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Factors Affecting

FDI and the


Comparison
Between
Bangladesh and
India
Sharzin Shavina Reza
111 0773 030

[INTERNATIONAL FINANCIAL
MANAGEMENT]

A. Discuss the importance of Foreign Direct Investment (FDI) for a country.


Ans:

Importance of Foreign Direct Investment


(FDI) for a country
Foreign direct investment (FDI) is one of the inevitable steps in todays globalization and
is beneficial to both the host and home countries. For a foreign firm it is beneficial in terms
of entrance to new markets and gaining new channels for the same, lower production costs,
gaining skills, production methods of host countries. A host country in turn receives free
technologies, capital, management skills and a required push toward economic
growth. Foreign direct investment, in its classic definition, is defined as a company from one
country making a physical investment into building a factory in another country. In the past
decade, FDI has played a major role in international business boosters. The sea change in
trade and investment policies and the regulatory environment globally in the past decade,
including trade policy and tariff liberalization, easing of restrictions on foreign investment
and acquisition in many nations, and the deregulation and privatization of many industries,
has probably been the most significant catalyst for FDIs expanded role.
The most profound effect of FDI has been seen in developing countries, where yearly
foreign direct investment flows have increased from an average of less than $10 billion in the
1970s to a yearly average of less than $20 billion in the 1980s, to explode in the 1990s from
$26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a
large portion of global FDI.
For small and medium sized companies, FDI gives an opportunity to overcome the
obvious barriers in international trade and gain a strong foothold among the local
competitors. Many governments are now liberalizing the barriers for it because of the
significant impact on the economy because of the investment inflows and outflows. It helps
in improving total production capacity for the companies.

B. Search FDI statistics (inflow and outflow) for Bangladesh and India over the last 10
years (2004 to 2013) and present them using an appropriate table.
Ans:
FDI statistics (inflows and outflows) for Bangladesh and India over the last 10
years:
Years
2004
2005
2006

Bangladesh
Inflows(US $)
448,905,400.71
760,504,265.76
728,615,341.69

India
Outflows(US $) Inflows(US $)
Outflows(US $)
5,771,297,152.82
1,571,886,321.86 7,269,407,225.61 11,898,059,490.95
1,425,821,625.78 20,029,119,267.00 26,021,405,202.5

2007

650,180,628.54

1,302,999,347.48 25,227,740,886.6

0
33,429,369,844.3

2008

8
1,023,737,397.11 2,033,360,561.10 43,406,277,075.8

0
67,556,026,905.5

2009

823,602,951.57

1
1,536,986,054.12 35,581,372,929.6

2
55,067,162,112.35

2010

861,736,237.16

6
1,778,384,778.11 27,396,885,033.7

38,825,670,779.5

2011

8
1,184,776,059.05 2,319,430,892.88 36,498,654,597.8

6
60,389,314,586.0

2012

6
1,474,542,605.46 2,730,913,775.56 23,995,685,014.2

0
39,438,132,357.1

2013

1,501,647,072.05

1
28,153,031,270.3
2

C. Compare and Contrast the FDI flows (over the last decade) between Bangladesh and
India.
Ans:

Bangladesh:
The FDI inflows of Bangladesh are less than the FDI outflows of Bangladesh all through 2004 to
2013. During the period of 2004-2005, the inflows and the outflows gradually increased, during
2006-2007, the FDI flows decreased and again increased in 2008. Well, in 2009 the FDI inflows
and outflows decreased and from 2010 onwards, the FDI flows are in an increasing trend.
The investors are encouraged to invest in Bangladesh because of the following reasons
a) 5 to 7 years corporate tax holiday for special sectors.
b) Private power companies enjoy corporate income tax exemption for a period of 15 years.
c) Tax exemption on royalties, technical knowhow and technical assistance fees and
facilities for their repatriation.
d) Tax exemption on foreign loans regarding interest.
e) Tax exemptions on capital gains from transfer of shares by the investing company.
f) Remittances of up to 50% of salaries of the foreigners employed in Bangladesh and
facilities for repatriation of their savings and retirement benefits at the time of their
return.
g) No restrictions on issuance of work permits to project related foreign nationals and
h)
i)
j)
k)

