FDI in BD in Comparison Among South Asian LDCs-Thesis

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Chapter Four: FDI Scenario in Bangladesh
Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs
Papon Tabassum
Economics Discipline School of Social Science Khulna University Khulna, Bangladesh
October, 2009
Generated by Foxit PDF Creator Foxit Software http://www.foxitsoftware.com For evaluation only. Chapter Four: FDI Scenario in Bangladesh
Papon Tabassum Student No.: 051511 Session: 2007-08
Supervisor
Ms. Nurun Naher Moni Lecturer Economics Discipline Khulna University Khulna, Bangladesh
A thesis submitted to Economics Discipline, School of Social Science, Khulna University in partial fulfillment for the degree of Bachelor of Social Science (Hons.) in Economics
October, 2009
. Professor Dr. Md. Saiful Islam Head Economics Discipline School of Social Science Khulna University
October, 2009
Statement of originality
The findings of this thesis are entirely of the candidates own research and any part of it has neither been accepted for any degree nor it is being concurrently submitted for any other degree
. Papon Tabassum Student No.: 051511 Session: 2007-08
October, 2009
Acknowledgement
First of all, I would like to thank the Almighty Allah for the completion of my research study. Without His kindness, study would not have been possible.
I would like to express my gratitude to my supervisor Ms. Nurun Naher Moni, Lecturer of Economics Discipline, Khulna University. Her systematic and sincere supervision and guidance enable me to complete my study successfully.
I would also like to express my thankfulness to my previous supervisor Mr. Sk. Sharafat Hossen, Lecturer of Economics Discipline, Khulna University. It is indeed a great honor and privilege for me to study under him. I would also thankful to Mr. Mohammed Ziaul Haider, Ph.D, Assistant Professor of Economics Discipline, Khulna University, for his wonderful guidance and assistance.
I would like to express my thankfulness to Mr. Professor Dr. Md. Saiful Islam, Head, Economics Discipline, Khulna University to give me the opportunity to conduct a thesis paper.
I am also grateful to my parents for the financial support they provide to complete this research paper. I would thank to all of my family members, friends and classmates for their supports and encouragement.
Papon Tabassum October, 2009
Abstract
This study paper reveals the present foreign direct investment (FDI) climate and scenario in Bangladesh and compares this scenario with other South Asian LDCs (Afghanistan, Bhutan, Maldives and Nepal). For measuring FDI scenario in Bangladesh, FDI inflows, outflows and component wise inflows are considered. The author also finds out the relationship between FDI and domestic investment, FDI and BOP, FDI and GNI and national savings, FDI and employment. The study also considered FDI scenario of other South Asian LDCs, their priority sectors, investment facilities and international investment agreements and why these facilities can be considered by Bangladesh economy. The problems faced by South Asian LDCS are also mentioned in this study. According to this paper, the trend line of FDI inflows is better than other concerned countries. Although Maldives has been got the first position in FDI inward stocks as percentage of GDP and also for World Bank ranking among South Asian LDCs, but Bangladesh has been got the first position according to the general trend line of FDI inward stocks. Moreover, Bangladesh has much potentiality to develop this field. The research paper is based on secondary data which is collected from different websites for publications, journals, news, reports, working papers, books and other published materials.
Key Words: FDI, FDI in Bangladesh, South Asian LDCs, FDI in South Asian Countries, Investment, Savings, BOP, GDP, Employment, Income.
Table of Contents
Title Acknowledgement Abstract Table of Contents List of Tables List of figures List of Analysis Acronyms and Abbreviations Technical Terms Used in the Study Page No. v vi vii ix ix x x xii
Chapter One: Introduction 1.1 Background of the Study 1.2 Rationale of the Study 1.3 Objective of the Study 1.4 Scope of the Study 1.5 Limitations of the Study
(1-3) 1 2 2 2 3
Chapter Two: Literature Review Chapter Three: Methodology
(4-6) (7-9)
Chapter Four: FDI Scenario in Bangladesh 4.1 Favorable FDI Climate 4.2 Present FDI Scenario 4.2.1 FDI Inflows 4.2.1.1 FDI Inflow Distribution by Component 4.2.1.2 FDI Distribution by Regulatory Agencies 4.2.1.3 Major FDI Sectors 4.2.1.4 Major Country-wise FDI Inflows in FY 2008-09 4.2.2 FDI Outflows 4.2.3 FDI Stock
(10-26) 10 10 11 12 12 14 14 15 16
4.2.4 FDI Facilities/ Incentives 4.2.5 Investment Treaties and Bilateral Agreements 4.3 Impact on Economic Growth 4.3.1 Employment Opportunities 4.3.2 Impact on GDP 4.3.3 Impact on Domestic Investment 4.3.4 Impact on Total Investment 4.3.5 Impact on GNI 4.3.6 Impact on National savings
16 17 17 18 18 22 23 24 26
Chapter Five: FDI Comparison among South Asian LDCs 5.1 FDI Climate 5.2 Present FDI Scenario 5.1.1 Inward FDI Stocks in South Asian LDCs 5.1.2 Inward FDI Stock as Percentage of GDP 5.1.3 Outward FDI Stock of South Asian LDCs 5.3 Priority Sectors for FDI in South Asian LDCS 5.4 Factors for Consideration by Investors in Doing Business in South Asian LDCs 5.5 Challenges and Constraints
(27-37) 27 33 33 34 34 35 35 36
Chapter Six: Findings, Bottlenecks and Recommendations 6.1 Findings of the Study 6.1.1 Findings of the Chapter Four 6.1.2 Findings of the Chapter Five 6.2 Bottlenecks Found 6.3 Recommendations
(38-44) 38 38 40 41 42
Chapter Seven: Conclusion References Statistical Appendix
45 (46-59) (60-65)
List of Tables
Title Table-01: Inward FDI Stock of South Asian LDCs, 1980-2007 (In million US$) Table-02: Inward FDI Stock of South Asian LDCs as percentage of GDP, 1980-2007 Table-03: Net FDI Flows and Inflows in Bangladesh Table-04: FDI Inflows Distribution by Components in Bangladesh, 2001-2007 Table-05: FDI Stock in Bangladesh (in Million US$) Table-06: Projects of Foreign Investment and Domestic Investment in Bangladesh Table-07: Country-wise FDI Inflows in Bangladesh Table-08: FDI outflow of Bangladesh Table-09: Total Investment, Official Investment and Private Investment 63 64 65 65 62 63 61 62 60 Page No.
List of Figures
Title Figure-01: Trend Line of Net FDI Flows in Bangladesh, FY 1999-2009 Figure-02: Trend Line of FDI Inflows in Bangladesh, FY 2000-2007 Figure-03: FDI Inflows Distribution by Components in 2007 Figure-04: FDI Distribution by Regulatory Agencies Figure-05: Major Sector-wise FDI Inflows in FY 2007-08 Figure-06: Major Country-wise FDI Inflows in FY 2008-09 Figure-07: Trend Line of Year-wise FDI Outflows in Bangladesh Figure-08: Inward FDI Stock of Bangladesh Figure-09: Outward FDI Stock in Bangladesh Figure-10: Potential Employment Opportunities in BOI-Registered projects Figure-11: Correlation between Foreign Investment and Local Investment Figure-12: Correlations between FDI, National Income and National Savings Figure-13: Trend Line of Inward FDI Stocks in South Asian LDCs, 1980-2007 Page No. 10 11 12 13 14 14 15 16 16 18 22 26 33
Figure-14: Year-wise Inward FDI Stock of South Asian LDCs As Percentage of GDP, 1980-2007 34
List of Analysis
Title Analysis-01: Correlation between Foreign Investment and Domestic Investment Analysis-02: Correlations between FDI and National Savings Analysis-03: Two Stage Least Square Method to Estimate BOP Analysis-04: Multiple Regression Analysis to Estimate Total Investment Analysis-05: Multiple Regression analysis to Estimate GNI Page No. 68 68 69 71 72
Acronyms & Abbreviation

AISA ANOVA BEPZA BIMSTEC Afghanistan Investment Support Agency Analysis of Variance Bangladesh Export Processing Zone Authority Bay of Bengal Initiative for Multi - Sectoral, Technical & Economic Cooperation BOI BOP BSCIC CB df EB EPZ EU FDI FI FY GDP GNI IFC Board of Investment Balance of Payment Bangladesh Small and Cottage Industries Corporation Commercial Banks Degree of Freedom Energy Bangla Export Processing Zone European Union Foreign Direct Investment Financing Institutions Fiscal Year Gross Domestic Product Gross National Income International Finance Corporation
IMF IT LDC MIGA MOF MNC MNE NRG OECD OLS OPIC SAARC SAP se TK TNC UNCTAD WB WIPO
International Monetary Fund Information Technology Least Developed Country Multilateral Investment Guarantee Agency Ministry of Finance Multinational Corporation Multinational Enterprise National Reference Group Organization for Economic Cooperation and Development Ordinary Least Square Overseas Private Investment Corporation South Asian Association for Regional Cooperation Structural Adjustment Programs Standard Error Taka Transnational Corporation United Nations Conference on Trade and Development World Bank World Intellectual Property Organization
Technical Terms Used

