capita: $1466
(nominal: 2015-16)
Total exports: $33.50b
(2015-16)
Total imports: $40.69b
(2015-16)
Currency: BDT (1 BDT= $0.0128205) (avg 2009-10
Foreign reserves:
$27 billion(2016)
GDP growth rate (%): 7.1%
(2015-16 est.)
Total FDI:$1833m
(2015)
596.46 644.14
726.23
557.95
255.36 248.23
119.31 68.01
341.1 395.91
606.92
489.94
0
100
200
300
400
500
600
700
800
Jul-Sep 2014 Apr-Jun 2015 Jan-Mar 2015 Apr-Jun 2015
Gross inflow Disinvestment Net inflow
period
FDI I
nfl
ow
s (i
n M
illio
n U
S$)
USD 2524.78m USD
690.91m
USD 1833.87m
Gross Inflow Disinvestment Net Inflow
500
700
900
1100
1300
1500
1700
1900
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
913.02
779.04
1194.88
1730.63
1480.34
1833.87
FDI I
nfl
ow
s (N
et)
(In
mill
ion
US$
)
Period
357.8, 33%
595.65, 54%
143.41, 13%
Equity Capital Reinvested earnings Intra-company Loans
0
200
400
600
800
1000
1200
Jul-Dec 2013 Jan-Jun 2014 Jul-Dec 2014 Jan-Jun 2015
666.07
814.27 737.01
1096.86
521.94 552.06 592.81
877.52
144.13
262.21
144.2
219.34
Total Non-EPZ EPZ
FDI I
nfl
ow
s (N
et)
(in
mill
ion
US$
)
389.58, 21%
197.22, 11%
80.44, 4%
29.22, 2%
351.62, 19%
96.59, 5%
38.7, 2%
199.54, 11%
83.36, 5% 36.79, 2%
330.81, 18%
Banking Telecommunication Power
Agriculture & Fishing Textiles & Wearing Food
Fertilizer Gas & Petroleum Trading
Leather & Leather Products Others
Strategic Location of Bangladesh
Youth & Ambition
Bangladesh’s Export
Competitiveness
Competitive Cost Base
Fiscal & Non-Fiscal Incentives
China and India between them have vast and increasingly prosperous populations, which
are projected to grow to three billion by 2050. Bangladesh is well situated in every sense to
take advantage of this opportunity.
With improving education, technology and economic growth, Bangladesh’s own market of
146.6 m people is becoming increasingly attractive to business and foreign investors.
Unlike older industrialized societies with growing legions
of ageing dependents, Bangladesh has a very youthful
demographic.
66% of the population are economically active (15 years
and over).
The country is young too, 40 years old.
English Widely Spoken - The national language is Bengali or
‘Bangla’. Yet our second language, English, is widely
spoken, understood and written.
Manufacturing output has seen steady growth, recently
in double figures. Bangladesh provides significant benefits
to exporters.
Bangladesh offers a most liberal FDI regime in South Asia, with no prior approval requirements or limits on equity participation and repatriation of profits and
income in most sectors.
Bangladesh enjoys tariff-free access to the EU, Canada, Australia and Japan. Bangladesh is the top manufactured products exporter to the least developed countries as well as to Europe, with more than 50%
market share
BD has lots of well-educated, skilled and
energetic workers. And the wages and salaries
are low
Dhaka's skilled labor cost base is still less than
the other major cities.
Dhaka's management grades are 2-3 times less
than in Singapore,
Shanghai, Bangkok.
Industrial estate rent in Dhaka is cost effective than Shanghai, Jakarta, Bangkok
Automation of investor
registration processes at BOI
Automation of export permit
issuance at DEPZ
Automation of Company
Registration with RJSC&F
Cash subsidy claim process
simplification of Bangladesh Bank
BOI introduced automated
registration system for both local &
foreign investors in 2010.
