Foreign Direct Investment

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                                Foreign Direct Investment

Foreign Direct Investment (FDI) the acquisition of managerial control by a citizen or
corporation of a home nation over a corporation of some other host nation. Corporations that
widely engage in FDI are called multinational companies, multinational enterprises, or
transnational corporations. FDI traditionally implies export of real capital from home to the host
nation, but even when economic investment results from FDI, capital may not be transferred
from the home nation to the host one. Rather, multinational corporation may acquire/utilise real
capital from local (or a third-nation) sources. On the supply side, FDI in Bangladesh originated
in imperfections in its   FOREIGN EXCHANGE MARKET      as well as in its financial market and its
market for technology. Also the 'eclectic theory' of multinational firms applies in its case as FDI
is induced here by imperfections in the market of real goods and factors of production. On the
demand side, however, Bangladesh invites FDI for industrial growth, in particular welcoming
establishment of manufacturing firms and service sector enterprises that would sell their products
within the country and also export outside it.

Records of the BOARD OF INVESTMENT (BOI), the only available source of information on FDI in
Bangladesh, suggest that FDI flows in the country are not very encouraging. The          GARMENT

INDUSTRY   has attracted the highest number of joint ventures and hundred per cent foreign
ownership enterprises. Consumer products top the list based on volume of invested capital.     TEA

is the oldest sector to involve FDI while the Karnafuli Fertiliser Company (KAFCO) is the
largest individual FDI unit in the country. The total number of FDI units established during the
period between 1947 - 1971 was only 22, and was dominated largely by units in sectors such as
drugs and pharmaceuticals, and electric goods.

Bangladesh initially adopted a policy of nationalisation of all large and medium industries.
Consequently, there was no new inflow of FDI in the country until 1977. Subsequent
governments experimented with various industrial policies, but because of very uncertain
political situation in the country, the FDI flows remained negligible until 1993. Only 220 FDI
units were registered in Bangladesh between 1977 and 1993, but subsequently, FDI has
experienced a fairly high annual growth. The number of FDI units registered in the country

during the period from July 1996 to May 1999 was 425. The expected volume of total
investments in these enterprises accounted for Tk 288.8 billion. These created employment for
more than 94,000 persons. This expansion is attributable largely to the relative stability of
economic policies and the establishment of an improved political, social and economic
environment. Sectors that now attract FDI are readymade garments,           TEXTILES   and fabrics,
chemicals,   PAPER   and paper products, equipment and spares,       PRINTING,   packaging, plastic
products, metal industries, food processing, electrical goods, pharmaceuticals etc. Of late, oil and
hospitals and clinics have become sectors favoured by many foreign investors. The choice of
FDI in initial years was limited in low investment, quick yield projects, while recent years show
some diversification in lines of high-tech, capital intensive projects as well as of preferential
distribution within the traditional sectors and sub-sectors. The share of            AGRICULTURE,

construction, storage and communication, however, remains historically low and account for less
than 3% of the total FDI.

Significant changes have taken place over time in the geographic origin of FDI flows in
Bangladesh. Source leaders during the pre-independence period were developed market
economies such as UK, North America and Japan. Hong Kong, Thailand, Singapore and India
started to participate in FDI in Bangladesh in the 1970s while Asian countries such as China,
Malaysia, Pakistan and South Korea began to invest in a relatively big scale in the 1990s.
Nevertheless, industrially developed countries still dominate in FDI in Bangladesh, and other
than UK, USA and Japan, notable sources of FDI in the country are Netherlands, Germany and

FDI in Bangladesh consists primarily of three elements: cash capital and capital equipment
brought in and reinvested earnings. These components have fluctuated considerably in the last
two decades. In the beginning of this reference period, these three components were in the ratio
of 26:4:70, which, towards the end, changed to 8:2:90. The difference implies that the net
transfer of resources into Bangladesh from abroad is fairly negligible, and that FDI contributes
very little in terms of transfer of 'hardware' technology.

FDI apparently does not have significant long-term impact on the technological base of the
country because of concentration of FDI in relatively low technology industries. Even in the case
of industries where technological diffusion is possible, such as pharmaceuticals, operations have
been confined mainly to bottling and packaging; only rarely has manufacturing come into the
scene. A shift of FDI related pharmaceutical industries from production of drugs to that of
cosmetics, toiletries,   PESTICIDEs, INSECTICIDEs   etc. allowed some transfer of technology through
licensing, introduction of new processes, and training of local production and management staff.
In other FDI related sectors such as the electrical and engineering industries, investments have
been predominantly in imports of components/parts for assembling rather than in real
manufacturing. External aid and donor agencies and foreign experts of local agents of
multinational companies traditionally play a significant role in decisions on choice of

The investment plans in Bangladesh do not have appropriate built-in mechanisms for progressive
development of technology capability in terms of research, engineering design, and local
manufacture of the various components of plants, machinery and infrastructure.

Bangladesh invites FDI in joint ventures as well as in arrangements like technical licensing,
counter trade, co-production agreements, management agreements, marketing assistance, turnkey
operations, and combined turnkey and management contracts. Incidences of technical
collaboration are in evidence in sectors like cigarette, chemical and pharmaceuticals (with UK
firms), electric goods (with South Korean firms), standard paints (with Thai firms) etc.
Marketing collaboration has occurred with sterling zone companies in the tea industry and in
readymade garment industry. Licensing agreement is predominant in chemicals and
pharmaceuticals sectors. A number of indigenous firms produce TNC brand products under
license but without equity participation.

