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Term Paper

Foreign Investment in Bangladesh

Submitted to
Professor Dr. Mudabber Ahmed
Course Instructor
Eco 477 Intermediate Macroeconomics II

Submitted by
Moshfeq Ur Rahman
Masters in Social Science, Economics
Fall 2016
2016-3-88-005

East West University


Dhaka, Bangladesh
9th December, 2016

Contents
Introduction ............................................................................................................................................ 1
Discussion................................................................................................................................................ 2
Factors Affecting Foreign Direct Investment: ..................................................................................... 2
Necessity of FDI for a country: ............................................................................................................ 2
ENTRY OPTIONS INTO BANGLADESH .................................................................................................. 3
LIAISON OFFICE ............................................................................................................................... 3
BRANCH OFFICE .............................................................................................................................. 3
LOCALLY REGISTERED COMPANY .................................................................................................... 4
RESTRICTION AND PRIOR APPROVAL.................................................................................................. 4
FUNDING OF BANGLADESHI BUSINESSES ........................................................................................... 5
EQUITY SHARE CAPITAL .................................................................................................................. 5
BORROWINGS ................................................................................................................................. 5
REPATRIATION OF FUNDS ................................................................................................................... 5
DIVIDENDS: ..................................................................................................................................... 5
ROYALTY, TECHNICAL KNOWHOW OR TECHNICAL ASSISTANCE FEES, OPERATIONAL SERVICES
FEES, MARKETING COMMISSION ETC. ............................................................................................ 5
TRAINING AND CONSULTANCY SERVICES ....................................................................................... 5
FDI in Figures ....................................................................................................................................... 6
Overall FDI Inflows (Net) ..................................................................................................................... 7
FDI Inflows (net) by Components ....................................................................................................... 8
Why You Should Choose to Invest in Bangladesh............................................................................... 9
Trends OF FDI in Bangladesh .............................................................................................................. 9
FDI Inflow survey in Bangladesh: .................................................................................................... 9

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:

It increases the economic growth: sustain increase in real, per capita, national product. This
brings -National income effect, Balance of payment effect& Public revenue effect.
Accelerate the industrial innovation this develops in integrations take a variety form which is
not necessarily mutually exclusive.
Political modernization: sustain increase in the degree to which political functions are
effectively collectively oriented, universalistic specific and achievement oriented.
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.

Discussion
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 countrys economy, it is important to
identify and monitor the factors that influence it. The most influential factors are:

Inflation
National income
Government restriction
Exchange rates

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 countrys 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 cannot 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
2

technology and skills, has made it the centre of attention for policy-makers in low-income countries
in particular.

ENTRY OPTIONS INTO BANGLADESH


When a foreign investor decides to set up a business in Bangladesh, there are three options:

Liaison Office (which does not have legal personality itself):


Branch Office (which does not have legal personality itself); and
Locally registered company (being a separate entity with legal personality).

LIAISON OFFICE
Foreign companies may open their Liaison Offices in Bangladesh (subject to obtaining specific
approval from Bangladesh Investment Development Authority) for undertaking liaison activities on
their behalf. These Liaison Offices act as a communication channel between the foreign companies
and the Bangladeshi customers. Such offices are normally established by foreign companies to
promote their business interests in the country by spreading awareness of their services/products
and exploring their opportunities for setting up a permanent presence. A Liaison Office also requires
registration with the Registrar of Joint Stock Companies and Firms.
A Liaison Office is not allowed to undertake any business activities therefore, cannot earn any
income in Bangladesh, under the terms of approval granted by the Bangladesh Investment
Development Authority (BIDA). All setup and operational costs including salaries of the expatriates
and local employees of the Liaison Office will have to be borne by the parent company abroad
through inward remittance of foreign exchange. No outward remittances of any kind from
Bangladesh will be allowed except the amount brought in from abroad (the unspent part).
A Liaison Office in Bangladesh is permitted to undertake the following activities:

Maintain liaison/ coordination between principal and local agents, distributors/exporters


institutions through correspondences, personal contracts and other electronic media.
Collect, compile analyse and disseminate business information related to its field of activities
as mentioned in the approval letter.
Just to avoid confusion, both Representative Office and Liaison Office refers to the same
thing in Bangladesh.

BRANCH OFFICE
A Branch Office is a setup as an extension of a foreign company in Bangladesh. Foreign companies
may open branch offices to conduct business in Bangladesh. Unlike a Liaison Office, a Branch Office
can perform broader scope of activities subject to prior approval of BIDA.
A Branch Office cannot undertake any activity in Bangladesh that is not explicitly permitted by BIDA.
A Branch Office is also required to register itself with the Registrar of Joint Stock Companies and
Firm and comply with certain procedural formalities prescribed under the Companies Act.
A Branch Office provides the advantages of ease in operation and an uncomplicated closure.
However, since the operations are strictly regulated by exchange control guidelines, a Branch May
not provide a foreign company with the most optimum structure for its expansion/diversification
plans.

LOCALLY REGISTERED COMPANY


Foreign investors can setup their subsidiary companies in the form of private/public limited
companies in Bangladesh. In most sectors, 100% foreign ownership is allowed. Foreign investors may
also setup JV with local or foreign partners.
In most sectors, prior approval of the government or any government agency is not required.
Depending on the nature of activities, prior approval of the government may be required.
In comparison with Branch Office or Liaison Office, a subsidiary company provides maximum
flexibility for conducting business in Bangladesh.
The subsidiary company incorporated under the laws of Bangladesh will be as domestic company for
tax purposes.

RESTRICTION AND PRIOR APPROVAL


As we mentioned above, foreign investment is allowed in most sectors. In certain sectors, all kinds of
investment are prohibited, whereas in some sectors prior approval of government is required.
Local as well as foreign investment is restricted in the following four sectors:

Arms and ammunitions and other military equipment and machinery;


Nuclear power;
Security printing and minting; and
Forestation and mechanized extraction within the boundary of reserved forest

There are 17 controlled sectors which require prior clearance/ permission from the respective line
ministries/authorities. These are:

Fishing in the deep sea


Bank/financial institution in the private sector
Insurance company in the private sector
Generation, supply and distribution of power in the private sector
Exploration, extraction and supply of natural gas/oil
Exploration, extraction and supply of coal
Exploration, extraction and supply of other mineral resources
Large-scale infrastructure project (e.g. flyover, elevated expressway, monorail, economic
zone, inland container depot/container freight station)
Crude oil refinery (recycling/refining of lube oil used as fuel)
Medium and large industry using natural gas/condescend and other minerals as raw
material
Telecommunication service (mobile/cellular and land phone)
Satellite channel
Cargo/passenger aviation
Sea-bound ship transport
Sea-port/deep sea-port
VOIP/IP telephone
Industries using heavy minerals accumulated from sea beach

FUNDING OF BANGLADESHI BUSINESSES


EQUITY SHARE CAPITAL
Issuing equity shares is the conventional means of funding a local Bangladeshi subsidiary. The
amount of equity capital a company can issue is limited by the authorized capital specied in the
Memorandum of Association of a company. A company can increase its authorized capital only if
permitted by its Articles of Association. Equity capital can be repatriated on liquidation or on
transfer of shares.

BORROWINGS
Companies may borrow money from both local and foreign sources. Borrowing from foreign sources
may require prior approval of Bangladesh Bank or BIDA.

REPATRIATION OF FUNDS
Foreign capital invested in Bangladesh is generally allowed to be repatriated along with profit, if any,
after the payment of taxes due on them.

DIVIDENDS:
Profits and dividends earned in Bangladesh are repatriable after the payment of taxes due on them.
No permission of Bangladesh Bank is necessary for effecting remittance, subject to compliance with
certain specified conditions. No prior approval is required to remit prots earned by Bangladeshi
branches of companies (other than banks) incorporated outside Bangladesh to their Head Ofces
outside the country.

ROYALTY, TECHNICAL KNOWHOW OR TECHNICAL ASSISTANCE FEES, OPERATIONAL SERVICES


FEES, MARKETING COMMISSION ETC.
Bangladeshi companies can enter into agreements for royalty, technical know-how or technical
assistance, operational services, marketing with foreign companies. These companies are permitted
to remit payments towards technical know-how and royalty under the terms of the foreign
collaboration agreement, subject to certain limits.

TRAINING AND CONSULTANCY SERVICES


Bangladeshi companies producing for local markets may remit up to a certain limit of annual sales as
declared in their previous years income tax return to meet the costs of training and consultancy
services as per relevant contract with the foreign trainer/consultant.

FDI in Figures
Bangladesh is a victim of a negative reputation: the country is seen as being extremely poor, underdeveloped, subject to devastating natural disasters and socio-political instability. However, the
country has the advantage of being located in a strategic geographical position between South and
Southeast Asia. In addition, its domestic consumption potential and the wealth of its natural
resources make the country a good candidate for investment. Despite these advantages, the country
ranks 174th out of 189 economies in the World Bank's 2016 Doing Business ranking.
Gross FDI inflows during FY 2015 reached US$ 2524.78 million. The size of disinvestment (including
capital repatriation, reverse investment, loans to parents, repayments of intra-company loans to
parents) during FY 2015 recorded US$ 690.91 million which was 27.37% of gross FDI inflows. Hence,
net FDI inflows in Bangladesh during FY 2015 were US$ 1833.87 million.

Here are some of the key indicators that are integral to the national economic wellbeing:

Years

GDP per
capita (USD)

Population
(million)

2013
2014
2015

882.00
924.00
973.00

153.70
155.80
157.90

FDI (MUSD)

Consumer
spending
(MUSD)

Personal
Saving
(MUSD)

Gross Fixed
Capital
Formation
(MUSD)

1,731.00
1,480.00
1,834.00

61,250.00
64,375.00
67,500.00

33,025.00
39,562.50
42,200.00

27,687.50
30,312.50
32,500.00

Overall FDI Inflows (Net)


Total FDI inflows (net) reached to US$ 1096.86 million during January-June, 2015 which was
increased by US$ 359.85 million or 48.83% compared to FDI inflows (net) during July-December,
2014 (US$ 737.01 million). While in July-December, 2014 FDI inflows (net) was decreased by US$
77.26 million or 9.49% compared to January-June, 2014 and an increase of US$ 148.20 million or
22.25% during the January-June, 2014 compared to July-December, 2013

Year on year basis, total FDI inflows (net) accomplished to US$ 1833.87 million during FY 2015 which
was increased by US$ 353.53 million or 23.88% compared to FDI inflows (net) during FY 2014 (US$
1480.34 million). While in FY 2014 FDI inflows (net) was decreased by US$ 250.29 million or 14.46%
compared to FY 2013 and an increase of US$ 535.75 million or 44.84% during the FY 2013 compared
to FY 2012.

FDI Inflows (net) by Components


The countrys overall FDI inflow (net) raised by US$ 395.85 million or 48.83% during January-June,
2015 over the previous period, July-December, 2014 due to mainly significant increase of equity
capital and intra-company loan inflows (net) by US$ 187.57 million and US$ 122.32 million
respectively.

The growth of FDI inflows (net) in Equity capital (net) arrived to US$ 357.80 million during
January-June, 2015 which was increased by US$ 187.57 million or 110.19% compared to
July-December, 2014 (US$ 170.23 million). Whereas in July-December, 2014 Equity capital
(net) was increased by US$ 60.16 million or 54.66% compared to January-June, 2014 and a
decrease of US$ 13.70 million or 11.07% during January-June, 2014 compared to JulyDecember, 2013.
Reinvested earnings (net) reached to US$ 595.65 million during January-June, 2015 which
was increased by US$ 49.96 million or 9.16% compared to July-December, 2014 (US$ 545.69
million). While in July-December, 2014 reinvested earnings (net) was increased by US$
102.57 million or 23.15% compared to January-June,2014 and an increase of US$ 90.46
million or 25.65% during January-June, 2014 compared to July-December, 2013.
Intra-company loans (net) arrived to US$ 143.41 million during January-June, 2015 which
was increased by US$ 122.32 million or 579.99% compared to July-December, 2014 (US$
21.09 million). Whereas in July-December, 2014 intra-company loans (net) was decreased by
US$ 239.99 million or 91.92% compared to January-June,2014 and an increase of US$ 71.44
million or 37.67% during the period January-June,2014 compared to July-December, 2013.

Why You Should Choose to Invest in Bangladesh

Strong Points:
o The country's strengths include: macroeconomic stability; open and
diversified economy; abundant cheap labour; strategic location as a gateway to the
countries of the Asia-Pacific region; a legislative framework favourable to business.
Weak Points:
o A number of factors act as impediments to investment, including weak
infrastructure, inconsistent energy supply, lack of land, occasional strikes,
weak financial sector, endemic corruption, cumbersome bureaucracy, lack of
transparency, slow judicial system and the absence of effective mechanism
for alternative dispute resolution.
Government Measures to Motivate or Restrict FDI
o The Bangladesh government is actively seeking to attract foreign
investment, particularly in the areas of energy and
infrastructure. Many incentives have been implemented through industrial
policy, growth strategy by exports and public-private partnership (PPP)
program launched in 2009.Although there is little discrimination against
foreign investors, the government often favors local industries. For example, the
import of medical drugs that compete with locally produced pharmaceutical
products is tightly controlled and in the new shipping lines a local majority stake is
required.
Bilateral Investment Conventions Signed By Bangladesh
o Bangladesh has signed 30 bilateral investment agreements.

Trends OF FDI in Bangladesh


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 (UNCTAD) is another major source of
information validated and dependable to derive the investment scenario in the nation.
However as suggested from the analysis above, not only the consumption has shown huge potential
for the market to be in still expandable state, the personal savings also indicated not only the future
of inward investment but also the possibility of us doing FDI in other more opportunist economies
on a national scale.