An Interesting Topic

(Foreign Direct Investment)

Example: Telenor Group invest in Bangladesh as

Grameenphone Ltd and started its operations on March

1997.

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Bangladeshi Labor migrant

USD 9774.09 Million (2015-2016)

More than 7 million

Nationals

Representing 12% of

the GDP of the year

67% of all labor work in one of the Gulf Cooperation

Council (GCC). countries: Bahrain,

Kuwait, Oman, Qatar, Saudi Arabia

or UAE (ILO).

•

•

•

•

•

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Economies of scale are the cost advantages that enterprises obtain, by decreasing cost per unit of output with increasing scale as fixed costs are spread out over more units of output.

Example: The printer quotes a price of $5,000 for 500 books, and $10,000 for 2,500 copies. While 500 books will cost you $10 per book, 2,500 will only cost you $4 per book.

Example: Experience Clothing Company Ltd. Of UK invests in Bangladesh garments sector for cheaper labor cost of production.

Knitting & other Textile producer of Italy A-One (BD) Ltd. invests in Bangladesh Textile industries for lower production cost.

3

Marico Ltd. started its operation in Bangladesh as Marico Bangladesh Ltd. in 2000 to produce different types of oil using the cheaper raw materials (coconut).

Maruti-Suzuki “A Japanese company” started its operation in India in 1981 in that contract that the Japanese owner control the business for a certain period and then it sold its substantial portion of share to the Indian owner as a result the Indian owner would get the control. In 2007, the Indian owner got the whole ownership of Suzuki company.

For Example: Wal-Mart has not only diversified internationally but has spread its business into many emerging markets as well. Because foreign expansion diversifies Wal-Mart's sources of revenue and thus reduces its reliance on the U.S. economy

Between 1997-1998, A currency devaluation occurred in Thailand and the Baht per dollar was jumped 28 to 48. American businessman take advantages from this opportunity and they bought land and establish plant

there. When the Baht came

into the flexible situation

then the American Business

men commenced their

operation.

Various inputs-including natural resources

Technologies,

Skilled personnel,

Physical infrastructures and materials

Market size and per capita income

Size of GNP and projected rate of growth

Access to regional and global markets

Country specific customer preferences

Structure of the markets

AN MNC can be motivated to FDI by analysing the geographic factors including-

The proximity of size to export markets

Availability of local raw materials

Availability of power, water and gas.

Form and stability of Government

attitude toward private and foreign investment by Government

customers and competition

Degree of anti-foreign discrimination

MNC companies always try to invest those countries where tax advantages are available

Tax rate trends

Joint tax treaties with home country and others

Availability of tariff protections

Foreign Direct Investments open a wide spectrum of opportunities in the trading of goods and services both in terms of import and export production.

Integration into global economy

Raising the Level of Investment

Trade

Example: South Korea's Samsung Electronics Co Ltd has applied for a license to invest $3 billion in building a second smartphone factory in northern Vietnam. This project will gear the wheel of economy in Vietnam both in terms of export and import of production.

Technology diffusion and knowledge transfer:

Developing countries by inviting FDI can introduce world-class technology and technical expertise and processes to their existing working process.

For example: In February 2011, Bangladesh reached an agreement with Russia to build the 2,000 megawatt (MW) Ruppur Nuclear Power Plant with two reactors, each of which will generate 1,200 MW of power to meet electricity shortages.

Increased competition

Overall development of a country is not possible without creating employment for unemployed citizens. In this regard FDI is working as a great helping hand of that particular host country’s which cordially invites FDI.

Despite having lot of contributions in the economic growth of a country, FDI is not free from limitations. The Barriers of FDI are..

Fall in domestic savings

Less corporate tax

Dualistic socio-economic structure

Control over Political Decision

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•

Independent variables:

Market Attractivness

Trade Openness

Environment Risk

Energy Price

Dependable Variable:

FDI

Market attractiveness, openness to trade and energy prices have a significant and positive association with FDI flows

High FDI flows are associated with low levels of institutional risk, as measured by a country‘s ratings for Bureaucracy Quality, Democratic Accountability and Law and Order.

High levels of several Economic and Financial risks are associated with high FDI flows like Budget and Trade Balance

Countries that earn large reserves of foreign currency from oil and gas revenues have found it not desirable to open up their markets to foreign investors

Countries that earn large reserves of foreign currency from oil and gas revenues have found it not desirable to open up their markets to foreign investors

For Example: Generally high level of restrictions to foreign ownership in OPEC countries compared to non-OPEC

fdi = α0 + α1gro + α2inf + α3 logcost + α4 logtel + α5 op + α6 risk + α7 tax + ε

fdi = FDI net inflows as a percentage of Gross Domestic Product (GDP)

inf = the rate of inflation measured by annual percentage change of consumer prices

Gro = growth rate of per capita GDP

Logtel = telephone main lines per 1,000 people

Logcost = labour cost per worker

Op = the degree of openness

FDI inflows are positively associated with a country‘s GDP per capita.

