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Journal of Money, Investment and Banking ISSN 1450-288X Issue 5 (2008) EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.

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Globalization and the Climate of Foreign Direct Investment: A Case for Bangladesh
Khan Md.Azizur Rahman Assistant Professor of Economics, School of Social science Khulna University, Bangladesh E-mail: khanarku@gmail.com Abstract Foreign Direct Investment is dramatically increasing in this age of globalization. It has played important role for economic growth in this global process. But, the distribution of FDI is uneven in all over the world. Some countries are ahead and some are lag behind to attract foreign direct investment. The poorest countries are disappointing in attracting FDI. First, the study attempts to describe the overall background, trends and definition of FDI in recent years. Second, it describes the theoretical development and extensive literature review to find out the appropriate variables to deter the Foreign Direct Investment from different reputed studies, third, it focuses on the challenges, opportunities, investment and economic environment associated with the inflow of FDI in Bangladesh. The study explores the determining factors of FDI in Bangladesh. It investigates the significant determinants of a particular country in Inflow of Foreign Direct Investment. At the end, it draws the conclusion to promote the inflow of foreign direct investment with a view to take measures to strengthen the positive impacts and reduce the negative impacts of FDI.

Keywords: Foreign Direct Investment, Globalizations, Investment climate, Determinants. JEL Classification Codes: F21.

Introduction
Foreign Direct Investment (FDI) is dramatically increasing in this age of globalization. As it is viewed as a major stimulus to economic growth in developing countries. The climate for investment and the privatized enabling environment attract Foreign Direct Investment in Bangladesh. Bangladesh is historically a reputed investment area where British companies dominated two hundred years. After getting freedom in 1971, Bangladesh started to have nationalization process. But afterwards, it has been realized to show the attitude towards privatization to catch up globalization process. Although Bangladesh economy is not matured enough to participate global process to get benefits to a large extent, thats why the economy is facing threaghts. But in order to catch up the things that are inevitable for Bangladesh in its global age of market economy, privatization can give a way and multinational should be invited to enhance the growth process refraining from the threaten situation from the effects of globalization. As the growing economy in SAARC (South Asian Regional Cooperation), Bangladesh is offering friendlier business and investment regime to attract foreign investment Investment. The determinants that can impact on the economy should be discussed here to clarify the sanse that basically which factor and things deter the Foreign direct Investment in Bangladesh.

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Definition of foreign direct investment


Foreign Direct Investment (FDI) is defined as an investment involving a long term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor and parent enterprise) in an enterprise resident in an economy other than that of that of the foreign direct investor( FDI enterprise or affiliate enterprise or foreign affiliate).FDI 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 transactions between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. FDI may be undertaken by individuals by as well as business entities.(WIP, 2004). Foreign direct investment is a linking part of an open and effective international economic system and a major influencing factor to bring development but is not easy to get benefits from FDI. National policies and the international investment architecture are important to attract FDI to a larger number of developing countries and for reaping the full benefits of FDI for development. The challenges initially focuses on the host countries that needs to set up a transparent, broad and effective enabling policy environment for investment and to build the human and institutional capacities to implement them. With most FDI flows originating from OECD developed countries can contribute and facilitate developing countries access to international markets and technology and ensure policy coherence for development more generally; use Overseas Development assistance to leverage public /private investment projects; encourage non-oecd countries to integrate further into rules based international framework for investment; actively promote the OECD guidelines for multinational enterprises, together with other elements of the OECD declaration on international investment; and share with non members the OECD peer review-based approach to building investment capacity(Foreign Direct Investment for Development, OECD,2002). Objectives Globalizations process entails maldistributions and inequalities over the time among the developing and developed countries. The process is throwing some countries in sufferings and some countries are gaining as winners relating with businesses, trade, aid and financial capital flows. The distribution of FDI across countries: 15 countries are account for over 80% of FDI to developing countries and 49 least developed countries(LDCs) attracted only 0.3% of world FDI inflows in 2003(UNCTAD,2001: xiii). Thats why, the study aims to explore what actually Bangladesh deserves considering investment climate in the globalised process of current world. Data and Methodology The study uses data collected from the World Bank Development indicator CD ROM, 2003. The data sets are not completely balanced and some countries in the different data sets are not observed every year. The data also collected from UNCTAD and FDI survey in Bangladesh,2004 and also from web (http://www.worldbank.org.bd), External Resource Development, ERD, Real sector economy, Central Bank, Bangladesh, and Asian Development Bank, 2005. Determinants of FDI indicate openness, GDP growth, inflation, return, human capital, infrastructure etc. As the country characteristic variable political instability as investment risk, real interest rate, inflation that reduces domestic investment opportunities, has been considered.

