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Chapter-01
Introduction
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1.1 Introduction
Investment has acquired considerable emotive force in any country. It is viewed as beneficial
on employment creator-as it brings about economic development. It can termed capital
flowing from a firm or individual within the country or in one country to a business or
businesses in another country involving a share of at least 10%. So the significance of
investment in a country is:
It increases the economic growth by sustain increase in real, per capita, national
product. This brings -National income effect, Balance of payment effect & Public
revenue effect.
Accelerate the industrial innovation this develops in integrations take a variety form
which is not necessarily mutually exclusive.
It increases Political modernization in the degree where it function are collective
oriented, universalistic specific and achievement oriented.
It also brings infrastructural development & modern nationalism.
From discussing the significance on investment it is two forms:
Local (Portfolio) investment.
Foreign Investment.
Investments come from a firm or individual within the country is domestic or local
investment. Investment or capital come from a firm in one country to a business or
businesses in another country is called foreign investment.
The investment situation in Bangladesh is consisting of Private vs. Public and Local vs.
Foreign investment. The economy in Bangladesh has been gradually drawing the attention of
private sector investors since its opening up in early 90s manufacturing is becoming
increasingly vibrant Claiming a significant share in the total investment.
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Primary data sources are used for preparing this project paper is the Board of Investment
(BOI), Bangladesh Bank &Bangladesh Burro of Statistics, Bangladesh Export Processing
Zone, etc.
ii.
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Chapter-02
Theoretical Aspects
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Our work shows that the conditions which link foreign direct investments to portfolio
investments always lead to a clear-cut outcome about investment decisions. In our model
rational agents exploit the higher order beliefs determined by the degree of noise in
transparency by endogenously affecting the information-based trade-off uncovered. This
enables them to pin down an equilibrium strategy and to select individual equilibrium
outcomes that may lead the recipient country to end up with a larger (smaller) share of FDI
relative to PI.
The rest of the paper is structured as follows. Section 2 motivates our work by reviewing
recent empirical and theoretical contributions in the literature on investment flows among
countries. We highlight some stylized facts that help us develop our model, which is described in Section 3 in the case of complete information. The role of higher order beliefs in
determining equilibrium strategies is analyzed in Section 4 in the case of incomplete
information. Section 5 concludes and discusses the normative implications and possible
extensions of our work.
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1) Planning of portfolio:
Planning is the most important element in a proper portfolio management. The success of the
portfolio management will depend upon the careful planning. While making the plan, due
consideration will be given to the investors financial capability and current capital market
situation. After taking into consideration a set of investment and speculative policies will be
prepared in the written form. It is called as statement of investment policy. The document
must contain (1) The portfolio objective (2) Applicable strategies (3) Investment and (4)
speculative constraints. The planning document must clearly define the asset allocation. It
means an optimal combination of various assets in an efficient market. The portfolio manager
must keep in mind about the difference between basic pure investment portfolio and actual
portfolio returns. The statement of investment policy may contain these elements. The
portfolio planning comprises the following situation for its better performance:
(A) Investor Conditions: - The first question which must be answered is this What is the
purpose of the security portfolio? While this question might seem obvious, it is too
often overlooked, giving way instead to the excitement of selecting the securities
which are to be held. Understanding the purpose for trading in financial securities will
help to: (1) define the expected portfolio liquidation, (2) aid in determining an
acceptable level or risk, and (3) indicate whether future consumption (liability needs)
are to be paid in nominal or real money, etc. For example: a 60 year old woman with
small to moderate saving probably (1) has a short investment horizon, (2) can accept
little investment risk, and (3) needs protection against short term inflation. In contrast,
a young couple investing couple investing for retirement in 30 years has (1) a very
long investment horizon, (2) an ability to accept moderate to large investment risk
because they can diversify over time, and (3) a need for protection against long-term
inflation. This suggests that the 60 year old woman should invest solely in lowdefault risk money market securities. The young couple could invest in many other
asset classes for diversification and accept greater investment risks. In short, knowing
the eventual purpose of the portfolio investment makes it possible to begin sketching
out appropriate investment / speculative policies.
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(B) Market Condition: - The portfolio owner must known the latest developments in the
market. He may be in a position to assess the potential of future return on various
capital market instruments. The investors expectation may be two types, long term
expectations and short term expectations. The most important investment decision in
portfolio construction is asset allocation. Asset allocation means the investment in
different financial instruments at a percentage in portfolio. Some investment
strategies are static. The portfolio requires changes according to investors needs and
knowledge. A continues changes in portfolio leads to higher operating cost. Generally
the potential volatility of equity and debt market is 2 to 3 years. The another type of
rebalancing strategy focuses on the level of prices of a given financial asset.
