Foreign Direct Investment (fdi)

Contribution of Foreign Direct Investment in Bangladesh: An analysis Khan Sarfaraz Ali** Abstract FDI (Foreign Direct Investment) is a well-recognized and focused issue in the discussion of global economy. As a fast developing country with abundant natural resources and peace seeking population, Bangladesh has already drawn the attention of the investment world. It has the potential to be an entry port to the South Asian region. The geographic, political and economic location of the country indicates its history of being a nation of investors, traders and suppliers. This article is an endeavor to illustrate the role and contribution of FDI in Bangladesh. Introduction Bangladesh is one of the least developed and most densely populated countries with 137 million people in the world, with more than 941 people per sq km. Only 15% of the people live in urban areas; 46.6% of the population is under 15, and 75% of women have their first child by the age of 17. The country is divided into 64 districts, 119 municipalities, 490 thanas (cities) and 59,990 villages1. Agriculture is the single largest producing sector of economy comprises about 30% of the country's GDP and employing around 60% of the total labor force (BBS: 2005). Bangladesh is a growing economy with 6.7% GDP growth rate, which is now in the process of transition from a predominantly agrarian economy to industrial and service economy. The country is continuously pursuing a liberalized economic policy and following a pace of free market mechanism. This has fostered its economic growth, attracted Foreign Direct Investment (FDI) flows remarkably and expanded its export-base. In 2005 substantial improvement has been achieved. Foreign direct investment (net) in FY 2004-05 rose up to US$ 800 million. By this year, gross investment in the country was 24.4%, export growth was 13.83% and the trade-GDP ratio increased up to 36.33%. A remarkable contribution of different sectors is visible during this period. Contribution of manufacturing sector and agriculture sector to GDP were respectively 17.05% and 16.912. This figure is really encouraging in the history of Bangladesh. ** Associate Management Counselor, Bangladesh Institute of Management (BIM)

[email protected] / 01817528067

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Statistical Pocket Book 2005. Bangladesh Bureau of Statistics Bangladesh Economic Survey 2006. Bangladesh Bank

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2.0 Factors behind Foreign Investment in Bangladesh Over the past four decades, the number of least developed countries have increased, but their share in the world export has declined over the past 20 years and hit the rock bottom of a mere 0.4% in nineties and increased slightly to 0.6 per cent at the beginning of this millennium. But posting an average annual growth of over 5 per cent during the 1990s Bangladesh has been an exception in this regard. 2.1 Foreign direct investment has a positive impact on the productivity of local firms. A number of significant policy reforms like: Industrial Policy, PRSP (Poverty Reduction Strategy Paper), Millennium Development Goal (MDG) are designed to create a more open and competitive climate for foreign investment. Recently foreign investors are being motivated to invest in the RMG (ready made garments) and agriculture sectors with a view to turn the people of the country into resources and to mobilize resources. The RMG sector alone has been able to provide employment for more than two million people, of them 80% is female. The Bangladesh garment industry is the largest employer of women in the formal manufacturing sector. Women from various class backgrounds are employed in the RMG sector because they can be molded into compliant workers. Fauzia Erfan Ahmed raises the idea that women are recruited to fill certain positions because of stereotypes that women are more docile, easier to control, and thus better suited to do repetitive manufacturing work, so that gendered divisions of labor rise out of gender biases in society3. The growth of RMG and agriculture sector has been contributing a lot in the national economy. At present foreign investors are enjoying the following advantages: 

Tax holiday from 5 years to 7 years; 

Special incentives like a quota of 10 % fixed for non-resident Bangladeshis

in primary public shares; 

Tax exemption on the interest on foreign loans under certain conditions;



Avoidance of double taxation in case of foreign investors on the basis of

bilateral agreements;

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The Rise of the Bangladesh Garment Industry: Globalization, Women Workers, and Voice by Ahmed, Fauzia Erfan. NWSA Journal - Volume 16, Number 2, Summer 2004, pp. 34-45

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

Exemption of income tax up to 3 years for the foreign technicians employed

in industries specified in the relevant schedule of income tax ordinance; 

Tax exemption on income of the private sector power generation company

for 15 years from the date of commercial production; 

Facilities for repatriation of invested capital, profit and dividend;



Six months' multiple entry visa for the foreign investors;



Different type of FDI friendly Laws and Act.

