Contribution of FDI in Bangladesh Economy

7/23/2019 Contribution of FDI in Bangladesh Economy

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1.0 Introduction

FDI refers to is a direct investment into production or business ina country by an individual or company of another country, eitherby buying a company in the target country or by expandingoperations of an existing business in the country. Foreign DirectInvestment which is a passive investment which is passiveinvestment in the securities of another country as stock andbonds. Foreign direct investment occurs when a rm investsdirectly in facilities to produce and /or market a product in

a foreign country.FDI plays a dominant role in the economics of angladesh through accelerating !ross Domestic"roduct#!D"$,export and domestic investment followed byoverall economic growth. %he ob&ective of this term paper is tond out the ma&or e'ect of FDI on industrial productivity of angladesh. Foreign direct investment #FDI$ enables a capitalpoor country like angladesh to build up capital, avoid threat tounemployment develop productive capacity. (onventionalwisdoms have it that rms with foreign e)uity tend to be moreproductive. %his could be due to the rm specic tangible assetssuch as exclusive technology and product designs, or theintangible know*how embodied in foreign e)uity such asmarketing, networking and sourcing. +uch assets may be morereadily available in big multinational corporations #-($. s such,being part of -(s allow the local subsidiaries with foreign e)uityto gain access to these assets, which in turn make them toproduce more output given the same level of inputs, and thus ahigher level of total factor productivity #%F"$ than the solelydomestic owned rms.

1.1 Background Of The Study

Foreign Direct Investment is one of the vital force to boost up theeconomy. Industrial productivity is an pre*re)uisite for economicgrowth of a developing country like angladesh .angladesh isbasically a country of agrarian economy .For her economic



development industrial economy is imperative. +o angladesh isgradually moving to industrial economy. esearchers havemarked FDI as an important factor in accelerating industrialproductivity. It helps the country in building up infrastructure,

creating employment, enhancing skills of the labor force of thehost country through transferring technological knowledge andmanagerial capability that ultimately help in the increase of domestic productivity.

During 01234s ,FDI to angladesh was very little and mostlyfocused in banking and a few other sector. angladeshgradually attracting FDI in industrial sector in the purpose of I increasing productivity. +ince 0115 angladesh startedattracting FDI in energy and power sector , economic reformas well as unexplored gas and oil resources . In 0167,annualFDI in8ow was 3.31 million 9+D and in 0115 , it become 7:0.50 million 9+D which rose signicantly in 7332 million9+D which declined to 10:.:7 million 9+D in 7303#+ource;angladesh oard of Investment$.

1.2 Objectives of the study:

%o nd out the impact of FDI on industrial productivity.

1.3 i!itation of the study:

%he study has the following limitations;

< =ne of the main limitations of the study was inade)uateaccess to information.

< %he time was insu>cient to know the in*dept.< It was very di>cult to collect the information from various

personnel related to industrial production.

< ecause of the limitations of information, someassumption was made. +o there may be some personalmistake in the report



2.0 iterature "evie#

7.0 ?ey Denition;

FDI is generally considered as the best way to attract modern

technology and management skills. ultinational @nterprises#-@s$ are a source of capital, employment, technology,managerial skills and global distribution networks. %hese benets,however, as has been argued vary with respect to thecharacteristics of di'erent sorts of FDI. %his probably led toarguments advocating the promotion of FDI that is better in someway. %his development is important to some extent which impliesthat some types of FDI are more deserving of incentives thanothers.

7.7 %he impact of FDI on industrial productivity identied byreseasearcher;

There is a global race for accelerating FDI .But how much it can contribute to

host country’s productivity incensement and reducing import of product

is a matter of assessment.

Ailken and arrison!"###$have evaluated the contribution of FDI on industrial

sector.and found that it has positive effect because in helps to format

capital%bring technology and other factors of production..