(C) Speculative Policies: - The portfolio owner may accept the speculative strategies in
order to reach his goals of earning to maximum extant. If no speculative strategies are
used the management of the portfolio is relatively easy. Speculative strategies may be
categorized as asset allocation timing decision or security selection decision. Small
investors can do by purchasing mutual funds which are indexed to a stock.
Organization with large capital can employ investment management firms to make
their speculative trading decisions.
(D) Strategic Asset Allocation: - The most important investment decision which the owner
of a portfolio must make is the portfolios asset allocation. Asset allocation refers to
the percentage invested in various security classes. Security classes are simply the
type of securities:
(1) Money Market Investment,
(2) Fixed Income obligations;
(3) Equity Shares,
(4) Real Estate Investment,
(5) International securities.
Strategic asset allocation represents the asset allocation which would be optimal for the
investor if all security prices trade at their long-term equilibrium values that is, if the markets
are efficiency priced.
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the investors portfolio allocated to equity would be held in HPS corporation shares.
The only reason to overweight or underweight particular securities in the strategic asset
allocation would be to offset risks the investors faces in other assets and liabilities
outside the marketable security portfolio. Security selection, however, actively
overweight and underweight holding of particular securities in the belief that they are
temporarily mispriced.
(3) Monitoring the performance of portfolio
Portfolio monitoring is a continuous and ongoing assessment of present portfolio and the
portfolio manger shall incorporate the latest development which occurred in capital market.
The portfolio manager should take into consideration of investors preferences, capital
market condition and expectations. Monitoring the portfolio is up-grading activity in asset
composition to take the advantage of economic, industry and market conditions. The market
conditions are depending upon the Government policy. Any change in Government policy
would reflect the stock market, which in turn affects the portfolio. The continues revision of a
portfolio depends upon the following factors:
Change in Government policy.
Shifting from one industry to other
Shifting from one company scrip to company scrip.
Shifting from one financial instrument to another.
The half yearly / yearly results of the corporate sector
Risk reduction is an important factor in portfolio. It will be achieved by a diversification of
the portfolio, changes in market prices may have necessitated in asset composition. The
composition has to be changed to maximize the returns to reach the goals of investor.
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2.3.1 Definitions
Broadly, foreign direct investment includes "mergers and acquisitions, building new
facilities, reinvesting profits earned from overseas operations and intra company loans". In a
narrow sense, foreign direct investment refers just to building new facilities. The numerical
FDI figures based on varied definitions are not easily comparable.
As a part of the national accounts of a country, and in regard to the GDP equation Y=C+I+G+
(X-M)[Consumption + gross Investment + Government spending +(exports - imports], where
I is domestic investment plus foreign investment, FDI is defined as the net inflows of
investment (inflow minus outflow) to acquire a lasting management interest (10 percent or
more of voting stock) in an enterprise operating in an economy other than that of the investor.
FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the
balance of payments. FDI usually involves participation in management, joint-venture,
transfer of technology and expertise. There are two types of FDI: inward and outward,
resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment",
which is the cumulative number for a given period. Direct investment excludes investment
through purchase of shares. FDI is one example of international factor movements.
2.3.2 Types
1.
Horizontal FDI arises when a firm duplicates its home countrybased activities at the same value chain stage in a host country
through FDI.
2.
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3.
Vertical FDI takes place when a firm through FDI moves upstream or
downstream in different value chains i.e., when firms perform valueadding activities stage by stage in a vertical fashion in a host country
2.3.3 Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through
any of the following methods:
by incorporating a wholly owned subsidiary or company anywhere.
by acquiring shares in an associated enterprise.
through a merger or an acquisition of an unrelated enterprise.
participating in an equity joint venture with another investor or enterprise.
tax holidays
preferential tariffs
Bonded Warehouses
Maquiladoras
infrastructure subsidies
R&D support
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Inflation
National income
Government restriction
Exchange rates
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i.
Impact of Inflation:
If a countrys inflation rate increases relative to the countries with which it invests, its capital
account would be expected to decrease, other things being equal. Consumer and corporations
in that country will most likely purchase more goods or invest more in overseas (due to high
local inflation), while the countrys exports to other countries & flow of investment from
foreign will decline.
ii.