2.2 Bangladesh is a FDI friendly country for its different development indicators. According to UNDP, the country has achieved a significant progress in different sectors during the last decades. Life expectancy at birth has reached up to 63.3%. Adult literacy rate has increased to 41% where combined primary, secondary and tertiary gross enrollment ratio is 57.1%. Women empowerment and gender development status is also noteworthy. Gender related development index (GDI) of the country has reached up to 98.8%4. People working in different service sectors are well educated and can communicate in foreign languages especially in English that is an advantage for the foreign investors. In order to serve the foreign investors properly, the Government has appointed skilled and efficient officers in vital positions. As a part of sound communication, infrastructural development in transportation already covered the whole country. Enormous progress in information and technology turned the country into a connecting state. Political stability of the country already ensured the investors to involve in business activities. All political parties are morally committed to co-operate the foreign investors for the greater interest of the country. Both the public and private sectors are committed to good governance that ensures transparency and accountability and ultimately assisting to develop appropriate climate for foreign direct investment. 3.0 Contribution of FDI in National Trade and Development Trade has gradually been liberalized over the past five years, although import duties and supplemental taxes remain high and constitute the largest single sources of government revenue. According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2006, total inward foreign direct investment to 4

UNDP. Human Development Report 2006.

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Bangladesh was $692 million in 2005, a 50% increase over figures for 2004. Outward foreign direct investment flows were negligible. UNCTAD figures show that the stock of inward direct investment grew 62% from 2000 to 2005. UNCTAD reports the following annual FDI inflows (in millions) for Bangladesh: 1990-2000 $190

2002 $328

2003 $350

2004 $460

2005 $692

According to UNCTAD, the stock of inward FDI was $2,162 million in 2000, $3,098 million in 2004 and $3,508 million in 20055. Figures from the Bangladesh Bank (the central bank in Bangladesh) show total net FDI flows (in millions) for the fiscal years 2002-2005 (ending June 30) as follows6: 2002 $391

2003 $376

2004 $385

2005 $776

The trend of foreign direct investment is very encouraging. The government is committed and has been pursuing policies for supporting and encouraging foreign investment in different sector. Recently FDI is playing a vital role to enhance national trade as well as leading towards development. In financial year (FY) 2004-05, its gross domestic product (GDP) was worth Taka 3684.76 billion at current market price (app. US$ 52.64 billion), recording an increase from Taka 2,370.86 billion in FY 1999/2000 (app. US$ 47.12 billion). During the last decade, GDP growth remained steady and fairly robust at an average annual rate of 5.0%, although there was a decline in GDP growth in FY 2001/02 mainly due to worldwide recession. This growth was 5.38% in 2004-05, which was mainly attributed to the industry and services sector. During the period per capita GDP increased steadily and stood at US$ 445 in FY 2004-05. The number of population below the poverty line had declined from 46.2 percent in 1999 to 40.9 percent 2004. The incidence of hardcore poverty also showed a declining trend during the same period. At present, the country has been striving hard to increase its growth over 6 percent to achieve the millennium development goals (MDGs) by 2015.

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World Investment Report 2006. UNCTAD Bangladesh Economic Review 2005. Bangladesh Bank

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3.1 During the last five years foreign direct investment continued to increase. Increase in shares of domestic savings and total investment in GDP is mainly because of increased participation of foreign investors.

A more recent shift of FDI has been towards

services. Most major economies in South Asia experienced significant increases in FDI inflows: flows to Bangladesh, India, Pakistan and Sri Lanka rose by 50%, 21%, 95% and 17% respectively7. The presence of these global changes is also evident in Bangladesh economy and has been driven in particular by the opening up of service industries to FDI. Owing to comparative advantage and an accommodative policy regime, a large chunk of FDI has gone into the ready-made garment (RMG) sector for establishing backward linkage industries, telecommunication, power, oil and gas exploration sector. In fact, there is substantial change in the pattern of FDI inflow in the new millennium and the foreign investors are looking at sectors like telecom, banks, power and energy, where profit growth is likely to be high, which may alter the sectoral composition in the days to come. Following table shows sector wise FDI inflow in Bangladesh8: Table 1: Sector-wise FDI inflow (1995-2005 in million US $): Sector Agriculture & Fishing Power, Gas & Petroleum Manufacturing Industry Trade & Commerce Transport & Telecom Services Total FDI in Bangladesh

