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An Interesting Topic

(Foreign Direct Investment)

Example: Telenor Group invest in Bangladesh as


Grameenphone Ltd and started its operations on March
1997.

Bangladeshi Labor migrant


USD 9774.09 Million
(2015-2016)
More
than 7
million
Nationals

Representin
g 12% of
the GDP of
the year

67% of all labor


work in one of the
Gulf Cooperation
Council (GCC).
countries: Bahrain,
Kuwait, Oman,
Qatar, Saudi Arabia
or UAE (ILO).

Economies of scale are the cost advantages that


enterprises obtain, by decreasing cost per unit of
output with increasing scale as fixed costs are spread
out over more units of output.
Example: The printer quotes a price of $5,000 for 500 books,
and $10,000 for 2,500 copies. While 500 books will cost you $10
per book, 2,500 will only cost you $4 per book.

Example: Experience Clothing Company Ltd. Of


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

3
Marico Ltd. started its operation in Bangladesh
as Marico Bangladesh Ltd. in 2000 to produce
different types of oil using the cheaper raw
materials (coconut).

Maruti-Suzuki A Japanese company started its


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

For Example: Wal-Mart has not only diversified


internationally but has spread its business into
many emerging markets as well. Because foreign
expansion diversifies Wal-Mart's sources of
revenue and thus reduces its reliance on the
U.S. economy

Between 1997-1998, A currency devaluation


occurred in Thailand and the Baht per dollar was
jumped 28 to 48. American businessman take
advantages from this opportunity and they bought
land and establish plant
there. When the Baht came
into the flexible situation
then the American Business
men commenced their
operation.

Various inputs-including natural resources

Technologies,

Skilled personnel,

Physical infrastructures and materials

Market size and per capita income


Size of GNP and projected rate of growth
Access to regional and global markets
Country specific customer preferences
Structure of the markets

AN MNC can be motivated to FDI by analysing the


geographic factors including

The proximity of size to export markets

Availability of local raw materials

Availability of power, water and gas.

Form and stability of Government


attitude toward private and foreign investment by
Government
customers and competition
Degree of anti-foreign discrimination

MNC companies always try to invest those


countries where tax advantages are available

Tax rate trends

Joint tax treaties with home country and others

Availability of tariff protections

Foreign Direct Investments open a wide spectrum of


opportunities in the trading of goods and services both in terms of
import and export production.

Integration into global economy


Raising the Level of Investment
Trade

Example: South Korea's Samsung Electronics Co Ltd has applied


for a license to invest $3 billion in building a second smartphone
factory in northern Vietnam. This project will gear the wheel of
economy in Vietnam both in terms of export and import of
production.

Technology diffusion and knowledge transfer:

Developing countries by inviting FDI can introduce world-class


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

Increased competition

Overall development of a country is not possible without


creating employment for unemployed citizens. In this regard FDI
is working as a great helping hand of that particular host
countrys which cordially invites FDI.

Despite having lot of contributions in the economic


growth of a country, FDI is not free from limitations.
The Barriers of FDI are..

Fall in domestic savings

Less corporate tax

Dualistic socio-economic structure

Control over Political Decision

Independent variables:
Market Attractivness
Trade Openness
Environment Risk
Energy Price
Dependable Variable:
FDI

Market attractiveness, openness to trade and


energy prices have a significant and positive
association with FDI flows
High FDI flows are associated with low levels of
institutional risk, as measured by a countrys
ratings for Bureaucracy Quality, Democratic
Accountability and Law and Order.
High levels of several Economic and Financial
risks are associated with high FDI flows like
Budget and Trade Balance

Countries that earn large reserves of foreign


currency from oil and gas revenues have found it
not desirable to open up their markets to foreign
investors
Countries that earn large reserves of foreign
currency from oil and gas revenues have found it
not desirable to open up their markets to foreign
investors
For Example: Generally high level of restrictions to
foreign ownership in OPEC countries compared to
non-OPEC

fdi = 0 + 1gro + 2inf + 3 logcost + 4 logtel + 5


op + 6 risk + 7 tax +
fdi = FDI net inflows as a percentage of Gross Domestic Product
(GDP)
inf = the rate of inflation measured by annual percentage change
of consumer prices
Gro = growth rate of per capita GDP
Logtel = telephone main lines per 1,000 people
Logcost = labour cost per worker
Op = the degree of openness

FDI inflows
are positively associated with a
countrys GDP per capita.
FDI inflows are positively associated with a
countrys manufacturing exports
FDI inflows in are negatively associated with a
countrys level of environmental risk
Political risk
Economic risk
Financial risk

Hymer (1976) explained the theories of FDI by


comparing the difference between foreign direct
investment and portfolio investment
Hymer also analyzed that there are two reasons
why investors seek control
1. To make sure their investment is safe
2. To eliminate competition in foreign countries and
other countries.

Hymer stated that multinational companies are


motivated to invest in foreign countries due to
certain advantages .

For example: Getting factors of production at a


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

Raymond Vernon (1966) product life cycle theory has


analyzed four production stages beginning with invention
of new product.
Vernon tried to understand the shift of
international trade and international
investment.

Stage 1- The enterprises are more focused on the


domestic market
Stage 2- When the product matures, enterprises start
exporting to developed countries.
Stage 3- When the product is standardized, the
enterprises would think less developed countries could
be good production place
Stage 4- The home countries will be an importer since
the production decreases

The Uppsala model is a theory that explains how firms


gradually intensify their activities in foreign markets
Step i- gain experience from the domestic market before
they move to foreign markets

Step ii- start their foreign operations from culturally and/or


geographically close countries and move gradually to
culturally and geographically more distant countries
Step iii start their foreign operations by using traditional
exports and gradually move to using more intensive and
demanding operation modes

FDI Inflows (Net) (In million US$)

300
250

273.55
,237.92

224.21

200
150

100

135.21
131.1
120.3
107.01
93.12
97.32
82.42

50
0

Country

77.54 69.56
55.25 49.45
40.32

FDI:
BANGLADESH
PERSPECTIVE

Rapidly developing market-based


economy
According to IMF,
Bangladesh ranked as the
44th largest economy in the
world in 2011.

But still its a developing


countries with the
numerous potential of
foreign investment

Exports of textiles
and garments are
the largest source of
foreign exchange
earnings

GDP total: $223.941b(2015-2016)


GDP per capita:
$1466
(nominal: 2015-16)
Total
exports:
$33.50b
(2015-16)

Total
imports:
$40.69b
(2015-16)

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

Foreign
reserves:
$27
billion(2016)

Total
FDI:$1833m

(2015)

GDP growth rate


(%): 7.1%
(2015-16 est.)

Gross inflow

Disinvestment

800

726.23

FDI Inflows (in Million US$)

700
600

Net inflow

644.14

596.46

606.92

489.94

500
400

557.95

395.91
341.1

300
200

255.36

100

248.23

119.31

0
Jul-Sep 2014

Apr-Jun 2015
Jan-Mar 2015
period

68.01
Apr-Jun 2015

USD
2524.78m

USD
690.91m

USD
1833.87m

Gross Inflow

Disinvestment

Net Inflow

FDI Inflows (Net) (In million US$)

1900

1833.87

1730.63

1700

1480.34

1500

1194.88

1300
1100

913.02
779.04

900
700
500

FY 2010

FY 2011

FY 2012
Period

FY 2013

FY 2014

FY 2015

Equity Capital

Reinvested earnings

Intra-company Loans

595.65, 54%
357.8, 33%
143.41, 13%

FDI Inflows (Net) (in million US$)

1200

1096.86

1000

877.52

814.27
800
600

737.01
666.07

400
200

592.81

552.06

521.94

219.34

262.21
144.2

144.13

0
Jul-Dec 2013

Jan-Jun 2014

Total

Jul-Dec 2014

Non-EPZ

EPZ

Jan-Jun 2015

330.81, 18%

389.58, 21%

36.79, 2%
83.36, 5%

197.22, 11%

199.54, 11%

80.44, 4%
29.22, 2%

38.7, 2%
96.59, 5%
351.62, 19%

Banking
Agriculture & Fishing
Fertilizer
Leather & Leather Products

Telecommunication
Textiles & Wearing
Gas & Petroleum
Others

Power
Food
Trading

Strategic
Location of
Bangladesh

Youth &
Ambition

Competitive Cost
Base

Bangladeshs
Export
Competitiveness

Fiscal & NonFiscal Incentives

China and India between them have vast and


increasingly prosperous populations, which
are projected to grow to three billion by 2050.
Bangladesh is well situated in every sense to
take advantage of this opportunity.

With improving education, technology and


economic growth, Bangladeshs own market of
146.6 m people is becoming increasingly attractive
to business and foreign investors.

Unlike older industrialized


societies with growing legions
of ageing dependents,
Bangladesh has a very youthful
demographic.

66% of the population are


economically active (15 years
and over).

The country is young too, 40


years old.

English Widely Spoken - The


national language is Bengali or
Bangla. Yet our second
language, English, is widely
spoken, understood and
written.

Manufacturing output has


seen steady growth, recently
in double figures. Bangladesh
provides significant benefits
to exporters.

Bangladesh offers a most liberal


FDI regime in South Asia, with
no prior approval requirements
or limits on equity participation
and repatriation of profits and
income in most sectors.

Bangladesh enjoys tariff-free access to the EU, Canada, Australia and


Japan. Bangladesh is the top manufactured products exporter to the
least developed countries as well as to Europe, with more than 50%
market share

BD has lots of welleducated, skilled and


energetic workers. And
the wages and salaries
are low

Dhaka's skilled labor


cost base is still less than
the other major cities.

Dhaka's management
grades are 2-3 times less
than in Singapore,
Shanghai, Bangkok.

Industrial estate rent in


Dhaka is cost effective
than Shanghai, Jakarta,
Bangkok

Automation of
investor
registration
processes at BOI

Automation of
export permit
issuance at DEPZ

Automation of
Company
Registration with
RJSC&F

Cash subsidy claim


process
simplification of
Bangladesh Bank

BOI introduced
automated
registration system
for both local &
foreign investors in
2010.

Avg time to register


fell from 42 days to
12 days!

Entire registration
process can be
completed online

No need to visit BOI


office or an
intermediary

Cost to register fell


by 82%

18% of industrial
projects are now
being registered
within 10 days only!

BEPZA issued
automated export
permit issuance
process at the DEPZ in
June 2010.

Average time to issue


an export permit has
reduced by 33 percent!

No of interfaces between companies and DEPZ


authority has reduced to 0 from 4!

Introduced automated
business registration in
March 2009.

The entire registration


process is now online.

26% reduction in time


required for
registration (23 days in
2009 to 17 days in
2012)

The number of visits to


RJSC&F has reduced
by 40%

98% reduction in time


required to obtain
name clearance (9 days
in 2009 to 1.58 hours in
2012)

Complicated
Bureaucracy

Political Unrest

Corruption

High Inefficiency

Insufficient
Power Supply

Inconsistency in
Policy
Implementation

Control of Red
Tape

Improvement
of Law and
Order

Infrastructural
Development

Efficiency in
Port services

Citi Investment Research & Analysis


stated that Bangladesh, alongside
China, Egypt, India, Indonesia, Iraq,
Mongolia, Nigeria, Philippines, Sri
Lanka and Vietnam, is having the
most promising (per capita) growth
prospects.

Goldman Sachs branded Bangladesh


in its 'Next 11' list after the BRIC
nations.

JPMorgan Chase commented


that Bangladesh ranks fourth
in growth of economically
active population.
A 2012 HSBC report titled The
World in 2050, listed
Bangladesh as one of the top 7
countries expected to deliver
the fastest growth en route to
2050.

Morgan Stanley announced that Bangladesh


is at the very early stages of an investment
boom.

1. International Financial Management by Jeff Madura Florida Atlantic University, 9th edition.
2. International Business By Oded Shenkar, Yadong Luo,
Tailan Chi
3. Foreign Direct Investment by edited by Kenneth A.
Froot.
4. Foreign Direct Investment by Harrison G. Blaine.
5. Foreign Direct Investment in Developing Countries: A
Theoretical Evaluation By Sarbajit Chaudhuri, Ujjaini
Mukhopadhyay

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


Department Bangladesh Bank.
2. World Investment Report-2015 by United Nations
Conference on Trade and Development(UNCTAD)
3. www.investopedia.com/Foreign Direct Investment FDI
4. en.wikipedia.org/wiki/Foreign_direct_investment
5. A study of foreign direct investment and economic
growth in bangladesh by Md. mamun howlader
6. Foreign direct investment in bangladesh, prospects
and challenges and its impact on economy by
Afsana Rahman.

7. Impact of Foreign Direct Investment on


Bangladeshs Balance of Payments: Some Policy
Implications by Muhammad Amir Hossain.
8.Foreign Direct Investment Theories: An Overview of
the Main FDI Theories by Vintila Denisia
9. Theories of international trade, foreign direct
investment and firm internationalization: a critique by
Robert E. Morgan and Constantine S. Katsikeas

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


direct investment?
2. What are the revenue related objectives and cost related
objectives of FDI? Give proper example with reference.
3. What are the others motives that is related to FDI?
4. Why FDI is important in the developing country like
Bangladesh? Are there any disadvantage? Explain?
5. What are the major types of FDI and how FDI can be
achieved ? Give proper Example.
6. How FDI can be determined and what are the factors that
influence the factors of FDI? How can we calculate FDI?
7. What are the theories of FDI? Explain Hymer FDI Theory ?
8. What is the condition of world FDI and what are the major
sources that influence FDI?

9. What is the present economic condition of Bangladesh? How


FDI develop the overall economy of Bangladesh?
10. Why foreign investor should invest in Bangladesh and what
factors influence the investment decision of foreign Investors?
11. What are the limitation of FDI, Explain? Do you have any
recommendation to attract foreign investors?

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