If a countrys income level (national income) increases by a higher percentage than those of
other countries, its capital account is expected to decrease, other things being equal. As the
real income level (adjusted for inflation) raises does consumption of goods. A percentage of
that increase in consumption will most likely reflect an increased demand for foreign
investment.
iii.
iv.
Each countrys currency is valued in terms of other currencies through the use of
exchanges rates, so that currencies can be exchanged to facilitate international transaction.
The values of most currencies can fluctuate over time because of market and government
forces. If a countrys currency begins to rise in value against other currencies, its capital
account balance should decrease, other things being equal. As the currency strengthens,
Investment by that country will become more expensive than the receiving countries.
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export-oriented industries;
Market access: firms set up production in a country because of its large domestic
market or its preferential access to regional or global markets
Firms consider different options when selecting an investment site. Hence, countries compete
to attract direct investment. The critical question for developing countries is:
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What are the factors that determine where firm set up direct investments?
The determinants of investment are unique to each circumstance; nonetheless, there are
common themes. Some of the questions that investors ask when considering investing in a
developing country follow:
Does the legal framework protect property rights and foreign investors?
These nine issues are explored in greater detail in the Investment Checklist. This checklist
contains questions that potential investors will consider. With each individual investment,
there is a shifting emphasis as to which are the key factors, hence, the checklist does not rank
the importance of each issue.
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Chapter-03
Role of Multinational
Corporation of FDI
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and has exploited this advantage successfully in local markets, the firm may have a more
distinct advantage in markets that have less advantage technology.
3.1.4 React to trade restrictions
In some cases; MNCs use DFI as a defensive rather than aggressive strategy. Specially,
MNCs may pursue DFI to circumvent trade barriers.
3.1.5 Diversify internationally
Since economies of countries do not move perfectly in tandem over time, net cash flow sales
of products across countries should be more stable then comparable sales if the products were
sold in a single country. By diversifying sales (and possibly even production) internationally,
a firm can make its net cash flows less volatile. Thus, the possibility of a liquidity deficiency
is less likely. In addition, the firm may enjoy a lower cost of capital as shareholders and
creditors perceived the MNCs risk to be lower as a result of more stable cash flows.
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to survey markets to determine whether they can benefit from cheaper costs by producing in
those markets.
3.2.3 Use foreign raw materials
Due to transportation costs, a corporation may attempt to avoid importing raw materials from
a given country, especially when it plans to sell the finished product back to consumers in
that country. Under such circumstances, a more feasible solution may be to develop the
product in the country where the raw materials are located
3.2.4 Use foreign technology
Corporations are increasingly establishing overseas plants or acquiring existing overseas
plants to learn the technology of foreign countries. This technology is then used to improve
their own production process and increase production efficiency at all subsidiary plants
around the world.
3.2.5 React to exchange rate movements
When a firm perceives that a foreign currency is undervalued, the firm may consider direct
foreign direct foreign investment in that country, as the initial outlay should be relatively low.
3.4
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Each government must weigh the advantage and disadvantage of direct foreign investment in
its country. It may provide incentives to encourage some forms of DFI, barriers to prevent
other of DFI, and impose conditions on some other forms of DFI.
When MNCs consider engaging in DFI by acquiring a foreign company, they may face
various barriers imposed by host government agencies. All countries have one or more
government agencies that monitor mergers and acquisitions. The acquisitions activity in any
given country is influenced by the regulations enforced by these agencies.
Some governments restrict foreign ownership of local firms. Such restrictions may limit or
prevent international acquisitions.
Red Tape Barriers - An implicit barrier to DFI in some countries is the Red Tape
involved, such as procedural and documentation requirements. A MNCs pursuing DFI is
subject is subject to a different set of requirements in each country. Therefore it is difficult
for MNCs to become proficient at the process it concentrates on DFI within a single foreign
country. The current efforts to make regulations uniform across Europe have simplified the
paperwork required to acquire European firms.
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supported by the parents FDI. Therefore FDI can affect the MNCs cost of capital, which
also affects the MNCs value.
Chapter-04
FDI and PI
On
Economic Growth in Developed
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4.1
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Economy
From a mainly feudal agrarian base, the economy of Bangladesh has undergone rapid
structural transformation towards manufacturing and services. The contribution of the
agriculture sector to GDP has dwindled from 50 percent in 1972-73 to around 20 percent in
1999-2000. The agricultural sector is, however, still the main employment provider. The
staple crop is rice, with paddy fields accounting for nearly 70% of all agricultural land.