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Theoretical Development
A 'Risk-adjusted Returns' Framework Conventional Methods of Investment Project Analysis Conventional analysis of investment projects in general, and also of FDI projects, is based on discounted cash flow techniques, such as the net present value rule (NPV). Roughly put, this is done by subtracting the (discounted value of the) investment cost of the project (I) from the value of the project (V), being the sum of discounted net cash flows that are generated by the project, or NPV = V - I. To the extent that the NPV is positive, the project is worthwile to be executed. If there is room for choice between different FDI projects (e.g. different locations), that project, i.e. that IFDI location, with the highest NPV, is preferred. However, since the projected cash flows are to be realised in the future, they will be subject to error, i.e. there is uncertainty on the exact realised value of future cash flows, since information is not perfect (and asymmetric) and the scope for diversification (which reduces uncertainty) or hedging will not be complete either. When uncertainty is to some extent predictable (more correctly put, in statistical terms, to the extent that the frequency distribution of all possible outcomes of the uncertain variable is known), this uncertainty can be quantified more exactly, which is then called 'risk', and a 'risk premium' can be determined. Risk is then defined as the variability of the return of the project. As such, if considering different FDI projects, i.e. different locations, it is crucial to distinguish the sources and likely magnitude of uncertainty or risk for each alternative, and try to correct the likely rate of return for possible risk or uncertainty, i.e. calculate a kind of risk-adjusted return. On the basis of this, the ultimate location can be determined. In practice, a large number of different techniques of integrating the uncertainty over future cash flows into the conventional discounted cash flow analysis, going from adjusting in a rather ad-hoc way the discount rate at which future net cash flows are discounted (and as such, incorporating a risk premium) to very sophisticated ways of sensitivity analysis and worst-case scenario impact analysis. However, this overall method of incorporating uncertainty and risk in investment analysis, has two basic flaws. The first is that, in general, it does not measure risk correctly. But more important, the main underlying source of dissatisfaction results from the fact that standard techniques cannot accurately capture the growing flexibility embedded in real-life investment projects: in an economic and business environment of growing uncertainty about the future, combined with fiercer strategic competitive interaction between the players, investment projects must be set up as to allow for the flexibility to defer, expand, contract, abandon or otherwise change the project during its lifetime as new information becomes available. For investment appraisal, it is crucial that these option characteristics, embedded in the investment project, are identified and their correct value incorporated in the appraisal; the only way by which traditional DCF-techniques could incorporate this was by using subjective approximations or ad hoc internal rates of return; contingent claims analysis, i.e. real option analysis provides an analytically-correct approach. Explaining Uncertainty and Risk in FDI: the 'real-option' approach The shortcomings of the conventional NPV-rule mentioned above are largely overcome by applying the so-called real options approach to investment evaluation. Here, deciding to invest is seen as exercising an option contract. An option is defined as the right, not the obligation, to buy (call option) or sell (put option) an asset at an agreed price during a specific period (American option) or at a predetermined future point in time (European option). The relevance and added value of a real option analysis for investment analysis can best be illustrated using an option-to-defer. In this situation, the investing firm has a specific investment project in mind, which is considered valuable (e.g. in NPV terms), but it has some freedom in determining when to go on with the project (e.g. on the timing of the investment project). Translated in option terms, this means that the investor has the option to do an investment project; when he decides

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to go along with the project, he executes or kills the option. While waiting, the firm is not entitled to any pay offs but can gather more information about the project itself or the market conditions in order to reduce the uncertainty under which the decision must be taken. If the project is started, the option is killed since the firm has given up the possibility to wait. This situation looks very much like a financial call option on a dividend-paying stock. What are the consequences of incorporating such an option to wait for investment analysis? The decision rule of thumb wil be altered: within the context of an option-to-defer it will no longer suffice for the net present value to exceed zero. The present value of an investment project need not only cover for the initial expenditures but for the opportunity cost associated with immediate investment as well, i.e. the value of waiting. Regardless of the mathematics, the adjusted investment rule can easily be visualised using figure 1 where F represents the value of waiting, V the present value of the project and I the present value of all expenditures associated with the investment.
Figure 1: Real option analysis (ROA) versus the net present value rule (NPV).

F V-I

ROA wait now

V-I F

0 never

(1) now

(2)

-I
Source: Cassimon and Vandenbroucke [1997, p.4].

NPV

Based on the net present value rule, investment will take place if the present value of the project exceeds (1) at the moment of evaluation. Should the expected cash flows be such that V-I<0, the project will be removed from the investment portfolio. Figure 1 clearly shows how real option analysis elaborates the traditional net present value rule. The NPV is no longer compared to zero, but to the value of waiting instead. In mathematical terms, V-I must be larger than F, or V>I+F. Accordingly, immediate investment will only take place if the present value of the project at the moment of evaluation is greater than or equal to (2). When the present value is smaller than (2), the decision not to invest (now) only implies that the option is kept alive; it does not imply, contrary to the NPV-rule, that the project itself is considered worthless. The investor only waits for the right moment. The crucial question now is: what will determine the value of the option to wait, or F, because clearly, the higher this value, the more waiting will occur (the lesser actual investment will take place now). In appendix 1, a more mathematical representation of the real option approach is given, including the standard algorithm for valuing an individual investment, as well as the problems arising when we aggregate over all investment decisions in order to determine the effect on overall (macro-