&othgeb !"#'($used his model to e)plore the impact of foreign investment

on the growth of Bangladesh and found that FDI has a positive impact on

growth.e also found a strong positive effect of the change in the level of

domestic investment on growth.

*uader%+yed ,an-ur!#$applied e)treme bounds analysis to the data of the

various catalyst variables of FDI inflows in Bangladesh.They found FDI and

domestic investment have a positive effect on productivity inncreasemenr

and the number of employment.

,allampally and +auvant !"###$ states that FDI is widely though to bring with

it into the host country a bundle of productive assets% including long term

foreign capital entrepreneurship %technology%skills%innovative capacity andmanagerial% organi-ational and e)port marketing know how.

3.0 $ethodo%ogy of the Study

%his section explains the methodology of research to develop theanswer to the research )uestions. t rst the research)uestions are addressed and then the hypotheses havedeveloped . -ext sampling frame and data collection procedurehas been discussed. Finally this section tests the validity andreliability analysis of the data.

%his study addresses following )uestions by analyAing literaturereview;

< If FDI have the positive impact of domestic industrialproductivity

< if have, how much domestic industrial productivity hasincreased in recent yearB

< In which sector foreign investor are eager to invest moreB



< the most attractive industrial sector of FDI and itscurrent productivity statisticsB

< the relation between FDI and increased productivity andexport possibility of angladesh.

"esearch !ode% and hy&othesis:

research model has identied to nd out the e'ect of FDI onindustrial productivity. %he model is as follows;

%he "roductivity +pillover odel; which analyAing if domesticrms gets benets from FDI rms.

'ri!ary data:"rimary data are collected in the course of conducting oraldiscussion with the o>cers and production manager of di'erentindustry.

Secondary data:

%hese are collected from books, nnul eport FDI, di'erentmagaAine on industrial productivity.

(.0 )n overvie# of *+I in Bang%adesh

(.1 Invest!ent "egistration Statistics inBang%adesh:

%he industrial investment mainly consist of private versus public,

local versus foreign investment. %he analysis of industrialinvestment status will provide good information as to how FDI isused. %he economy of angladesh has been gradually drawingthe attention of private sector investors since its opening upin early 01134s. anufacturing is becoming increasingly vibrantclaiming a signicant share in the total investment.



Cear "roposed ocalInvestment

"roposed ForeignInvestment

%otal "roposedInvestment

!rowth

"ro&ect 9+E#illion

$

"ro&ect 9+E#illion$

"ro&ect

9+E#illion$

733*7335

06G 7557.:0

0: :570.0 0221 572: 07H

7335*7336

01:3 72G2.12

010 0672.75 7070 G66 *76H

7332*7331

0::5 7G23.67

0:7 70:6.: 0G52 G502 *70H

7331*7303

265 02:0.GG

17 506.52 152 7GG1 76H

%otal 600 0756 51: 2217 273G 70G1

+ource; angladesh @conomic eview #February 7303$

During FC 733* 7335 to FC 7331 *7303 , cumulative privateinvestment registered with oard of Investment#=I$, the apexprivate investment promoting and facilitating body, total 9EE 70,G1 million. %he registered investments consists of 2.6G percent as local and G0.75 percent as local and G0.75percent as foreign #033 percent and Joint Kenture$. In the

above table presents the time series data during FC 733*7335 to FC 7331 L 7303. In FC733*7 335,total privateinvestment registered amounted 9EE572:.G5 million, whereasin 7331*7303 it reached 9EE 7GG1.07 million 7332*7331experienced a 76 percent in the overall investmentcomprising of *07.GH growths in local and 060.0H growth inforeign investment. +ee the table in above for moreinformation.

(.2 *oreign 'rivate invest!ent &rojectsregister #ith Bang%adesh:

%extile and service are the two most growing sectors inFC7331*7303. gro based industry also growth in FC 7331*7303



compared to FC 7332*7331.+imultaneously ,total share of grobased industry grew 1 units in 7331*7303.