Industrial production growth has averaged more than 6% over the last 5 years. The export
sector has been the engine of industrial growth, with ready-made garments leading the way,
having grown at an average of 30% over the last 5 years. Primary products constitute less
than 10 percent of the countrys exports; the bulk of exports are manufactured/processed
products, ready-made garments and knit wears in particular.
Climate
The climate in Bangladesh is sub-tropical, with temperatures ranging from a daytime low of
18`c in the cold season to a maximum of 40`c in the summer. Annual rainfall ranges from
200 to 400 cm. The country has four main seasons, winter (Dec-Feb), summer (Mar-May),
Monsoon (Jun-Sep) and autumn (Oct-Nov).
Social Development
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Bangladesh has achieved substantial progress in mass literacy, public health, reduction of
population growth and self employment support for rural poor. Primary education is
compulsory and female education is free through the first eight years. The strong
commitment to primary education and to gender equity means that three out of four girls now
enter primary education. In the area of health, over 80% of the countrys children are
immunized against the six `killer` diseases. Infant mortality has decreased significantly.
There has been a sharp decline in the fertility rate.
The increased participation of women in poverty alleviation programs as well as in
Bangladeshs ready-made garments sector, which provides jobs for more than 1 million
women, has helped create an awareness of womens issues at all levels.
An unparalleled concentration of innovative and committed non-governmental organizations
has brought about a micro-credit revolution and guided countless indigent women and
landless households into income generating activities. The safety net programs initiated by
the government in improving the condition of the poorest to a level of survival are proving
effective.
2001 (Adjusted)
2004(Projected)
2004
2002
2004 (Projected)
130.03
137.2
1.48
105.4
928
49.80
53.10
36.60
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33.37
37.40
19.10
4.43
3.45
0.98
51.69
13.56
Other Labor
34.75
3723
4832
13823
2854.96
49
Local Bank
Foreign Bank
39
10
Financial Institution
28
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Sample surveys of the BOI on registered local investment projects found that about that 85
percent of the registered local projects are either implemented or at the different stages of
implementation.
Private Investment Registration
Private investors initially register their investment proposals with Board of Investment
expressing their intent to invest in the respective proposals. After detailed feasibility studies
investment proposals are implemented in phases. As a result the actual investment projection
could be made possible on the basis of registration statistics.
Importance of FDI
The most Heavily Indebted Poor Countries and low income countries of the world remain
largely dependent on bilateral and multilateral aid for their development strategies. However,
since 1990 total Overseas Development Assistance (ODA) has dropped by more than half.
Much greater importance is now being placed on alternative sources of capital to finance
national development (ECOSOC 2000) and Foreign Direct Investment (FDI)1 is now the
largest source of foreign private capital reaching developing countries (Figure 1). Global
flows of FDI have grown phenomenally over the last ten years. Total inflows rose by nearly
four times, from US $174 billion in 1992 to US$ 644 billion in 1998. However, total flows to
developing economies fell between 1997 and 1998 (UNCTAD 1999). Regionally, prospects
look least good for developed countries. Of the middle to low income countries, Asia has
experienced the fastest rate of growth in FDI but also the greatest volatility.
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investment security for local markets, fair competition and corporate responsibility through
defining equitable, secure, non-discriminatory, transparent investment practices.
Socially Responsible Investment
Ethical and socially responsible FDI can be encouraged through national, bilateral and
international investment guidelines and regulation e.g. consumer rights, information
provision, commercial probity, labor standards and corporate culture (UNCTAD 1999).
Several institutions have developed or are currently working on responsible practice. The
ILO has 180 conventions referring to social responsibility and it also has more specific
Tripartite Declaration of Principles (1977), concerning TNCs and social policy2. UNCTAD
has developed a Code of Restrictive Business Practices. Eradication of poverty and
reduction of gender inequality, where women make up nearly 70% of the worlds poorest,
should be prioritized.
Environmental protection
Greater efforts need to be made to assess the linkages between environmental impacts and
FDI, although it may be difficult to isolate FDI impacts from other activities. Authorities and
businesses can apply Environmental Management Systems (EMS) to assess the potential
impacts of FDI ventures, e.g. ISO 4001 which details techniques such as Life-CycleAnalysis, Environmental Impact Assessments (EIA) and Environmental Audits. These all
require investment in inspection, monitoring, regulation and enforcement to ensure effective
implementation. The resources required to effectively adopt these approaches are often
lacking in many developing countries, suggesting a vital need for targeted international
assistance (UNCTAD 1999). Greater environmental commitment can also bring long term
corporate gains e.g. greater efficiency and better quality of practice.
