1

CHAPTER

Introduction
1.1Introduction:
Direct Foreign investment (DFI) is a persuasive weapon of economic development of a
country, especially in the current global context. It enables Bangladesh, a capital-poor
country, to build up physical capital, generate employment opportunities, expand productive
capacity, augment skills of local labor through transfer of technology and know-how, and
help to integrate the domestic economy with the global economy. Industrial development is
an important pre-requisite for economic growth of a developing country. Bangladesh is
basically a country of agrarian economy, indeed rapid industrialization is essential in
Bangladesh to keep pace with its development needs. But the low rate of Gross Domestic
Savings and Investment as well as low level of technology base hamper the expected
industrialization process. Foreign aids and grants had been serving to bridge the gap. As the
developing countries are in the process of graduating from being aid dependent economy into
a trading economy, therefore, FDI is viewed as a major stimulus to economic growth in these
countries. Despite some policies reforms, Bangladesh could not attract handsome flow of FDI
as yet.

1.2 Objectives:
The main objective of the study is to analyze FDI inflows in Bangladesh.

The specific objectives are as follows:

To analyze the FDI environment in Bangladesh.

To analyze the trend of FDI inflows in Bangladesh.

To measure the status of FDI inflows in Bangladesh as compared to Cambodia,

Vietnam &India.

To identify the major prospects and problems of FDI in Bangladesh.

CHAPTER

Theoretical Background
2.1 Foreign Direct Investment (FDI):
An investment into production or business in a country made by a company or entity based
on other than host country ,either by buying a company in the target country or by expanding
operations of an existing business in that country. Foreign direct investments differ
substantially from indirect investments such as portfolio flows, wherein overseas institutions
invest in equities listed on a nation's stock exchange. Entities making direct investments
typically have a significant degree of influence and control over the company into which the
investment is made. Open economies with skilled workforces and good growth prospects
tend to attract larger amounts of foreign direct investment than closed, highly regulated
economies. The components of FDI are: a) Equity capital, b) Reinvested earnings and c)
Intra-company loans. Equity Capital states the ownership as well as the share purchasing of
an enterprise by a foreign investor. Reinvested earnings demonstrate that portion of earning
of an investor which is not distributed back to him. This means the profits that are not given
out as dividends. It is kept within the firm. Intra-company loans include debt transactions and
these transactions are regarding lending by the foreign parent company to its affiliates in the
form of both short and long-term.

2.2 Importance of FDI:

There is a strong relationship between foreign direct investment and economic growth.
Larger inflows of foreign investments are needed for the country to achieve a sustainable
high trajectory of economic growth. In Bangladesh the countrys savings-investment gap had
been mainly bridged by external economic assistance. However, after the cold war era, the
availability of foreign aid is decreasing gradually. As a result, there is now widespread
support for the need for FDI in Bangladesh. If the economy is to grow faster, as is being
envisaged, there is the need for larger inflow of FDI in Bangladesh with a view to creating
jobs for vast labor force, increasing foreign exchange earnings, acquiring new and modern
technology and management skills, accelerating overall growth and development of the
economy. FDI is thought of contributing to economic development through initial

macroeconomic stimulus and by raising total factor productivity and efficiency of resource
use in the recipient economy by:

Transmission Mechanisms:

FDI

1. Direct technology transfer to affiliates

2. Technological and other spillovers
3. Human capital formation
4. International trade integration
5. Competitive business environment
6. Enterprises development
7. Improvement of environmental and social
conditions

Enhanced
Economic
Growth

Figure 1: FDI Transmission Mechanisms

2.3 Bangladeshs Investment Regime:
Bangladesh is well positioned as a favorable investment destination because of its large and
growing local market. The economy has experienced a moderately accelerated annual growth
of 5-6 percent since 1996, a range of constraints notwithstanding. Bangladeshs growth was
resilient during the 2008-09 global financial crises (Table 1). The realized GDP growth in
Bangladesh was in fact higher in 2010 (6.3%) than the IMFs projection of 5.4% growth for
that year. The targeted GDP growth rate is 6.7% in 2011 and above 7% in the years till 2015.
Country/Region
Bangladesh
Cambodia

Table 1: Comparative Scenario of GDP Growth (%)

Actual
2007 2008 2009 2010 2011
6.3
6.0
5.74
6.3
6.71
10.2
6.7
-2.6
4.8
6.8

India
Vietnam
Developing Asian Economies
Emerging Economies and Developing
Economies
Developed Economies
World

Projections
2015
6.2
6.8

9.4
8.5
10.6
6.5

7.3
6.2
7.9
9.2

5.7
5.3
6.6
5.2

8.8
6.0
8.7
6.2

8.8
6.5
8.7
4.7

8.1
7.5
8.5
3.8

0.2
5.2

0.5
3.0

0.4
-0.6

0.4
4.2

0.3
4.3

0.1
4.6

Source: IMF, World Economic Outlook, 2010

Other favorable factors for FDI are the countrys geographically strategic location and
moderate climate, efficient regional transport connectivity in terms of roads, ports and
telecommunications infrastructure, lower energy costs, the presence of export processing
zones that offer special facilities to foreign investors over local investors, and an investmentfriendly legal framework. Bangladesh in fact offers the most generous of incentives in the
South Asian region for foreign investment under its liberalized investment regime shaped by
industrial policy and export-oriented, private sector-led growth strategy.