+.-o

+ector -o. =f9nit

InvestmentIn 9+E#illion$

@mployment=pportunities#person$

0 gro ased 1 0G.71 7GG:G

7 (hemical 5 012.1G 50G6

: @ngineering 6 :2.15 G:22

G Food and llied 0: 01.00 0557

!lass and (eramic : 2.01 :72

5 "ainting and"ackaging

6 7.76 :7

6 %annery and ubber"roduct

G G.30 537

2 %extile 00 770.75 2G62

1 +ervice 10 G6.13 0262

03 iscellaneous 6 7.2: 6:

%otal G70 6307.66 0G16

+ource; Investment Implementation onitoring (ell #II($, oardof Investment.

%able 7; sector*Mise Distribution of foreign "rivate investmentpro&ects register with =! from FC 7331*7303

(.3 ,-&ort 'erfor!ance of ar!entSector



%he past few years have witnessed an expansion of angladeshgarment export to the world market. In 0112, the total value of garment export from angladesh was about 9+E:.2 billion, itincreased to 9+EG.7 billion in 7330 and settled at 9+E:.5 billion in

733:. %his Information is obtained from the 9nited -ations(omrade Database according to the reporting of the angladeshgovernment. Figure 0 presents the breakdown of the aggregateexport of the angladesh garment sector by destinations, in 0112,7330 and 733:. In both 0112 and 7330, the share of @9 inangladesh garment export was about 3 percent, closelyfollowed by the 9+ at G percent, while other countries,noticeably (anada, made up the remaining percent of aggregate garment export. In 733:, the importance of @9 furtherincreased to 2 percent, while the share of the 9+ dropped to :6

percent.

Figure 0; reakdown of !arment @xport

%he surprising fall in the garment export to the 9+ could be due totransshipment or misclassication of goods. ased on 9+ customdata from the 9+ International %rade (ommission #9+I%($,



garment export to 9+ from angladesh in fact has been steadilyclimbing from 9+E0. billion in 0112 to 9+E0.2 billion in 733:. In733G, the value of garment export from angladesh furtherincreased to 9+E0.1 billion, which makes angladesh the 03th

largest garment supplier for the 9+ market. Figure 7 presents thevalues of garment imports of 9+ from 0112 to 733G by ma&orexporting countries. In 733G, the top ten garment exportingcountries to the 9+ market and their market shares are (hina#05H$, exico #03H$, Nong ?ong #.2H$, Nonduras #G.0H$,Kietnam #:.6H$, Indonesia #:.5H$, India #:.GH$, Dominicanepublic #:.0H$, !uatemala #7.1H$ and angladesh #7.2H$.

Figure 7; reakdown of a&or !arment @xporters in the 9+arket

Me further use a rm level export data set obtained from the %extile 9nit of the @xport "romotion oard #@"$ of angladesh toanalyAe the export performance of the angladesh garmentsector. %his information is compiled from those rms that appliedfor (ountry of =rigin (erticates in 733G. %his certicate is often



re)uested by the importing countries to verify the origins of theimported goods in order to grant trade preferences.

In this rm level data set there are 7:26 garment rms exportingin 733G. %he total value of garment export is 9+E.6 billion, with

more than G33 million doAens of garment exported. =verall 6percent of garment export headed to the @9, 73 percent for the9+ and the remaining 7: percent went to the other countries suchas (anada and ustralia. %able 0 presents the breakdown of garment export volume by destinations.

Description Ouantity #doAen$ Kalue #9+E$

@9 under !+" :01,602,G00 :,7GG,57,221

=thers :7,3GG,G7 0,:35,031,200

9+ with )uota G7,015,65 165,756,371

9+ without )uota 01,62,G27 01,03,760

%otal G0:,6G,300 ,525,313,333

Tab%e 1: ar!ent ,-&ort by +estination/ 200(

In terms of the distribution of rms across di'erent markets in733G, there are 0156 rms exporting under !+", mainly to the@uropean market, 03:1 rms exporting to the 9+, of which 631export under )uota allocations, and 07:0 rms exporting to othercountries. Figure : presents the distribution of rms by exportdestinations.

mong these rms, G5 percent only supply to one market, :Gpercent supply to two markets, 0G percent to three markets, and percent to all four markets. %his is clearly presented in Figure G.