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discriminatory treatment between foreign and local investment, and repatriation of proceeds
from sales of shares and profit.
Government of Bangladesh is agreeably helping to provide proper legal facility for the
foreign investors. So in the question of legal environment and FDI prospect it can be told that
the legal environment is quite sound for the foreign investors.
Political Environment
Political Environment is very crucial for an economy to attract foreign investor or to increase
Foreign Direct Investment (FDI). Political situation of Bangladesh are not sound enough to
attract investor in a high speed. Political situation is important because the investors are not
feeling secure to invest in such country where the countrys political situations are unstable.
It is very harmful for such a developing economy like Bangladesh. If the government wants
to increase its FDI performances than political climate obviously have to be sound to attract
the investors from the different countries of the world.
Population
Population is another issue in the question of FDI. We have a huge number of population in a
ratio with our total lands. Huge population always indicates that the huge amount of demand
and which will make the foreign investors interested to invest such country.
Forest plantation and mechanized extraction within the bounds of reserved forests
are open for private investment in Bangladesh. The governments role is that of a facilitator
which helps create an enabling environment for expanding private investment, both domestic
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and foreign. The Board of Investment (BOI), established by the government for accelerating
private investment, provides institutional support services to intending investors.
Tax exemption on income of the private sector power generation company for 15
years from the date of commercial production.
Tax exemption on capital gains from the transfer of shares of public limited
companies listed with a stock exchange.
Accelerated depreciation
Industrial undertakings not enjoying tax holiday will enjoy accelerated depreciation
allowance.
Such allowance is available at the rate of 100 per cent of the cost of the
machinery or plant if the industrial undertaking is set up in the areas falling within the cities
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of Dhaka, Narayangonj, Chittagong and Khulna and areas within a radius of 10 miles from
the municipal limits of those cities. If the industrial undertaking is set up elsewhere in the
country, accelerated depreciation is allowed at the rate of 80 per cent in the first year and 20
per cent in the second year.
Concessionary duty on imported capital machinery
Import duty, at the rate of 5% ad valorem, is payable on capital machinery and spares
imported for initial installation or BMR/BMRE of the existing industries. The value of spare
parts should not, however, exceed 10% of the total C & F value of the machinery. For 100%
export oriented industries, no import duty is charged in case of capital machinery and spares.
However, import duty @ 5% is secured in the form of bank guarantee or an indemnity bond
will be returned after installation of the machinery. Value added Tax (Vat) is not payable for
imported capital machinery and spares.
Foreign Investment
Private investment from overseas sources is welcome in all areas of the economy with the
exception of the four reserved sectors (mentioned earlier). Such investments can be made
either independently or through venture on mutually beneficial terms and conditions. Foreign
investment is, however, especially desired in the following major categories of industries:
Export oriented industries;
Industries in the Export Processing Zones (EPZs)
High technology products that will be either import substitute or export oriented.
Facilities / incentives
For foreign direct investment, there is no limitation pertaining to foreign equity
participation, i.e. 100 percent foreign equity is allowed. Non-resident institutional or
individual investors can make portfolio investments in stock exchanges in Bangladesh.
Foreign investors or companies may obtain full working loans from local banks. The terms of
such loans will be determined on the basis of bank-client relationship.
A foreign technician employed in foreign companies will not be subjected to personal tax up
to 3 (three) years , and beyond that period his/ her personal income tax payment will be
governed by the existence or non-existence of agreement on avoidance of double taxation
with country of citizenship.
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Full repatriation of capital invested from foreign sources will be allowed. Similarly, profits
and dividend accruing to foreign investment may be transferred in full. If foreign investors
reinvest their repatriable dividends and or retained earnings, those will be treated as new
investment. Foreigners employed in Bangladesh are entitled to remit up to 50 percent of their
salary and will enjoy facilities for full repatriation of their savings and retirement benefits.
Foreign entrepreneurs are, therefore, entitled to the same facilities as domestic entrepreneurs
with respect to tax holiday, payment of royalty, technical know-how fees etc.
The process of issuing work permits to foreign experts on the recommendation of investing
foreign companies or joint ventures will operate without any hindrance or restriction.
Multiple entry visa will be issued to prospective foreign investors for 3 years. In the case of
experts, multiple entry visa will be issued for the whole tenure of their assignments.