Balance of Payment is the total of all international transactions undertaken by a country during a given time. Equity capital is the foreign direct investor's purchase of shares of an enterprise in a country other than its own. FDI is the investment made by a foreign individual or company in productive capacity of another country as for example, the purchase or construction of a factory. GDP Measure of all final goods and services produced within the country in 1 year. IMF is an international organization established in 1944 to provide short term financial assistance to countries needing to stabilize exchange rates of alleviates balance of payments difficulties. Since the 80s the IMF has becoming increasingly involved in the
economic decision-making of nations through the conditionality associated loans.
with its
Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication systems to institutional development (e.g. accounting, legal services, etc.). LDCs The worlds poorest countries with very low per capita incomes ($100 or less at 1968 prices), a share of manufacturing in GDP of below 10% and a literacy rate 20%. At present there are 50 LDCs in the world. MNE is an enterprise that operates production or marketing facilities in more than one country. Portfolio Investment refers to the purchase of foreign stocks, bonds or other securities. Privatization The transfer to private ownership and control of assets or enterprises which were previously under public ownership. Reinvested earnings comprise the direct investor's share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested. South Asian LDCs Afghanistan, Bangladesh, Bhutan, Maldives and Nepal. TNE is an enterprise that operates production or marketing facilities in more than one country. Trade Balance is the net flow dollars into the country due to sales of goods abroad. UNCTAD an UN organization established in 1964. It is intended to represent the LDCs and acts as a pressure group for increased aid and an international regime for trade and investment more favorable to LDCs. World Bank is the main international agency providing development finance. Established in 1944, its role was that of post-war reconstruction, primarily in Europe. Once accomplished, its emphasis shifted to financing development projects in developing countries. Resources are provided by contributions from operations are financed mainly by borrowing from the IMF, the country shareholders have a its member countries, but its under
international financial markets. Like
percentage of votes based on the amount of
resources they provide, the US holding the largest percentage of vote.
Chapter One: Introduction
1.1 Background of the Study Foreign Direct Investment (FDI) is a part of total investment in an economy. It has the potentiality to generate employment, raise productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development of the worlds developing countries. More than ever, countries at all levels of development seek to leverage FDI for development. FDI plays a crucial role to enhance the economy of the developing country like Bangladesh. Bangladesh is a poor and least developing country. Its economy is always competing with other developing country. In recent years, the trend of FDI inflows of Bangladesh is extending at an increasing rate. The inflows of FDI in Bangladesh are higher than other South Asian LDCs e.g., Afghanistan, Bhutan, Maldives and Nepal. Among them, the rank of doing business in Maldives is 81 whereas Bangladesh is 119. It is because the inflows of FDI in Maldives as a percentage of GDP are higher than other South Asian LDCs. But Bangladesh has most favorable investment climate among them. FDI helps to meet up deficit trade balance of Bangladesh. Under Board of Investment (BOI), FDI creates lots of employment opportunities in recent years. It increases the national income as well as national savings of Bangladesh. Although recent global recession and unstable political situation hamper the economic growth of the country in many sectors, the trend of FDI is still increasing. Bangladesh has a now good position in LDCs. It will be gone out from the LDCs very soon if it will keep this trend of economic growth. And FDI can support in this regard. Afghanistan has come out from the surroundings of war recently. It has much potentiality for FDI. So investors are now showing investing in raw sectors of Afghanistan. FDI climate and investment facilities of Bhutan are not so much good. The same condition is seen in Nepal. They are still attracting investors with their tourism sectors. Maldives also attracts investors with their tourism as well as other potential sectors. But Bangladesh has most potentiality among these countries. If it keeps this trend of FDI, it can overcome Maldives very soon.
1.2 Rationale of the Study Bangladesh is a developing country. It has so much potentiality to develop its economic growth. But there is not much capital for large scale investment. As a result, large scale industries are not been possible although there is so much potentiality. In this situation, FDI can play a great role for establishment of large or medium scale industries. At present, there are various types of small, medium or large scale foreign industries and Multinational Corporations (MNCs) in Bangladesh, which contribute a lot for our economy. Bangladesh has now got the second largest position in the growth rate of FDI among South Asian LDCs. Besides it has more favorable climate than other South Asian LDCs. Author has shown this climate through this study. So this is the rationality of choosing this topic.
1.3 Objective of the Study To show the current trend and prospects of FDI in Bangladesh and compare with other South Asian LDCs.
1.4 Scope of the Study The scope of the study was to cover the inflows of FDI in Bangladesh for various sectors, such as multinational enterprises and large or medium scale industries which are involved with FDI, the reasons for increasing or decreasing rate of FDI and comparison the inflows of FDI in Bangladesh with other South Asian LDCs (Afghanistan, Bhutan, Maldives and Nepal). This study has obviously been based on secondary data. These secondary data has been obtained through various published journals, articles, news and analytical reports, prepared by various renowned government and non-government organizations through websites, books and other sources.
1.5 Limitations of the Study As this study has been based on secondary data, author faced some problems during the study, which are as follows. i. FDI related websites of South Asian LDCs like Maldives and Afghanistan are not so much developed. ii. Renowned organizations like IMF or UNCTAD, who publish various economics as well as FDI related working papers on a regular basis, they are indifferent to concentrate on details studies of South Asian countries. iii. iv. Lack of knowledge about econometric methods for further analysis. Insufficient time for conducting a thesis paper.
Chapter Two: Literature Review

According to Rahman (2003), FDI is the acquisition of managerial control by a citizen or corporation of a home nation over a corporation of some other host nation. It implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. FDI is net inflows of investment 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.
A typical MNE is one with net sales of 100 million dollars to several thousand million dollars, having FDI in manufacturing usually accounting for at least 15% to 20% of the companys total investment. FDI means at least a 25% participation in the share capital of the foreign enterprise (Lal and Streeten, 1977).
Murtaza (2000) found that FDI has the potential to generate employment, raise productivity, transfer foreign skills and technology, enhance exports and contribute to the long-term economic development of the worlds developing countries.
According to the Aggarwal (2008), the criteria underlying the list of LDCs are: a low income, as measured by GDP per capita; weak human resources, as measured by a composite index (Augmented Physical Quality of Life Index) based on indicators of life expectancy at birth, per capita calorie intake, combined primary and secondary school enrolment, and adult literacy and a low level of economic diversification, as measured by a composite index (Economic Diversification Index) based on the share of manufacturing in GDP, the share of the labor force in industry, annual per capita commercial energy consumption, and UNCTADs merchandise export concentration index.
In Bangladesh, FDI inflows are reported under the capital and financial account of the countrys Balance of Payments (BOP) statement which provides the direct effect on the
BOP. Thus the inflow of FDI plays an important role in determining the surplus/deficit in the capital and financial account of the BOP statement. The initial impact of an inflow of FDI on Bangladeshs BOP is positive but the medium term effect could become either positive or negative as the investors increase their imports of intermediate goods and services, and begin to repatriate profit. Usually, FDI inflow tends to have a greater positive impact through augmenting exports than creating a negative impact through increasing imports. It is found that FDI-financed firms tend to export a greater proportion of their output than their local counterparts. Because these firms usually tend to have a comparative advantage in their knowledge of international markets, efficiency of distribution channels, and their ability to adjust and respond to the changing pattern and dynamics of international markets. Similarly, policies of creating Export Processing Zones (EPZs) contribute to strengthening the positive correlation between FDI inflows and exports. So, the inflow of FDI may play an important role in Bangladesh in the long run in reducing the deficit in the countrys trade balance (Hossain, 2008).
FDI and trade liberalization causes economic growth in the perspective of Bangladesh. FDI has a dynamic and positive impact on the domestic investment of Bangladesh with positive and dynamic impact of domestic investment itself. Thus the respective authorities ought to put efforts in encouraging more FDI inflows to Bangladesh and review the existing policies in liberalizing trade (Mortaza and Das, 2007).
The Maldives has recorded remarkable economic growth over the past two decades, especially compared with the rest of the South Asian countries, and is on the threshold of graduating from LDC status to the middle-income group. Ironically, although the Maldives lacks the resource endowments, the scale of economies, and the geography diversity enjoyed by its South Asian neighbors, it has surpassed all of them to achieve the highest per capita GDP levels in the region. The Maldives belongs to a special category of countries called "Small Island Economies," of which a large number are dependent primarily on tourism and or on a narrow product or service range (Hulugalle et al., 2006)
Nepal has only recently opened the doors to foreign investment. Foreign investment promotion as an important strategy in achieving the objectives of increasing industrial production to meet the basic needs of the people, create maximum employment opportunities and pave the way for the improvement in the balance of payments. Foreign investment is expected to supplement domestic private investment through foreign capital flows, transfer of technology, improvement in management skills and productivity and providing access to international markets (Durbar, 2008).
Bhutan has been little successful in attracting foreign investment that is believed to generate great benefit to the economy. As FDI is expected not only to bring in much needed scarce capital but also access to international markets and technical know-how, Bhutan is fully committed to integrating into the world economy and reaping the benefits of the integration. One such initiative is its membership to BIMST-EC. Besides, it is also in the preparation process to accession to World Trade Organization (currently observer status) and most importantly, the FDI policy had been approved by the national assembly. Notwithstanding these initiatives on the part of the Royal government, Bhutan is still considered by foreign investors as less attractive destination partly due to its inaccessible location and partly due to its small market size and limited resources (Jigme, 2006)
Security and stability is getting better, economic sectors are flourishing day by day in Afghanistan, and under these circumstances it is expected that Afghanistan will attract more FDI within the coming years. It should be noted that Afghanistan has a market with substantial opportunities for businesses such as agricultural consulting services, manufacturing, precious stones, and semi precious stones and so on. (Shah, 2009)
Concluding Remarks of the Literature Review: During literature review, author found that FDI in Bangladesh in comparison among South Asian LDCs is a unique topic. There have not been found any direct similarity with other articles, journal, working papers, thesis papers or other materials of various published sources. The compiling the data and information of FDI in Bangladesh and South Asian LDCs was the thought of researchers own.
Chapter Three: Methodology

3.1 Formulating a Study Problem At first, author formulated a study problem for conducting the thesis paper. To think about the study problem, author considered some major aspects related to this study such as study design, measurement procedure, sampling strategy, frame of analysis and the style of writing of the report. Author also considered the availability of time, financial resources and expertise and knowledge of this field by herself. Moreover, lack of statistical as well as mathematical knowledge, required for the analysis and lack of sufficient computer and software were also considered.
3.2 Conceptualizing a Study Design For conceptualizing the study design and developing the literature aspects, author reviewed various published books, journals, articles, working papers, thesis papers of various government and non-government, national and international organizations and newspapers articles reports and news bulletin through websites and other published sources. Author always followed the daily newspapers for updated news regarding this field.
3.3 Constructing an Instrument for Data Collection Author collected data from the secondary sources such as various papers, articles, books, journals of government and non-government, national and international organizations through websites, newspapers and other published sources. This study design is mainly non-experimental one by nature.
3.4 Selecting a Sample As this study report is based on secondary data, there is no definite sample or population size. Here the period of data might be counted as sample size. All the aspects of FDI, identified by different organizations are sampling elements. Bangladesh as well as other four countries of South Asian LDCs i.e., Afghanistan, Bhutan, Maldives and Nepal, are included into the sample frame. Various econometric tools for analyzing the variables are
sample statistics. Author tried to show the recent FDI trend in Bangladesh as well as other South Asian LDCs and comparison among them with various variables and parameters. The study is based on both stratified random sampling and judgmental sampling.
3.5 Writing a Study Proposal After completing the previous steps, author submitted a proposal to the supervisor. The study proposal included the objectives of the study, hypothesis testing, study design, instruments for data collection, sample size, data processing procedures, problems and limitations and time frame. The objective of the study was to show the current trend of FDI in Bangladesh and compare with other South Asian LDCs. The hypothesis testing was based on multiple regression analysis between the variables by using t-test. Author also used simultaneous equation model. The data collection method was secondary basis. The scope of the study was to cover the inflows of FDI in Bangladesh for various sectors, such as multinational enterprises and large or medium scale industries which are involved with FDI, the reasons for increasing or decreasing rate of FDI and comparison the inflows of FDI in Bangladesh with other South Asian LDCs (Afghanistan, Bhutan, Maldives and Nepal)
3.6 Collecting Data After finalizing the proposal, author collected data from various published sources. Data were collected sequentially. At first, author conceptualized about FDI, FDI scenario in Bangladesh, LDC, name of the LDCs, name of the south Asian LDCs, FDI scenario in South Asian LDCs, FDI facilities, incentives, agreements, priority sectors, and FDI climates and so on. Concept of FDI, MNE, and LDC etc. were enriched through various books. Data about FDI scenario in Bangladesh were collected from the websites and other published sources of various government and non-government organizations of Bangladesh such as Ministry of Finance, Board of Investment, and Bangladesh Bureau of Statistics and so on. The data of South Asian LDCs and other materials were collected from the websites and other published sources of international organizations such as
UNCTAD, World Bank, IMF and so on. Moreover, author collected data from the investment related websites of concerned countries.
3.7 Data Processing The information of the study is based on both qualitative and quantitative data. Qualitative data was compiled by computer program such as MS Word. Quantitative data was analyzed by SPSS software and MS Excel. Various econometric tools such as correlation analysis, multiple regression analysis, use of two-stage least square, ANOVA analysis, variables and parameters identified, hypothesis testing, bar diagrams, line
diagrams, pie charts and many other tools were used for analyzing. After analyzing, the quantitative data was paste into the MS word program.
3.8 Writing Study Report After processing data, author wrote the study report in an academic style. The study report was divided into different chapters and sections based upon the main themes of the study. The first chapter reveals the background, rationality, objectives, scope and limitations of the study. The second chapter and third chapter show the literature review and the methodology of the study respectively. The fourth and fifth chapters are the analysis part. Fourth chapter expresses the FDI scenario in Bangladesh. The fifth chapter reveals the position of FDI of Bangladesh being a LDC and compare with other South Asian LDCs. The sixth chapter includes findings of the study, problems and recommendations. The seventh chapter is the concluding remarks. References and statistical annexes are attached into the ending of the study report. Abstract and acknowledgement are attached after the cover pages in beginning. Acronyms, abbreviation and technical terms are attached after the contents of the study.
4.1 Favorable FDI Climate