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economic) investment. From this analysis in appendix, two major conclusions can be drawn that are necessary and sufficient to be able to follow the story line here, in terms of the consequences for our risk-return framework: 1. The value of waiting will be to a large part determined by the stochastic process of the variables determining the cash flows, i.e. by the fact that there is risk and uncertainty surrounding the future realisation of projected cash flows. In short, the higher uncertainty, the more investors will wait; 2. When aggregating in order to determine what is the impact on overall investment, the crucial variable is a threshold value for the marginal productivity of capital, which is not readily observable; as such, one has to rely on approximating indicators for overall uncertainty, such as the volatility of key macro-economic indicators (inflation, real exchange rates), and/or indicators of socio-political instability. In other words, empirical analysis will have to determine which types of uncertainty are deemed to be the most important in a specific situation. The approach which is described so far for investment decisions in general (and aggregate domestic investment in particular) can easily be transfered to the foreign direct investment decision. On the theoretical level, existing literature on the real option approach to FDI takes the viewpoint of the global multinational firm having to decide how to service a particular foreign market under uncertainty (Capel [1992], Bell [1995]) or the option value of operating flexibility by creating a multinational network (Kogut & Kulatilaka [1994]). When aggregating the individual FDI decisions for a specific country, the same reasoning applies: as there is no theoretical straightforward way to introduce the threshold value of investment, determining the actual impact of volatility on FDI is largely left to the empirics. Which Types of Uncertainty and Risk are Important for Foreign Investors? The abstract concept of risk or uncertainty needs to be translated into measurable, indicators, refering to observable variables. With respect to FDI decision, it is useful to distinguish between four different sources of risk or uncertainty, i.e. dealing with market (or commercial) aspects, political aspects, legal aspects, as well as financial-economic aspects of uncertainty and risk. Market (or commercial) risk quantifies the uncertainty concerning the future market development of the products or technologies which the firm produces. It is the uncertainty that lies in the nature of doing business. Political risk quantifies the effect of political actions of (usually the host) government on the return of the project. Generally, it incorporates the effect of government changes (leading to a radical change in policy), expropriation of the project without adequate compensation, and transfer risk (i.e. the inability to transfer resources to the home country due to foreign currency shortage). Overall, usually the term 'country risk' is used. Legal risk quantifies the uncertainty concerning the legal framework of the host country when doing business in the host country. It refers to the state of the judicial system in the host country with respect to e.g. contract enforceability, sanctioning, property rights, and dispute settlement. Financial risk quantifies the effect on project return of both external and (usually host) government policy induced uncertainty over the evolution of key macro-economic variables, such as prices (and inflation), interest rates, real exchange rate, both in terms of level and variability. Preliminary research (e.g. Cassimon and Vandenbroucke [1997]) tends to indicate that the relative importance of different sources of uncertainty might differ according to the type of investment. It is frequently assumed, as in the Global Economic Prospects Report-1996 [World Bank,1996], that volatility is likely to discourage foreign investors more (than domestic investors), since foreign investors know less about the country than domestic investors, have greater choice in pursuing alternate opportunities outside the country, and are likely to attach a higher risk premium to a more unstable economy. However, one might also ague that, since foreign investors can diversify some of

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their risks (like foreign exchange risk) over investment projects in several countries, while domestic investors can not, foreign investors are less vulnerable to some types of volatility. Moreover, relative importance might shift according to which countries are involved. In the next phase of our research, this will be verified for a sample of Bangladesh to see what types of uncertainty are deemed crucial for foreign investment there. This does not refrain us from already using the overall framework to pin down the main bottlenecks for FDI in Bangladesh.

Investment climate in Bangladesh


What extent of FDI would be attracted that depends on many factors?. A suitable investment environment specially is important, so it is necessary to discuss the feasibility and atmosphere to attract foreign direct investment. Bangladesh boosts a business friendly investment regime. Since the mid 1970s the government has moved towards a market economy and recently more flexible rules and policies have been implemented to attract foreign investment. Many procedures and institutional process needed to set up business have been simplified or deregulated. A privatatization commission was set up and there has been success with privatization of government enterprises. Over recent years the government has opened up to private investment and more liberal foreign investment policies have been adopted, liberalized measures have included earlier insurance of work permits for foreign national reduced approval time for new investments, relaxation of the foreign exchange control act. Indirect costs are impediments to doing business in Bangladesh. These include the cost of politically motivated strikes, of securing adequate infrastructure, of ensuring security of property and personnels of unofficial charges necessary to obtain licenses and permits and of time lost in dealing with inefficient beauracracy.Political indifference can also affect ---opportunities added to these as problems of poor infrastructure and the furnished image of Bangladesh in the international perception index.

Private sector in Bangladesh


To accelerate the economic development the private sector at present is playing a significant role as a major source of investment in the era of global market oriented economy with the direction of economic policy. The government has decided to make no new investment in the manufacturing sector barring the reserve sector defence, forestry, nuclear power, security printing). Public investment is now mainly going into the modernization and renovation of existing state owned ventures with a view to making them viable for privatization. Currently the aggregate investment in Bangladesh is a little above 18.5 percent of GDP of which the public sector accounts for less than 38 percent. (BOI-2003) There is a positive correlation between foreign and domestic firms. In different aspects, they depend to each other although there exists a good competition between them in certain product markets. In many cases they also have developed a healthy partnership in the supply of raw materials, the marketing of products and other activities. Foreign companies buy packing materials and other product components from local firm, which in turn depends on foreign firms for raw materials (e, g textiles). Many local companies supply accessories to foreign owned readymade garments factories in Export Processing Zone. Foreign and joint venture firms in the leather industry by raw materials from local tanneries. Because of the foreign private sector, FDI inflows have risen in Bangladesh in the 1990s as else where in South Asia. Approved FDI investment projects including joint ventures registered in 1997 and 1998, totals nearly $ 4.5 billion. The primary attraction is Bangladeshs gas reserves. Other area of proposed and implemented investment is container ports, airport, hotel, composite textile mill. Among the main home countries of foreign investors are the United States, Japan, Malaysia, the republic Korea, Singapore, India, China and the United Kingdom. Foreign Investors have their own association, the foreign investors Chambers of Commerce and Industry (FICCI) which currently has 120 members.

