An overview of Foreign Direct Investment in Bangladesh

The main objective of this report is to get an overall insight in the flow of Foreign Direct Investment in Bangladesh in Bangladesh. General objectives of this reports are to give an insight into the theoretical issues relating to FDI, to highlight the role of multinational corporation in FDI, to give an overview of FDI in Asian Countries, to focus on the administration of FDI in Bangladesh, to evaluate the status of FDI in Bangladesh and to identify the problem of FDI & prescribe some issues for their solution. Finally this report make swot analysis Foreign Direct Investment in Bangladesh.

Introduction

Investment has acquired considerable emotive force in any country. It is viewed as beneficial on employment creator-as it brings about economic development. It can termed capital flowing from a firm or individual within the country or in one country to a business or businesses in another country involving a share of at least 10%. So the significance of investment in a country is:

1. It increases the economic growth by sustain increase in real, per capita, national product. This brings -National income effect, Balance of payment effect & Public revenue effect.
2. Accelerate the industrial innovation this develops in integrations take a variety form which is not necessarily mutually exclusive.
3. It increases Political modernization in the degree where it function are collective oriented, universalistic specific and achievement oriented.
4. It also brings infrastructural development & modern nationalism.

From discussing the significance on investment it is two forms:

1. Local (Domestic) investment.
2. Foreign Investment.

Investments come from a firm or individual within the country is domestic or local investment. Investment or capital come from a firm in one country to a business or businesses in another country is called foreign investment.

The investment situation in Bangladesh is consisting of Private vs. Public and Local vs. Foreign investment. The economy in Bangladesh has been gradually drawing the attention of private sector investors since it’s opening up in early 90’s manufacturing is becoming increasingly vibrant Claiming a significant share in the total investment.

Objective of the study:

This study is conducted with the objective to get an overall insight in the flow of FDI in Bangladesh. The total objective is decomposed into several parts to get idea about the factors affecting the flow of FDI. The specific objectives of this study are:

• To give an insight into the theoretical issues relating to FDI
• To highlight the role of multinational corporation in FDI.
• To give an overview of FDI in Asian Countries.
• To focus on the administration of FDI in Bangladesh.
• To evaluate the status of FDI in Bangladesh
• To identify the problem of FDI V & prescribe some issues for their solution.

Foreign Direct Investment:

Foreign Direct Investment (FDI) is the acquisition of managerial control by a citizen or corporation of a home nation over a corporation of some other host nation. Corporations that widely engage in FDI are called multinational companies, multinational enterprises, or transnational corporations. FDI traditionally implies export of real capital from home to the host nation, but even when economic investment results from FDI, capital may not be transferred from the home nation to the host one. Rather, multinational corporation may acquire/utilize real capital from local (or a third-nation) sources foreign capital” means capital invested in Bangladesh in any industrial undertaking by a citizen of any foreign country or by a company incorporated outside Bangladesh. In the form of foreign exchange, imported machinery and equipment, or in such other form as the government may approve for the purpose of such investment; Bangladesh invites FDI for industrial growth, in particular welcoming establishment of manufacturing firms and service sector enterprises that would sell their products within the country and also export outside it.

Factors Affecting Foreign Direct Investment:

Because Foreign Direct Investment can significantly affect a country’s economy, the most influential factors are:

1. Inflation
2. National income
3. Government restriction
4. Exchange rates

Impact of Inflation:

If a country’s inflation rate increases relative to the countries with which it invests, its capital account would be expected to decrease, other things being equal. Consumer and corporations in that country will most likely purchase more goods or invest more in overseas (due to high local inflation), while the country’s exports to other countries & flow of investment from foreign will decline.

Impact of National Income:

If a country’s income level (national income) increases by a higher percentage than those of other countries, its capital account is expected to decrease, other things being equal. As the real income level (adjusted for inflation) raises does consumption of goods. A percentage of that increase in consumption will most likely reflect an increased demand for foreign investment.

Impact of Government Restrictions:

A country’s Government can prevent or discourage investment from other countries. By imposing such restrictions, the Government disrupts investment flows. Among the most commonly used investment restriction are bureaucratic tangles, projection of intellectual property right and f\fiscal policy changes. In addition to these, a Government can reduce its country’s investment by enforcing laws, or a maximum limit that can be invested.

Impact of Exchange Rates:

Each country’s currency is valued in terms of other currencies through the use of exchanges rates, so that currencies can be exchanged to facilitate international transaction. The values of most currencies can fluctuate over time because of market and government forces. If a country’s currency begins to rise in value against other currencies, its capital account balance should decrease, other things being equal. As the currency strengthens, Investment by that country will become more expensive than the receiving countries.