Bangladesh is considered as an attractive destination in South Asia for doing businesses. The recently published Doing Business 2010 report by the World Bank and IFC has ranked
Bangladesh 119th among 183 economies of the world. However, the rank of Bangladesh in investor protection is 20, which is even better than many developed economies. Besides, Bangladeshs position in starting a business, getting credit and paying taxes are 98, 71 and 89 respectively.
4.2 Present FDI Scenario Global Economic recession has already affected Bangladesh Economy. But the recession has not adversely affected Bangladesh Economy like other South Asian countries. Recession has badly affected developed countries which have decreased their consumption expenditures. As a result, those countries which has trade relation with Bangladesh, has the negative impact on FDI in Bangladesh. But still FDI's contribution to the total investment in Bangladesh economy is remarkable. The FDI flow of Bangladesh was 6.1% as a percentage of GDP in 2007. The figure-01 presents the trend line of net FDI flows in Bangladesh.
Figure-01: Trend Line of Net FDI Flows in Bangladesh, FY 1999-2009
FDI Flows (in Million US$)
1000 800 600 400 200 0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 FDI Flows 2 per. Mov. Avg. (FDI Flows) 383 550 391 376 385 776 675 793 769 882
Source: Authors Compilation, Based on Bangladesh Economic Review 2009
The figure-01 shows the net FDI flows in Bangladesh from FY 1999-2009. The trend line (2 period moving averages) shows the cyclical fluctuation of FDI flows. In FY 2000-01, The FDI rate was higher than the previous year. During 2001-2004, the FDI flows remained at same rate. But after 2004, the flows were increasing at increasing rate. Although in FY 2005-06, the flow decreased a little but after that period it again recovered. Bangladesh achieved highest FDI in FY 2008-09. That means Bangladesh has still been enabled to attract the investors in spite of recent global economic recession and recent political movement of Bangladesh. The statistical data of net FDI of Bangladesh is attached into the appendix.
4.2.1 FDI Inflows The inflows of FDI are now playing a fundamental role in economic growth of Bangladesh. Figure-02: Trend Line of FDI Inflows in Bangladesh, FY 2000-2007
FD I In flows (in Million U S $) 1000 800 600 400 200 0 579 2000 355 2001 328 2002 FDI Inflows 350 2003 460 2004 845 2005 793 2006 666 2007
2 per. Mov. Avg. (FDI Inflows)
The figure-02 presents the year-wise FDI inflows in Bangladesh. The trend line shows the cyclical fluctuations of FDI inflows in different years. In 2000, the FDI inflow was US$579. But after that period, FDI inflows had been decreased. From 2004, FDI inflow was increasing and Bangladesh got highest FDI in 2005. In 2007, this flow was again decreasing because of political instability of Bangladesh. The statistical data of net FDI of Bangladesh is attached into the appendix.
4.2.1.1 FDI Inflow Distribution by Component Figure-03: FDI Inflows Distribution by Components in 2007
16%
Equity Capital
18% 66%
Reinvested Earnings
Intra-Company Loans
The pie-chart shows the FDI inflows distribution by components in 2007. Equity capital, the principal component is 60%, reinvestment earnings are 32% and intra-company loans 8%. The FDI inflows distribution by components of year 2001-2007 is attached into the appendix.
4.2.1.2 FDI Distribution by Regulatory Agencies Foreign Investors would take permission for doing business in Bangladesh and register from the following regulatory agencies.
Sl. No. 01
Regulatory Agencies Board of Investment (BOI)
Regulation Power Registration of all industrial projects in the private sector outside the authorities of BSCIC and BEPZA. For institutional facility industrial purposes, projects registration financed of by
Commercial Banks or by different financing institutions outside the
authorities of BSCIC & BEPZA.
02
Bangladesh Export Processing Zones Authority (BEPZA)
Approval of all projects to be located in the EPZs. Registration having exceeding of industrial projects not (for
03
Bangladesh Small and Cottage Industries Corporation (BSCIC)
capital TK
investment 30.00 million
BMRE maximum TK 45.00 million). 04 Financing Institutions (FI) and Commercial Banks (CB) Approval and financing of projects having investment of any amount.
Figure-04: FDI Distribution by Regulatory Agencies
13%
EPZ Registered Non-EPZ Registered
87%
The pie-chart presents that most of the FDI (87%) have been brought by companies outside EPZs. The balance (13%) has been invested in companies registered with BEPZA. The FDI inflows distribution by regulatory agencies is attached into the appendix
4.2.1.3 Major FDI Sectors Figure-05: Major Sector-wise FDI Inflows in FY 2007-08
5.69% 9.22% 12.35% 0.31% 0.05% 0.06%
44.11%
28.21% Textiles Engineering Agrobased Leather and Leather Goods Services Chemical Food and Allied Miscellaneous
In FY 2007-08, foreign investment was dominated by textiles, services and. Engineering. Besides, chemical industries, agro based industries, food and allied, leather and leather goods was also playing a good role.
4.2.1.4 Major Country-wise FDI Inflows in FY 2008-09 Figure-06: Major Country-wise FDI Inflows in FY 2008-09
FDI Inflows Indonesia Germany China India South Korea US UAE Canada Russia UK 0 5000 10000 1108.16 1390.084 1599.056 1701.015 1824.449 2736.708 3294.694 4259.682 5596.6 15952.685 15000 20000
FDI Inflows (in Million TK)
In 2006, FDI has been originated from 27 countries dominated by both developed economies and developing economies. The top-10 FDI sources are UK, Russia, Canada, UAE, US, South Korea, India, China, Germany and Indonesia respectively. The figure-05 presents country-wise FDI inflows in FY 2008-09. The statistical data of 27 FDI inflows of countries is attached into the appendix.
4.2.2 FDI Outflows Figure-07: Trend Line of Year-wise FDI Outflows in Bangladesh
FDI Outflow 2008 2007 2006 2002 2001 2000 1999 1990 1985 -5 0 0.1 0.5 -0.3 5 10 15 20 25 2 4 4.1 20.6 9 21
FDI Outflow (in million US$)
Source: Authors Compilation, Based on World Investment Report of UNCTAD
Bangladesh economy is now also keeping a part of outward FDI. The figure-06 expresses the FDI outflow of Bangladesh. In 1985, FDI outflow was negative. But after 1990, FDI outflows is increasing and showing a positive trend. In 2001, Bangladesh got second highest FDI outflow. But after that period, this rate was again decreasing. Bangladesh got highest FDI outflow in 2007. The Year-wise data of FDI outflows of Bangladesh is attached into the appendix.
4.3 Favorable FDI Climate

Bangladesh is considered as an attractive destination in South Asia for doing businesses. The recently published Doing Business 2010 report by the World Bank and IFC has ranked
Bangladesh 119th among 183 economies of the world. However, the rank of Bangladesh in investor protection is 20, which is even better than many developed economies. Besides, Bangladeshs position in starting a business, getting credit and paying taxes are 98, 71 and 89 respectively.
4.4 Present FDI Scenario Global Economic recession has already affected Bangladesh Economy. But the recession has not adversely affected Bangladesh Economy like other South Asian countries. Recession has badly affected developed countries which have decreased their consumption expenditures. As a result, those countries which has trade relation with Bangladesh, has the negative impact on FDI in Bangladesh. But still FDI's contribution to the total investment in Bangladesh economy is remarkable. The FDI flow of Bangladesh was 6.1% as a percentage of GDP in 2007. The figure-01 presents the trend line of net FDI flows in Bangladesh.
Figure-01: Trend Line of Net FDI Flows in Bangladesh, FY 1999-2009
FDI Flows (in Million US$)
1000 800 600 400 200 0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 FDI Flows 2 per. Mov. Avg. (FDI Flows) 383 550 391 376 385 776 675 793 769 882
The figure-01 shows the net FDI flows in Bangladesh from FY 1999-2009. The trend line (2 period moving averages) shows the cyclical fluctuation of FDI flows. In FY 2000-01, The FDI rate was higher than the previous year. During 2001-2004, the FDI flows remained at same rate. But after 2004, the flows were increasing at increasing rate. Although in FY 2005-06, the flow decreased a little but after that period it again recovered. Bangladesh achieved highest FDI in FY 2008-09. That means Bangladesh has still been enabled to attract the investors in spite of recent global economic recession and recent political movement of Bangladesh. The statistical data of net FDI of Bangladesh is attached into the appendix.
4.4.1 FDI Inflows The inflows of FDI are now playing a fundamental role in economic growth of Bangladesh.
Figure-02: Trend Line of FDI Inflows in Bangladesh, FY 2000-2007