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Although privatization has been constructed, the process to privatize is moving slowly. The private sector prefers to see the pace of privatization pick up but there is considerable opposition on the part of the trade unions. The SOEs are generally loss making ventures. The government recently reviews the procedures for privatization and introduced some pragmatic changes. Earlier the entire assets of an enterprise including land used to be put up for sale as one package and there were restrictions on restructuring the assets or reducing the workforce. This naturally discouraged potential buyers. The new procedure requires that the government take the responsibility for reducing the workforce, so that the buyer can start without excess labour.

Industrial Policies
The industrial policy of the governments provides extensive incentives and facilities to attract FDI in Bangladesh. These includes tax holiday, concession in import duty on machinery, repatriation of profits dividends, invested capital and capital gain and salaries of foreign personal and exemption of export oriented industries from paying local taxes, up to 90% financing of labor cost value of export products. The government has liberalized the trade regime and significantly reduced non tariff restrictions. Foreign investors in Bangladesh have access to the series of the countries stock exchanges. Export oriented industries of the trust sector ( Toys, luggage and fashion articles, leather goods, diamond cutting and polishing stationary goods, cloth, gifts items, cut and artificial flowers and orchid, vegetable processing, engineering consultancy services) are provided cash incentives, ventures capital and other facilities. The establishments of EPZs proved to be an effective FDI in Bangladesh and government permission to allow creation of private EPZs in the country has been welcome decision (See industrial policy in Appendix)

Challenges
Multi Fibre Agreements and China accession in WTO pushes Bangladesh in a great challenge. A great share in world market in apparel and readymade garments industry. Industry of Bangladesh is now in a full of terrible condition. What would be the rethinking of Growth strategies? What benefits Bangladesh is catching up in Globalization age? What is the good news for Bangladesh where apparel and readymade garments is the only major exportable? A full phase-out of the MFA quotas, WTO accession of China as well as WTO Doha Round effects on the Bangladeshi economy. ATC implementation will lead to an increase in production in Bangladesh, but compared to China and particularly India growth rates will be quite modest since Bangladesh looses in competitiveness against China and India (Herok and van Tongeren, 2002). The impact on liberalization on exportable (clothing sector) of Bangladesh clarifies the issue by which the exportable of the country suffers from increased competition threat in the international market. From Investment Guide to Bangladesh, UNCTAD, (2000) we see that the half of the population is still very poor, poverty alleviation is the number of one priority of the governments development policy. In reaching this goal, stronger economic growth and dynamic private sector will play crucial roles. In order to attract increased FDI there is an urgent need for improvements particularly in the area of infrastructure education and technical training and the rapid and effective implementation of what are generally enlightened policies. Meanwhile, the recognition by the government that the private sector is the engine of growth is encouraging and offers much hope for the future. There is also an important inflow of FDI and skills, the latter in the form of young Bangladeshis who have been educated abroad. These factors will together play a key role in the economic transformation of Bangladesh in the year ahead.

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Opportunities
In order to facilitate the expansion of the private sector and increase the inflow of Foreign Direct Investment, Bangladesh has adopted a number of policies since the beginning of 1990s. The private sector is recognized as the engine of growth although the agrarian sector is in a transition process to an industrial economy. In fact, the country offers the most liberal FDI regime in South Asia. With no prior approval requirements or limits on equity participation or restrictions on the repatriation of profits and income. The sectors that attract FDI are readymade garments, textiles and fabrics, chemicals, papers products, metal industries food processing, electrical goods, pharmaceuticals etc. Oil and natural gas, electricity - power -energy sectors, telecommunications, cement, hotel and restaurants, hospital and clinics have become favored by many foreign sectors. The choice of FDI in initial years was limited in low investment quick yield projects while recent years show some diversification in line of high-tech capital intensive projects as well as of preferential distribution within the traditional sectors and sub sectors. The share of agriculture, constructions storage and communications remains historically low and account for less than 3% of the total FDI. There exists a unique opportunity to inject foreign investment in Bangladesh. Although there are some impediments on the way of the investments the opportunities have expanded the volume of FDIs. If we have a look over the figures then we can see that FDI increases from 0 in 1980s to 300 ml (USD) in the late 1990s. (World Bank Indicator, 2002).The international investor may consider investing in Bangladesh to access a growing market, low cost production facilities or abundant natural resources. Besides growing potential sizeable markets with middle class purchasing power and growing demand for various products and services. In terms of GDP when adjusted for purchasing power, the Bangladesh economy amounts to over $ 170 billion. Bangladesh also offers potential market in itself (and potential access to the much larger south Asian market). It offers considerable potential as a base for labor intensive manufacturing. Low cost labor is the factor most often cited by the private as well as the public sector in Bangladesh when asked to name the most attractive features of the country. For example, in 1998 the average hourly labor cost in apperal was a mere $ 0.43 which is competitive even by regional standards. For export oriented activities, Government has set two export processing Zones ( EPZs) in the two largest urban areas and a further further are being developed. The advantages of EPZs include facilitation services and a variety of fiscal and non-fiscal incentives. Not only for its large population but also its lower cost labor, Bangladesh offers major reserves of natural resources, in particular natural gas. According to the United States Geographical Survey, proven gas reserve is excess of 10 trillion cubic feet (tcf) and private estimates of probable reserves go as high as 50 tcf. These resources have attracted the attention of major cooperations such as Claim Energy, Shell and Unicol. The gas sector accounted for more than half of the total inflow of FDI in 1998. The investment opportunities in this area relate to the extraction as well as the distribution of gas. The investment opportunities exist in the areas of power generation, telecommunication etc. FDI in Bangladesh makes a direct contribution in terms of addition to the inevitable funds and mobilization of local resources for investment in manufacturing trade and the service sectors. New investments including FDI generate additional employment, train local executives and workers make thrust into the export markets introduced improved technologies, open up new horizons for R and D expenditures and above all create new sources of tax revenue for the governments. The contribution of FDI in employment generations in the country however is quite insignificant, FDI provides employment to about 1.5% of the total industrial employment and less than 0.2% of the total working populations of the country. Bangladesh is a signatory to multilateral investment guarantee agency (MIGA) and the overseas private investment corporations (OPIC).This provides a guarantee to foreign investors against loss caused by non Commercial risks, the risk of currency transfers, war and civil disturbances. The foreign Investment (promotion and protection) Act 1980 ensures legal protection to FDI in the country agencies nationalization and expropriation and guarantees, repatriations of capital and dividends. Also