The favorable

natural factors and various policy supports extended by government for attracting foreign
investment led global banks and multilateral institutions portray a highly optimistic outlook.
JP Morgan, Goldman Sachs, Citicorp, and Merrill Lynch have identified Bangladesh as a
highly attractive investment destination, projecting the country to be the next Asian Tiger.

JP Morgan included Bangladesh in their Frontier Five. The Frontier Five was
selected on the relative attractiveness of these countries based on macroeconomic and
demographic trends.

Goldman Sachs included Bangladesh in its list of Next 11 after the BRIC countries
(Brazil, Russia, India, and China) and identified it as a country with the future
potential to emulate the BRIC nations.

Japan External Trade Organization (JETRO) in its 19th Survey of Investment-related

Cost Comparison during January 2009 reported that Bangladesh is competitive in
business support services like communications (mobile phone usage charges) and
utilities (tariff for water and gas). Cost per cubic meter general use of gas in
Bangladesh is the lowest compared to other Asian countries.

The World Bank in its report Doing Business 2010 has ranked Bangladesh in the
20th position for Protecting Investors much above India (40), China (93), and
Vietnam (172). For starting a business, Bangladesh was positioned at 98, showing a
more favorable investment environment compared to India (169), China (151), and
Vietnam (116).

Global multinationals such as Mobil, BP, Procter & Gamble, and Lafarge have their
strong presence in Bangladesh.

2.4 Policy Framework of Bangladesh Government toward FDI:

Investment in an economy raises output and improves standard of living of the people. Since
the supply of capital from the local source in Bangladesh is not adequate to meet the growing
need for investment due to low rate of domestic savings, the importance of foreign capital in
4

the form of FDI is increasing gradually. Now FDI is termed as a major stimulus to economic
growth in the developing countries. Bangladesh Government has adopted several policy
measures to boost the FDI flow in Bangladesh. The government of Bangladesh has listed the
following five areas in which FDI should be encouraged under joint venture and 100%
ownership by the foreigners:
a) Export oriented industries
b) Industries located in the Export Processing Zones (EPZs)
c) Industries that are based on high technology, which will either be import substitute or
export oriented
d) Basic industries based mainly on local raw materials and investment towards
improvement of quality and marketing of goods manufactured and/or the increase of
production capacities of existing industries
e) Physical infrastructure projects on Build-Operate-Own (BOO) and Build-OperateTransfer (BOT).
The major incentives for foreign direct investment in Bangladesh are: Some of the

incentives allowed for attracting FDI in Bangladesh are:

1. No ceiling on investment
2. 100% foreign equity participation allowed
3. Tax holiday up to 10 years
4. Allowances of accelerated depreciation in lieu of tax holiday
5. Tax exemption and duty free importation of capital machinery and spare parts for
100% export oriented industries
6. Residency permits for foreign nationals
7. No restriction on issuing work permit to a foreign national
8. Capital, profit and dividend repatriation facilities
9. Term loans and working capital loans from local banks
10. Avoidance of double taxation on the basis of bilateral agreement
11. Tax exemption on the interest of payable to foreign loans and on royalties and
technical knowhow fees
12. Multiple entry visas for investors
13. Convertibility of Taka for current account transactions
14. Protection of foreign investment through The Foreign Private Investment Act-1980
and Settlement of Investment Dispute (ICSID), The Multilateral Investment
Guarantee (MIGA), and World Intellectual Property Organization (WIPO).
5

2.5 Benefits of FDI:

At the theoretical level, the benefits of FDI include the following:
1) Overcoming domestic resource constraint. FDI can close the domestic resource gap
by providing an outside source of financing for investment. FDI inflows are believed
to be more stable and easier to service than other sources of foreign private capital
such as commercial debts or portfolio investment.
2) Raising the productivity of labor and capital. FDI raises the productivity of labor,
and so raises the quality of employment. Economies of scope and scale and
managerial efficiency can raise the productivity and returns of all production inputs.
3) Generating employment. By creating new productive facilities, FDI creates more
jobs in the economy. Increased employment, like investment, will have a multiplier
effect on the economy and stimulate a dynamic growth cycle.
4) Easing the balance of payments constraints. FDI leads to an improvement in the
host countrys balance of payments and possibly also terms of trade. Foreign
investment constitutes an inflow on the capital account and therefore allows the
economy to sustain the deficit on the current account without devaluing the currency
or introducing austerity measures.
5) Raising exports. This is in fact one reason why developing country governments try
to attract FDI through the creation of export processing zones (EPZs).
6) Access to technology. FDI brings in new technology, which may have positive
spillover effects for other local firms.
7) Access to markets. TNCs can help host countries gain easy access to the lucrative
markets of the rich countries.
8) Benefits to environment. TNCs have better access to and knowledge of
environmentally sound technologies and are expected to bring such technologies to
the host country.
9) Benefits to consumers. Consumers are likely to benefit from increased FDI inflows
in the form of lower prices and improved product quality when the investment is costreducing and product-improving. Benefits also accrue to consumers because FDI is
likely to introduce new products and thus widen the choice in consumer goods
markets.
10) FDI may also contribute increased revenue to the government.