FD I In flows (in Million U S $) 1000 800 600 400 200 0 579 2000 355 2001 328 2002 FDI Inflows 350 2003 460 2004 845 2005 793 2006 666 2007
2 per. Mov. Avg. (FDI Inflows)
The figure-02 presents the year-wise FDI inflows in Bangladesh. The trend line shows the cyclical fluctuations of FDI inflows in different years. In 2000, the FDI inflow was US$579. But after that period, FDI inflows had been decreased. From 2004, FDI inflow was increasing and Bangladesh got highest FDI in 2005. In 2007, this flow was again decreasing because of political instability of Bangladesh. The statistical data of net FDI of Bangladesh is attached into the appendix.
4.4.1.1 FDI Inflow Distribution by Component Figure-03: FDI Inflows Distribution by Components in 2007
16%
Equity Capital
18% 66%
Reinvested Earnings
Intra-Company Loans
The pie-chart shows the FDI inflows distribution by components in 2007. Equity capital, the principal component is 60%, reinvestment earnings are 32% and intra-company loans 8%. The FDI inflows distribution by components of year 2001-2007 is attached into the appendix.
4.4.1.2 FDI Distribution by Regulatory Agencies Foreign Investors would take permission for doing business in Bangladesh and register from the following regulatory agencies.
Sl. No. 01
Regulatory Agencies Board of Investment (BOI)
Regulation Power Registration of all industrial projects in the private sector outside the authorities of BSCIC and BEPZA. For institutional facility industrial purposes, projects registration financed of by
Commercial Banks or by different financing institutions outside the
authorities of BSCIC & BEPZA.
02
Bangladesh Export Processing Zones Authority (BEPZA)
Approval of all projects to be located in the EPZs. Registration having exceeding of industrial projects not (for
03
Bangladesh Small and Cottage Industries Corporation (BSCIC)
capital TK
investment 30.00 million
BMRE maximum TK 45.00 million). 04 Financing Institutions (FI) and Commercial Banks (CB) Approval and financing of projects having investment of any amount.
Figure-04: FDI Distribution by Regulatory Agencies
13%
EPZ Registered Non-EPZ Registered
87%
The pie-chart presents that most of the FDI (87%) have been brought by companies outside EPZs. The balance (13%) has been invested in companies registered with BEPZA. The FDI inflows distribution by regulatory agencies is attached into the appendix.
4.4.1.3 Major FDI Sectors Figure-05: Major Sector-wise FDI Inflows in FY 2007-08
5.69% 9.22% 12.35% 0.31% 0.05% 0.06%
44.11%
28.21% Textiles Engineering Agrobased Leather and Leather Goods Services Chemical Food and Allied Miscellaneous
In FY 2007-08, foreign investment was dominated by textiles, services and. Engineering. Besides, chemical industries, agro based industries, food and allied, leather and leather goods was also playing a good role.
4.2.1.4 Major Country-wise FDI Inflows in FY 2008-09 Figure-06: Major Country-wise FDI Inflows in FY 2008-09
FDI Inflows Indonesia Germany China India South Korea US UAE Canada Russia UK 0 5000 10000 1108.16 1390.084 1599.056 1701.015 1824.449 2736.708 3294.694 4259.682 5596.6 15952.685 15000 20000
FDI Inflows (in Million TK)
In 2006, FDI has been originated from 27 countries dominated by both developed economies and developing economies. The top-10 FDI sources are UK, Russia, Canada, UAE, US, South Korea, India, China, Germany and Indonesia respectively. The figure-05 presents country-wise FDI inflows in FY 2008-09. The statistical data of 27 FDI inflows of countries is attached into the appendix.
4.4.2 FDI Outflows Figure-07: Trend Line of Year-wise FDI Outflows in Bangladesh
FDI Outflow 2008 2007 2006 2002 2001 2000 1999 1990 1985 -5 0 0.1 0.5 -0.3 5 10 15 20 25 2 4 4.1 20.6 9 21
FDI Outflow (in million US$)
Bangladesh economy is now also keeping a part of outward FDI. The figure-06 expresses the FDI outflow of Bangladesh. In 1985, FDI outflow was negative. But after 1990, FDI outflows is increasing and showing a positive trend. In 2001, Bangladesh got second highest FDI outflow. But after that period, this rate was again decreasing. Bangladesh got highest FDI outflow in 2007. The Year-wise data of FDI outflows of Bangladesh is attached into the appendix.
4.4.3 FDI Stock
Figure-08: Inward FDI Stock

Inward FDI Stock (in Million US$) Inward Stock 6000 5000 4000 3000 2000 1000 0 1990 2000 2008 478 2162 4817
Figure-09: Outward FDI Stock

Outward Stock (in Million US $) Outward Stock 100 81 80 60 40 20 0 1990 2000 2008 45 69
The figure-07 shows the increasing rate of Inward FDI stock in Bangladesh. In 1990, Bangladesh had US$478 inward FDI stock. Now this rate is US$4817. Bangladesh also plays a role in outward FDI stock. The figure-08 presents the outward FDI stock. In 2008, outward FDI stock of Bangladesh was US$81.
4.4.4 FDI Facilities/ Incentives Major incentives are as follows: 1. Tax Exemptions: Generally 5 to 7 years. However, for power generation exemption is allowed for 15 years. 2. Duty : No import duty for export oriented industry. For other industry it is @ 5% advalorem. 3. Tax Law : i. Double taxation can be avoided in case of foreign investors on the basis of bilateral agreements. ii. Exemption of income tax up to 3 years for the expatriate employees in industries specified in the relevant schedule of
Income Tax ordinance. 4. Remittance 5. Exit : : Facilities for full repatriation of invested capital profit and divided. An investor can wind up on investment either through a decision of the AGM or EGM. Once a foreign investor completes the formalities to exit the country, he or she can repatriate the sales proceeds after securing proper authorization from the Central Bank. 6. Ownership : Foreign investor can set up ventures either wholly owned on in joint collaboration with local partner.
4.4.5 Investment Treaties and Bilateral Agreements Investment treaties for promotion and protection of investment between Bangladesh and the following countries have been concluded: USA, Republic of Korea, UK, Thailand, Germany, Turkey, Romania, France, Belgium, and Italy. Negotiations are going on with a few other East Asian and European countries including the Netherlands and Switzerland.
Avoidance of Double Taxation - Bilateral Agreements Bilateral agreements have been concluded by the Bangladesh government with the following countries for avoidance of double taxation: Japan, Italy, Singapore, Sweden, Republic of Korea, United Kingdom (including Northern Ireland), Canada, Malaysia, Romania, Sri Lanka, France, Germany, India and Pakistan. Negotiations are going on for similar agreements with Belgium, the Netherlands and the USA.
4.5 Impact on Economic Growth Although there is no direct relationship between FDI and economic growth, the recent years survey reveals that FDI and economic growth is positively correlated. FDI is a part of total investment in an economy. In modern economy, investment plays a great role in economic growth of a country. It increases national revenue, national income and national savings. It creates employment opportunities. It also influences the BOP.
4.5.1 Employment Opportunities Creating opportunities for employment is a key area of focus of the national economic development and poverty reduction strategy. Generally, manufacturing investments provide large employment opportunities for managerial, technical, supervisory, skilled, semi-skilled and unskilled persons. Figure-10: Potential Employment Opportunities in BOI-Registered projects
Employment Opportunities
2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 2003-2004 2002-2003 2001-2002 2000-2001 319,516 273,754 373,625 346,587 208,635 410,744 458,478 418,529 425,232
Projects registered with BOI during FY 2008-09 have estimated to provide 208635 job opportunities which are shown in the figure-09.
4.5.2 Impact on BOP In Bangladesh, FDI inflow creates direct effect on the BOP. Thus the inflow of FDI plays an important role in determining the surplus/deficit in the capital and financial account of the BOP statement. The initial impact of an inflow of FDI on Bangladeshs BOP is positive but the medium term effect could become either positive or negative. After setting up capital machineries, the FDI-financed companies begin to export their products. Most of these companies are export-oriented. Usually, FDI inflow tends to have a greater positive impact through augmenting exports than creating a negative impact through increasing imports. Policies of creating Export Processing Zones (EPZs)
contribute to strengthening the positive correlation between FDI inflows and exports. So, the inflow of FDI may play an important role in Bangladesh in the long run in reducing the deficit in the countrys trade balance. Empirical research in several countries suggests that the initial inflow of FDI tends to increase the host country's imports. One reason for this is that primarily FDI companies have high propensities to import capital and intermediate goods and services that are not readily available in the host country. However, if FDI is concentrated in import substituting industries, then it is expected to affect imports negatively because the goods that were imported earlier would now be produced in the host country by foreign investors. We can prove that FDI influences the BOP. Consider the following simultaneous equation model to estimate the two-stage least square method:
BOP Function:
Bt 1 2 Cu t 3Ca t 4 Fit 5 Ert u1t (i)
Financial Account Function: Fit 1 2 Fd t 3 Pot 4 Ot t u 2t .. (ii)
Where, B = Balance of payment Cu = Current Account Ca = Capital Account Fi = Financial Account Er = Errors and Omission Fd = FDI Po = Portfolio Investment Ot = Other Investment
The u1, u2 are residuals, 1 , 2 , 3 , 4 , 5 , 1 , 2 , 3 , 4 are parameters, B, Fi, endogenous variables and Cu, Ca, Er, Fd, Po, Ot are exogenous variables. The BOP equation states that BOP is determined by current account, capital account, financial account and errors and omission. The financial account function postulates that the financial account determined on the basis of FDI, portfolio investment and other investment. So there is obviously a simultaneous equation problem.
(a) Order Condition for identification: K M G 1 . In our example, K = 8 M=5 G=2
(8 5) (2 1)
3 >1 The order condition is satisfied and the equation is overidentified.
(b) Rank Condition for Identification: Complete Table of Structural Parameters Variables B Cu Ca Fi Er Fd Po Ot 1st Equation 2nd Equation -1 2 0 0 Table of parameters
2 3 4
3 4 5 0
0 -1 0 0
0 2 3 4
The rank condition for identification is also satisfied for the BOP function and the BOP function is overidentified.
We first obtain the reduced-form value of the endogenous variable (Financial Account): Fit 1 2 Cu t 3Ca t 4 Ert 5 Fd t 6 Pot 7 Ot t u 2t . (iii)
The results are as follows
Fi 2.27 1.66Cu 3.43Ca 3.44 Er 1.00 Fd 1.00 Po 1.00Ot (iv)
We next substitute the calculated value of financial account for the original Fi variable, and perform the regression
* * * * Bt* 1* 2 Cu t 3 Ca t 4 Fit 5 Ert u1*t .. (v)
The result is as follows