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the various types of insurance facilities offered by nationalized and private companies seem to provide adequate facilities for coverage operational risks
Investment key Factors for Foreign Investors
Strengths -A largely homogeneous society with no major internal or external tensions and a populations with great resilience in the face of adversity.( e,g., floods) -Broad non partisan political support for market oriented reform and perhaps the most investors freindly regulatory regime in South Asia. -Trainable, enthusiastic, hard working and low cost (even by regional standards) labor force. -Potentially significant market, especially with potential access to South Asia. Opportunities -Natural gas exploration- proven reserves of 11 trillion cubic feet and estimated reserves of up to 50 tcf. -Infrastructure including power generation, transmission and distribution; telecommunication, including cellular telephony and upgrading of ports, railways and airports. -Fisheries, agro processing, textiles, Leather goods and light manufacturing generally. -Health, education and other services including software services. -Multilateral and bilateral financing may be available for infrastructure projects. Threats -periodic flooding and cyclones -Anticipated end in 2005 to the export quotas provided under the Multi- Fibre Arrangement (MFA) to readymade-garment (RMG) industry, currently the principle exchange earner.

Weakness - Large perceived gap between good policies and week implementation (as illustrated, for example, by the pace of privatization). - Low levels of skills and training in the workplace.
Source: BD investment guide.

Investment Determinants
We have discussed above the investment climate, privatizations, threaghts, challenges, and opportunities in the context of Bangladesh. Now it is emphasized to discuss about the factors that deters and keep impacts on the flow of inward FDI in Bangladesh comparing to the ASEAN and SAARC countries.

Market size and Access


Bangladesh is a populous country of the world containing 132 million people with little purchasing power. There are some middle class with some purchasing power in Bangladesh as in the rest of South Asia. Bangladesh is a member of South Asian Association for Regional Cooperation (SAARC) that creates South Asian preferential trade arrangement and in latest south Asian Free Trade Area, 2005. A single South Asian market is really large containing 1250 million people and accelerating economic growth, their markers through liberalizing progressively in the region. Bangladesh is by no means been lagged in liberalization by regional standards. Its policy regime foreign Direct Investment hopefully best in south Asia. (Data-BD-Statistical yearbook-2002).

Economic Environment
Bangladesh is in the process of a transition from a predominantly agrarian economy to an industrial and service economy. The private sector is playing an increasingly active role in the economic life of the country while the public sector concentrates more on the physical and social infrastructure. There have been significant structural shifts in the economy over the past two decades. The share of value added by agriculture in Bangladeshs GDP has fallen from 34 percent in 1980 to 23 percent in 1998. The service sectors contribution has increased during the same period from 42 to 49 percent. Industrys

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contribution has increased from 24 to 28 percent. (Data sources: World Bank, world Development Indicators, 2000) Economic growth has perceptibly accelerated in 1990swith an annual average rate of 4.7 percent. For the first time in the history of Bangladesh, the country has posted GDP growth of 5 percent or more in four consecutive years (1995-1998). Besides some natural devastation (1998) Bangladesh has achieved a steady growth rate during the last few years.The real GDP recorded growth of 5.5% in FY2003 measured current market prices. The GDP of Bangladesh in FY 04 was $ US 55119 representing a nominal growth of 10.6% in FY04 compared with 10.0 percent recorded in FY 03. In FY 04 the countrys percapita GDP increased by about 4% in real terms and by 92% in nominal terms. The 5.5 percent real GDP growth was broad based, reflecting increased. Economic activity in all major sources. Spurred by a robust 7.7% growth in the industrial production, GDP growth in the year was also supported by 5.7% growth in the service sector while agricultural activities recorded in moderated growth of 2.7%. (Data source-real sector economy, Central Bank, Bangladesh)
Table :
Sector Agriculture Industry Service Manufacturing Share in GDP Contributionto GDP growth Share in GDP Contributing to GDP growth Share in GDP Contributing to GDP growth Share in GDP Contributing to GDP Growth

Sectoral contribution.
1983-93 30.7 2.2 21.9 3.0 47.4 3.7 14.7 5.8 1993/03 26.3 3.6 23.8 6.9 49.9 5.0 14.9 6.2 2002 22.7 0.0 26.4 6.5 50.9 5.4 15.9 5.5 2003 21.8 3.1 26.3 7.3 52.0 5.4 15.8 6.7