Other Incentives
flower-making,
Computer
software
and
information
technology,
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Local borrowings
Banks in Bangladesh may extend working capital loans or term loans in local currency to
foreign-controlled or foreign-owned firms/companies (manufacturing or non-manufacturing)
operating in Bangladesh on the basis of normal banker-customer relationship, without
reference to Bangladesh Bank. Banks in Bangladesh are free to grant local currency loans to
joint venture industries in EPZ up to the amount of short term foreign currency loans
obtained from abroad.
Convertibility on Trade Account
Bangladesh Taka is fully convertible for settlements of trade related transactions. Import
license is not required for import of items not in the control list. An importer has automatic
access to foreign exchange for import of all items outside the control list, and also for import
of control list items as per general or specific authorization of the office of the Chief
Controller of Imports and Exports.
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interest bearing renewable term deposit accounts in Bangladesh with a minimum amount of
USD 2,000 or Pound Sterling 1,500 equivalent.
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Persons ordinarily resident in Bangladesh may maintain foreign currency accounts with
foreign exchange brought in at the time of their return to Bangladesh from visits abroad.
These accounts are termed as Resident Foreign Currency Deposit (RFCD) accounts. The
amount brought in with declaration to customs authorities on form FMJ and up to US $ 5000
brought in without declaration may be credited to this account. However, proceeds of export
of goods or services from Bangladesh and commission earnings arising from business deals
in Bangladesh cannot be credited to such accounts. Balances of such accounts are freely
remittable abroad. Balances of RFCD accounts may also be used by the accounts holders for
their travel abroad in the usual manner. RFCD accounts may be opened in US Dollar, Euro,
Pound Sterling, Deutsche Mark or Japanese Yen and may be maintained as long as the
account holders desire. Interest may be paid on these deposits if these are for a term of not
less than one month and the balance is not less than US $ 1000 or Pound Sterling 500
equivalent.
F.C Accounts of other entities
ADs do not require prior permission of Bangladesh Bank for opening of foreign currency
accounts of:
Local and joint venture contracting firms employed to execute projects financed
by foreign donors/international donor agencies;
Miscellaneous Remittances
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Visa fee
Family maintenance
Chapter-05
Financial System of FDI and PI
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Capital Adequacy
Bank Licensing
Commercial Banks
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of FY 2002-03 as the benchmark. The purpose is to comprehend the dynamics of the
economy identifying key macroeconomic fundamentals and formulate and implement
realistic budget.
Economic Sectors
The following paragraphs are intended to present briefly tI1e results of progress detailed in
the important sectors of the economy.
Agriculture
Industry
Poverty reduction
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Hong Kong (China) and Malaysia (9% each). Most of the FDI from Norway was in telecoms
and from the United States in the services sector (g.e. power generation, oil and gas, liquefied
petroleum gas bottling, medicare service). Investments from Asia, particularly South, East
and South-East Asia, were concentrated in manufacturing. The major investors include ASE
and Unocal (United States), BASF (Germany), Cemexs (Mexico), Holcim and Nestle
(Switzerland), Lafarge and Total FinaElf (France), Taiheyo (Japan), Telenor (Norway) and
TMI (Malaysia).
This is an example of how careful FDI statistics need to be interpreted, given the different
ways in which they are compiled. According to the commitments made in the Mid-term
Strategic Promotional Plan 2003-04 of BO1, the first half yearly FDI Inflow survey of 2003
was undertaken by BOI in cooperation with BEPZA. This report, the second of its kind,
presents the findings of the survey in detail.
FDI Inflow Survey Findings
During January-June 2003, a total of US$ 287 million of FDI received in Bangladesh which
is 71% higher than the corresponding period of last year.
Rate
40.00
40.20
40.84
45.46
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1996-97
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
Exchange Rate of Dollar ($)
42.70
48.06
50.31
53.96
57.43
57.90
58.94
59.68
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Power
Tele communication
Transport Sector
Tourism
Water Transport
Education
Agriculture
5.3 Motivation
FDIs contribution to domestic investment and output growth dominates over the contributions
stemming from portfolio equity flows and international loans. The gains to the host country from
FDI are determined by the informational value of
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FDI: The hands-on-management style of direct investments enables foreign direct investors
to operate only in sectors with good economic growth prospects. This has also an indirect
effect because it spurs the domestic economy to invest in particular sectors, thereby leading
to economies of scale and positive spill-over effects to the rest of the economy. These latter
effects will be more or less pronounced depending on the nature of the investment
technology and of the degree of trade-openness of the recipient country. The informational
value of FDI poses also a problem of asymmetric information between buyers and sellers of
investment projects. As common knowledge about the direct investors informationadvantaged -on where, when and why to invest in particular sectors of the host country reduces the resale price that a direct investor may get when deciding to exit from the host
country. This higher exit cost, due to the difficulty of reselling a firm (i.e. asymmetric
information at the exit level), implies that only investors that have a low probability of
having to resell early will end up undertaking direct investments. Portfolio investors are then
by default only short-term investors, which is why empirically portfolio investments exhibit a
much larger volatility than direct investments.