Bt 50.499 0.998Cu t 1.089Ca t 1.02 Fit 0.986 Ert (vi)
se =
(45.537) (.033) (30.104) df= 9
(.102) (10.668)
(.063)
(.101)
t = (-1.109) R2 = 0.996
(16.239) (9.739)
The coefficient of determination, R2 is 0.996 or 99% that means the regression line gives 99% fit for the observed data. We can create a hypothesis that is financial account (including FDI flows) influences balance of payment of Bangladesh.
The null hypothesis is
H0 : 4 = 0
The alternative hypothesis is
H1 : 4 0
The standard error of parameter 4 is 0.063 which is smaller than half of the numerical value (1.02/2) of the parameter estimate. That means we reject null hypothesis that the
true population parameter 4 =0. We conclude that the least square estimate is statistically significant and the rejection of null hypothesis 4 = 0 implies that financial
account (including FDI) influences overall BOP. We can take t-test for further testing. The observed t value is 16.239 with the desired level of significance is 5% in a two-tailed test where df is 9. The observed value is greater than the critical value 2.262. That means
we reject the null hypothesis and the estimate 4 is statistically significant.
4.5.3 Impact on Domestic Investment FDI may displace domestic investment by competing in product and financial market due to its superiority in technologies and skills, larger economies of scale and better management and production process. There are a number of empirical evidences that support the view that domestically owned firms are positively related to the presence of foreign firms. Figure-11: Correlation between Foreign Investment and Local Investment
30000
F re n In s en o ig ve tm t
20000
10000
-10000 -10000
10000
Local Investment
20000
30000
Source: Authors Compiling, Based on Bangladesh Economic Review 2009
The figure-10 shows that there is a positive correlation between local investment and foreign investment during the period 1992-2009. It is seen that when local investment increases then the foreign investment increases but a lower rate because there are some factors behind this situation. So there is a low degree of positive correlation between domestic investment and foreign investment. The data of Local investment and domestic investment of period 1992-2009 and correlation analysis are attached into the appendix. Due to the expected backward and forward linkages between FDI and local industries, FDI can either crowd in domestic investment by transferring technologies and knowledge to domestic firms or crowd out domestic investment due to larger economies of scale and better managerial skills. These characteristics of FDI open the door for the discussion of the dynamic effect of FDI on domestic investment. FDI also plays a role for substitutes or complementary of domestic investment to balance the total investment.
4.5.4 Impact on Total Investment Total investment of an economy equals official investment and private investment i.e., domestic investment and foreign investment. The growth of investment will be positive within a favorable investment climate.
Let us consider the following model for estimating that the FDI flows of Bangladesh influence the total investment. Investment Function: I t 1 2 Of t 3 Fd t 4 Ot t u t ...(i) Where, I = Investment Function Of = Official Investment Fd = FDI Ot = Other Investment t = Time
The u is residual, 1 , 2 , 3 , 4 are parameters, I endogenous variable and Of, Fd, Ot are exogenous variables. The investment function states that total investment is determined by official/ public investment and private investment which includes FDI and other private investment. We first compute the value of variables. The statistical analysis is attached into the appendix.
The results are as follows:

I 0.114 1.000Of 0.995Fd 1.000Ot (ii)
se = (0.329) (0.003) R2 = 1.00
(0.026)
(0.000) (2915.668)
t = (0.346) (345.732) (38.117) df= 9
The coefficient of determination, R2 is 1.00 or 100% that means the regression line gives 100% fit for the observed data. We can create a hypothesis that is FDI influences the total investment.

H0 : 3 = 0

H1 : 3 0
The standard error of parameter 3 is 0.026 which is smaller than half of the numerical value (0.995/2) of the parameter estimate. That means we reject null hypothesis that the
true population parameter 3 =0. We conclude that the least square estimate is statistically significant and the rejection of null hypothesis 3 = 0 implies that FDI
influence the total investment. We can take t-test for further testing. The observed t value is 38.117 with the desired level of significance is 5% in a two-tailed test where df is 9. The observed value is greater than the critical value 2.262. That means we reject the null
hypothesis and the estimate 3 is statistically significant.
4.5.5 Impact on GNI According to the classical macroeconomics, gross national income is determined by consumption, investment, government expenditure, export and import in a four sector economy. That means FDI, which is a part of total investment, plays a role in gross national income. Let us consider the following multiple regression model for estimating that the investment (including FDI flows) of Bangladesh influence GNI. GNI Function: Yt 1 2 C t 3 I t 4 Gt 5 Xn 6 Ot u t ... (i) Where, Y = GNI C = Consumption I = Investment G = Government Expenditure Xn = Trade Balance; Export (X)-Import (M) Ot = Other Investment t = Time
The u is residual, 1 , 2 , 3 , 4 , 5 , 6 are parameters, Y endogenous variable and C, I, G, Xn, Ot are exogenous variables. We first compute the value of variables. The statistical data and analysis are attached into the appendix.
The results are as follows: Yt 299.012 0.068C t 1.437 I t 1.049Gt 0.875 Xn 1.064Ot (ii) t = (34.703) (21635.298) (13.345) (18.872) (20.788) (378.989) R2 = 1.00 df = 7
The coefficient of determination, R2 is 1.00 or 100% that means the regression line gives 100% fit for the observed data. We can create a hypothesis that is investment in Bangladesh (including FDI) influences the GNI.

H0 : 3 = 0

H1 : 3 0
The observed t value is 13.345 with the desired level of significance is 5% in a two-tailed test where df is 7. The observed value is greater than the critical value 2.365. That means
we reject the null hypothesis that the true population parameter 3 =0. We conclude that
the least square estimate is statistically significant and the rejection of null hypothesis
3 = 0 implies that investment (including FDI) influences the GNI of Bangladesh.
4.5.6 Impact on National Savings FDI plays a role in increasing consumption as well as savings of the economy.
Figure-12: Correlations between FDI, National Income and National Savings
30000
20000
Foreign Investment
10000
-10000 -10000
10000
Local Investment
20000
30000
Figure-11 shows that there is a positive correlation between national savings and FDI during the period 2001-2008. It is seen that when FDI increases then national savings increases at a higher rate. So there is a high degree of positive correlation between national savings and FDI. The data of FDI and national savings of period 2001-2008 is attached into the appendix.
Chapter Five: FDI Comparison among South Asian LDCs
5.2 FDI Climate

South Asian LDCs are considered as attractive destination for doing businesses. The recently
published Doing Business 2010 report by the World Bank and IFC has ranked the South Asian LDCs as follows.
Aspects Easy of Doing Business Starting a Business Dealing with Construction Permit Employing Workers Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing A Business
Afghanistan 160 23 149 69 164 127 183 55 183 164 183
Bangladesh 119 98 118 124 176 71 20 89 107 180 108
Bhutan 126 80 127 12 41 177 132 90 153 33 183
Maldives 87 49 9 41 183 150 73 1 126 92 126
Nepal 123 87 131 148 26 113 73 124 161 122 105
Starting a Business The challenges of launching a business in South Asian LDCs are shown below. It included the number of steps entrepreneurs can expect to go through to launch, the time it takes on average, and the cost and minimum capital required as a percentage of gross national income (GNI) per capita.
Indicator Procedures (Numbers) Time (Days) Cost (% of income per capita) Minimum capital (% of income per capita) Afghanistan 4 7 30.2% 0 Bangladesh 7 44 36.2% 0 Bhutan 8 46 8% 0 Maldives 5 9 10% 4% Nepal 7 31 53.6% 0
It is seen that there are only 4 procedures to go through to launch a business in Afghanistan; entrepreneurs of Bangladesh go through 7 steps. Unnecessary steps should be removed from Bangladesh. Afghanistan takes 7 days to start a business whereas Bangladesh takes 44 days which is very lengthy and boring for entrepreneurs. No minimum capital is required for starting a business in Bangladesh which is a positive sign for businessman.
Dealing with Construction Permit Shown below are the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections.
Indicator Procedures (number) Time (days) Cost (% of income per capita)
Afghanistan 13 340 12877.6
Bangladesh 14 231 645.1
Bhutan 25 183 149.0
Maldives 9 118 21.9
Nepal 15 424 221.3
In Maldives, there are only 9 procedures to build a warehouse whereas Bangladesh has 14 procedures to obtain necessary licenses and permits, complete required notifications and inspections and obtain utility connections. Bangladesh needs 231 days to build a warehouse whereas Maldives takes 118 days.
Employing Workers The difficulties that employers face in hiring and firing workers are shown below. Each index assigns values between 0 and 100, with higher values representing more rigid regulations. The Rigidity of Employment Index is an average of the three indices.
Indicator Difficulty of hiring index (0-100) Rigidity of hours index (0-100) Difficulty of redundancy index (0-100)
Afghanistan 0
Bangladesh 44
Bhutan 0
Maldives 33
Nepal 67
20 40
0 40
0 20
20 0
0 70
Rigidity of employment index (0-100) Redundancy costs (weeks of salary)
20
28
18
46
30
104
10
90
In Afghanistan, there are no rigid regulations whereas Bangladesh has 44 rigid regulations for employing workers. Redundancy cost in Maldives is 9 weeks of salary. On the contrary, Bangladesh is 104 weeks of salary which is very high for being a LDC.
Registering Property The ease with which businesses can secure rights to property is shown below. Included are the number of steps, time, and cost involved in registering property.
Indicator Procedures (number) Time (days) Cost (% of property value)
Bhutan 5 64 0
Maldives No Practice No Practice No Practice
Nepal 3 5 4.8
Bangladesh takes 245 days to follow the 8 procedures of registering properties which cost is 10.2% of property value. On the other hand, there are not seen such practices in Maldives. But registering property is a legal step for making your property legal or authorized. But Bangladesh needs to reduce the time and number of procedures.
Getting Credit Measures on credit information sharing and the legal rights of borrowers and lenders are shown below. The Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. It ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau.
Indicator Strength of legal rights index (0-10) Depth of credit information
Afghanistan 6
Bangladesh 7
Bhutan 2
Maldives 4
Nepal 5
index (0-6) Public registry coverage (% of adults) Private bureau coverage (% of adults) 0 0 0 0 0.3 0 .9 0 0 0
Protecting Investors The indicators below describe three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), shareholders ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection.
Indicator Extent of disclosure index (0-10) Extent of director liability index (0-10) Ease of shareholder suits index (0-10) Strength of investor protection
Afghanistan 0 0
Bangladesh 6 7
Bhutan 5 3
Maldives 0 8
Nepal 6 1
0.7
6.7
5.3
5.3
index (0-10)
In the case of protecting investors, Bangladesh is the greater disclosure than Maldives. The position in liability of directors and powers of shareholders in Bangladesh, Maldives and Nepal is very good. Bangladesh is the better investor protection than other South Asian LDCs. Paying Taxes
The data below shows the tax that a medium-size company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes. These measures include the number of payments an entrepreneur must make; the number of hours spent preparing, filing, and paying; and the percentage of their profits they must pay in taxes.
Indicator Payments (number per year) Time (hours per year) Profit tax (%) Labor tax and contributions (%) Other taxes (%) Total tax rate (% profit)
Afghanistan 8 275 0 0 36.4 36.4
Bangladesh 21 302 25.7 0 9.2 35
Bhutan 18 274 35 1.1 4.4 40.6
Maldives 1 0 0 0 9.1 9.1
Nepal 34 338 16.8 11.3 10.7 38.8
In Maldives and Afghanistan, an entrepreneur takes 1 and 8 numbers of paying taxes whereas Bangladesh takes 21 numbers. There is no hours spent for preparing tax, Bangladesh takes 302 hours per year. Total tax rate as percentage of profit in Bangladesh is 35% whereas Maldives is only 9.1%.
Trading Across Borders The costs and procedures involved in importing and exporting a standardized shipment of goods are detailed under this topic. Every official procedure involved is recorded starting from the final contractual agreement between the two parties, and ending with the delivery of the goods.
Indicator Documents to export (number) Time to export (days) Cost to export (US$ per container) Documents to import (number) Time to import (days) Cost to import (US$ per container)
Afghanistan 12 74 3350 11 77 3000
Bangladesh 6 25 970 8 29 1375
Bhutan 8 38 1210 11 38 2140
Maldives 8 21 1348 9 20 1348
Nepal 9 41 1764 10 35 1825
Bangladesh has to submit only 6 documents for export and takes 25 days for exporting whereas Afghanistan takes 74 days. The export cost and import cost of Bangladesh is lowest than other South Asian LDCs. Bangladesh takes 29 days for importing whereas Afghanistan takes 77 days.
Enforcing Contracts The ease or difficulty of enforcing commercial contracts is measured below. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment.
Indicator Procedures (number) Time (days) Cost (% of claim)
Bhutan 47 225 0.1
Maldives 41 665 16.5
Nepal 39 735 26.8
To enforce a contract, Bangladesh takes 1442 days whereas Bhutan takes only 225 days. Cost of enforcing contracts as percentage of claim is highest than other South Asian LDCs. Closing A Business The time and cost required to resolve bankruptcies is shown below. The data identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is also shown.
Indicator Time (years) Cost (% of estate) Recovery rate (cents) Afghanistan No Practice No Practice 0 Bangladesh 4 8 23.2 Bhutan No Practice No Practice 0 Maldives 6.7 4 18.2 Nepal 5.0 9 24.5
5.3 Present FDI Scenario
The investment climate of South Asian LDCs is more favorable for doing business. As a result, the foreign investors of developed countries are showing lots of interest to invest here.
5.3.1 Inward FDI Stocks in South Asian LDCs Figure-13: Trend Line of Inward FDI Stocks in South Asian LDCs, 1980-2007
Afganistan
Inward FDI Stock (in Million US$) 1600 1400 1200 1000 800 600 400 200 0 3000 2000 1000 0
Bhutan
Maldives
Nepal
Bangladesh
7000 6000 5000 4000
Source: Authors Compilation, based on World Investment Report of UNCTAD
Figure-12 shows that only Bangladesh keeps a great role for earnings from inward FDI stocks. The line curve of Bangladesh reveals an increasing rate of inward FDI stock from the year 1996. Afghanistan is getting FDI from 2002 and now its FDI is upward slopping at an increasing rate. The line curve of Maldives is increasing at a growing rate gradually but with the lowest amount. The FDI of Nepal is also increasing gradually from the year 1996. Bhutan is recently getting opportunities of FDI. So, in this graph we can conclude that, Bangladesh is the highest position for getting inward FDI stock. The data of inward FDI stock of South Asian LDCs of period 1980-2008 are attached into the appendix.
5.3.2 Inward FDI Stock as Percentage of GDP Figure-14: Year-wise Inward FDI Stock of South Asian LDCs
19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08
As Percentage of GDP, 1980-2007