Source: http://www.worldbank.org.bd

The greatest challenge for the government is to accelerate growth in the economy by freeing it from the vicious cycle of sluggishness and low growth and infusing new life into it. GDP grew by 4.2 percent in 1993-94, 4.4 percent in 1994-95, 4.7 percent in 1995-96, 5.9 percent in 1996-97 and 5.6 percent in 1997-98 and 5.5 percent in 2003-04. Poverty alleviation in the country is possible only along the accelerated growth path. As envisaged by the Fifth Five-year Plan launched in 1997, it is hoped that the rate will go up to 7 percent. The agriculture sector registering a high growth has been the main engine of economic growth. Based on recently released estimates of the Bangladesh Bureau of statistics (BBS) GDP growth in Fiscal Year 2005 is estimated at 5.4%, lower than 6.3%. Bangladesh faces a several challenges to sustaining high rate of economic growth. In the recent years, Multifibre phasing out is a great issuer. For a higher GDP growth, investment in both public and private sectors will need to be accelerated. Investment in the private sector has been highly encouraged. As good as Bangladesh's growth performance has been, it has to be even better if it is to achieve its poverty reduction objectives. The latest statistics show signs of mixed recovery, as Bangladeshs industrial sector undergoes a painful liberalization driven restructuring. In recent years, there has been a substantial improvement in the overall macroeconomic performance in Bangladesh and maintaining macroeconomic stability has been the cornerstone of economic policy.

Trade and Investment


We look at the trade and investment scenario then we can see that the export on the one hand in Bangladesh have grown and changed substantially. (See the box in the Annex). The RMG industry that follows considerable unrealized potential for expanding exports in particular of new, value added items. There may be similar potential in light manufacturing (tools, consumer electronics) to be exploited. Export performance in Fiscal year 2005 stated off robustly with 21.7% growth in July-Sept 2004, over the unemployment period of the previous year. The growth rate however moderated

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reaching 15% during July-May 2005 fiscal year. The trade deficit during July April of FY 2005 recorded an increase of 65.9% to $ 2882 ml from $ 1,737 million during the corresponding period of Fiscal year 2004. In view of the sharp increase in the trade deficit and inspite of higher growth in workers remittances( a 14.8% year on year increase ) the surplus of $ 393 million in current account of the balance of payments during July-April of FY 2004 was transformed into a deficit of $ 402 milion during July April of FY 2005 (data source-ADB, 2005).

Principle growth sectors and their trend


Agriculture is one of the largest sectors of the Bangladesh economy. The economic structure of Bangladesh has developed around which account for two thirds of work force and 25% of the GDP. Agricultural products accounted for 6% (2001-2002) of total exports. Agriculture only follows knitwear and Readymade Garments (RMG) exports which constitute 75% of exports. Agriculture plays a crucial role in alleviating poverty. Manufacturing sector has been a gradual and continued growth over the years. These sectors accounted for close to 16% of GDP in 2002-2003. These sectors showed growth of 6.6% in FY 2003 against 5.5% growth in 2002-2002. Around 75% of export earnings come from textiles and clothing. Bangladesh has a total 2.4% share of the international Readymade Garments (RMG) market at present. But post MFA action program has been formulated with increased training and policy reforms in the garments and textiles sector such that the government is confident that most firms will survive. But in reality the number of firms that will actually be able to survive the stiff competition from countries like India, China, Vietnam, turkey, Taiwan and Pakistan in the post MFA scenario is quite uncertain.

Infrastructure
Infrastructure is weak in Bangladesh. Weak infrastructure is a disadvantage for doing business; it also means that the area offers substantial prospects for investment. The conditions of telecommunications are poor in Bangladesh, it is determined by a low teledency of only 3 telephone lines per 1000 persons, most of them analogue. (See Annex).This is mainly because of the lack of capacity of the state owned telephone company, the Bangladesh telegraph and telephone Board (BTTB). The number of cellular telephone companies has entered the sector, many in operational partnerships with major international corporations. There are 125 telephone exchange providing nationwide dialing facilities in Bangladesh. International calls are routed through two trunk exchanges located at Dhaka. Four satellite stations provide the international communication link. The Government is encouraging private participation to set up card phone systems and public call centers to take telecommunication to the grassroots.

Human resources
Bangladesh work force is one of the countrys principal assets that attract enthusiasm of both foreign and domestic business people with some qualification. It is seen as enthusiastic, flexible hard working and trainable. It is also seen as poorly trained. Wages are low in Bangladesh, even by regional standards. Wage rate vary but the BOIs investing in Bangladesh estimates the remuneration of unskilled workers at about $50 p.m, that of semi skilled workers at $60 p.m and that of skilled workers at $ 70 p.m. something over 40 per cent of this consists of benefits, mainly forms of pensions benefit: provident fund and gratuity.

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Foreign Aid
A growth of more than 26 percent was recorded in FY03 compared to the preceding year. Bangladesh is experiencing a ballooning aid pipeline in recent years. Bangladesh had received US$ 49.12 billion from the day of independence till date, of which more than US$ 40.74 billion (83 percent) was disbursed. The trend of aid disbursement shows that the mismatch between the commitment and disbursement is increasing on a continuous basis. In FY03 foreign aid committed to Bangladesh amounted to about $2179 million, whilst actual disbursement was in the region of $1577 million. In 2003-04 fiscal year the net aid flows was $ 656 ml US. The major problem for Bangladesh originates in its weak capacity to utilise the already committed foreign aid. Thus, the aid pipeline amounts to more than $6201.0 million (as of July 01, 2003). At the same time, most of the foreign assistance disbursed in the recent past had been in the form of loans implying the possibility of a growth in DSL in the near future.The IMF also indicated that in case there is any shortfall in the BOP due to the negative impact of MFA phase-out it would provide support, if necessary. In recent consultations, the World Bank has agreed to make available to Bangladesh about $1 billion as aid under various projects subject to compliance with a host of conditionalities or poor actions. (Data source-External Resource Development, ERD).