Necessity of FDI for a country:                      

The world has seen a spectacular wave of global corporate activity particularly during the second half of the last decade. This has been facilitated by advances made in the information technology. This trend, strengthened with the direction toward border less-

Economies, is drawing more and more TNCs (Trans national corporation) into the global operation.FDI is no longer only a strategic option of corporations; it also plays a key role in the national economic development strategies. Various countries are attempting to attract foreign investors through a variety of measures, i.e. liberalization of investment environment, fiscal reforms and a package of incentive offers. FDI can transform a country’s economic scenario within shortest possible time. It is not merely access to fund, but also provide transfer of technical know-how and management expertise. It is also a stabilizing factor in any economy, because once TNCs have made an asset-based direct investment, they can not simply pull out overnight like in the case of portfolio investment. Normally the benefits accruable from FDI are inclusive of

• Transfer of technology to individual firms and technological spill-over to the wider economy,
• Increased productive efficiency due to competition from multinational    subsidiaries
• Improvement in the quality of the factors of production including management in other firms, not just the host firm,
• Benefits to the balance of payments through inflow of investment funds,
• Increase in exports
• Increase in savings and investment and
• Faster growth and employment.

 Thus, foreign direct investment is viewed as a major stimulus to economic growth in developing countries. Its ability to deal with two major obstacles, namely, shortages of financial resources and technology and skills, has made it the centre of attention for policy-makers in low-income countries in particular.

Foreign investment opportunity:

Private investment from overseas sources is welcome in all areas of the economy with the exemption of five industrial sectors (arms, production of nuclear energy, forest plantation and mechanized extraction within the bounds of reserved forests, security Printing and minting, air transportation and railways) reserved for public sector. Such investments can be made either indecently or through joint venture on mutually beneficial terms and conditions. In other words, 100% foreign direct investment as well as joint venture both with local private sponsor and with public sector is allowed. Foreign investment, however, is specially desired in the following categories:

• export-oriented industries;
• industries in the Export Processing Zones;
• high technology products that will be either import-substitute or export-oriented;
• undertaking in which more diversified use of indigenous natural resources is possible;
• basic industries based mainly only on local raw materials;
• investment towards improvement of quality and marketing of goods manufactured and/or increase of production capacities of existing industries; and
• Labor intensive/technology intensive/capital intensive industries.

An objective assessment of environment by a foreign investor for his decision making process:

In attracting investment, countries must recognize the main reasons that firms invest in developing countries:

• Resource extraction: firms locate in a specific country because of the natural resource wealth that can be exploited
• Market access: firms set up production in a country because of its large domestic market or its preferential access to regional or global markets
• Operating efficiencies: firms locate in a country because of competitive unit costs (typically labor and transportation costs)

Firms consider different options when selecting an investment site. Hence, countries compete to attract direct investment. The critical question for developing countries is:

What are the factors that determine where firm set up direct investments?

The determinants of investment are unique to each circumstance; nonetheless, there are common themes. Some of the questions that investors ask when considering investing in a developing country follow:

• Are government policies supportive of investment?
• Is the political environment stable and predictable?
• Is there a well-managed economic framework?
• Does the legal framework protect property rights and foreign investors?
• How is the relevant industry regulated and structured?
• Is the local work force sufficiently trained and healthy?
• Is there adequate infrastructure in place?
• Are there significant natural resource deposits?
• How is the quality of life?

These nine issues are explored in greater detail in the Investment Checklist. This checklist contains questions that potential investors will consider. With each individual investment, there is a shifting emphasis as to which are the key factors, hence, the checklist does not rank the importance of each issue.

Significance of foreign investment in Bangladesh:

Foreign investment carries enormous significance in a developing country like Bangladesh. Realizing the importance of foreign investment Bangladesh formulated its first industrial investment policy in 1973, revised it again in 1974, 1975, and in 1978. Foreign private investment (Promotion and protection) act, 1980 and the Bangladesh Export Processing zones authority act 1980 were enacted. To make the foreign investment more attractive new industrial policy was announced in 1982. However, the industrial policy 1999 is by far the most comprehensive document. Bangladesh has ever made for investment including foreign investment.

The major incentives for foreign direct investment in Bangladesh are:

• Projection of Foreign investment from nationalization and expropriation
• Abolition of ceiling on investment and equity share-holding by foreigners
• Tax holiday between 5 – 10 years power generating companies
• Accelerated depreciation in lieu of tax holiday on certain simple conditions
• Concessionary duty and VAT on capital machinery and spares
• Rationalization of import duties and taxes
• Six month multiple visa for prospective investors
• Citizenship by investing USD 500,000 or transferring USD 1,000,000
• Permanent relationship by investing USD 75,000
• Tax exemption on capital gains under certain simple conditions
• Bonded warehouse and back to back L/C for exporting industries
• Avoidance of double taxation with certain countries
• Facilities for repatriation of capital, profit, royalty, technical fee etc.
• Tax exemption on royalty, technical know-how and expatriates’ salary
• Protection of intellectual property rights
• Taka convertibility in current account
• Treating reinvestment of repatriable dividend as new investment