A corollary of this result is that increased transparency - i.e. a more efficient institutional
framework, warranting, among other things, higher capital markets and corporate governance
transparency - in the host country could lead to a higher direct investment share by mitigating
the informational asymmetry inherent in the nature of direct investments. In a more
transparent environment a buyer could distinguish whether the seller of an investment project
is motivated by, say, personal liquidity needs or by bad information about the expected
profitability of an investment project. This would lead to higher resale prices, larger fractions
of direct investments relative to portfolio investments and a lower (positive) volatility
differential between portfolio and direct investments.
Developed countries exhibit lower volatility differentials between PI and FDI relative to
developing countries. The authors find that herding among funds (i.e. among portfolio
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investors) tends to be more prevalent in less transparent countries.
In a noisy economic environment with various assumptions about the degree of (capital
markets and corporate governance) transparency, any equilibrium outcome (i.e. a pooling
equilibrium, or a separating equilibrium) is possible depending on the exogenous probability
faced by a foreign investor of being hit by a liquidity shock that forces her to resell the
investment project ahead of time and by the presence of setup costs for undertaking a certain
investment project (a proxy for uncertainty at the entry level). Informational asymmetries
between buyers and sellers may be stronger (weaker) depending on a particular scenario
faced by investors.
This paper explicitly accounts for varying degrees of transparency due to some noise
incurred by investors when observing some fundamental variables (such as institutional
efficiency, capital and corporate governance transparency, and also the financial liquidity
conditions of other foreign investors. We show how the (imperfect) degree of transparency
can help to pin down an equilibrium outcome in the presence of noise that leads to
informational asymmetries between foreign investors. In our framework noise leads to higher
order beliefs that are exploited by rational agents to select an optimal (i.e. noise-contingent)
equilibrium strategy.
The contributions of our work can be summarized as follows: First, we formalize the results
in the recent (theoretical and empirical) contributions to the investment literature by using the
global games framework as a tool for explicitly allowing for heterogeneity among foreign
investors. This allows us to endogenize the relevance of asymmetric information in
determining the relative shares of direct relative to portfolio investments in the recipient
country. In particular, we think of our paper as a complementary contribution to the literature
discussed above, that explicitly accounts for the role of informational asymmetries in
deterring types of investment flows. Second, our results have a clear and intuitive normative
implication. Lower noise (higher transparency) leads to more direct investments relative to
portfolio investments and lower volatility differentials between the two types of investment.
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Third, while this work focuses only on a static game between investors, it suggests that in a
(repeated) dynamic setup a country might move through investment cycles characterized by
different degrees of the various types of investment forms.
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problems of which politics seems to be prominent. A free trade policy otherwise called
globalization is seen as a lively remedy to solve both the problems of developed and
developing countries.
Investment Status: The present democratic government concentrates on more local &
foreign investments in oil, gas, cement, infrastructure, textile sectors of Bangladesh to face
the challenges of the twenty first century. Though prospects are there in Bangladesh, due to
insufficiency of capital & technology greater investment is no taking place. However the
recent trends o administrative, banking and infrastructure reform process, low rate of
inflation compared to the neighboring countries( in Pakistan 11.2%, in India 8.5%, Srilanka
16.7 % and Bangladesh 5%) and separate export processing zones are some of the indicators
of the countries development process. That may help in attracting local and foreign investors
from developed countries.
Besides, the most important tasks is to revive the rural economy so that the migration of rural
people will come down, because a country like Bangladesh has poor resources to meet the
bargaining demand of the citizens already settled in the urban areas.
5.5
Before going for full-length analysis of the FDI flow in recent period I have a short look on
the industrial investment status. The industrial investment mainly consists of private versus
public, and local versus foreign investment. The analysis of industrial investment status will
provide us good information as to how we are using the FDI. The economy of Bangladesh
has been gradually drawing the attention of private sector investors since its opening up in
early 90s. Manufacturing is becoming increasingly vibrant claiming a significant share in
the total investment.