Inflation
The rising trend in inflation continues. Inflation increase to 7.9% in October, 2004 from 5.7% in July, 2004. Mainly due to a rise in food prices, thereafter, inflation declined to 5.5% in Jun 2005. but rose again to 6.4% in May 2005, because of rising food prices. (Sources-ADB-2005). The current inflation rate stands as 7.83% that is terrible in fact for the economy where price level is increasing persistently.

Trends of FDI flow in Bangladesh


The magnitude, dynamics of FDI inflow in Bangladesh Political unrest, the law and order situation in Bangladesh have slowed down the rate of new investment. The following figure shows the recent trends in Foreign Direct Investment (FDI) Inflows. After 2002, the trend of the FDI flow is increasingly increasing. Basically it shows the positive inflow in the regard of investment of the country. In 2003, the flow of FDI is about 121 US million dollar.
Figure 2: FDI trends of Bangladesh from 1995-2003 ( USD in million)
FDI trends in USD mln
300 250 200

value

150 100 50 0

FDI trends in USD mln

1995

1999

2000 year

2001

2002

2003

Source: The world investment report-2004,

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Foreign direct investment increased 81% from $ 27 million in July 2003 to $ 49 million in January 2004, but off a very low base. Bangladeshs major source of investment is followed by Europe and North America. Some of the large scale investments include ASE and Unocal ( United states), BASF ( Germany), Cemex (Mexico), holcim and Nestle (Switzerland), Lafarge and Total FinaEIf (France), Taiheyo (Japan), Telenor (Norway) and TMI (Malaysia), Australia has investment worth around (US $) 44 million in Bangladesh
Figure 3: Distribution of FDI by component
Dis tr ibution of FDI inflow by com pone nt

Reinvestment , 34.03, 34% Equity, 58.63, 59% Intra company borrow ing, 7.34, 7%

Reinvestment Intra company borrow ing Equity

Source: FDI survey in Bangladesh, 2004.

The manufacturing sector continues to receive the highest FDI (74%) followed by textile (34%), and chemical ( 31%), telecommunication has emerged as one of the largest sectors to attract FDI with energy and gas following nongovernmental policies may influence private and foreign investment infrastructure. Among the source country USA, Malaysia, Japan, UK are most important countries for Bangladesh. (see fig-4) Inward FDI Flow in Bangladesh, South Asia and East Asia The greater role of FDI on development can be perceived from East Asian experiences. High investment rates have driven this countries rapid pace of output growth. In the pursuit of achieving industrialized status, countries must develop a competitive edge in terms of quality products, market efficiency and ability to develop and upgrade technology. Following the path of the NIEs (Korea, Taiwan, Honking and Singapore), ASEAN4 countries (Thailand, Malaysia, Indonesia and Philippines) prospered through export led strategies by attracting FDI, based on intensive use of relatively cheap and skilled labor. These countries primarily rely on FDI as an important means for boosting technological capability. However competitive advantages of these countries in labor intensive products have eroded as countries like Bangladesh, Vietnam, India, and China. If we have a look over South Asia and East Asia then it is visualized that the inward trend of FDI is much higher than South Asia (see figure4).

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Figure 4: FDI distribution by source countries ( USD million).

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FDI distribution by source countries

5000 4500 4000 3500 3000 values Series1 2500 2000 1500 1000 500 0

ay si a

ng

re

SA

try

ay

pa

ra b

on ko

po

an er m G S

un

ga

or w

Ja

co

al

countries
Source: FDI survey in Bangladesh,2004.

Table 5.1: FDI flows (million of Dollars )


Country Bangladesh Inward Outward India Inward Outward Mynmar Inward Outward South, East and South east Asia Inward Outward Developing Economies Inward Outward World Inward Outward 1985-95 3 1 455 23 110 30189 16634 50779 21620 181704 203620 1999 180 2 2168 80 304 . 109115 39216 231880 75488 1086750 1092279 2000 280 2 2319 509 208 . 142683 80031 252459 98929 1387953 1186838 2001 79 21 3403 1397 192 . 102228 45063 219721 59861 817574 721501 2002 52 4 3449 1107 191 ... 86342 34652 157612 44009 678751 596487 2003 121 8 4269 913 128 .. 96915 23487 172033 35591 559576 612201

Source: UNCTAD, World Development Report 2004,

Si n

or

ea

ia

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Table 5.2: FDI flows (As a percentage of gross fixed capital formation)
Country Bangladesh Inward Outward India Inward Outward Mynmar Inward Outward South,East and South East Asia Inward Outward Developing Economies Inward Outward World Inward Outward 1985-95 0.1 0.6 .. .. 5.4 2.9 4.5 2.9 3.9 4.6 2000 2.7 2.3 0.5 .. .. 15.2 8.7 14.9 8.7 19.8 17.1 2001 0.7 0.2 3.2 1.3 .. .. 10.8 4.8 13.1 4.8 12.0 10.8 2002 0.5 3.2 1.0 .. .. 8.7 3.6 9.9 3.6 10.0 9.0 2003 1.1 0.1 4.0 0.8 .. .. 9.7 2.4 10.0 2.4 7.5 8.4

Source: UNCTAD, World Development Report 2004,

Table 6.1: FDI stocks (Millions of dollar)