employees.
Facilities for repatriation of invested capital, profits and dividends.
Provision of transfer of shares held by foreign shareholders to local investors.
Reinvestment of remittable dividends would be treated as new investment.
An investor can wind up on investment either through a decision of the AGM. Once a
foreign investor completes the related formalities to exit the country, he or she can
repatriate the sales proceeds after securing proper authorization from the Central bank.

Bangladesh makes no difference between foreign private investors and domestic investors
regarding investment incentives. In Bangladesh foreign investors enjoy the access to domestic

capital markets for working capital in the form of loans sanctioned from the commercial banks
and development financial institutions. The foreign investors have been given the opportunity to
have access to the services of the country's stock exchanges. Some export-oriented industries of
the thrust sector are provided with the benefit of cash incentives, venture capital, and other
investment friendly facilities.
The Board of Investment (BoI) of Bangladesh provides registration and other services. They also
provide the procedures for FDI those have been simplified to attract FDI.
Bangladesh Bank has prepared a sovereign and highly effective credit rating report. This should
help to attract FDI as well as boost short-term borrowings for the country's private and public
sectors. Countrys image will be enhanced by this sound and sovereign credit rating report. It
will certainly help local financial organizations to tap low-cost borrowings from foreign sources.
The dependence on the London inter-bank offer rate will be definitely reduced. It also helps to
obtain low-cost funds from foreign sources.

India:
The FDI inflows of India are less than the FDI outflows of India all through 2004 to 2013.
During the period of 2004-2008, the inflows and the outflows were in an increasing trend, during
2009 and 2010, the FDI flows decreased and again increased in 2011. In 2012, the FDI inflows
and outflows decreased and again in 2013, the FDI flows increased.
India is competing to get a larger share in world trade and investment. Indias main competitive
advantage lies in its lower labor costs and remunerative domestic markets. But India is fast
losing its competitive advantage to countries like Indonesia and Vietnam as investors are shifting
FDI away from known growth engines towards these new emerging economies. No doubt Indian
government has implemented several reform measures in order to attract greater FDI but there
are several studies which have highlighted Indias weak spots. One such report is Doing
Business 2014-it is an annual report co-published by the World Bank and International Finance
Corporation that brings out the differences in business regulations and their implementation
across economies. This study covers 189 countries, ranking them on 11 indicators. These

indicators reflect the quality of the investment climate in a country and better performance on
these indicators is frequently associated with greater inflows of FDI.
India is performing well only on two indicators- getting credit and protecting investors. Indias
performance on three indicators- starting a business, dealing with construction permits and
enforcing contracts shows a dismal picture of the investment climate in India.
Another report Global Competitiveness Report published annually by World
Economic Forum ranks 148 economies on their competitiveness with respect to indicators like
infrastructure, institutions, macro-economic stability, innovation etc.
Indias overall rank for 2013 on the Global Competitiveness Index was 60. The most problematic
factors for doing business identified in the report are inadequate supply of infrastructure,
corruption, inefficient government bureaucracy, policy instability, tax regulation and restrictive
labor regulations.

D. Singapore Power Ltd (SPL) is planning to invest $1000 million in a power generation
plant and has short listed Bangladesh and India as the potential foreign destinations. SPL

has hired you to prepare a summary note on investment in Bangladesh and India. Your
note should briefly discuss the merits and demerits of investing in Bangladesh and India. In
addition you must recommend one of the countries to SPL for their project and support
your recommendations with arguments. (20 marks)
Ans:
There is a long-standing impression among policymakers that foreign direct investment is more
conducive to long-run growth and development than other forms of capital inflows. There are
also some macroeconomic variables affecting FDI in both short term and long term phases. We
will discuss about the factors of Bangladesh and India affecting FDI and compare between each
of them to come into a conclusion for the SPL and recommend them one of these countries for
their investment.

