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Foreign Direct Investment

Foreign Direct Investment (FDI) refers to 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, 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 single largest FDI unit in the country. The total number of FDI units established from 1947 to 1971 was only 22, and there were mainly large plants of drugs and pharmaceuticals, and electric goods.

After the Independence, Bangladesh adopted a policy of nationalisation of all large and medium industries. So, 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 would create employment for more than 94,000 persons. 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 natural gas, electricity, telecommunication, cement, hotels and restaurants, 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. Despite a continuous increase in the number of FDI projects registered with the BOI over the last few years, the net FDI flows into the country remained low and in 2005, the figure accounted for around 1.3% of the county's GDP. In 2007-08, the BOI recorded 143 proposals of FDI projects with a total FDI of Tk 54.33 billion, while the corresponding figures for 1995-96 were 127 and Tk 62.61 billion.

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 Canada.

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 technology.

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 is a real hazard. The World Bank and IFC document named 'Doing Business 2009' ranked Bangladesh 110th in the list of a total of 181 assessed in terms of ease of doing business. The document however, ranked the country 18th according to the index 'protecting investors' and 59th in availability of loan funds, which make the country relatively attractive for FDI. 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. [S M Mahfuzur Rahman]