2.6 Factors Affecting Foreign Direct Investment:

Because Foreign Direct Investment can significantly affect a countrys economy, the most
influential factors are:
Impact of Inflation: if a countrys 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 countrys exports to other countries
& flow of investment from foreign will decline.
Impact of National Income: If a countrys 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 countrys 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 countrys investment by enforcing laws, or a maximum
limit that can be invested.
Impact of Exchange Rates: Each countrys 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 countrys 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 less expensive than the
receiving countries.

Tax Rates: Countries that impose relatively low tax rates on corporate earnings are more
likely to attract FDI. When assessing the feasibility of FDI, firms estimate the after tax CFs
that they expect to earn.

CHAPTER

FDI Flows in Bangladesh

3.1 Current Situation of FDI in Bangladesh:
Bangladesh is in the process of transition from a predominantly agricultural economy to a
modern economy there has been a considerable change in global flows of trade and finance
including a surge in FDI. Despite being a recent phenomenon, several underlying factors
have contributed to increasing the FDI inflow in Bangladesh. These are trade and exchange
rate liberalization, current account convertibility, emphasis on a private sector led
development, liberalization of the investment regime, opening up of infrastructure and
services to the private sector both domestic and foreign, and above all the growing interest
of foreign investors in energy and telecommunication sectors. It is argued that more open
trade policies are associated with the presence of foreign firms and economy wide
technological and productivity gains in developing countries like Bangladesh. The private
sector is envisaged to play an increasingly active role with public sector development
programmers concentrating on basic infrastructure and human resource development. In
recognition of the private sectors ability to contribute towards achievement of the goal of
socio-economic improvement of its people, the government has recently implemented policy
reforms to create a more open and competitive climate for both foreign and local investment.

3.2 Actual Foreign Direct Investment- FDI

The actual FDI recorded US$ 1194.88 million in FY 20011-12. During FY 2012-13; the
actual FDI recorded US$ 1730.63 million, which was not only higher than the previous fiscal
year but also highest ever. The key feature of this increasing flow of investment during FY
2012-13 was a favorable investment environment and political stability. We see that the FDI
trend is upward sloping since FY 09 (presented in table) except in FY 20010-11 where actual
FDI recorded US$ 779.04 which is lower than the previous fiscal year.
Table 2 : Recent Trend in FDI inflows in Bangladesh (In US$ Million)
FY
FDI
%

FY 04

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

284.1

803.8

744.6

792.8

767.7

960.6

913.02

779.04

1194.9

1730.6

183%

-7%

6%

-3%

25%

-5%

-15%

53%

45%

**Sources: Statistical Department, Bangladesh Bank

8

FDI Inflows in Bangladesh (Million in US$ )

2000
1800
1600
1400
1200
1000

FDI

800
600
400
200
0
FY 04

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

Figure 2: FDI Inflows in Bangladesh (Million in US$ )

3.3 Sector-wise Inflows of FDI:
Sector-wise analysis of FDI reveals the fact that a shift has been made by the foreign investors in their
investment in Bangladesh. The pie chart shows the trend of FDI towards power and energy,
manufacturing and telecommunications, whereas the neglected sectors were agricultural, Services and
trade and commerce. In 2013, the main focus of investment was in the manufacturing sector in total
but telecommunication sector individually is highest position. The success in textiles through the
ready-made garments (RMG) industry was a vital part of this investment.