Afghanistan Inward FDI Stock (as % of GDP) 14 12 10 8 6 4 2 0 15 10 5 0 Bangladesh Bhutan Nepal Maldives 30 25 20
Source: Authors Compilation, based on World Investment Report of UNCTAD
Figure-13 presents the inward FDI stock of South Asian LDCs as percentage of GDP. According to this graph, Maldives is the top position. That means, the FDI of Maldives contributes a lot for their real GDP. That is why, World Bank ranked it as 81 for doing business. The line curve of Maldives is increasing at a growing rate. The second top position is for Bangladesh for inward FDI stock as percentage of GDP. The line curve of it is average. The FDI of Afghanistan and Bhutan is recently contributing in their GDP. The FDI of Nepal is still low. The Data of inward FDI stock in South Asian LDCs as percentage of GDP are attached into the Appendix.
5.3.3 Outward FDI Stock of South Asian LDCs Only Bangladesh is now enabled for outward FDI. Bangladesh has started Outward FDI from 2000. Other concerned countries are not still ready for outward FDI. Outward FDI Stock of Bangladesh has shown in chapter four.
5.4 Priority Sectors for FDI in South Asian LDCs Afghanistan Agro based industries (dairy, honey, almond, sunflower, tomato, sugar
19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06
beet, olive etc.), mining, energy and power, transport and logistics, housing, hotels, ICT and construction materials. Bangladesh Textiles, electronics, IT, natural gas based industries, frozen foods, leather, ceramics, light engineering and agro based. Bhutan Maldives Nepal Hydro power, agro processing, tourism, medicinal plants. Marine based industries, tourism, infrastructure and air and sea transport. Medicinal and aromatic plants, agro based (mushroom, spices, vegetables, fruits), dairy, tea, sericulture, hydro power, leather, poultry and textiles
Bangladesh FDI is mainly based on manufacturing industries. But Bangladesh is an agrobased country. There are lots of potentialities in many agro sectors of Bangladesh in where foreign investors can invest. We see that FDI of Afghanistan is mainly based on agro-based industries. Bangladesh must look forward for those industries of Afghanistan which are profitable for FDI. FDI in Maldives is established on the basis of marine industries and tourism. Bangladesh has two international sea ports. Moreover, Bangladesh is land of rivers. So government of Bangladesh must pay attention in this sector. Bangladesh has world largest sea beach and greatest mangrove forest which is enriched with many precious wild animals, trees and herbal products. Besides, Bangladesh has many magnificent historical places which have thousand years old histories. So, foreign investors can also invest in tourism sectors of Bangladesh. FDI in Nepal is based on medicinal and aromatic plants. Bangladesh has also lots of potentiality in this sector. Because Bangladesh has many forests area in where there are found lots of herbal plants which can be helpful for developing this sector.
5.5 Factors for Consideration by Investors in Doing Business in South Asian LDCs a) Attitude of the foreign government towards foreign investment. b) Administrative practices affecting the prospects in investment, such as import quotas, tariffs, availability of patent/ trade-mark etc. c) Existence of investment guarantees agreement with investors. d) Government assurances regarding remittance of profits and repatriation of capital.
e) Tax rates which affect the proposed enterprise. f) Trade agreements with other countries. g) Availability of auxiliary industries. h) Extent and elements of competition. i) Extent of market. j) Availability of domestic raw materials and spare parts.
5.6 Challenges and Constraints Some challenges and constraints for doing business in South Asian LDCs are as follows. (a) Political factors Despite the economic stakes, political compulsions are preventing the authorities, in some instances, from encouraging FDI movement between contiguous or physically adjacent countries. Bilateral relations there are unfortunately defined by mistrust and aggression. Tense relationships, mired in narrow nationalism, have discouraged active involvement of companies. Regional agreements thus could not go far in overcoming local obstacles. Psychological factors Efforts are being made to promote FDI from the developed countries. It is believed that TNCs from there can bring superior technologies and that the spillover effects will modernize the local economies. This psyche, inherited from colonial rule, is one of the hurdles in the way of promoting FDI from within the region.
(b) Restrictions on outward investment Liberalizing the inward FDI regime alone is a necessary, but insufficient, condition for intra regional FDI flows. Promotion of such FDI requires eliminating restrictions on outward-oriented FDI flows also. Outward FDI flows are highly restricted in South Asian countries owing to their implication for foreign exchange outflows. In other countries also it is tightly regulated with ceilings on the overall flows. These restrictions can affect the patterns of FDI flows by diverting them to sectors which require less capital and are less scale- intensive. These ceilings need to be addressed. (c) Structural barriers
Leading from a state of extreme over-regulation, the trend since 1991 has been a gradual decrease of governmental obstruction of private business. Many regulatory changes, however, have not yet been politically possible to implement. These economies are still hobbled by excessive rules and a powerful bureaucracy and leaders with broad discretionary powers.
(d) Extremism and political instability Extortion of money from businesses by ruffians claiming political backing is common in Bangladesh. Power struggles, the rapid rise of fundamentalism and militarization, have weakened the political system. For nine years, Nepal was wracked by a violent Maoist insurgency, with the conflict initially confined to the mid-western districts. There are significant threats to foreign interests in Bangladesh, Afghanistan and Nepal. Only Maldives and Bhutan have a long record of political tranquility.
(e) Rigid labor laws and Trade unions There are more than 6,300 registered trade unions in Bangladesh, with in excess of 1.9 million union members. Bangladeshs labor unions, most of them associated with political parties, are often militant and have narrow personal stakes. Organized labor comprises a very small percentage of the total workforce. Although associations are not expressly prohibited, the Government does not recognize the right to form unions or to strike. Hence, labor actions and disputes are rare.
(f) Infrastructure Poor infrastructure is stated to be another structural blockage that these countries are facing.
(g) Visas The exclusion of cross border movement of labor poses grave difficulties for investors. The problems faced include long procedures, high costs, frequent renewals and the attitude towards investors.
Chapter Six: Findings, Bottlenecks and Recommendation

6.2 Findings of the Study Chapter four and five are the analysis part of the study. Chapter four reveals FDI scenario in Bangladesh and Chapter five presents FDI in Bangladesh in comparison with other South Asian LDCs.
6.2.1 Findings of the Chapter Four Chapter four of the study presents the current FDI scenario and how FDI influence the economic growth of the Bangladesh.
FDI Scenario i. Despite of recent global economic recession and political instability, the FDI flow of Bangladesh is still remaining its average rate. ii. 83% foreign projects of Bangladesh are registered by Non-EPZ. Only 13% projects are registered by EPZ. iii. Top three FDI sectors of Bangladesh are textile, services and engineering. Textiles of Bangladesh play the top position in revenue earnings of Bangladesh. iv. The top-10 FDI sources of Bangladesh are UK, Russia, Canada, UAE, US, South Korea, India, China, Germany and Indonesia respectively. v. Investment treaties for promotion and protection of investment of Bangladesh with USA, Republic of Korea, UK, Thailand, Germany, Turkey, Romania, France, Belgium, and Italy. For avoidance of double taxation Bilateral agreements of Bangladesh government with Japan, Italy, Singapore, Sweden, Republic of Korea, UK, Canada, Malaysia, Romania, Sri Lanka, France, Germany, India and Pakistan.
Impact on Economic Growth i. In recent years, foreign projects registered by BOI of Bangladesh are creating lots of employment opportunities in Bangladesh. ii. FDI helps to meet up deficit trade balance of Bangladesh. The hypothesis testing proved that FDI influences the BOP of Bangladesh. Moreover, import of manufacturing goods increases due to increase in FDI. iii. It is seen in correlation analysis, when local investment increases then the foreign investment increases. So there is a low degree of positive correlation between domestic investment and foreign investment. Due to the expected backward and forward linkages between FDI and local industries, FDI can either crowd in domestic investment by transferring technologies and knowledge to domestic firms or crowd out domestic investment due to larger economies of scale and better managerial skills. These characteristics of FDI open the door for the discussion of the dynamic effect of FDI on domestic investment. FDI also plays a role for substitutes or complementary of domestic investment to balance the total investment. iv. The hypothesis testing proved that FDI keeps a significant role in total investment. v. Hypothesis testing proved that total investment influences the GNI. As FDI is now a significant part of total investment, which means FDI, also influences the GNI. vi. Correlation analysis shows that there is a positive correlation between national savings and FDI. It is seen that when FDI increases then national savings increases at a higher rate. So there is a high degree of positive correlation between national savings and FDI.
6.2.2 Findings of the Chapter Five i. According to the Doing Business Report 2010 by WB and IFC, Bangladesh has favorable FDI climate. But due to lengthy procedures and durations, investors do not show much interest in doing business in Bangladesh. According to this, South Asian LDCs have favorable investment climate. Among them, the rank of Bangladesh is 119th among 183 countries. ii. The FDI inflow in Bangladesh is higher than other South Asian LDCs. But according to the WB and IFC, the investment climate of Maldives is more favorable than Bangladesh. It is because the FDI inflow of Maldives as percentage of GDP is higher than Bangladesh. That means the FDI inflow of Bangladesh is still not so good in perspective of economy of Bangladesh. iii. iv. In South Asian LDCs, only Bangladesh is playing a role in outward FDI. The better investment climate of Maldives is for its political stability. Moreover, it emphasizes on its marine based industries as well as tourism for earnings of revenue. Bhutan also emphasizes on its tourism sectors like Maldives. Nepal emphasizes on its medicinal and aromatic plants. Afghanistan emphasizes on their agro based industries. v. Afghanistan has lots of raw materials which are still is untouched. As a result, investors are showing more interests to do business in Afghanistan. vi. Political instability and internal relations are most important factors for low investment in South Asian LDCs. Terrorism and violence also affects the foreign investment. Political, psychological and social factors hinder the regional and bilateral agreements which hamper FDI flows in South Asian LDCs. Rigid labor laws and excessive power of trade unions are other factors of low investment. Visa is another problem for foreign investors to do business in South Asian LDCs.
6.3 Bottlenecks Found from the Study Author explored some problems found from the studies which are as follows.
Political instability, power struggles, the rapid rise of fundamentalism and