Figure :; -umber of Firms in Di'erent arkets



Figure G; -umber of Firms vs. -umber of arkets

Figure presents the choice of export markets of angladeshgarment exporters according to the number of export market therms supply. It is very clear that @9 is the most popular

destination, especially among rms that have only one exportmarket. mong the 0031 rms that only supply one market,nearly 23 rms concentrate on @9 which is about 65 percent.

%he 9+ market appears to be toughest to break in among thisgroup of rms, less than 2 percent only export to the 9+ with andwithout )uota.

For rms that supply two markets, both the @9 and the others arethe favorites. %ogether, they account for 23 percent of themarkets among the 05G3 rms that export to two markets. %he9+ in )uota market is popular for rms that export to more than 7markets.

Figure ; arket (hoice by Firms with Di'erent arkets



In addition, according to @aton, ?ortum and ?ramarA #@, 733G$

who study the export performance of French rms, the number of

markets a rm supplies re8ects the productivity and

competitiveness of the rm in the world market. %he above

distribution of rms implies that more than : percent of angladesh garment exporters participate in world markets

widely with at least : export destinations, and are thus very

competitive. %his is )uite evidence in Figure 5, when we plot the

unit value of garment export #left axis$ and total export value

#right axis$ against the number of export destinations. Firms that

export to more destinations tend to have higher average unit

values and larger in siAe, with the former re8ects better )uality

and the latter indicates greater scale economies, both signalhigher productivity of the rms. %he di'erences in unit values

and total siAe among rms with di'erent number of markets are

statistically signicant.



Figure 5; @xporting and "roductivity

(.( 're%i!inary *indings Based on *ir! Survey

Firm level survey was conducted from the period of -ovember

733G to pril 733, which covers a stratied random sample of :3 rms, which is about 03H of the total population of thegarment rms currently operating in angladesh. fter cleaningup the data to exclude outliers and rms with incompleteinformation, there are a total of 7:0 rms in the unbalanced nalpanel data set of 0375, from 0111 to 733:. In this unbalancedpanel data set, the composition of sub*industries of knitwear,sweaters and woven is 7GH, 2H and 52H respectively. mongthe sampled rms, 0:H have positive foreign e)uity, while theremaining 26H are purely domestic owned. oreover, 0H of thesampled rms are in the Dhaka and (hittagong @"Ps, 5:H inDhaka and 0H in (hittagong.

%ables 7*G and Figures 6*1 present the sample means of the keyvariables of the sub*industries of knitwear, sweaters and woven,by foreign versus domestic rms. It is clear that FDI rms are ingeneral larger in sales, in exports, they purchase more materialinputs, including imported materials, they hire more employees,including production workers. FDI rms also have larger capital

stock and investment. ll these suggest that FDI rms are largerin scale and presumably more protable and productive. %oformally study the productivity superiority of FDI rms, and thepossible productivity spillover to domestic rms, we will need torst estimate rm level productivity for the rm sample. %heestimated rm productivity is then relate to the ownership of therms, and the relationship between productivity of domestic andFDI rms in the same sub*industries will be statistically examined.