Sector wise FDI inflows in FY 2013

2%
4%

Agriculture & Fishing

5%

3%

Power, Gas & Petroleum

Food Products
Textiles & Wearing

30%

Chemicals & Pharmaceuticals

24%

Metal & Machinery Products

Vehicle & Transport Equipment
Fertilizer
Cement
Leather & Leather

2%

17%

6%
2%
0%

1% 1%
2%

Mfg (Others)
1%

Construction

**Sources: Statistical Department, Bangladesh Bank

Figure 3: Sector wise FDI inflows in FY 2013
9

3.4 FDI Inflows (in million USD) by countries:

The United Kingdom has gained the top most position among the top 10 investing countries
in Bangladesh during 1996-2012 in investing in various sectors of economy. Out of total FDI
inflows from the top 10 investing countries during this period, 17.4% was from United
Kingdom, 13% from USA, 8% from Egypt, 7.7% from South Korea, 6.4% from Netherlands,
6.2% from Singapore, 5.6% from Hong Kong, 5.2% UAE, 4.8% from Japan, 3.5% from
Malaysia, 3.2% from Australia, 2.1% from Denmark, 2.1% from Switzerland.
The figure shows in FY 2013, Malaysia has gained the top most position among the countries
investing in Bangladesh with USD 337.97 and followed by UK and Egypt.
FDI Inflows (in million USD) by Countries in FY 2013
350
300
250
200
150
100
50
0

**Sources: Statistical Department, Bangladesh Bank

Figure 4: FDI Inflows (in million USD) by Countries in FY 2013

3.5 FDI as a % of GDP:

Figure 5: FDI as a % of GDP

10

3.6 Comparison among Export earning, Foreign Aid, Remittance & FDI:

Figure 6: Comparison among Export earning, Foreign Aid, Remittance & FDI

3.7 FDI Environment in Bangladesh

Strategic Location of Bangladesh

Advantageous Trading Agreements

Attractive Business and Investment Climate

Improving Education and Skills

English Widely Spoken

Bangladesh Export Competitiveness

Competitive Cost Base

Export Processing Zone

FDI Magazine's Rankings

TABLE 3: COMPARISON ON ECONOMIC FREEDOM IN ASIA PACIFIC REGION

Name of the
country

Business freedom Trade freedom Monetary freedom Investment freedom

(%)
(%)
(%)
(%)

Bangladesh

68.7

54

67.5

55

Cambodia

40.7

65.2

80.7

60

China

46.4

71.6

74.2

25

India

35.5

64.1

62.9

35

Indonesia

54.6

73.9

75.2

35

Philippines

54.3

75.5

77.1

40

Singapore

97.2

90

84.8

75

Sri Lanka

78

77.1

68.5

30

Thailand

72.5

75.2

69.3

15

Vietnam

61.1

79.6

75.1

15

11

CHAPTER

Comparison between Bangladesh & Cambodia

4.1 Trend of Foreign Direct Investment, Net Inflows
This series shows Net Inflows (new investment inflows less disinvestment) in an economy
from foreign investors. Data are in U.S. dollars. The latest value for Net Inflows in Cambodia
was USD 1,557,134,885as of 2012. Over the past 9 years, the value for this indicator has
fluctuated between USD 131,416,229 in 2004 and USD 1,557,134,885in 2012. On the other
hand, the latest value for Net Inflows in Bangladesh was USD 1,178,439,622as of 2012. Over
the past 9 years, the value for this indicator has fluctuated between USD 448,905,401in 2004
and USD 1,178,439,622in 2012.
Table 5: FDI inflows in BD & Cambodia
Year
Cambodia
Bangladesh
131,416,229
448,905,401
2004
379,180,191
813,321,972
2005
483,209,383
697,206,284
2006
867,288,539
652,818,719
2007
815,180,218
1,009,623,164
2008
539,113,440
732,809,636
2009
782,596,735
918,172,638
2010
901,668,591
1,137,916,361
2011
1,557,134,885
1,178,439,622
2012
Source: http://data.worldbank.org
A graphical comparison of Foreign Direct Investment, Net Inflows of these two countries is
shown below
1,800,000,000
Cambodia
Bangladesh

1,600,000,000
1,400,000,000
1,200,000,000
1,000,000,000
800,000,000
600,000,000
400,000,000
200,000,000
0
2004

2005

2006

2007

2008

2009

2010

Figure 7: Comparison of Foreign Direct Investment

12

2011

2012

4.2 Factors that Attract Cambodia as Best FDI Destination:

Amidst global economic frailty, Foreign Direct Investment in Cambodia grew by an
impressive 67% in 2012. The FDI reached USD1.6 billion in 2012, compared to USD 902
million in 2011. There are investment opportunities in the following sectors in Cambodia