FDI in Bangladesh makes a direct contribution in terms of additions to the investible funds and
mobilisation of local resources for investments in manufacturing, trade and the services sectors.
New investments, including FDI, generate additional employment, train local executives and
workers, make thrusts into the export market, introduce improved technologies, open up new

horizon for R&D expenditures, and above all, create new sources of tax revenue for the
government. The contribution of FDI in employment generation in the country however, is quite
insignificant. FDI provides employment to about 1.5% of the total industrial employment and
less than 0.2% of the total working POPULATION of the country.

Bangladesh is a signatory to the Multilateral Investment Guarantee Agency (MIGA) and the
Overseas Private Investment Corporation (OPIC). This provides a guarantee to foreign investors
against loss caused by non-commercial risks, the risks of currency transfer, war and civil
disturbances. The foreign Private Investment (Promotion and Protection) Act 1980 ensures legal
protection to FDI in the country against nationalisation and expropriation and guarantees
repatriation of capital and dividend. Also, the various types of    INSURANCE    facilities offered by
nationalised and private companies seem to provide adequate facilities for coverage of
operational risks.

The industrial policy of the government provides extensive incentives and facilities to attract FDI
in Bangladesh. These include tax holidays, concession in import duty on machinery, repatriation
of profits dividends, invested capital and capital gain, and salaries of foreign personnel and
exemption of tax on these incomes, exemption of export oriented industries from paying local
taxes, up to 90% financing of the L/C value of export products. The government has liberalised
the trade regime and significantly reduced non-tariff restrictions. Foreign investors in
Bangladesh have access to domestic      CAPITAL MARKETs     for working capital in the form of loans
from commercial banks and development financial institutions. They also have access to the
services of the country's   STOCK EXCHANGEs.    Export-oriented industries of the thrust sector (toys,
luggage and fashion articles, leather goods, diamond cutting and polishing, stationery goods,
SILK   cloth, gift items, cut and artificial flowers and orchid, vegetable processing, and engineering
consultancy services) are provided cash incentives, venture capital, and other facilities. The
establishment of     EXPORT PROCESSING ZONEs     (EPZ) proved to be an effective step in attracting
FDI in Bangladesh and government permission to allow creation of private EPZs in the country
has been a welcome decision.

The cultural environment in Bangladesh has a number of elements that can be identified as
favourable for FDI. The population has a high degree of ethnic and communal harmony.
Conservatism on religious grounds is not extreme and foreigners are exempted from restrictions
on this count. Major political parties of the country have almost identical economic programmes.
All of these favour liberalisation, which will enable the country to fit in the globalisation process.

Despite the FDI friendly policies of the government and a culture of hospitality to foreigners,
FDI records in the country in terms of the number of projects implemented as compared to those
officially registered is frustrating. Of the 365 FDI projects registered during 1996 - 1998, only 72
went into production in end 1999 and 27 were in process of implementation, while the remaining
266 languished only as the file-cases.

Problems that have restricted FDI potentials in the country include excessive bureaucratic
interference, alleged irregularities in processing papers, lack of commitment on the part of local
investors, inordinate delays in selecting projects for feasibility studies, and frequent changes in
policies on import duties for raw materials, machinery and equipment. Overlapping
administrative procedures and absence of a transparent system of formalities often confuse not
only investors proposing projects, but also staff and personnel assigned for discharging
procedural responsibilities. Frequent transfers of top and mid level officials in various ministries,
directorates and departments affect continuity and prevent timely implementation of strategic,
procedural, and even routine duties. Many foreign companies feel disturbed and ultimately are
discouraged by disruptions in the production processes in the country because of frequent power
failures, poor infrastructure support, and labour and political unrest. An additional problem is the
lack of professional personnel, i.e., the technical, managerial and innovative skills in the country
needed to efficiently handle entrepreneurial function including risk taking, planning and
coordination and control.

The standardised set of procedures required to be followed for FDI in a new venture in
Bangladesh starts with meeting of the foreign investor with BOI member to communicate the
investment proposal and submission of an application for registration. The BOI issues the
registration letter after scrutiny and collection of clearance from the Department of Environment.

The company is then asked to submit a Memo and Articles of Association for incorporation with
the   SECURITIES AND EXCHANGE COMMISSION       and registration with Registrar of the Joint Stock
Companies and also with the Chief Inspector of Factories and Establishments. Upon completion
of registration formalities, the company can purchase and acquire land, construct factory and
office premises, open letter of credit in any commercial bank for import of machinery and
equipment and release of consignment at customs point. This apparently easy looking process
however, is often difficult to put into practice. Foreign investors often find problems in
infrastructure, law and order, and enforcement of contracts.

Bangladesh has an advantage in labour costs, which can be converted into an exportable product,
but the advantage has many difficulties. The factories in the country have to deal with constraints
beyond their control, such as, power failures, poor communications or increased transaction costs
and cumbersome procedures in customs in many government offices. The political instability,
including frequent hartals, etc, are real hazarts. However, the situation is expected to improve if
the political commitment of the government to promote and protect FDI in the country can be
increased and the policy environment can be changed from one that is regulatory to one that is
supportive/complementary in nature.

Collection from The Banglapedia.

Abdur Rab (forhad)
Department of Public Administration.
Jahangirnagar University
Dhaka, Bangladesh.

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