Tab%e 2: Su!!ary for nit#ear

*igure : Su!!ary for nit#ear



Tab%e 3: Su!!ary for S#eater Industry

*igure : Su!!ary for S#eater Industry



Tab%e (: Su!!ary for oven Industry

Figure 1; +ummary for Moven Industry

(.4 ,sti!ating 5r! &roductivity



%o formally study the overall productivity of rms, we need toestimate rm production function, taking into account total factorusage per unit of output. In the rm survey we asked rms toprovide the annual increase in the main product price and the

main material input price. %he rm level price information allowsus to construct rm level price indexes of output and material,which we use to de8ate sales and material costs to obtain realoutput and material level. Me estimate the following productionfunction,

where i a nd t are the indexes forrm and year, respectively. In log, output, Y , is linearly related tolabor, L, materials, M, and capital stock, K . ny part of Y that arenot explained by the three factors of production are attributed toproductivity, A, which varies by rms and years. In other words, if we regress lnY on lnL, lnM and lnK using ordinary least s)uares#=+$ estimation, the regression errors are the rms productivity,ln A.

Nowever, rm4s input choices are likely to be endogenous.

Now many workers to hire, how many unit of fabrics to purchase,and how many new machines to set up each year depends on theproductivity of the rms, which is known to the rms, but not theresearchers or economists. +uch input endogeneity will bias =+estimates of labor and materials upward. In addition, if larger andolder rms tend to stay in business despite low productivity, willyounger and smaller rms tend to )uit easier, such entry/exitdecision of the rm will bias =+ estimates of capital downward.

%o address input endogeneity bias and selectivity bias, we

follow a :*step nonlinear estimation methodology developed by=lley and "akes #@conometrica, 0115$. oreover, to control forany factors that are specic to the rms, such as fraudulentaccounting practice, or years, such as economic downturns, thatmay bias our estimates that are beyond the =lley*"akescorrection, we also include rm and year xed e'ects in ourregressions. Me modied the three stage nonlinear estimation of



the above production function due to =lley and "akes to includerm and year xed e'ects. Furthermore, even that older rmsare more likely to stay in business despite temporary down turn inbusiness, we also control for rm age in the estimation.

%o control for input endogeneity, we rst regress lnY on lnL,lnM, a full set of rm and year xed e'ects and a : rd orderpolynomial function of real investment and capital, which is usedto control for the unobserved productivity. %he estimatedcoe>cients on labor and materials are consistent. Firms4 realinvestment, I, is obtained by de8ating nominal investment fromthe rm survey by the !D" de8ator of domestic xed capital

formation of angladesh in the respective years. (apital isconstructed by summing real investment over the years using

perpetual inventory method with an annual depreciation rate,of 03 percent;

with initial capital stock being constructed using average betweenrm4s rst year xed asset, F , and the innite sum series of investment prior to the rst year, assuming that the growth rateof investment of 3 and depreciation rate of 03 percent.

%o obtain consistent coe>cient estimate of capital, we rstestimate the entry/exit decision of the rms using a "rotregression on a :rd order polynomial function of investment,capital and age, controlling for year, region and industry xed

e'ects. %his regression yields the propensity for a rm to stay in

business. Me then regress , constructed using

the consistent estimates of and from the 0st step, on age,capital, and a :rd order polynomial function of propensity of



survival and . %his last*stage nonlinear

regression gives us consistent estimated coe>cient on capital,.

esults of the regressions are reported in %able . (olumn#0$ of %able shows the =+ estimation with no correction onendogeneity, selectivity, rm or year xed e'ects. %heseestimates are likely to be biased. (olumn #7$ shows the withinestimates with rm and year xed e'ects. Mhile these estimatesare robust to factor such as location which is specic to a rm andmacro economic climates which is specic to a year, year to yearvariation of productivity within rm will still bias our estimates.

(olumn #:$ reports the rst stage =lley*"akes procedure, where a:rd order polynomial function of investment, capital and age isincluded, in addition to rm and year xed e'ects, to control forwithin rm year to year changes in the unobserved rmproductivity. %his procedure corrects for input endogeneity, whichreduces the upward bias relative to the =+ estimates. %heconsistent estimated coe>cients for labor and materials are 3.7and 3.67, respectively. Mithout correcting for selectivity, theestimated coe>cient on capital is too low.

%able ; Dependent Kariable L log of rm output



(olumn #G$ controls for selectivity bias by including a :rd orderpolynomial function of the estimated survival probability and thenet tted output. %he resulting estimated coe>cient for capital is3.37. ll these coe>cients are statistically signicant, and are in

line with the estimates in the literature. Finally, with the sum of the estimated coe>cients of labor, capital and material e)uals toone, the production function in the garment sector is found beconstant returns to scale.

Mith these estimates, we constructed rm level productivityaccording to the following e)uations;



(omparing rm productivity across all rms in all sub*

industries and locations yields some interesting insights in termsof relative productivity of rms. Mhen we compare di'erent rmsacross di'erent sub*industries, on average, knitwear rms are themost productive. n average knitwear rm has 03 percent higherproductivity than a woven rm, and 06 percent more productivethan a sweater rm. Figure 03 presents the distribution of theestimated rm productivity by the three sub*industries. In termsof locations, productivity of rms located in Dhaka*@"P is thehighest, follow by rms in Dhaka, (hittagong*@"P and (hittagong.

Figure 00 presents the distribution of rm productivity by location.



Figure 00; Distribution of rm productivity by location



(omparing rm productivity from year to year within rms alsosheds some interesting new lights. =n average, garment rmsare : percent more productive in 733: than in 0111. %heimprovement in productivity is especially clear for the sample of

domestic rms ** on average, domestic rm productivity is .percent higher in 733: than in 0111. Figure 07 presents themovement of rm productivity over time in the di'erent sub*industries. It is clear that most of the improvements are driven byrms in the +weater and Moven industries. %hese results purelyre8ect the growth in productivity within a given rm, and thus arenot contaminated by the composition of rms in di'erentindustries. +uch an increase in productivity within a rm suggeststhat there are some exogenous factors pushing rms to be moreproductive over time. Me explore one such exogenous factors

which is the productivity spillover e'ects of FDI rms.

Figure 07; "roductivity !rowth of Domestic Firms by +ub*industries

(.6 )re *+I 5r!s !ore &roductive7



Me relate the rm level productivity, Ait , to the ownership of therms. s shown in Figure 0:, on average, productivity of rmswith foreign e)uity are about 73 percent higher than purelydomestically owned rms.

Figure 0:; "roductivity of Firms with Di'erent =wnerships

Mhat could have explained the 73 percent productivity advantageof FDI rmsB (olumn #0$ of %able #5$ regress the estimated ln %F"of rms on a FDI indicator variable, controlling for industry, yearand location xed e'ects. %his is to isolate the e'ect of foreignownership from the in8uences of sub*industries, investmentclimate of the locations, and the macro economic shock in each

year. !iven that ownership seldom change within rms in oursample, between*rms variation in foreign ownership is used toidentify the e'ect of FDI dummy on productivity. %he result showsthat a FDI rm is still about 73H more productive than a domesticrm in the same industry, location and year. %his shows that thee'ect of foreign e)uity on rm productivity is independent on thelocation of the rms, the sub*industry of the rms and the



macroeconomic 8uctuations. (olumns #7$ and #:$ further includeage and export destinations of the rms in both the between andthe =+ regressions. It is clear that FDI rms do have a higherlevel of productivity, even after we take into account the export

destinations and thus the potential demand shocks of the rms,as well as the experience of the rms as proxies by age.oreover, the =+ results show that rms export to 9+ tend to bemore productive, which concurs our previous nding using rmexport data from @".

(olumns #G$ to #5$ repeat the exercise by using the actualforeign e)uity share in the regressions instead of a FDI dummyvariable. %he results are strikingly similar. %his could be becausemost of the FDI rms in angladesh garment sector have 033

percent foreign e)uity, only 6 FDI rms are &ointly venture rmswith foreign e)uity no less than 7 percent.

%hus overall there is convincing and statistical signicantevidence suggesting that FDI rms are more productive thanotherwise identical domestic rms operating in angladesh. %hisresult is robust after taking into account the e'ects of locations,sub*industries, macro 8uctuation, export destinations andexperience.



%able 5; Dependent Kariable L log of %F"

(. 'roductivity S&i%%over: 8an +o!estic*ir!s Bene5t fro! *+I *ir!s7any countries provide special incentives such as tax holidays orsubsidies, and import duty exemptions to attract FDI, with theassumptions that the presence of FDI will benet domesticeconomy through the some unmeasured Qspillover e'ects.R %o

date, there is evidence of QverticalR spillover e'ects through thecontact of domestic upstream suppliers to the downstream FDIrms #Javorcik, @, 733G$, evidence of QhoriAontalR spillovere'ects however have been )uite elusive.

%o study whether such e'ects exists in angladesh4sgarment sector, we rst relate the estimated %F" of the domesticrms to the presence of FDI rms in the sub*industries. "resence



of FDI rms in sub*industry j, FP jt , is captured by the share of employment of FDI rms collectively in the sub*industries in agiven year, ad&usted by the percentage of foreign ownership of FDI rms, FSit , for all rm i in sub*industry j. %his measure of the

in8uence of FDI rms has been used in the literature #itken andNarrison, @, 0111$.

In addition, we further relate the estimated %F" of domesticrms to the %F" of FDI rms in the same sub*industry and year. In

order to capture the economic in8uence of the productivity of FDIrms, we weight the %F" of FDI rms with the share of foreigne)uity and the share of employment in the industry. Meighting bycapital or output would not change the results.

!iven that both the presence of FDI in the industry and theproductivity of FDI rms in the industry do not vary within eachrm observation, and are specic to each industry*year, we haveaggregate variables in micro unit, which will articially de8ate thestandard errors of the rm level panel regression #oulton,@+%%, 0113$. Me correct for such problem non parametricallyby clustering the standard errors of the regressions by industry*

year.

%able 6 presents the regression results. (olumn #0$ shows thatcontrolling for rm and year xed e'ects, productivity of domesticrms increases with the presence of FDI rms in the sub*industry.Nowever, while the e'ect is positive, it is not statisticallysignicant. %his is )uite in line with the nding of the previous



literature, and is robust to the inclusion of other control variablessuch as age and export destinations in (olumn #7$. %he moreinteresting result is presented in (olumns #:$ where we ndpositive and signicant e'ects of the productivity spillover of FDI

rms on the domestic rms in the same sub*industry. For every03 percent increase in the productivity of FDI rms, theproductivity level of domestic rms in the same sub*industryimproves by 0.G percent. %his result is robust to controlling forexport shares and age of the rms as shown in (olumn #G$.

(olumns #$ to #2$ repeat the same exercise, but instead of usinglog of %F" as dependent variable, we use the level of %F". %his iscloser to the usual notion of productivity #=lley and "akes,@conometrica, 0115$. In these specications, both the presence

of FDI rms and the productivity of FDI rms have positive andstatistically signicant e'ects on the productivity of domesticrms in the same sub*industry.

=verall, there are su>cient statistically evidence suggesting thatdomestic rms may benet from the productivity growth of FDIrms in their sub*industries. %hus, not only are FDI rms moreproductive than domestic rms, productivity growth of FDI rmsmay spillover to the domestic economy to benet the domesticrms.



%able 6; Foreign "roductivity +pillover



4.0 *indings of the study

angladesh is a winning combination with its competitive market,business friendly environment and cost structure for FDI, some of the opportunities are as follows;

angladesh o'ers a well*educated, highly adaptive and

industrious workforce with the lowest wages and salaries inthe region. 6.:H of the population is under 7, providing a

youthful group for recruitment. %he country has consistentlydeveloped a skilled workforce catering to investors needsthroug making FDI 8exible in this country.