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Chapter-06
Recommendation
&
Conclusion
The Impact of Foreign Direct Investment and Portfolio Investment on
Economic Growth in Developing and Developed Economies
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6.1 Recommendation:
Overcoming the barriers
One can now look for the ways to overcoming the barriers to FDI and PI as we have
mentioned above. Here, we would recommend following measures that the authorities
concerned might consider:
6.1.1
Good governance denotes a desirable state of affairs and so is the key to success of all the
reforms. Political and bureaucratic accountability are the two principal components of good
governance, and without ensuring them, good governance is not possible. Securing progress
on this front is the highest priority as continued difficulties pose a serious threat to the
sustainability of even the development achieved already. Establishing the rule of law is in
fact a pre-requisite to ensuring good governance.
6.1.2 Accountability and transparency
Accountability and transparency continue to remain the twin elusive prerequisites for the
overall development of the country. Private sector investment and FDI inflow are severely
hindered by the administrative barriers that arise out of a lack of transparency and
accountability, which logically leads to inefficiency and corruption. Competence and
efficiency, which are both appallingly, lacking in the bureaucracy, will both become
achievable goals with the infusion of transparency in decision-making and governance. This
will also greatly reduce what is commonly known as red-tapism or bureaucratic
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wrangling since the tiers of the decision making process are bound to become fluent and
responsible if they are held accountable for their work.
6.1.3
Without reducing the utter lack of co-ordination among the state agencies, the services and
functionaries cannot be efficient. Assuring proper co-ordination among ministries,
departments, regulatory bodies, and faster decision-making in the implementation process
will enhance the flow of investment.
6.1.4
Government agencies responsible for facilitating investment need to be more active. In this
regard, full autonomy to the agencies like the central bank, investment promotion agencies,
telecom regulatory authority, energy regulatory authority, Securities and Exchange
Commissions etc., is a prerequisite.
6.1.5
The size of the state organs is quite large and thus mostly inefficient, unproductive and
hazardous. So, rightsizing the government is important. By reducing the number of officials
in the decision making process in various state organs, transparency and accountability of
bureaucracy can be established. Offering a reasonable compensation package to the officials
retained is also one of the key factors in ensuring transparency and accountability.
6.1.6
A sound judicial system, which is a must for good governance, is possible when the judiciary
can exercise its authority independently. In this regard, separation of the judiciary from
executive branch of the government is essential as influence of the executive on the lower
judiciary continues to be exercised. There is need for capacity building in the judicial system
in order to ensure speedy disposal of cases. Archaic laws, especially those related with trade
and investment should be updated in line with the needs of the day.
6.1.7 Tackling corruption
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Tackling corruption in banking, power, other state-owned enterprises and tax administration
ought to be an urgent priority. A comprehensive resolution of the corruption problem in
banking, power and other state-owned enterprises will require privatization along with
independent regulatory bodies functioning in the public sector.
6.1.8
Fiscal reform
Infrastructure reform
The main policy challenge is to redefine the role of public sector in infrastructure
development by gradually allowing the private sector to play a bigger role. Public sectors
role should be restricted to regulatory functions only. Mention may be made here that,
Bangladeshs existing Industrial Policy includes infrastructure as a thrust sector
acknowledging a lead role of the private sector supported by special incentives and the
Finance Minister of Bangladesh, in his 2002 budget speech, stressed the need for more
private sector participation in infrastructure development of the country. The Infrastructure
Investment Facilitation Center (IIFC) of Bangladesh has been interacting with the private
sector to attract private investment in this sector. Other countries of the region could take
lesson from Bangladesh in this regard.
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Conclusion
In conclusion, it could be said that experiences referred to as above are based on the same
encountered in Bangladesh. But, these are more or less the same in other countries of the
region. If the respective governments do not take appropriate measures, it would be difficult
to attract the expected level of FDI and PI.
The policy regarding the foreign direct investment should be clear and flexible and should
contain some lucrative options for foreign investors. This will certainly boast up the health of
FDI and PI in our country.
Our country is very much underdeveloped. In the context of an underdeveloped country the
role of FDI and PI is very vital and essential. We do not have sufficient internal resources to
meet up the growing demand of increasing population at different aspect. As a result we have
to rely greatly on FDI and PI to accelerate our economic growth and to meet up the demand.
Another point is credible and must have to note is the necessity of common census of foreign
direct investment. Only few months back the BOI and BB have provided contradictory result
regarding the FDI and PI in our country. But there should not be any discrepancy in regard to
this. This figure represents the condition of the country and should be accurate in nature.
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