The variables are:

Balance of Trade
Exports
Imports
Current Account
Currency
FDI
Inflation Rate
Interest Rate
Consumer Spending
Corporate Tax
Unemployment Rate

Balance of Trade: Trade between Bangladesh and India has been highly uneven. Trade
liberalization carried out by these two countries in the recent years produced a rather lopsided
effect on their trade flows. The balance of trade position of Bangladesh is comparatively better
than that of Indias. Which means Indias net import is lower than Bangladeshs net import.

0
-2000

-945.9

-4000
-6000

Bangladesh

-8000

India

-10000
-12000
-14000

-13350

-16000

Figure 1: Balance of Trade (in USD millions)

Exports: Exports in Bangladesh increased to 2691.49 USD Billion in August of


2014. Exports in India decreased to 26100 USD Million in October of 2014
from 28903.28 USD Million in September of 2014.
30000
26100
25000
20000
Bangladesh

15000

India

10000
5000

2691.47

Figure 2: Exports (in USD millions)


Imports: Imports in Bangladesh increased to 3636.06 USD billion in August of
2014. Imports in India decreased to 39400 USD Million in October of 2014
from 43150.70 USD Million in September of 2014.

45000

39400

40000
35000
30000
25000

Bangladesh

20000

India

15000
10000
5000

3636.06

Figure 3: Imports (in USD millions)


Current Account: Till the end of 2013 Bangladesh maintained a positive current account
balance of 1107 billion USD. Whereas, India has been experiencing a negative Current account
balance for a pretty long time. In 2013 India had the highest amount of Current Account balance
which is -1.2 billion USD. In 2014 Bangladesh faced a sudden decrease in Current Account and
that made the Current Account position of Bangladesh a lot worse than Indias.
-7.8

0
-20
-40
-60
-80

Bangladesh

-100

India

-120
-140
-160
-180
-200

-178

Figure 4: Current Account (in USD Billions)

Currency (compared to USD): The US Dollar decreased to 75.92 Bangladeshi


Taka in December from 75.95 in November of 2014. The US Dollar increased
to 62.29 Indian Rupee in December from 62.05 in November of 2014. This
means India is in a favorable position compared to Bangladesh.
90
80
70

77.31
62.47

60
50

Bangladesh

40

India

30
20
10
0

Figure 5: Currency (compared to USD)


FDI: Foreign Direct Investment in Bangladesh increased to 1300 USD Million
in 2014 from 1191 USD Million in 2013. In India it increased to 3577 USD
Million in September of 2014 from 2514 USD Million in August of 2014. India
is more involved in investing in foreign business than Bangladesh thus in a
better position.

4000

3577

3500
3000
2500
Bangladesh

2000
1500

India
1300

1000
500
0

Figure 6: FDI (USD million)


Inflation rate: The inflation rate in Bangladesh was recorded at 6.21 percent
in November of 2014. The inflation rate in India was recorded at 4.38 percent
in November of 2014. As Bangladesh is going through a higher inflation, so
its in a disadvantageous position.
6.4
6.2

6.21

6
5.8
5.6

Bangladesh
5.52

India

5.4
5.2
5

Figure 7: Inflation rate


Interest rate: The benchmark interest rate in Bangladesh was last recorded
at 7.25 percent. The benchmark interest rate in India was last recorded at 8

percent. As interest rate is favorable for a countrys financial position, so


India is leading Bangladesh by 0.75% in this criterion.
8.2
8

8
7.8
7.6
7.4

Bangladesh
India
7.25

7.2
7
6.8

Figure 8: Interest rate


Consumer Spending: Consumer Spending in Bangladesh increased to 8381.45 BDT Billion in
2014 from 7412.87 BDT Billion in 2013. Consumer Spending in India decreased to 9233.88 INR
Billion in the third quarter of 2014 from 9349.95 INR Billion in the second quarter of 2014. This
means Indian consumers have more capability to spend money than that of Bangladeshis.
9400
9200
9000
8800
Bangladesh