Agriculture and Agro Industry

Transportation and Telecommunication Sector

Energy Sector

Labor Intensive Industries and Export Oriented Industries

Processing Industry

Tourism Sector

Human Resource Development

Oil & Gas, Mining

The influx in investment is credited to the following factors

Safe Banking Sector: One of the authorities playing a key role in Cambodia's macroeconomic success is the National Bank of Cambodia (NBC) which has overseen trade
policies, market liberalization and low inflation that has defined the country's economic
development. Cambodias strength in Greenfield projects in retail banking. Over the past
decade, Cambodias banking sector attracted the most capital, US$2.3 billion, of any least
developed country, and the second highest number of projects, at 56.
Strong Bilateral Relations: Economic diversification is attracting substantial sums of FDI
from China and beyond. Home to the fastest-growing economy in Southeast Asia, Cambodia
enjoys excellent bilateral political and fiscal ties to the People's Republic of China that
continue to strengthen after being formed 55 years ago.
Small Businesses Serve as Backbone of Sustainable Economy: Historically, Cambodia has
relied on the role of small- and medium-sized enterprises (SMEs) as the backbone of a
sustainable economy. Generally, in Cambodia when we talk about SME economic activities,
we are in fact talking about micro-small and medium-sized enterprises (MSMEs), as out of
the more than 500,000 economic establishments or enterprises counted in the 2011 Cambodia
Economic Census, some 493,000 of them employ only one to 10 employees. Growth in the
number of MSMEs could help expand the economy, create more jobs, facilitate Foreign
Direct Investment, and enlarge the tax collection base.

13

Strategic Position: Home to the fastest-growing economy in Southeast Asia, Cambodia

enjoys a strategic position. Established in 1986, Phnom Penh Autonomous Port is the
country's second largest international port and boasts a strategic position at the intersection of
four major rivers in the heart of the country.
Business Climate :Rich in history and culture and blessed with wonderful natural and human
resources that are driving its impressive economic growth and attracting record sums of
foreign direct investment (FDI), the Kingdom of Cambodia offers investors a modern,
friendly and welcoming business climate.
Investment Protection: The Investment Law and Sub-decree of Cambodia contain a number
of important guarantees for the investors:

Equal treatment of all investors

No requirement of local equity participation

No price controls on products or services

No restriction on ForEx convertibility

Free remittance of foreign currencies abroad

There are several investment incentives such as

20% Corporate Tax

Tax holidays of 3years

Full Import Duty Exemption

Repatriation of profit (withholding tax)

Reinvestment of earning (special depreciation)

Labor Intensive Economy: Many major international companies have invested hundreds of
millions of dollars in labor-intensive garment and manufacturing industries to take advantage
of the country's young population and duty free access to a number of lucrative markets such
as the EU. Businesses are looking to cut costs in labor intensive industries, particularly the
garment sector. Cambodia is touted as a bright spot in Southeast Asia, where overall FDI
increased by only 2%.
Special Economic Zones (SEZs): Cham Prasidh, senior minister and minister of Commerce,
has played a key role in Cambodias emergence as leading FDI destination and in the creation
of more than 20 strategically-located Special Economic Zones (SEZs) around the country
which ensure better infrastructure and One Stop Services/SEZ Zone Administration,
including SEZs near the borders with Thailand and Vietnam. 22 SEZs have been authorized

14

and are being developed by private investors/operators. Five SEZs are currently in operation,
the remainders are in various stages of development.

4.3 Comparison between Cambodia & Bangladesh

Proportion of investment: In general, there are no restrictions on the percentage of equity
that foreign nationals may hold in a locally incorporated company where as 100% foreign
ownership permissible in Bangladesh; no ceiling on foreign and local investment.
Export Processing Zone: Cambodias emergence as leading FDI destination and in the
creation of more than 20 strategically-located Special Economic Zones (SEZs) around
the country but in Bangladesh there is only 8 export processing zone which is very limited in
terms of export volume of the country.

Investment Incentives: Cambodia offers liberal tax policy, import duty and opportunities for
carry forwarding losses, 50 years of land lease program for regular projects. Besides,
Bangladesh offers Tax- Remittance of royalty, technical know-how and technical assistance
fees, repatriation facilities of dividend and capital at exit.
Tax holiday: Cambodia attracts foreign investor for FDI by offering Tax holidays of 3years
& Full Import Duty Exemption where as in Bangladesh Tax holiday up to 10 years &
allowances of accelerated depreciation in lieu of tax holiday.

Minimum wage: Still, Cambodia continues to show signs of steady improvement in other
areas. For example, minimum wage was recently raised $14 to $75, from $61. According to
the BFC, a $5 health care allowance per worker was also instituted as part of the same
legislation. Where as in Bangladesh minimum labor cost is appx $66 which is still lower than
that of Cambodia.
Investment-related laws: Current Cambodian laws and regulations have been developed to
create a legal framework suitable for the market economy and consistent with experience and
practice in developing countries, especially ASEAN member countries. Land ownership
provisions are similar to those in Viet Nam, Indonesia and the Lao Peoples Democratic
Republic, where foreigners cannot own land. Tax nomenclature has been reformed in
accordance with the Harmonized System (HS) tariff codes of ASEAN.
15

4.4 Challenges:
Corruption: Although the businesses in Cambodia are optimistic of the countrys economy,
its appeal as an investment destination lags behind most of its neighbors due to the perception
of endemic corruption. There are several benefits of doing business in Cambodia as
mentioned above. For companies already operating in Cambodia, the profit outlook was
overwhelmingly positive.