Entire registration process can be
completed online
No need to visit BOI office or an
intermediary
Avg time to register fell from 42 days to
12 days!
Cost to register fell by 82%
18% of industrial projects are now being registered
within 10 days only!
BEPZA issued automated export
permit issuance process at the DEPZ in
June 2010.
Average time to issue an export permit has
reduced by 33 percent!
No of interfaces between companies and DEPZ authority has reduced to 0 from 4!
Introduced automated business registration in
March 2009.
The entire registration process is now online.
The number of visits to RJSC&F has reduced
by 40%
26% reduction in time required for
registration (23 days in 2009 to 17 days in
2012)
98% reduction in time required to obtain
name clearance (9 days in 2009 to 1.58 hours in
2012)
Complicated Bureaucracy
Political Unrest Corruption
High Inefficiency Insufficient
Power Supply
Inconsistency in Policy
Implementation
Control of Red Tape
Improvement of Law and
Order
Infrastructural Development
Efficiency in Port services
• Citi Investment Research & Analysis
stated that Bangladesh, alongside
China, Egypt, India, Indonesia, Iraq,
Mongolia, Nigeria, Philippines, Sri
Lanka and Vietnam, is having the
most promising (per capita) growth
prospects.
Goldman Sachs branded Bangladesh
in its 'Next 11' list after the BRIC
nations.
JPMorgan Chase commented
that Bangladesh ranks fourth
in growth of economically
active population.
A 2012 HSBC report titled The
World in 2050, listed
Bangladesh as one of the top 7
countries expected to deliver
the fastest growth en route to
2050.
• Morgan Stanley announced that Bangladesh
is at the very early stages of an investment
boom.
1. International Financial Management by Jeff Madura - Florida Atlantic University, 9th edition.
2. International Business By Oded Shenkar, Yadong Luo, Tailan Chi
3. Foreign Direct Investment by edited by Kenneth A. Froot.
4. Foreign Direct Investment by Harrison G. Blaine.
5. Foreign Direct Investment in Developing Countries: A Theoretical Evaluation By Sarbajit Chaudhuri, Ujjaini Mukhopadhyay
1. FDI Survey Report January-June, 2015 By Statistics Department Bangladesh Bank.
2. World Investment Report-2015 by United Nations Conference on Trade and Development(UNCTAD)
3. www.investopedia.com/Foreign Direct Investment - FDI
4. en.wikipedia.org/wiki/Foreign_direct_investment
5. “A study of foreign direct investment and economic growth in bangladesh” by Md. mamun howlader
6. “Foreign direct investment in bangladesh, prospects and challenges and its impact on economy” by Afsana Rahman.
7. “Impact of Foreign Direct Investment on Bangladesh’s Balance of Payments: Some Policy Implications” by Muhammad Amir Hossain.
8.”Foreign Direct Investment Theories: An Overview of the Main FDI Theories” by Vintila Denisia
9. Theories of international trade, foreign direct
investment and firm internationalization: a critique by Robert E. Morgan and Constantine S. Katsikeas
1. What is FDI? What are the primary objectives of Foreign direct investment?
2. What are the revenue related objectives and cost related objectives of FDI? Give proper example with reference.
3. What are the others motives that is related to FDI?
4. Why FDI is important in the developing country like Bangladesh? Are there any disadvantage? Explain?
5. What are the major types of FDI and how FDI can be achieved ? Give proper Example.
6. How FDI can be determined and what are the factors that influence the factors of FDI? How can we calculate FDI?
7. What are the theories of FDI? Explain Hymer FDI Theory ?
8. What is the condition of world FDI and what are the major sources that influence FDI?
9. What is the present economic condition of Bangladesh? How FDI develop the overall economy of Bangladesh?
10. Why foreign investor should invest in Bangladesh and what factors influence the investment decision of foreign Investors?
11. What are the limitation of FDI, Explain? Do you have any recommendation to attract foreign investors?
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