8600
8400

India

8381

8200
8000
7800

9234

Figure 9: Consumer spending

Corporate Tax Rate: The Corporate Tax Rate in Bangladesh stands at 27.50 percent. The
Corporate Tax Rate in India stands at 34 percent. As corporations need to pay more taxes in
India, Bangladesh is in an advantageous position in this criterion.
40
34

35
30

27.5

25
Bangladesh

20

India

15
10
5
0

Figure 10: Corporate Tax Rate


Unemployment

Rate:

unchanged

4.50

at

Unemployment
percent

in

2014

Rate

in

from

Bangladesh

4.50

percent

remained
in

2011.

Unemployment Rate in India decreased to 5.20 percent in 2012 from 6.30


percent in 2011. Unemployment rate is unfavorable for the country itself but
this might be changed in respect to the situations.

5.4
5.2

5.2
5
4.8
4.6

Bangladesh
4.5

India

4.4
4.2
4

Figure 11: Unemployment Rate

Merits and Demerits of Investing in BANGLADESH


Merits
Low cost, easily trainable labor is abundant.

Less restriction on issuing work permit to a foreign national.


Need of 51.949 Giga Watt power through 2017.
Avoidance of double taxation agreements have been signed with Singapore.
Foreign exchange regulations have been relaxed to the maximum limit by the recent
introduction of free convertibility of Taka.
Extension of term loans by banks on normal banking considerations to foreign firms
operating in Bangladesh.
Cost of land and energy prices are one of the lowest.
Balance of trade position is favorable.

Demerits
Political instability and uncertainty.
Bangladesh is familiar as a poor, terrorist, full of natural calamities and extremist country.
Corruption and bureaucratic delay.
Poor infrastructure.
High inflation rate.
A negative current account deficit is experienced.
Worse position of currency than Indias. Lower chance of strengthening.

Merits and Demerits of investing in INDIA


Merits
Strong Indian industry and high consumer confidence.
11th largest economy by GDP and Purchasing Power Parity.
Huge population with high number of young workforce.
IT revolution and English Literacy.
Openness towards FDI.
Flexible regulatory framework and investment protection.
Need of 13.5 Giga Watt power through 2017.
Earns a lot of foreign currency through exporting.
Imports huge amount of Indian goods.
Huge chance of the Currency to strengthen.

Demerits
Poor infrastructure, inadequate and not up-to-the-mark airports, seaports, roads, power grids,
communication system and facilities, health care and education.
Higher wage rates for the employees.
Corruption in government. Legal and ethical challenges.
Negotiation with Indians is a lengthy bargaining process.
Lacks fossil fuel resources.
A major portion of the market is lower and middle class who still suffers from budget shortage.
Very diverse consumer around the country.

Recommendation
India is the worlds fifth largest economy and has the third highest GDP in Asia. Though the need
of power is a lot more in Bangladesh than that of in India, Bangladesh is definitely not an
advantageous place to invest. Singapore being a country with large economic growth will find it
fruitful by investing in India because, the exchange rate of India is expected to strengthen soon,
and the government restrictions are legit meaning a good analysis and preparation will be more
than enough to enter into this country. The potential economic growth is very strong and rising
every year in India unlike Bangladesh. The corporate tax rate difference between Bangladesh
and India is not too much to divert SPL towards Bangladesh. Moreover there are lots of
industries being privatized by Indians, causing a more suitable place to attract the foreign
investors.
So, from the thorough analysis of the individual factors affecting FDI and the
advantages/disadvantages mentioned above, we can come into a decision that Singapore Power
Ltd (SPL) should invest in India.

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