FDI and Bangladesh:

Foreign Direct Investment (FDI) generates economic benefits to the recipient country through positive impacts on the real economy resulting from physical capital formation, transfer of technology and increased domestic completion. Bangladesh stands to gain from these inflows provided it is able to allocate and manage these resources efficiently keeping in view the concomitant liabilities of profit and income payments. in the Bangladesh context, the recent surge in FDI in energy and telecom sectors appear to have heavy import content with little impact on foreign exchange reserve  accumulation. The concern that logically emerges is whether the real economy would be able to generate sufficient foreign exchange to finance the remittance of profits and income originating from the foreign investment. Further more, the private sector has been incurring foreign debt obligation of short, medium, and long term maturity to the tune of USD 60-70 million a year. These give rise to interest and principal payments in foreign exchange over and above the official debt obligations to bilateral and multilateral agencies.

In the following table the Sectoral Distribution of private capital inflows and outflows into Bangladesh from 1996 to 2010 are given:

Table :  Profile of Capital inflows (5 years average) (Million USD)

Capitals out flow on the basis of the following sector are as follows:

Table: Profile of Capital Outflows (5 years average) (Million USD)

The main question is, can the economy sustain the foreign exchange payments that will be needed to cover the profit repatriation, interest payments and amortization of private debt? Clearly, in the Bangladesh context, the nature of private capital inflows has implied little augmentation of foreign exchange reserves. Thus three critical issues emerge from the nature of these capital inflows:

First, the high import intensity of FDI inflow and subsequent profit repatriation and interest payments, implies a worsening current account deficit associated with FDI.

Second, there is no discernible accumulation of foreign exchange reserves and consequently, no upward pressure on exchange rates (essentially ruling out the prospects of” Dutch Disease”)

Third this FDI together with private sector borrowing in foreign currency, which has risen to an estimated USD 600 million a year between FY 01-FY 05, and over a billion USD a year for the next 5 years.

Bangladesh Status:

From the inception of the independence Bangladesh has been in the center of economic investment incentive for many countries and institutional bodies of the world. With the passage of time Bangladesh reform its regulatory structure in regard to the FDI to open up the new avenue and to dislodge the compliances related to the FDI. But the effort of this structural progress has back warded by sudden and unexpected political influence and changes. The situation becomes worse one in the September attack on US. During this period flow of FDI all over the world shrunken at a greater extend. Bangladesh had also severely affected by that unwanted changes in the world scenario. Before going for in depth analysis the status of Bangladesh from different aspects are discussed. Bangladesh could be an attractive place of FDI. It is located between the growing markets of south Asia.

• Economic Status: The macroeconomic situation of the country is by large, stable, characterized by a manageable fiscal deficit and low current account deficit. In external trade, it has steady export growth. Foreign Exchange reserve is not bad.
• Political Status: Bangladesh is a developing country having a republic type democratic government. It has British style parliamentary system. After liberation in 1971 the then government nationalized all the key industries. As a result, aid from western world remains as the means of survival. But development of Bangladesh through aid seems to have failed. We see hat Bangladesh is still poverty-ridden. As the effectiveness of aid declined very much demand arose about market access to the developed countries of the product & services of developing countries. But the market access of developed countries is faced with several problems of which politics seems to be prominent. A free trade policy otherwise called globalization is seen as a lively remedy to solve both the problems of developed and developing countries.
• Investment Status: The present democratic government concentrates on more local & foreign investments in oil, gas, cement, infrastructure, textile sectors of Bangladesh to face the challenges of the twenty first century. Though prospects are there in Bangladesh, due to insufficiency of capital & technology greater investment is no taking place. However the recent trends o administrative, banking and infrastructure reform process, low rate of inflation compared to the neighboring countries( in Pakistan 11.2%, in India 8.5%, Srilanka 16.7 % and Bangladesh 5%) and separate export processing zones are some of the indicators of the countries development process. That may help in attracting local and foreign investors from developed countries.

Besides, the most important tasks is to revive the rural economy so that the migration of rural people will come down, because a country like Bangladesh has poor resources to meet the bargaining demand of the citizens already settled in the urban areas.

Investment Registration Statistics in Bangladesh:

Before going for full-length analysis of the FDI flow in recent period I have a short look on the industrial investment status. The industrial investment mainly consists of private versus public, and local versus foreign investment. The analysis of industrial investment status will provide us good information as to how we are using the FDI. The economy of Bangladesh has been gradually drawing the attention of private sector investors since it’s opening up in early ’90s. Manufacturing is becoming increasingly vibrant claiming a significant share in the total investment.

Foreign Private Investment Projects Registrar with Bangladesh:

As per registration data, Textile and Service are the two most growing sectors in FY 2009-10. Agro based industry also growth in FY 2009-10 compared to FY 2008-09. Simultaneously, total share of Agro based industry grew 59 units in 2009-10.

Table: Sector-wise Distribution of Foreign Private Investment

Projects register with BOI from FY 2009-2010. (Million USD)

Table depicts the time-series data during FY 2009-10. See table in above for more information. Registration of local industries also grew substantially. Engineering, Chemical, printing and packaging, agro-based and food and allied sectors have led the growth .The share of manufacturing in local investment registration is major percent of the total investment proposals in 2009-10 that grew substantially over 2008-09.

The present investment trend indicates that the industrial growth would rise to 27 percent in the FY 2009-10. It may be noted here that the manufacturing sector lead growth during 2009-10.

Recent FDI flows over the world:

Asia, for some time now, has been a major influence in the global economy. South Asia, however, lags far behind in comparison despite its huge potential. Opportunities abound in terms of prospective investment in the South Asian countries since they offer different sorts of incentives. Many countries do not show any discriminating attitude towards foreign investors and they are allowed to take home their profits. In fact, over the last few years, countries in South Asia have come to adopt Foreign Direct Investment (FDI)-specific regulatory frameworks to support their investment-related objectives. These have been reflected in recent trends of the FDI inflows in South Asia, which increased by 32% as a whole and amounted US$ 41,406 million in 2009 while south asia FDI inflows plunged by 16.61%. South Asian countries received US$ 49,659 million as FDI in 2008. UNCTAD’s World Investment Report (WIR) 2010 revealed that south asia FDI inflows, after reaching US$49,659 million, record high in 2008, declined sharply to US$ 8,253 million in 2009. Such a plunge, for the first time in a decade, was mainly the result of weakening of the global economy, notably in the world’s three largest economies, all of which went into recession. A consequent drop in the value of cross-border merger and acquisitions, US$ 594 billion, completed in 2009, was only half of that in 2008 happens to be another reason as well. As a result, the downturn in FDI in developed countries was 59% against a 14% drop in developing countries.

Table   FDI Recipient and FDI Donors

Flow of FDI in South Asia:

FDI inflows into South Asia went up by 32% as a whole and amounted US$ 41,406 million in 2009 while south asia FDI inflows plunged by 16.61%.. According to the WIR 2010, FDI inflows to India went up from US$ 40,418 million in 2008 to US$ 34,613 million in 2009, which is a 14.36% decrease. Pakistan, too, experienced a decrease in FDI inflow, where it reached US$ 2,387 million in 2009, a 56.10% decrease over US$ 5438 million in 2008.

Table: FDI Inflow by south Asian countries (Million Dollar)

In 2001, south Asian Countries received $41,406 million in FDI, which is $8,253 million below that of the previous year.

FDI Inflow survey in Bangladesh

Foreign private capital flows into Bangladesh have taken three forms: FDI, portfolio investment, and foreign currency loans (supplier credit or commercial loan).  But liberalization of the investment regime, while making foreign investment procedures simpler, has also made it difficult for the central bank to mobilize information on capital flows. The Bangladesh Bank has been experiencing difficulty reporting FDI accurately as private capital flows emerge as a significant component in the balance of payments.

FDI Inflow Survey 2002 was successfully conducted by BOI, for the first time in Bangladesh in February 2003.It was the first-ever attempt to gather credible data on actual FDI inflow on the basis of definition given by UNCTAD. The World Investment Report 2003 (UNCTAD-2003) mentioned that ”FDI flows to Bangladesh and other countries in the sub region declined. However, in the case of Bangladesh, FDI flows in 2002 would have been higher if investment in kind were included.

The FDI census in Bangladesh:

The Bangladesh Bank conducted a census of foreign direct investors in 2009-2010, to gather comprehensive primary data and actual FDI inflows based on projects registered with BOI and the Bangladesh Export Processing Zones Authority.

Table: Component of FDI inflows (Million USD)

FDI inflows in 2009 were $700.16 million (reported by the Central Bank of Bangladesh). Half of it was financed by reinvested earnings that are 52%, 31% by equity and 17% by intra-company loans. This is an example of how careful FDI statistics need to be interpreted, given the different ways in which they are compiled.

Summary of FDI inflow by components:

According to the commitments made in the Mid-term Strategic Promotional Plan 2008-09 of BOI, the first half yearly FDI Inflow survey of 2009 was undertaken by BOI in cooperation with BEPZA. This Report, the second of its kind, presents the findings of the survey in detail.

Distribution of FDI inflow by Components:

• Total FDI inflow during January-June 2009 is US$ 700.16 million.
• Equity stands for about 31% of the total investment.
• Reinvestment is the major portion of the inflow constituting 52%.
• Intra-company borrowing comprises of 17% of the FDI.

Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.

Reinvested earnings comprise the direct investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.

Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises.

Table: Component of FDI inflows with Growth (In million USD)

Figure: 1 FDI in 2009

Comparative Statement of FDI Inflow:

Table: Comparative Statement of FDI Inflow from 2005 to 2009 (In million USD)

• The highest growth has been experienced in Inter-company loan marking 273%. It definitely shows the confidence of the existing investors on the investment climate and performance of the economy as a whole.
• Growth in the equity (-73%) and growth in reinvestment is (49%), which should be reflected in the country’s Balance of Payment Statement.

Sectoral Distribution of FDI:

The growth of manufacturing sector is evident from the table below:

Table: Sectoral Distribution of FDI during 2009-10.

Sectoral Distribution of FDI

• Textile is the highest recipient of FDI (3.16%) followed by chemicals (28.32%). The garments in EPZs largely contribute textile sector. However, Service sector is largely contributed by (65.25%).
• Energy and gas sector has sharply declined (only 0.4%) to attract FDI during this period. Given the present utility infrastructure situation of the country and projecting faster growth of industry in coming years, energy and gas could be attractive sector for investment in future.
• A tremendous growth in the manufacturing sector indicates prospective growth of the industry in the upcoming years. It will also facilitate creating job opportunities and SME development.
• Telecommunication has emerged as the 1^st largest sector having huge growth potential in the reformed environment of telecom sector.

Trends of FDI Inflow by Sources:

Country wise distribution of foreign private investment

The major sources of investment lead by Asia (45%), followed by Europe (32%) and North America (17%). Norway was the single largest investor (19%), followed by the United States (17%), Singapore (14%) and Hong Kong (China) and Malaysia (9% each). Most of the FDI from Norway was in telecom and from the United States in the services sector (i.e. power generation, oil and gas, liquefied petroleum gas bottling, Medicare service). Investments from Asia, particularly South, East and South-East Asia, were concentrated in manufacturing.

The major investors include ASE and Unocal (United States), BASF (Germany), Cemexs (Mexico), Holcim and Nestle (Switzerland), Lafarge and Total FinaElf (France), Taiheyo (Japan), Telenor (Norway) and TMI (Malaysia).

Investment in EPZ’s:

Investment & employment

EPZ’s in Bangladesh are another potential export oriented sectors where FDI is used.

Tables provide data relating to the number of operational industries, investment, manpower and export of the six EPZs at Dhaka, Chittagong, Comilla, Mongla, Uttara and Iswardhi, Adamjee, Karnaphuli.

Table:Yearly Investment in EPZ’s (Million USD)

Up to December 2010-2011 total investment of US$ 1,479.29 million. Of the operational units, major percent were RMGs and textiles, 183,648 local manpower have been employed in these industries.

Investment & Export

Annual Investment and Export: Dhaka, Chittagong, Mongla, Comilla, Uttara and Iswardhi Adamjee, Karnaphuli EPZs (2000-01 through 2010-2011) are as follows:

Table: Yearly Employment, Investment & Export in EPZ’s (Million USD)

From the above table Upto December 2011 goods valuing of US$ 16591.04 million were exported from the Zones during 2010-11, which almost 18 percent of national exports.

Here the investment trend is increases for investment are increase and terms & condition of investment by foreigner are relaxed in our country. In the same way the export are increase and the trend is upward moved. Here the export is higher than the investment so here are higher incentives in future to participate in national export.

Investment & Foreign Direct Invest as % of Gross Fixed Capital Formation

Foreign Direct Invest has a great impact to format capital in the following table we can see the percentage of Foreign Direct Invest  with respect to gross fixed capital formation  –

Table: 14 Investment & Foreign Direct Invest as % of Gross Fixed Capital Formation

We get the following figure by plotting the above data related to Investment & Foreign Direct Invest as % of Gross Fixed Capital Formation –

Foreign Direct Invest & Percentage of Gross domestic product

In the following table we present the year wise percentage with respect to Gross domestic product –

Table: Inward FDI stock as a Percentage of Gross domestic product

We get the following figure by plotting the above data related to Investment & Foreign Direct Invest as % of Gross domestic product –

Major conclusion from the study of FDI inflow in Bangladesh:

Four major conclusions can be drawn from the study:

• Bangladesh has experienced a more stable (less vulnerable) form of capital inflow, with FDI making up about 85-90 percent of the total inflows so far.

• Both FDI and private debt inflows in Bangladesh have largely financed imports of machinery and equipment a sign that Bangladesh is only in the preliminary phase of FDI flows.

• FDI and debt inflows have not helped in augmenting foreign exchange reserves so far and are not expected to do so over the next 10 years.  In fact, as inflows grow so do outflows in the medium- to long-term.

• The benefits of FDI are many and worth harnessing.  But the downside risks must not be overlooked.  The growing repayment obligation presents the prospects of net negative transfers in the future and poses major challenges requiring the country to search for new avenues of earning (or saving) additional foreign exchange.

The benefits of FDI in terms of physical capital formation, transfer of technology, and know-how are sufficient to justify sustaining these flows.  Capital controls are not the answer to a rising flow of FDI.  To ensure that resulting payments liabilities remain within the country s debt-servicing capacity, it is essential to develop an effective non-intrusive reporting and monitoring system the main ingredients of which are presented in the study.

Future of FDI in Bangladesh

According to a recent study, FDI inflows are projected to average about $900 million annually from 2000-2010, as compared to $620 million annually during 1992-2000.  Outflows in this case would rise, on an annual basis, from a mere $129 million during 1996-2000, to almost $600 million during 2001-2005, and $1.2 billion during 2006-2010.

The energy sector has been the principal recipient of the inflows but, if current trends continue, foreign investment in telecom, manufacturing, and services could overtake energy by 2006. All these expected trends in FDI depend on several factors. The regulatory body like Board of Investment and other government and non-government institution should take proper step to remove the obstacles in the way of foreign direct investment.

Extent of the barriers: Policy legislation and implementation

In this context, the extent of the administrative barriers is quite longwinded and inter-related. Poor policy design and implementation, competitive weakness, structural impediments, low quality of infrastructure and skills, weak institutions, poor governance and administrative hassles represent the administrative barriers that discourage potential FDI. But the main drawbacks in the bureaucratic system are inefficiency and corruption, turning the whole administrative functionaries into a harassing experience.

Administrative barriers are also translated in different forms and vary from sector to sector. In Bangladesh, we are used to face barriers in different regulatory bodies in the form of their policy, legislation and functions. National Board of Revenue (NBR) and Board of Investment (the Investment Promotion Agency) are two important agencies directly related with FDI operations.

Cost of inefficiency is high indeed

The governance and management of the government entities has been largely inefficient, ineffective and unresponsive. The cost of economy of inefficient services of state-owned entities in energy, telecommunication, ports, railways and other public utilities and banking, in terms of increased cost of doing business has been high indeed. Power outages and voltage fluctuations, shortage of gas supply particularly due to limited network, limited telephone services, inadequate urban water supply, and the high incidental and transaction costs associated with these services have imposed considerable costs on entrepreneurs. In fact, the activities of the public sector utility service providers have been inward looking and have not worked well, while the rationale for ‘public’ provision has been weak or missing in many areas. And much of the shortfall in their performance can be linked to ineffective and inefficient management and unresponsive governance.

Corruption is a disguised form of taxation

Reasons for the extensiveness of official corruption can be numerous. Many of these are cultural or sociological, but the more important ones are organization-related and economic policy-related in nature. Corruption thrives in an environment of pervasive bureaucratic and regulatory controls. Extensive discretionary powers in the hands of the officials and weakness in the legal framework also induce corruption. Though corruption afflicts different sections of the society in diverse ways, its costs fall heavily on the investors, entrepreneurs as well as the business community. For them, corruption is a disguised form of taxation. When regulations and controls are pervasive, and effective means of obtaining redress through legal or administrative procedures are absent, businessmen end up bribing officials to overcome them. Many companies regard bribery as just one of the costs of doing business and show these payments as legitimate business expenses.

Policy discrepancy

Bangladesh offers generous opportunities for investment under its liberalized Industrial Policy and export-oriented, private sector-led growth strategy and the relevant policies are attractive in paper. But, there are several policy discrepancies that are quite enough to discourage FDI.

Differential treatment

Although existing regulations provide for equal treatment of domestic and foreign investors, certain discriminatory rules continue with regard to foreign investment. Sanctioning requirements for particular categories of foreign investment, restrictions against capacity expansion, special regulations for supplier’s credit and pay-as-you-earn-schemes are some of the areas of differential treatment.

One stop service of BOI

In Bangladesh, the Board of Investment (BOI) has created a cell to provide all types of services and assistance to private investments including FDI. But, offering one stop service to the existing and prospective investors in real terms is yet to materialize. The officials of several state-owned utility service providers, working for BOI one stop service, are less capable and less powered to provide necessary service.

Dictated regulatory authority

To facilitate investment and business activities, there are some government agencies working as regulatory authorities for the respective sectors. Though these regulatory bodies were supposed to enjoy operational autonomy, in practice their autonomy has been limited. This has affected their ability to respond effectively and quickly through prompt decisions catering to demands and necessity of the entrepreneurs and investors. For instance, supervisory control over the Public Finance Institutions (PFIs) by the Ministry of Finance, rather than Bangladesh bank (Central Bank), has weakened their autonomy and politicized their management. As a result, required services from PFIs become less effective and time spending.

Legal paradox

The legal procedure is very cumbersome in most South Asian countries and laws are not properly implemented. The archaic laws and regulations are not supportive of the policy incentives to FDI. Judicial dispensation process is mostly too lengthy and at times takes more than a decade in handing out a judgment. This is discouraging for investors in general and foreign investors in particular.

Protection of Intellectual Property Rights (IPR)

It is being observed that Bangladesh is not moving quickly enough to ensure that the country’s laws and regulations are in conformity with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). Although there are existing laws in the country for IPR protection, these are not adequate. It is well known that there exists a direct relationship between increased foreign direct investment and IPR protection and in the backdrop of declining FDI flow; governments of South Asian countries must take immediate steps for protection of IPR.

Lawsuits

There are many lawsuits by taxpayers against the government and majority of which the government loses. But, due to cumbersome legal procedure such lawsuits become inconvenient for the businessmen.

Hassles in implementation

The major quandary of administrative barriers lies in the gap between investment and trade related policies, and lack of co-ordination between various government agencies in the implementation process. As a result, investors face hassles and the cost of doing business goes up.

Discretionary authority of tax officials

Tax officials have enjoyed the discretionary power and it appears that they exercise it to harass businessmen and investors. The discretionary authority of Tax officials made many of them corrupt. Some time, those who are willing to pay taxes are not able to pay even the amount assessed by tax officials themselves as the corrupt officials seek a ‘percentage’ from taxpayers in lieu of reducing the assessed value.

Registration complexity

The procedure for registration with the sponsoring agency has been an annoyance to entrepreneurs and does not serve any useful purpose. With regard to registration with the ‘Inspectorate of Factories and Establishments’ the rules governing the role of the inspector seem to provide ample discretionary power and put industries in a disadvantaged situation.

Lack of coordination among state entities

There is a serious lack of co-ordination between the policy implementing agencies of the government and because of this investor’s suffering goes up. This induces lot of hassles in the implementation process and creates barriers for the investors in getting due incentives offered by the government and ultimately discourages foreign investors to proceed on.

Fiscal policy changes

Any change in the fiscal change after passage of Finance Act seriously disturbs any business plan and discourages FDI in particular. In Bangladesh, quite often policies are changed through issuance of Statutory Regulatory Orders (SROs).

Lengthy customs processing

It takes something like 25 signatures to release a consignment from customs. And it takes more than the stipulated time to release a consignment supervised by an authorized PSI firm even when the consignment is not selected for physical inspection.

Infrastructure

Also linked with administrative barriers the level of infrastructure development is another factor that affects the level of foreign investment and it can be hardly claimed that South Asian countries have reached a level of infrastructure development that will satisfy foreign investors. Again this administrative and bureaucratic inefficiency failed to increase proper infrastructure support.

Restricted telecommunication access

Bangladesh’s telecommunication sector lags considerably behind compared to most other developing countries of the region and the sector strategy has been highly inward looking. Restricted access to telephone connections, noncompetitive pricing and poor quality of services, linked to the inefficiency of old telephone exchanges and transmission links and public monopoly in fixed lines, have imposed a high cost on the economy. This has raised the cost of doing business.

Power supply

Bangladesh has one of the lowest per capita consumption of power and coverage of electrification among developing countries. System losses in the power sector have often exceeded 40 per cent of gross generation. Involvement of the government in the power sector has created an overlapping and confusing situation regarding responsibilities. In fact, inadequate and inefficient power supply continues to impose a high cost on the economy. The extensive load-shedding from time to time, particularly during peak hours, has disrupted industrial production thus affecting the country’s external competitiveness.

Expensive port

The cost of inefficient cargo handling at the Port has been particularly high, thus affecting the external competitiveness of the economy. There are numerous workers’ unions at the port, all of which are crucial for handling cargo. In case that one of these associations decides to call a strike, the whole system comes to a standstill.

There are, of course, the hidden unofficial costs for clearing cargo, be it for import, be it for exports. In fact the port happens to be one of the most expensive ports (container wise) in the world, singularly due to these “unofficial” payments, to which the authorities concerned are comfortably oblivious, evidently to their benefits.

Another factor is the inefficiency and bureaucratic logjam, which increases the lead-time for shipments. Hence, even if a foreign client is interested in ordering from Bangladesh, the company is compelled to procure the products from elsewhere if it is quite urgent. Not only do the entrepreneurs lose, the government also loses its due tariffs and levies from the port.

Impact of FDI Barriers on MNC’s:

In this section we highlighted the experience of two renewed multinational companies that are operating their business for a long period. Especially we highlighted the experience they had in handling their business operation in our country.

Experience of BOC Bangladesh Ltd.

BOC Bangladesh Ltd. has been operating in Bangladesh for several decades now starting from pre-independence time and has been facing the existing administrative barriers, which the company finds manageable with difficulty. If these barriers were not there, the company’s profitability would increase. It may be mentioned here that in light of the global position of BOC, profitability in Bangladesh is quite impressive.

Experience of Siemens Bangladesh Ltd.

Siemens Bangladesh Ltd. started its operation here in 1962. Since then it is contributing a great in the economic progress of our country. Although the company has the good track record in our country it faces difficulty at various periods to conduct its normal operation. They pointed out the political influence and corruption as the root of all evil. They have to comply with various fake changes in the political power and have to spend a lot of money to have the hassle free operation in Bangladesh. Should the company need not to spend such money the profitability of the company must increase.

Recommendation:

Overcoming the barriers

One can now look for the ways to overcoming the barriers to FDI as we have mentioned above. Here, we would recommend following measures that the authorities concerned might consider:

Ensuring good governance

Good governance denotes a desirable state of affairs and so is the key to success of all the reforms. Political and bureaucratic accountability are the two principal components of good governance, and without ensuring them, good governance is not possible. Securing progress on this front is the highest priority as continued difficulties pose a serious threat to the sustainability of even the development achieved already. Establishing the rule of law is in fact a pre-requisite to ensuring good governance.

Accountability and transparency

Accountability and transparency continue to remain the twin elusive prerequisites for the overall development of the country. Private sector investment and FDI inflow are severely hindered by the administrative barriers that arise out of a lack of transparency and accountability, which logically leads to inefficiency and corruption. Competence and efficiency, which are both appallingly, lacking in the bureaucracy, will both become achievable goals with the infusion of transparency in decision-making and governance. This will also greatly reduce what is commonly known as “red-tapism” or “bureaucratic wrangling” since the tiers of the decision making process are bound to become fluent and responsible if they are held accountable for their work.

Co-ordination among state agencies

Without reducing the utter lack of co-ordination among the state agencies, the services and functionaries cannot be efficient. Assuring proper co-ordination among ministries, departments, regulatory bodies, and faster decision-making in the implementation process will enhance the flow of investment.

Strengthening the regulatory authority

Government agencies responsible for facilitating investment need to be more active. In this regard, full autonomy to the agencies like the central bank, investment promotion agencies, telecom regulatory authority, energy regulatory authority, securities and exchange commissions etc., is a prerequisite.

Rightsizing the government

The size of the state organs is quite large and thus mostly inefficient, unproductive and hazardous. So, rightsizing the government is important. By reducing the number of officials in the decision making process in various state organs, transparency and accountability of bureaucracy can be established. Offering a reasonable compensation package to the officials retained is also one of the key factors in ensuring transparency and accountability.

Tackling corruption

Tackling corruption in banking, power, other state-owned enterprises and tax administration ought to be an urgent priority. A comprehensive resolution of the corruption problem in banking, power and other state-owned enterprises will require privatization along with independent regulatory bodies functioning in the public sector.

Fiscal reform

Regarding tax administration, reform option includes establishing an autonomous tax institution with proper incentive and accountability. Countries of the region can learn from the international experience of a number of countries including the Internal Revenue Service of the USA. There is, however, a need for further deregulation of authority. It is also necessary to establish a coordinating mechanism to take decisive and continuous steps in resolving problems identified in relation to project implementation.

Infrastructure reform

The main policy challenge is to redefine the role of public sector in infrastructure development by gradually allowing the private sector to play a bigger role. Public sector’s role should be restricted to regulatory functions only.  Mention may be made here that, Bangladesh’s existing Industrial Policy includes infrastructure as a thrust sector acknowledging a lead role of the private sector supported by special incentives and the Finance Minister of Bangladesh, in his 2002 budget speech, stressed the need for more private sector participation in infrastructure development of the country. The Infrastructure Investment Facilitation Center (IIFC) of Bangladesh has been interacting with the private sector to attract private investment in this sector. Other countries of the region could take lesson from Bangladesh in this regard.

Conclusion

In conclusion, it could be said that experiences referred to as above are based on the same encountered in Bangladesh. But, these are more or less the same in other countries of the region. If the respective governments do not take appropriate measures, it would be difficult to attract the expected level of FDI.

The policy regarding the foreign direct investment should be clear and flexible and should contain some lucrative options for foreign investors. This will certainly boast up the health of FDI in our country.

Our country is very much underdeveloped. In the context of an underdeveloped country the role of FDI is very vital and essential. We do not have sufficient internal resources to meet up the growing demand of increasing population at different aspect. As a result we have to rely greatly on FDI to accelerate our economic growth and to meet up the demand.

Another point is credible and must have to note is the necessity of common census of foreign direct investment. Only few months back the BOI and BB have provided contradictory result regarding the FDI in our country. But there should not be any discrepancy in regard to this.  This figure represents the condition of the country and should be accurate in nature.