Country Bangladesh Inward Outward India Inward Outward Mynmar Inward Outward South,East and South east Asia Inward Outward Developing Economies Inward Outward World Inward Outward 1980 308 .. 452 4 1 .. 211039 4515 301974 60239 692714 559629 1990 324 6 1657 50 281 .. 337082 41042 547965 128561 1950303 1758216 1995 356 9 5641 264 1210 .. 581012 181812 916697 308624 2992068 2897574 2000 2429 29 17517 1859 3865 .. 1195687 577763 1939926 793297 6089884 5983342 2002 2574 54 25408 4006 4248 .. 1259136 560966 2093569 796503 7371554 7209582 2003 2695 62 30827 5054 4376 .. 1352409 607488 2280171 858681 8245074 612201

Source: UNCTAD, World Development Report 2004,

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Table 6.2: FDI stocks (as a percentage of gross domestic product)
Country Bangladesh Inward Outward India Inward Outward Mynmar Inward Outward South, East and South East Asia Inward Outward Developing Economies Inward Outward World Inward Outward
Source: UNCTAD, World Development Report 2004,

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1980 1.7 0.2 .. .. 27.4 1.0 12.4 3.6 6.6 5.8

1990 1.1 0.5 .. .. 20.8 2.6 14.7 3.8 9.3 8.6

2000 5.2 0.1 3.8 0.4 .. .. 36.6 18.1 29.3 12.4 19.3 19.1

2002 5.2 0.1 5.2 0.8 .. .. 35.6 16.2 31.9 12.6 23.0 22.6

2003 5.0 0.1 5.4 0.9 .. ..

34.6 15.9 31.4 12.2 22.0 23.0

Unfortunately FDI flow in Bangladesh is not satisfactory. According to UNCTAD, in 2003 Bangladesh achieved only 0.05 percent of total FDI while the proportion was 0.9 percent in India, 0.52 percent in Vietnam,10.2 percent in Indonesia, and 70 percent in China. The statistics show that china has become the most attractive destination for FDI. Chinas success in FDI attraction can be explained by its abundant cheap labor- supply and large domestic market with strong consumption behavior. We also cannot deny the possibility herd like behavior of foreign investors. It is thought that India is lagging behind from china due to week consumption behavior of its market. Moreover, Indias policy toward FDI somewhat restricts easy flow of FDI. Although Bangladesh offers attractive package facilities for foreign investors, why FDI flow in Bangladesh is lower than the similar advantaged countries? This is not only a question for Bangladesh---this is a question on FDI dynamics as this is true for many countries. In the regional context, inward FDI in Bangladesh in 2003 is USD 121 ml, India USD 4269 and in South, East and South East Asia, USD 96915 ml. If investigate the FDI stock, then we can see that in Bangladesh USD 2695 ml, India USD 30827 ml, South, East and South East Asia USD 1352409 ml. Capial formation, Bangladesh 1.1%, India 4.0%. (See Table 5.1- 6.2.FDI flows)

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Figure 5: FDI stock (in million US dollar).
FDI stock as % of GDP in Bangladesh, south ,East and South -East Asia 1980-2003

40 35 30 25 20 15 10 5 0 Series1 Series2 1 1.7 27.4 2 1.1 20.8 3 5.2 36.6 4 5.2 35.6 5 5.3 34.6

Series 1 indicate FDI stock, Bangladesh Series 2 indicate South East Asian Stock of FDI flow Source: UNCTAD, WDR, 2004

If we analyze the FDI in Bangladesh, most of the FDI has gone to the energy sector. Comparatively FDI in manufacturing sector is not high. This may be due to the fact Bangladesh has a small domestic market and is not fully capable of consuming quality goods due to poor economic conditions of the people. One good option for foreign investors is to choose Bangladesh looking at Indias big market. The problem is that there are many tariff and non tariff barriers in getting access to Indias market from Bangladesh. This problem may disappoint such types of foreign investors. (Figure 5: FDI stock as % of GDP in Bangladesh,- South, East and South East Asia).

Conclusion
The possibility for Bangladesh is to get more access into Indian market if Indian investors come to Bangladesh by targeting mainly the Indian Market. Tatas $2 billion investment proposal is one such example. Exploring all investment facilities in Bangladesh, their target is to produce goods that have demand in both markets. Their investment proposals up to now are in infrastructure sector for which we have already achieved technological capability. The main target of technological transfer would not be achieved in this case. The East Asian countries are developed, optimized and modernized the technology brought by FDI. Huge investment exists in our energy sectors but we are not still sure how much capability our Petro Bangla and BAPEX have achieved from the technology brought by international oil companies. We must have to learn the technology; we must try reducing dependency on them. Otherwise we would not get much benefit from FDI. Attracting Indian FDI is important for various reasons. As Bangladesh has good opportunity to explore the market of Indias seven sister provinces, Indias investors can explore that market by investing in Bangladesh. If they come here they will act as an agent to remove quantity restrictions of India imposed on Bangladeshi goods. In this way Bangladeshi manufacturers may also get the same advantages if they could produce competitive products. Another option is to integrate with ASEAN. Joining ASEAN will open the window for

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attracting more FDI for cheap labor intensive products. As the labor intensive FDIs are now shifting from ASEAN4 to mainly Vietnam and China due to increased wage level, Bangladesh could also get benefit with integration. Since chinas wage level is also increasing, Bangladesh and Vietnam should be the next destination of FDI. These two countries get more attentions because these two countries are small and less diversified. Moreover, Bangladesh can be used as a center for marketing goods to India and Mynamr. Joining ASEAN may uphold our low profile image.

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