FDI inflows are positively associated with a country‘s manufacturing exports

FDI inflows in are negatively associated with a country‘s level of environmental risk

Political risk Economic risk Financial risk

Hymer (1976) explained the theories of FDI by comparing the difference between foreign direct investment and portfolio investment

Hymer also analyzed that there are two reasons why investors seek control

1. To make sure their investment is safe

2. To eliminate competition in foreign countries and other countries.

Hymer stated that multinational companies are motivated to invest in foreign countries due to certain advantages .

For example: Getting factors of production at a lower cost

Where market imperfection exists multinational companies prefer to engage in direct investments

Raymond Vernon (1966) product life cycle theory has analyzed four production stages beginning with invention of new product.

Vernon tried to understand the shift of

international trade and international

investment.

• Stage 1- The enterprises are more focused on the domestic market

• Stage 2- When the product matures, enterprises start

exporting to developed countries. • Stage 3- When the product is standardized, the

enterprises would think less developed countries could be good production place

• Stage 4- The home countries will be an importer since

the production decreases

The Uppsala model is a theory that explains how firms gradually intensify their activities in foreign markets • Step i- gain experience from the domestic market before

they move to foreign markets • Step ii- start their foreign operations from culturally and/or

geographically close countries and move gradually to culturally and geographically more distant countries

• Step iii start their foreign operations by using traditional

exports and gradually move to using more intensive and demanding operation modes

0

50

100

150

200

250

300 273.55

224.21

135.21 131.1

120.3 107.01

97.32 93.12

82.42 77.54 69.56 55.25 49.45

40.32

,237.92

FDI I

nfl

ow

s (N

et)

(In

mill

ion

US$

)

Country

FDI:

BANGLADESH

PERSPECTIVE

Rapidly developing market-based economy

According to IMF, Bangladesh ranked as the

44th largest economy in the world in 2011.

But still it’s a developing countries with the

numerous potential of foreign investment

Exports of textiles and garments are

the largest source of foreign exchange

earnings

GDP total: $223.941b(2015-2016)

GDP per capita: $1466

(nominal: 2015-16)

Total exports: $33.50b

(2015-16)

Total imports: $40.69b

(2015-16)

Currency: BDT (1 BDT= $0.0128205) (avg 2009-10

Foreign reserves:

$27 billion(2016)

GDP growth rate (%): 7.1%

(2015-16 est.)

Total FDI:$1833m

(2015)

596.46 644.14

726.23

557.95

255.36 248.23

119.31 68.01

341.1 395.91

606.92

489.94

0

100

200

300

400

500

600

700

800

Jul-Sep 2014 Apr-Jun 2015 Jan-Mar 2015 Apr-Jun 2015

Gross inflow Disinvestment Net inflow

period

FDI I

nfl

ow

s (i

n M

illio

n U

S$)

USD 2524.78m USD

690.91m

USD 1833.87m

Gross Inflow Disinvestment Net Inflow

500

700

900

1100

1300

1500

1700

1900

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

913.02

779.04

1194.88

1730.63

1480.34

1833.87

FDI I

nfl

ow

s (N

et)

(In

mill

ion

US$

)

Period

357.8, 33%

595.65, 54%

143.41, 13%

Equity Capital Reinvested earnings Intra-company Loans

0

200

400

600

800

1000

1200

Jul-Dec 2013 Jan-Jun 2014 Jul-Dec 2014 Jan-Jun 2015

666.07

814.27 737.01

1096.86

521.94 552.06 592.81

877.52

144.13

262.21

144.2

219.34

Total Non-EPZ EPZ

FDI I

nfl

ow

s (N

et)

(in

mill

ion

US$

)

389.58, 21%

197.22, 11%

80.44, 4%

29.22, 2%

351.62, 19%

96.59, 5%

38.7, 2%

199.54, 11%

83.36, 5% 36.79, 2%

330.81, 18%

Banking Telecommunication Power

Agriculture & Fishing Textiles & Wearing Food

Fertilizer Gas & Petroleum Trading

Leather & Leather Products Others

Strategic Location of Bangladesh

Youth & Ambition

Bangladesh’s Export

Competitiveness

Competitive Cost Base

Fiscal & Non-Fiscal Incentives

China and India between them have vast and increasingly prosperous populations, which

are projected to grow to three billion by 2050. Bangladesh is well situated in every sense to

take advantage of this opportunity.

With improving education, technology and economic growth, Bangladesh’s own market of

146.6 m people is becoming increasingly attractive to business and foreign investors.

Unlike older industrialized societies with growing legions

of ageing dependents, Bangladesh has a very youthful

demographic.

66% of the population are economically active (15 years

and over).

The country is young too, 40 years old.

English Widely Spoken - The national language is Bengali or

‘Bangla’. Yet our second language, English, is widely

spoken, understood and written.