militarization obstacle the FDI growth in South Asian LDCs especially in Bangladesh.
Political, social and psychological factors hinder the regional agreements and
bilateral agreements in South Asian LDCs.
Outward FDI flows are highly restricted in South Asian countries owing to their
implication for foreign exchange outflows.
Excessive rules and a powerful bureaucracy and leaders with broad discretionary
powers in South Asian LDCs especially in Bangladesh, also obstacle the FDI flows.
Poor infrastructure is stated to be another structural blockage that these countries

are facing.
Bangladeshs labor unions, most of them associated with political parties, are
often militant and have narrow personal stakes. Although associations are not expressly prohibited, the Government does not recognize the right to form unions or to strike. Hence, labor actions and disputes are rare.
The exclusion of cross border movement of labor poses grave difficulties for
investors. The problems faced include long procedures, high costs, frequent renewals and the attitude towards investors. .
6.4 Recommendation Suggested
Author of this thesis paper suggested some recommendation for favorable FDI in Bangladesh as well as South Asian LDCs which are as follows.
(a) Overcome Recent Global Economic Recession More policies, incentives and facilities should be adopted by the concerned countries as well as developed countries to overcome recent global economic recession.
(b) Improvement the Relationship between SAARC Countries To increase the foreign investment, Bangladesh as well as other South Asian LDCs should try to improve the activities of SAARC. More Conferences, policies, facilities and initiatives must be taken by SAARC to improve the investment climate in this region.
(c) More Exploration To attract more investors, more exploration by government as well as nongovernment organizations for increasing availability of raw materials must be needed. Modern Technology must be essential for these explorations. G
(d) Labor Training Most of the labors of Bangladesh are unskilled or semi skilled. Proper training should be needed for them before starting their works. Youth Development Board should be taken more initiatives for their development.
(e) Develop Bilateral Relationship To attract investors, concerned countries must develop more bilateral relationship within all those developed countries who are interested to invest abroad.
(f) Develop Regional Relationship Regional relationship between Asian countries must be developed. (g) Keep Political stability
Political instability, power struggles, the rapid rise of fundamentalism and militarization must be reduced for the development of their countries.
(h) Increase Internal Communication facilities Internal communication facilities of Bangladesh as well as this region like transportation, telecommunication, banking, insurance, research etc. will have to be increased.
(i) Increase Online facilities Online facilities of Bangladesh must be improved if they compete with modern world. Break down of submarine cable in Coxs Bazaar is now common factor in Bangladesh. This problem must be solved forever. Wi-max facilities must be introduced as soon as possible.
(j) Eradicate Corruption Corruption must be abolished from Bangladesh. Foreign investors try to give bribe to the political leaders which are very usual scene in our country. Political leaders must be patriotic. Anti-corruption commission must be active and freed from corruption.
(k) Increase Energy supply Energy supply i.e., fuel, gas, coal, electricity must be ensured for the investors.
(l) It is seen that some raw materials are available here and some are imported from abroad. It creates often hazardous situation for investors for doing business.
(m)Reduce Trade Union Activities Labor Trade unions should be separate with political parties.
(n) Emphasize on Tourism Sector
Maldives is developed in FDI only for its tourism. Nepal and Bhutan also emphasize on their tourism sector. Bangladesh should also be more attention to its tourism sectors. Bangladesh has longest sea beach in the world. The world largest mangrove forest, Sundarban is in Bangladesh. Moreover, Bangladesh has many historical places. Government must take more initiatives to make these more attractive to attract foreign investors.
(o) Develop Intra-regional transportation Transportation facilities, especially intra-regional must be developed.
Transportation of passengers and goods will make easier. Environment must be created for investors to come and go and raw materials availability will be increased.
Chapter Six: Conclusion

Bangladesh is a least developed country. Among South Asian Countries, it is the second position in FDI flows being a LDC. It has favorable FDI climate. At presents, it plays a great role in economy. The average trend line of FDI inflows, outflows, inward stock and outward stock are very good. Among South Asian LDCs, only Bangladesh plays a role in outward flows of FDI. There have been creating lots of employment opportunities in FDI related fields. Sometimes, it is used as complementary or substitute of domestic investment. It also influences the BOP to meet up trade deficit of Bangladesh. It also keeping balance in total investment. It is partially correlated with GNI. That means it increases GNI as well as consumption habit, savings, export and import of the country. Although, Maldives has been better position than Bangladesh in doing business, FDI climate of Bangladesh is still good. Only lengthy procedures and times hinder the FDI in Bangladesh. Political instability also restricts the FDI. Bangladesh has lots of potentiality in marine industries, tourism, medicinal and aromatic plats. As it is agro based country, it can play more roles in developing this sector. The author tried to show the current trend line of FDI flows in Bangladesh and compare this trend with other South Asian LDCs. Lack of expertise and availability of data, there are seen some limitations in this study. There are lots of fields in FDI for further research such as GNI, Employment opportunities, discovering new field discover for investment, potential sectors etc. If Bangladesh government will take more initiatives to attract the investors and time and procedures will be reduced, then Bangladesh will play significant role in economic growth.
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Statistical Appendix
Appendix-1: Statistical Data
Table-01: Inward FDI Stock of South Asian LDCs, 1980-2007 (In million US$)
Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Afghanistan 11 11 11 11 11 11 11 12 12 12 12 12 12 12 12 12 12 11 11 17 17 18 68 126 313 586 827 1116 Bangladesh 1475 1480 1487 1488 1487 1481 1483 1486 1488 1488 1492 1493 1497 1511 1522 1614 1846 2421 3224 3353 3848 4022 4474 5336 5863 3702 4189 4404 Bhutan 0 0 0 0 0 0 0 0 0 0 2 3 3 3 3 3 4 3 3 4 4 4 7 9 12 21 28 106 Maldives 5 5 2 2 2 3 9 14 15 19 25 31 38 45 54 61 70 82 93 105 118 130 143 158 171 180 194 209 Nepal 1 1 1 0 1 2 3 5 5 6 12 14 14 14 14 14 33 56 68 72 72 116 110 125 125 127 120 126
Source: Authors Compilation, based on Report of UNCTAD
Table-02: Inward FDI Stock of South Asian LDCs as percentage of GDP, 1980-2007
Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Afghanistan 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.3 0.3 0.3 0.4 0.6 0.4 0.4 0.4 0.4 0.6 0.6 0.8 1.4 2.6 5.5 8.6 10 Bangladesh 7.5 7.8 8.5 7.8 7 6.7 6.3 5.8 5.4 4.9 4.7 4.6 4.6 4.4 4 3.9 4.3 5.3 6.9 6.9 7.9 8.2 8.6 9.3 9.5 5.7 6.1 Bhutan 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.7 1.1 1.1 1.2 1 0.9 1.3 0.9 0.9 1.1 1 0.9 1.2 1.4 1.8 2.6 3 Maldives 8.3 7.1 2.4 2.5 2 2.6 5.9 9.9 9 10.3 11.6 12.9 13.4 13.9 15.1 15.3 15.6 16.1 17.2 17.9 19 20.8 22.3 22.5 22 24 21.4 Nepal 0.1 0 0 0 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.4 0.4 0.4 0.3 0.3 0.8 1.2 1.5 1.4 1.3 2.1 2 2.1 1.8 1.8 1.7
2007
12.6
6.1
8.1
19.9
1.6
Source: Authors Compilation, based on Report of UNCTAD
Table-03: Net FDI Flows and Inflows in Bangladesh (In Million US$) Year 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 Net FDI Flows 383 350 391 376 385 776 675 793 769 882 FDI Inflows 579 355 328 350 460 845 793 666 579 355
Source: Authors Compilation, based on Bangladesh Economic Review 2009
Table-04: FDI Inflows Distribution by Components in Bangladesh, 2001-2007 (In million US$) FDI Components Equity Capital Reinvested Earnings Intra-Company Loans Total 2001 234 65 56 355 2002 134 117 78 328 2003 156 170 24 350 2004 156 240 65 460 2005 426 248 172 845 2006 2007 504 265 24 793 402 213 52 666
Table-05: FDI Stock In Bangladesh (in Million US$) Year 1990 2000 2008 Inward Stock 478 2162 4817 Outward Stock 45 69 81
Table-06: Projects of Foreign Investment and Domestic Investment in Bangladesh (In Crore TK) Fiscal Year 1991- 92 1992- 93 1993-94 1994-95 1995-96 1996- 97 1997- 98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Foreign Investment 294 211 3217 2920 6261 4515 15308 9243 10594 6993 1734 2067 2644 5298 24986 9385 5433 14353 Local Investment 365 360 1872 3383 4836 4746 5061 5677 6621 7809 8806 11653 13546 14005 18370 15853 19553 10793
Source: Authors Compilation, based on Bangladesh Economic Review 2009
Table-07: Country-wise FDI Inflows in Bangladesh