Accuracy of the Statistics: For the first time in recent memory, the Ministry of Economy
and Finance has released growth projections for the first half of the year, and the numbers are
good. The ministrys preliminary data claims that from January through June, economic
growth stood at 7.6 percent, an announcement that critics are questioning not only for
accuracy but also for timing.

Risk of Credit Growth: The World Bank has warned that the rapid growth of lending by
Cambodias Banks is still a concern, despite a recent slow-down in credit disbursals. Credit
growth, which has been driven largely by wholesale and retail financing, and starting in 2011
agriculture financing, has eased to 29.2 percent (year on year) in January 2013. The
annualized rate of lending growth was 34 percent in December and as high as 34.6 percent in
January 2012.

Limited Access to Capital: Commercial banks are a primary source of funding. Limited
access to capital is one of the constraints of doing business in Cambodia. In 2011, the key
players in Cambodias financial sector are 31 Commercial banks, 2 Representative Offices,7
specialized banks and 32 microfinance institutions, 28 micro-finance NGOs and 11 insurance
companies. The top-4 holds over 70% of total deposits and loans in the banking system.

Ownership and Use of Land: The Law on Investment of Cambodia restricts foreigners from
owning land in Cambodia since land ownership is reserved to natural and legal Cambodians.

Employment of Foreigners: A business is entitled to obtain visas and work permits for the
employment in Cambodia of foreign citizens as managers, technicians and skilled workers, if
the qualification and expertise are not available in Cambodia.

16

CHAPTER

Comparison between Bangladesh & Vietnam

5.1 Overview of FDI Environment in Vietnam: Competitive advantages of Vietnam are
stated bellow-

Business environment

Emerging market

Human resources

Natural Resources- land, water, mineral, nautical, tourism resources etc

5.2 Comparison between Bangladesh & Vietnam

Bangladesh and Vietnam both of the country faces GDP growth rate around 5% and 6.3%
respectively for last five years. They have similarity in many aspects i.e. tropical culture,
geographic location, seaports. Both the country had bitter experience of outside aggression as
well. Bangladesh achieved its independence in the year 1970 where as Vietnam achieved it in
1975. Even after having so much of similarity, Vietnam is far ahead of Bangladesh in
attracting FDI. The FDI in Vietnam contributed in economic advancement, employment
generation, technology transfer etc. Strategic differences to attract FDI are shown below

Proportion of investment: Vietnam allows at most 49% foreign shares for joint stock
company where as 100% foreign ownership permissible in Bangladesh; no ceiling on foreign
and local investment.

Investment Opportunities: Vietnam encourages FDI in developing infrastructure,

information technology, electricity, finance and banking sectors of the country through
providing different incentive programs, tax holiday (5% value added tax), almost no
restrictions on the entry and exit mode and transfer of capital or profits out of Vietnam. In
contrast Bangladesh are ready to encourage FDI in mostly information technology, power
generation sectors through providing investment friendly environment i.e. no prior approval
requirements or limits on equity participation and repatriation of profits and income are
required in most sectors. Moreover, full repatriation of capital & dividend is allowed at
Bangladesh.

17

Export Processing Zone: Vietnam encourages its export through establishing 283 export
processing zone throughout the country. Presently 180 out of 283 EPZs are active in Vietnam
but in Bangladesh there are only 8 export processing zone which is very limited in terms of
export volume of the country.

Investment Incentives: Vietnam offers liberal tax policy, import duty and opportunities for
carry forwarding losses, 50 years of land lease program for regular projects. Besides,
Bangladesh offers Tax- Remittance of royalty, technical know-how and technical assistance
fees, repatriation facilities of dividend and capital at exit. Moreover, permanent resident
investor permits on investing US$ 75,000 and citizenship on investing US$ 500,000.
Businesses exporting 80% or more of goods or services qualify for duty free import of
machinery and spares, bonded warehousing.

Tax holiday: Vietnam promotes export products and services by applying 0% value added
tax on the same. They also offers enterprise income tax for small business is 28%, surveying
or exploring of natural and precious resources tax rates are from 28% to 50% depending on
individual projects and enterprises. However, Ten years tax holiday for the Industries to be
established before 1st January, 2012 and Industries to set up after 31st December 2011 tax
holidays for Dhaka and Chittagong Divisions are 100% in first two years, 50% in the year
three and four, and 25% in the year five; and for other Divisions and three Chittagong Hilly
Districts are 100% for first three years, 50% for next three years, 25% for year seven.
Besides, MNCs are free from double taxation and exemption from dividend tax in
Bangladesh.

Depreciation allowances: In Vietnam the maximum rate of depreciation shall not be more
than twice the level of depreciation as stipulated by regulations on depreciation of fixed
assets. Besides, in Bangladesh accelerated depreciation for new industries is available at the
rate of 50%, 30% and 20% for the first, second and third years respectively, on the cost of
plant and machinery.