Manufacturing output has seen steady growth, recently

in double figures. Bangladesh provides significant benefits

to exporters.

Bangladesh offers a most liberal FDI regime in South Asia, with no prior approval requirements or limits on equity participation and repatriation of profits and

income in most sectors.

Bangladesh enjoys tariff-free access to the EU, Canada, Australia and Japan. Bangladesh is the top manufactured products exporter to the least developed countries as well as to Europe, with more than 50%

market share

BD has lots of well-educated, skilled and

energetic workers. And the wages and salaries

are low

Dhaka's skilled labor cost base is still less than

the other major cities.

Dhaka's management grades are 2-3 times less

than in Singapore,

Shanghai, Bangkok.

Industrial estate rent in Dhaka is cost effective than Shanghai, Jakarta, Bangkok

Automation of investor

registration processes at BOI

Automation of export permit

issuance at DEPZ

Automation of Company

Registration with RJSC&F

Cash subsidy claim process

simplification of Bangladesh Bank

BOI introduced automated

registration system for both local &

foreign investors in 2010.

Entire registration process can be

completed online

No need to visit BOI office or an

intermediary

Avg time to register fell from 42 days to

12 days!

Cost to register fell by 82%

18% of industrial projects are now being registered

within 10 days only!

BEPZA issued automated export

permit issuance process at the DEPZ in

June 2010.

Average time to issue an export permit has

reduced by 33 percent!

No of interfaces between companies and DEPZ authority has reduced to 0 from 4!

Introduced automated business registration in

March 2009.

The entire registration process is now online.

The number of visits to RJSC&F has reduced

by 40%

26% reduction in time required for

registration (23 days in 2009 to 17 days in

2012)

98% reduction in time required to obtain

name clearance (9 days in 2009 to 1.58 hours in

2012)

Complicated Bureaucracy

Political Unrest Corruption

High Inefficiency Insufficient

Power Supply

Inconsistency in Policy

Implementation

Control of Red Tape

Improvement of Law and

Order

Infrastructural Development

Efficiency in Port services

• Citi Investment Research & Analysis

stated that Bangladesh, alongside

China, Egypt, India, Indonesia, Iraq,

Mongolia, Nigeria, Philippines, Sri

Lanka and Vietnam, is having the

most promising (per capita) growth

prospects.

Goldman Sachs branded Bangladesh

in its 'Next 11' list after the BRIC

nations.

JPMorgan Chase commented

that Bangladesh ranks fourth

in growth of economically

active population.

A 2012 HSBC report titled The

World in 2050, listed

Bangladesh as one of the top 7

countries expected to deliver

the fastest growth en route to

2050.

• Morgan Stanley announced that Bangladesh

is at the very early stages of an investment

boom.

1. International Financial Management by Jeff Madura - Florida Atlantic University, 9th edition.

2. International Business By Oded Shenkar, Yadong Luo, Tailan Chi

3. Foreign Direct Investment by edited by Kenneth A. Froot.

4. Foreign Direct Investment by Harrison G. Blaine.

5. Foreign Direct Investment in Developing Countries: A Theoretical Evaluation By Sarbajit Chaudhuri, Ujjaini Mukhopadhyay

1. FDI Survey Report January-June, 2015 By Statistics Department Bangladesh Bank.

2. World Investment Report-2015 by United Nations Conference on Trade and Development(UNCTAD)

3. www.investopedia.com/Foreign Direct Investment - FDI

4. en.wikipedia.org/wiki/Foreign_direct_investment

5. “A study of foreign direct investment and economic growth in bangladesh” by Md. mamun howlader

6. “Foreign direct investment in bangladesh, prospects and challenges and its impact on economy” by Afsana Rahman.

7. “Impact of Foreign Direct Investment on Bangladesh’s Balance of Payments: Some Policy Implications” by Muhammad Amir Hossain.

8.”Foreign Direct Investment Theories: An Overview of the Main FDI Theories” by Vintila Denisia

9. Theories of international trade, foreign direct

investment and firm internationalization: a critique by Robert E. Morgan and Constantine S. Katsikeas

1. What is FDI? What are the primary objectives of Foreign direct investment?

2. What are the revenue related objectives and cost related objectives of FDI? Give proper example with reference.

3. What are the others motives that is related to FDI?

4. Why FDI is important in the developing country like Bangladesh? Are there any disadvantage? Explain?

5. What are the major types of FDI and how FDI can be achieved ? Give proper Example.

6. How FDI can be determined and what are the factors that influence the factors of FDI? How can we calculate FDI?

7. What are the theories of FDI? Explain Hymer FDI Theory ?

8. What is the condition of world FDI and what are the major sources that influence FDI?

9. What is the present economic condition of Bangladesh? How FDI develop the overall economy of Bangladesh?

10. Why foreign investor should invest in Bangladesh and what factors influence the investment decision of foreign Investors?

11. What are the limitation of FDI, Explain? Do you have any recommendation to attract foreign investors?

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