FDI helps in formating capital ,being technology. create

empolyment for people,increasing money supply actuallycontribute to increase productivity.

angladesh has proved to be an attractive investment

location with its 0G5.5 million populations and consistenteconomic growth leading to strong and growing domesticdemand to the foreign country.

angladesh o'ers the most liberal FDI regime in +outh sia,

allowing 033H foreign e)uity with unrestricted exit policy,easy remittance of royalty, and repatriation of prots andincomes.

due to FDI garment Ss productivity is increasing day by

day,and there is a high growth in sector.

@xport of angladesh increased to 027.57 angladesh

taka billion in may of 730G from 061.5: angladesh taka



billion in april30G.it has been possible due to foreigninvestment.

the FDI firm is /0 more productive then domestic firms

6.0 8onc%usion and"eco!!endations

6.1 8onc%usions:angladesh has a number of positive attributes that can

successfully attract the attention of foreign investors from bothdeveloped and developing countries. %he increasing availability of skilled and unskilled labor at relatively low wages and the successin maintaining reasonably stable macroeconomic environment area few factors behind making the country an attractive destinationfor foreign investors. %hey are generally aware that the wagerates in angladesh are among the lowest in sian countries, therate of in8ation is usually contained within tolerable limits, theexchange rate is reasonably stable, custom regulations areinvestment friendly without discrimination between foreign anddomestic investors, and attractive incentive packages areavailable for the foreign investors. angladesh needs toundertake e'ective promotion measures to convince the potentialforeign investors that their involvement in business activities inthe country is valued, they would be facing friendly regulations,and they can en&oy investment incentives that are competitivewith those o'ered by other countries in the region and thedeveloping world. %he country also needs to move forwardthrough implementing investment friendly policies, simplifying

regulatory practices, and removing ine>cient bureaucraticprocedures. ased on the foregoing discussion and analysis, itmay be stated that as angladesh has not yet been successful increating a favorable environment for attracting su>cient amountof FDI, it is likely that dialing the 8ows of FDI will remain at thebottom level. %he country is lagging behind most of the otherregional developing nations in attracting FDI. %herefore, all



barriers that stand in the way of industrialiAation and attractingFDI are re)uired to be overcome. %he infrastructure is number onedetermining factor in attracting FDI. "oor infrastructure and highlypriced utilities in angladesh shy away foreign investors from

their invest

ment. In every sector of infrastructure, the availabilityof )uality and reliable services are vital factors in attracting FDI. %his paper studies the relationship between foreign e)uity andrm productivity of angladesh industrial sector. Firmproductivity is measured by the total factor productivity #%F"$,which is the level of output that is not explained by inputs,re8ects e>ciency in production of the rms. 9sing between rmvariations, we show that FDI rms on average are 73 percentmore productive than domestic rms in the same sub*industryand location. Furthermore, there is statistically signicant

evidence suggesting that domestic rms may benet from theproductivity spillover from the FDI rms. For every 03 percentincrease in FDI rm productivity, the productivity of domesticrms improve by 0.G percent. %he ndings of this paper support amore open FDI policy in angladesh industrial sector.

6.2 "eco!!endations

fter the above study and practical knowledge on the impact of FDI on industrial productivity in angladesh, some focal points arediscussed below to improve the FDI opportunities in angladesh.

%he following suggestion is based on the assumption, idea andknowledge about the FDI in angladesh but there is no empiricalproof.

+ustainable @conomic Development; +ustaining macroeconomic

stability through maintenance of appropriate monetary and scalpolicy, increasing the Investment, increasing revenue, improvingexport performance, sustaining remittance growth, providingproductive employment to the labor force and improving businessand investment climate. %he (entral ank should pursue suchmonetary policy as would reduce in8ation and promote higher





boosting trade, and increasing the attraction of the region toforeign investors.

Numan esource Development; For human resource development

through knowledge base education, training and research,attention had to be given to increase people4s access toinformation, research and capacity development so that theforeign investor get it more feasile to invest in anglades.

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Documents

Contribution of FDI in Bangladesh Economy