Allowances of Domestic sales: In Bangladesh domestic market sales of up to 20% is allowed

to export oriented business located outside an EPZ on payment of relevant duties which
creates competition for local producers. No such kind of facility has been appreciated by

18

Vietnam exports.

Interest rates: Interest rates for loans from commercial banks in Vietnamese currency varies
from 20 ~ 24% and in US dollars varies from 13.5 ~ 15% including all charges. But in
Bangladesh presently lending rate is 12.5% and borrowing rate varies from 15% ~ 18%.
From this point of view Bangladesh is more favorable than Vietnam for FDI.

Tariff free Export country: 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. While 73% of
Chilean exports will be granted tariff-free access to Vietnam, accordingly 75% Vietnamese
exports will be granted a tariff- free access to Chile according to Embajada de Chile en la
Repblica Socialista de Vietnam.

Credit Facility: Vietnam offers favorable borrowing options to its investors. Bangladesh
offers 90% loans against letters of credit and funds for export promotion, export credit
guarantee scheme, cash incentives and export subsidies are granted on the FOB value of
selected exports ranging from 5% to 20% on selected products. In addition investors are
allowed for Foreign Currency loan from abroad under direct automatic route in Bangladesh.

Investment expenses: Industrial estate rent in Dhaka is cost effective than Shanghai, Jakarta,
Bangkok. Office rents are also very competitive with other international cities. Dhaka's
housing rent for foreigners are less expensive than Singapore, Mumbai, Karachi, Hanoi.
Domestic bidders cost ranges from 140 USD ~ 170 USD/m2 where Foreign bidders cost
ranges from 250 USD ~ 350 USD/ m2.

Working capital expenses: Compared to Vietnam, Cost of diesel in Bangladesh is found to

be more competitively priced as vehicles increasingly use LPG. However labor costs are
relatively low in Bangladesh but number of skilled labor is high at Vietnam as such Vietnam
enjoys competitive advantage over Bangladesh. Other overhead costs are relatively same in
both the countries.

CHAPTER
19

FDI inflows in India and Overall Environment

6.1 Current Situation of FDI in India: India has received large FDI inflows in line with its
robust domestic economic performance over the last two decades. The attractiveness of India
as a preferred investment destination could be ascertained from the large increase in FDI
inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 33 billion
in 2011-12. The significant increase in FDI inflows to India reflected the impact of
liberalization of the economy since the early 1990s as well as gradual opening up of the
capital account. Inter alia, there are some key factors which contributed the huge upsurge in
Indias FDI Inflow in recent years.

FDI Flows in India

45000
40000

US $ Million

35000
30000
25000

FDI Inflow

20000

FDI Outflow

15000

Net FDI

10000
5000
0
0

10

12

14

Year 2000 to 2014

Figure 8: FDI Flows in India

6.2 Essential Change in Policy Framework: There has been a radical change in Indias
approach to foreign investment from the early 1990s when it began structural economic
reforms encompassing almost all the sectors of the economy. Historically, India had followed
an extremely cautious and selective approach while formulating FDI policy in view of the
dominance of import-substitution strategy of industrialization. With the objective of
becoming self reliant, there was a dual nature of policy intention FDI through foreign
collaboration was welcomed in the areas of high technology and high priorities to build

20

national capability and discouraged in low technology areas to protect and nurture domestic
industries.
6.3 Policy Measures: During the pre-liberalization period, the regulatory framework was
consolidated through the enactment of Foreign Exchange RegulationAct (FERA), 1973
wherein foreign equity holding in ajoint venture was allowed only up to 40%. An Indian
company may receive Foreign Direct Investment under the two routes as given under:
i. Automatic Route: FDI is allowed under the automatic route without prior approval either
of the Government or the Reserve Bank of India in all activities/sectors as specified in the
consolidated FDI Policy, issued by the Government of India from time to time.
ii. Government Route: FDI in activities not covered under the automatic route requires prior
approval of the Government which are considered by the Foreign Investment Promotion
Board (FIPB), Department of Economic Affairs, Ministry of Finance.
The Indian company having received FDI either under the Automatic route or
the Government route is required to comply with provisions of the FDI policy including
reporting the FDI to the Reserve Bank.

6.4 Economic Factors:

Market Size: A large consumer market means more potential of consumption and thus more
opportunity for trade. It also provides lower production costs through scale economies.
Countries having larger consumer market should receive more inflows than that of smaller
countries. And India being country with the second largest population in the world (1.24
billion approx.) offers a huge opportunity to foreign investors.

Labor cost: Higher labor cost in the home country is expected to pull the FDIs to host
country. With more than 70% of the population comprising of the middle class and lower
middle class, India is accommodating labor intensive industries being shifted from the
western buyers. This abundance of cheap labor is nowhere to be found other than the
subcontinent.