Country UK Russia Canada UAE US FDI Inflows (in Million TK) 15952.685 5596.6 4259.682 3294.694 2736.708
South Korea India China Germany Indonesia Pakistan Japan Hong Kong The Netherlands Sri Lanka Switzerland Poland Italy Turkey Malaysia Singapore Spain France Denmark Taiwan Austria Sweden
1824.449 1701.015 1599.056 1390.084 1108.16 963.095 812.557 611.233 526.797 312.39 156.097 153.255 107 106.053 102.45 95.008 74.01 53.381 32.4 21 18.958 8.95
Table-08: FDI outflow of Bangladesh Year 1985 1990 1999 2000 2001 FDI Outflow (in Million US$) -0.3 0.5 0.1 2 20.6
2002 2006 2007 2008
4.1 4 21 9
Table-09: Total Investment, Official Investment and Private Investment (In billion US$) Year Total Investment 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 545.9 585.4 632.4 703.5 799.9 909.2 1024.8 1155.9 1321.3 1486.9 Official Investment 175.7 183.8 174.0 186.3 206.2 230.1 249.3 257.3 270.4 284.9 3.8 5.5 3.9 3.8 3.9 7.8 6.8 7.9 7.7 8.8 FDI Other Private Investment 366.3 396.0 454.5 513.4 589.9 671.4 768.8 890.7 1043.2 1193.2
Source: Authors compilation, Based on Bangladesh economic Review 2009
Table-10: Balance of payment of Bangladesh (In Million US$)
Year
BOP
Current Account
Capital Account
Financial Account
Errors and omissions
FDI
Portfolio
Other
Investment Investment
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
179 -281 408 815 171 67 365 1493 604 1037
-418 -1098 157 176 176 -557 572 936 672 1090
561 432 410 428 196 163 242 490 576 325
-116 682 391 413 78 760 -24 762 -312 -303
152 -297 -550 -202 -170 -323 -425 -695 -332 -75
383 550 391 376 385 776 675 793 769 882
0 0 -6 2 6 0 32 106 48 -111
-499 132 6 35 -313 -16 -731 -137 -1129 -1074
Foreign Direct Investment in Bangladesh in comparison among South Asian LDCs
58
Table-11: GNI, Consumption, investment, Govt. expenditure, BOT, Others (In billion US$) Year GNI Consumption Investment Govt. Expenditure 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 28574.3 31716.3 35052.6 38963.5 44293.5 50476.6 59421.2 68323.1 2235.9 2445.7 2679.3 2965.1 3315.5 3763.2 4349.7 4918.9 632.4 703.5 799.9 909.2 1024.8 1155.9 1321.3 1486.9 407.6 437.0 493.7 556.3 610.6 668.4 936.1 941.4 -146.8 -180.0 -194.3 -276.6 -193.1 -382.4 -380.0 -277.6 25445.2 28310.1 31274.0 34809.5 39535.7 45271.5 53194.1 61253.5 BOT Others
Foreign Direct Investment in Bangladesh in comparison among South Asian LDCs
59
Generated by Foxit PDF Creator Foxit Software http://www.foxitsoftware.com For evaluation only. Statistical Appendix
Appendix-2: Statistical Analysis
Analysis-01: Correlation between Foreign Investment and Domestic Investment Variables Local Investment Statistics Pearson Correlation Sig. (2-tailed) N Foreign Investment Pearson Correlation Sig. (2-tailed) N Local Investment 1 18 0.428 0.076 18 Foreign Investment 0.428 0.076 18 1 18
Analysis-02: Correlations between FDI and National Savings Variables FDI Statistics Pearson Correlation Sig. (2-tailed) N National savings Pearson Correlation Sig. (2-tailed) N FDI 1 . 8 .840(**) .009 8 National savings .840(**) .009 8 1 . 8
** Correlation is significant at the 0.01 level (2-tailed).

60
Analysis-03: Two Stage Least Square Method to Estimate BOP

Step-1 MODEL: MOD_1. Equation number: 1
Dependent variable.. FINANCIAL ACCOUNT List wise Deletion of Missing Data
Multiple R R Square Adjusted R Square Standard Error
1.00000 1.00000 1.00000 .00000
Analysis of Variance: DF Sum of Squares Regression Residuals F is undefined ------------------ Variables in the Equation -----------------Variable CURRENT CAPITAL ERRORS FDI PORTFOLI B -1.66077859E-16 -3.43447967E-16 3.44452621E-16 1.000000 1.000000 SE B . 000000 .000000 .000000 .000000 .000000 .000000 .000000 Beta -2.721E-16 -1.185E-16 1.949E-16 .479995 .127867 1.102097 . . . . . . . . T Sig T . . . . . . 6 3 1612730.90000 .00000 Mean Square 268788.48333 .00000
OTHERINV 1.000000 (Constant) 2.273737E-13
Correlation Matrix of Parameter Estimates CURRENT CURRENT CAPITAL ERRORS FDI PORTFOLI OTHERINV 1.0000000 -.0035300 .5774217 .1846963 .1735321 .7128110 CAPITAL -.0035300 1.0000000 -.1221207 .1538267 -.3894339 .1674782 ERRORS .5774217 -.1221207 1.0000000 .5224863 .5856968 .6526398 FDI .1846963 .1538267 .5224863 1.0000000 .1867516 .5794212 PORTFOLIO OTHERINV. .1735321 -.3894339 .5856968 .1867516 1.0000000 .1165995 .7128110 .1674782 .6526398 .5794212 .1165995 1.0000000

61
Step-2 MODEL: MOD_2. Equation number: 1
Dependent variable.. BOP List wise Deletion of Missing Data
Multiple R R Square Adjusted R Square Standard Error
.99801 .99601 .99283 43.89882
Analysis of Variance: DF Sum of Squares Regression Residuals F= 312.41501 4 5 2408228.1 9635.5 Signify F = .0000 Mean Square 602057.02 1927.11
------------------ Variables in the Equation -----------------Variable CURRENT CAPITAL FINANCIA ERRORS (Constant) B .998402 1.088997 1.018252 .986307 SE B .033165 .102079 .062705 .101271 Beta 1.335944 .306992 .831611 .455840 T 30.104 Sig T .0000
10.668 .0001 16.239 .0000 9.739 .0002 -1.109 .3179
-50.499658 45.536812
Correlation Matrix of Parameter Estimates CURRENT CURRENT CAPITAL FINANCIA ERRORS 1.0000000 .0719411 .7478667 .6977760 CAPITAL .0719411 1.0000000 .1689282 .0883813 FINANCIA .7478667 .1689282 1.0000000 .7775983 ERRORS .6977760 .0883813 .7775983 1.0000000
62
Analysis-04: Multiple Regression Analysis to Estimate Total Investment

Variables Entered/Removed (b) Model 1 Variables Entered Other Investment, FDI, Official Investment(a) a All requested variables entered. b Dependent Variable: Total Investment Source: Authors Compilation, Based on Bangladesh Economic Review 2009 Model Summary Model 1 R 1.000(a) R Square 1.000 Adjusted R Square 1.000 Std. Error of the Estimate .0625 Variables Removed . Method Enter
a Predictors: (Constant), Other Investment, FDI, Official Investment
ANOVA (b) Model 1 Regression Residual Total Sum of Squares 944962.653 .023 944962.676 df 3 6 9 Mean Square 314987.551 .004 F 80715590.156 Sig. .000(a)
a Predictors: (Constant), Other Investment, FDI, Official Investment b Dependent Variable: Total Investment Coefficients (a) Unstandardized Coefficients Model 1 (Constant) Official Investment FDI Other Investment B .114 1.000 .995 1.000 Std. Error .329 .003 .026 .000 .129 .006 .868 Standardized Coefficients Beta t .346 345.732 38.117 2915.668 Sig. .741 .000 .000 .000
a Dependent Variable: Total Investment
63
Analysis-05: Multiple Regression analysis to Estimate GNI
Variables Entered/Removed (b) Model 1 Variables Entered Others, Balance of Trade, Government Expenditure, Investment(a) a Tolerance = .000 limits reached. b Dependent Variable: GNI Source: Authors Compilation, Based on Bangladesh Economic Review 2009 Variables Removed . Method Enter
Model Summary Model 1 R 1.000(a) R Square 1.000 Adjusted R Square 1.000 Std. Error of the Estimate 5.8197
a Predictors: (Constant), Others, Balance of Trade, Government Expenditure, Investment
ANOVA (b) Model 1 Regression Sum of Squares 1362817420.791 101.607 1362817522.399 df 4 3 7 Mean Square 340704355.1 98 33.869 F 10059425.74 3 Sig. .000(a)
Residual Total
a Predictors: (Constant), Others, Balance of Trade, Government Expenditure, Investment b Dependent Variable: GNI
64
Coefficients (a)
Unstandardized Coefficients Model B 1 (Constant) Investment Government Expenditure Balance of Trade Others a Dependent Variable: GNI 299.012 1.437 1.049 .875 1.064 Std. Error 8.616 .108 .056 .042 .003
Standardized Coefficients t Sig.
Beta 34.703 .031 .016 .006 .958 13.345 18.872 20.788 378.989 .000 .001 .000 .000 .000
Excluded Variables (b) Collinearity Partial Model 1 Consump tion Beta In .068(a) t 21635.2 98 Sig. .000 Correlation 1.000 Statistics Tolerance 1.616E-05
a Predictors in the Model: (Constant), Others, Balance of Trade, Government Expenditure, Investment b Dependent Variable: GNI
65

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Chapter Four: FDI Scenario in Bangladesh

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Economics Discipline School of Social Science Khulna University Khulna, Bangladesh

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Papon Tabassum Student No.: 051511 Session: 2007-08

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

. Papon Tabassum Student No.: 051511 Session: 2007-08

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Papon Tabassum October, 2009

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Chapter Two: Literature Review Chapter Three: Methodology

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Chapter Seven: Conclusion References Statistical Appendix

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Acronyms & Abbreviation

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Technical Terms Used

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

economic decision-making of nations through the conditionality associated loans.

international financial markets. Like

percentage of votes based on the amount of

resources they provide, the US holding the largest percentage of vote.

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Chapter One: Introduction

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Chapter Two: Literature Review

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Chapter Three: Methodology

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Chapter Four: FDI Scenario in Bangladesh

4.1 Favorable FDI Climate

Figure-01: Trend Line of Net FDI Flows in Bangladesh, FY 1999-2009

FDI Flows (in Million US$)

Source: Authors Compilation, Based on Bangladesh Economic Review 2009

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

2 per. Mov. Avg. (FDI Inflows)

Source: Authors Compilation, Based on Bangladesh Economic Review 2009

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Source: Authors Compilation, Based on Bangladesh Economic Review 2009

Regulatory Agencies Board of Investment (BOI)

Commercial Banks or by different financing institutions outside the

authorities of BSCIC & BEPZA.

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Bangladesh Export Processing Zones Authority (BEPZA)

Bangladesh Small and Cottage Industries Corporation (BSCIC)

investment 30.00 million

Figure-04: FDI Distribution by Regulatory Agencies

EPZ Registered Non-EPZ Registered

Source: Authors Compilation, Based on Bangladesh Economic Review 2007

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs