East West University ITB301, Section 4

Foreign Direct Investment (FDI)

According to International Monetary Fund (IMF), FDI refers to investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. IMF also requires calling an investment as FDI if an investor holds a substantial ownership share, at least 10%, and exercises a significant amount of management control. Types of FDI: FDI can be classified into five different types such as Greenfield investment, Merger or Acquisition, Joint Venture, Horizontal FDI, and Vertical FDI. They are discussed in the following: Greenfield Investment A company that wishes to own a foreign subsidiary outright may start from a Greenfield investment by building new facilities or expanding existing facilities. The establishments of industrial plants and facilities at Export Processing Zones (EPZs) are examples of Greenfield investment in Bangladesh. Merger or Acquisition Merger or acquisition occurs when a foreign firm purchases the existing assets of a local firm to start a business. For example, in 2004, Orascom, a major player in the global telecommunications market, purchased 100% share of ShebaTelecom (Pvt.) Ltd. in Bangladesh and started their business as BanglaLink which is a wholly-owned subsidiary of the company. Joint Venture (JV) A company can enter into a foreign market by establishing a JV formed by an international company and local company or the government of the country of investment and an international company or a corporate entity formed by two international companies. For example, In Bangladesh, GrameenPhone (GP) is a JV formed by Telenor of Norway and Grameen Telecom of Bangladesh. Horizontal FDI Horizontal FDI refers to investment in the same industry abroad as at home (Foreign Direct Investment, 2009). For example, Telenor, a major player in the telecommunications market in Norway, entered into the telecommunications market in Bangladesh by forming a JV with Grameen Telecom of Bangladesh. Vertical FDI Vertical FDI has two forms: 1. Backward vertical FDI investing in an industry which provides input for the investing firms domestic production; and, 2.
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East West University ITB301, Section 4

Forward vertical FDI investing in an industry which sells the output of the investing firms domestic production. FDI in Bangladesh: As discussed before, FDI can fill the resource gap of a developing country. Being a developing nation, Bangladesh cannot deny the necessity of foreign investment. Therefore, right after its independence from Pakistan in 1971, Bangladesh has been trying to attract FDI for capital formation and transfer of technology and knowledge. However, the inflow of FDI has increased significantly since 1999, when a new industrial policy was adopted by the GOB. The Board of Investment (BOI), which was created for speedy implementation of new industrial projects, provides a wide range of services to the foreign investors including infrastructure facility, import and export facility, resolving disputes faced by foreign investors, and pre-investment counseling. BOI also provides courtesy services to visiting foreign investors such as reception at the airport, hotel booking, and transport arrangement. The most preferential sectors to invest in Bangladesh are: energy and power infrastructure, telecommunication, computer, aircraft and motor parts, textile and neat ware, agriculture, and pharmaceuticals. However, foreign investors are welcome to invest any sector of their choices except the reserved industries such as arms and ammunitions, forest plantation, nuclear energy, and printing currency notes. In other sectors, Bangladesh provides nondiscriminatory treatment between foreign and local investors. In a wide variety of aspects, foreign investors are enjoying similar facilities as the local investors, such as tax holiday, payment of royalty, and technical knowhow fee. The foreign investors also enjoy 100% foreign equity and full repatriation of profits. In addition to the FDI-friendly policy, the GOB has established Export Processing Zones (EPZs) to provide lucrative incentives to the foreign investors. During the period of the last ten years, the amount of FDI inflow in Bangladesh has increased from $564 million in 2001 to $913 million in 2010. Nevertheless, the amount of FDI in Bangladesh is still low compared to its neighboring country, India. In 2010, India received $23.70 billion FDI. Factors behind the unsatisfactory amount of FDI inflow are: political instability, inadequate infrastructure, inefficient bureaucracy, rampant corruption, natural disaster, unskilled labor force, and slow moving privatization process.