Economic stability and Growth prospects: FDI tends to flow to the countries with larger
market size and higher economic growth rates in which larger economies of scale could be
provided for FDI to exploit their ownership advantages. With a forecasted GDP growth rate
of 3.21% by the year 2030 (forecast by Trading Economics) the huge potential of India
21

remains untapped. To complement the growth rate, low inflation rate, depreciation of Indian
Rupee and lower interest rates have also helped to attract more FDI.

Trade openness: Numerous empirical studies suggest that trade (imports and exports)
complements rather than substitutes for FDI. Multinational enterprises (MNEs) tend to invest
in the trade partner markets with which they are familiar. Much of FDI is export oriented and
may also require the import of complementary, intermediate and capital goods.

Infrastructure facilities: Well established and advance infrastructure facility narrates about
the prosperity of the country and provides opportunity for FDIs. Government not only
established special economic zones (SEZs) but also designed liberal policy and provided
incentives for promoting FDI in these zones with a view to promote exports.

6.5 Pitfalls of India to Attract FDI:

Administrative procedure is still cumbersome and stringent. On receipt of FDI,

investee has to report to RBI through his banker within 30 days and allotment has to
be made within six months of receipt of funds. Non-observance of this procedure
lands a recipient company in a serious trouble.

Lack of an effective and expeditious alternative dispute resolution mechanism.

Sectorial caps (especially in insurance) and restrictions on FDI flows (especially in

multi-brand retail).The main apprehensions in India, however, are that FDI in retail
would expose the domestic retailers especially the small family managed outlets - to
unfair competition.

High trade and transaction costs.

Still lagging behind china in crucial factors like ease of registering property, trading
across borders, enforcing contracts and closing business etc.

22

CHAPTER

Prospects & Problems of FDI in Bangladesh

7.1 Prospects of FDI in Bangladesh:
Like most other developing and least developed countries, Bangladesh considers FDI as an
important resource for development. In order to attract more and more FDI, the country
undertook a massive liberalization of its investment program. It can influence our trade
commerce and industrial sector for quick development. The opportunities of investment in
Bangladesh can be gained in two aspects. One is the resource advantage like GAS, Agro
products including fisheries and low cost labor and the other is the development of power,
Telecommunication and transportation sectors.

Bangladesh is not self-sufficient in energy sector. There is already growing interest among
international oil companies in contracts for exploration in this field. The Gas sector has by
now drawn large amounts of foreign investment. It has to be assumed that FDI is increasingly
becoming a significant source for financing domestic investment in Bangladesh. But unlike in
Srilanka and some other countries in the region the FDI is focused on export oriented
activities in Bangladesh. The countries in the region the FDI is focused on Export oriented
activities in Bangladesh. The administrative system for FDI needs to be effective in dealing
with foreign investors and their needs. Economic conditions conducive to foreign investment
are the key determinants but they rely more on political stability and recognized
dissemination of facts.

7.2 Problems of FDI in Bangladesh:

Despite substantial changes in government policy, Bangladesh has failed to attract
satisfactory levels of FDI and reasons for this failure can be identified quite easily.
Government policy is obviously an important factor influencing inflows of FDI. But, there
are other, equally important factors. So far as the investment related policies of the
government are concerned, these are fine in spirit, but their actual implementation continues
to create obstacles for both local and foreign investors. An inefficient and not-too honest

23

bureaucratic system is primarily responsible for this problem. All the administrative barriers
are in fact generated from this non-investment-friendly bureaucratic system.
The problems that have restricted FDI potentials in the country are as follows:
1. Bureaucratic interference
2. corruptions
3. Irregularities in processing papers
4. Overlapping administrative procedures
5. Absence of a transparent system of formalities
6. Continuity and prevent timely implementation of strategic, procedural, and even
routine duties
7. Frequent power failures
8. Poor infrastructure support
9. Labor unrest
10. Political unrest
11. Lack of professional personnel
12. lack of commitment on the part of local investors
13. Unexpected delays in selecting projects in studying feasibility
14. Frequent changes in policies on import duties for raw materials, machinery and
equipment etc.

24

CHAPTER

Conclusion
8.1 Conclusion:
Bangladesh has a number of positive attributes that can successfully attract the attention of
foreign investors from both developed and developing countries. In Bangladesh FDI plays a
very important role in achieving expected economic growth. FDI flows have been successful
in increasing GDP. At the same time, FDI has also made a contribution in improving the
income level of Bangladesh. The increasing availability of skilled and unskilled labor at
relatively low wages and the success in maintaining reasonably stable macroeconomic
environment are a few factors behind making the country an attractive destination for foreign
investors. They are generally aware that the wage rates in Bangladesh are among the lowest
in Asian countries, the rate of inflation is usually contained within tolerable limits, the
exchange rate is reasonably stable, custom regulations are investment friendly without
discrimination between foreign and domestic investors, and attractive incentive packages are
available for the foreign investors.

25

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