2001 1.1 192.4 132.2 324.6 27.6 0.9 28.8 354.5

2002 1.6 57.9 142.9 200.8 63.7 48.5 125.9 328.3

2003 4.1 88.1 165.2 253.3 44 45.9 92.8 350.2

2004 1.7 124.1 139.4 263.5 66.6 127.5 195.2 460.4

2005 2.3 208.3 219.3 427.6 130.5 281.9 415.4 845.0

As a developing country, Bangladesh needs FDI for its ongoing development process. Since independence, Bangladesh is trying to be a suitable location for FDI. Special zones have been set up and lucrative incentive packages have been provided to attract FDI. However, the total inflow of FDI has been increasing over the years. 4.0 Conclusion and Recommendation

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Ibid. UNCTAD Bangladesh Bank. 2006

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Foreign Direct Investment can undoubtedly play an important role in the trade and development of Bangladesh in terms of capital formation, output growth, technological progress, exports and employment. The share of FDI in GDP, however, indicates that the potentials are far from being realized in the Bangladesh experience thus far. Nevertheless, concerns remain about the possible effects of FDI, including the question of market power, technological dependence, capital flight and profit outflow. The limited evidence gathered above tends to support some of these apprehensions. On a positive note, service sector growth appears well correlated with FDI flow to this sector. Further, this has a linkage effect to the rest of the economy. In this context few recommendations are suggested in brief: 

Tax Holiday may be guaranteed up to 10 years



Exemption of income tax up to 5 years for the foreign technicians instead of 3 years 

1 year multiple entry visa for the foreign investors



Simplifying the administrative procedures



Ensuring one stop service to the foreign investors



Proper application of FDI related Act and Laws



Encourage the practice of good governance in every step.

Above all, considering the suggestions and advice of foreign investors and domestic scholars may be an advance stair to accelerate foreign direct investment in Bangladesh. 4.1 References: 1.

Ahmed, Fauzia Erfan. The Rise of the Bangladesh Garment Industry:

Globalization, Women Workers, and Voice. NWSA Journal - Volume 16, Number 2, Summer 2004, pp. 34-45. 2.

BBS (Bangladesh Bureau of Statistics): Household Expenditure Survey

2004-05. Dhaka. 2006. 3.

Bangladesh Bank. Bangladesh Economic Review. 2005. Dhaka.

4.

Bangladesh Bank. Economic Survey. 2006. Dhaka.

5.

GoB (Government of Bangladesh). Bangladesh: A National Strategy for

Economic Growth and Poverty Reduction. Ministry of Finance. 2002. Dhaka. 6.

Statistics Department. Bangladesh Bank. 2006.

7.

The Daily Star, September 30, 2005. Vol: 5, No. 479. Dhaka. Bangladesh.

8.

Trade Organization.org/english/res_e/booksp_e/special_study_6_e.pdf 6

9.

UNCTAD. FDI in Least Developed Countries at a Glance 2005/2006.

10.

Vylder, S.D. (2007): The Least Developed Countries and World Trade

(Second Edition). Sida Studies no. 19. 11.

World Bank (2005). "Global Agricultural Trade and the Developing

Countries" 12.

World Trade Organization (2001). Market Access: Unfinished Business,

Special Studies. 13.

United Nations Conference on Trade and Development (UNCTAD). World

Investment Report 2006. 14.

UNCTAD. World Investment Report 2006: FDI from Developing and

Transition Economies: Implications for Development. 15.

UNCTAD. World Investment Report 2004: The Shift towards Services.

16.

http://links.jstor.org/sici?

sici=00130133(199601)106%3A434%3C92%3AFDIAGI%3E2.0.CO%3B2-S 17.

http://www.wto.org/english/tratop_e/tpr_e/tp269_e.htm

18.

http://www.state.gov/e/eeb/ifd/2007/80678.htm -------

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