Assignment

Submitted To:
Rajib Dutta
Assistant Professor
Faculty of Business Studies

Submitted by
Maha Binta Nasir

ID No: 1803920302041
Semester 4th
Batch: 39th
Course Title: International Finance

Assignment on Foreign Direct Investment

Program: RMBA

Premier University Chittagong, Wasa Campus

Date of Submission: July08, 2020

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1.Introduction
FDI is an investment in the form of a controlling ownership in a business in one country by
an entity based in another country. It has been distinguished from foreign portfolio
investment by the notion of direct control. In broad sense, FDI covers mergers and
acquisitions, building new facilities, reinvesting profits earned from overseas operations etc.
If narrowly defined, FDI creates a lasting management interest (more than 10 percent voting
stock) in an organization operating in a foreign country. FDI is measured as the sum of equity
capital, long-term capital, and short-term capital shown in balance of payments (BOP).
Types of FDI
In general, FDI can be classified as Greenfield investment and Brownfield investment.
In a Greenfield investment (GI), a company establishes operations in a foreign country and
constructs new facilities (sales office, manufacturing facility, etc.) cross-border from the
ground up. For example, in 2015, Toyota Motor Corporation established a new
manufacturing facility in Mexico investing of US$1 billion.
A brownfield investment is the lease or purchase of a pre-existing facility by a company in a
foreign country. For example, Tata Motors in India, acquired Jaguar Land Rover’s businesses
valued at $2.3 billion in 2008. Through the investment, TATA obtained intellectual property
rights, manufacturing plants, two design centers in the United Kingdom.

From strategic viewpoint, FDI is of two types: Horizontal and Vertical FDI.
In Horizontal FDI, a business expands its domestic operations to a foreign country where it
conducts the same operation in a foreign country. For example, Starbuck’s entry in China is
considered horizontal FDI.
In Vertical FDI, a firm conducts different but related business operation abroad. For
example, Toyota motors acquired car distributorship in the USA in addition to their existing
business.
However, two other forms of FDI have also been observed: Conglomerate and Platform FDI.
Conglomerate is a business that acquires an unrelated business in a foreign country. This is
challenging and not very common, as it requires overcoming two barriers to entry: entering a
foreign country and entering a new industry or market.
Platform is a business that expands into a foreign country but the output from the foreign
operations is exported to a third country. Platform FDI usually done in low-cost locations
inside free-trade areas.[ CITATION CFI \l 1033 ]

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2. Impact of FDI on Sustainable Development
2.1 Economic Impact
FDI has significantly strong positive effect on economic growth. FDI flows from one country
to another to utilize different opportunities i.e. lower labor cost, lower raw material cost,
demand in the host country, technology availability, capital scarcity etc. For whichever
reason FDI flows, it brings together the factors of production namely land, labor, capital and
entrepreneurship leading to the increase in production. Consequently, the GDP of the host
country has a positive push from this. FDI not only has positive impact on GDP, but also has
a positive long-term effect on BOP for both host and home countries. In addition to these,
FDI flow increases employment and wages, helps in industrial growth and technology
transfer.
2.1.1 Impact on GDP
Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods
and services PRODUCED within a country's borders in a specific time period. FDI brings the
factors of production together and increase production and thus GDP.
Sathe and Handley-Schachler tried to establish a correlation between Per capita GDP and FDI
by a study in India and came out with the following result.
Growth=+ FDI+ [ CITATION Shr06 \l 2057 ]

Table 1: Annual growth rates for 32 Indian states and territories (1993–2002) regressed on FDI approvals per head (1991–

2002 [ CITATION Shr06 \l 2057 ]

The result can be easily seen to be with a significant positive co relation. The positive
correlation between GDP and FDI has been also shown in multiple researches on different
parts of the world. The following time series graph plots shows the change in FDI per capita
and GDP per capita in different continents and almost everywhere a strong positive
correlation has been found.
2.1.2 Effect on BOP
For the home country, FDI causes a negative effect initially because of the reduction in
capital account. However, income repatriation to the home country should result in a higher
inward cash flow for the host country in long term which should affect the income and other
payment accounts positively enough to offset the initial negative flow.

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Figure 1: Relation between FDI per capita and GDP per capita in different continents (In Graph A: BRICS= Brazil, Russia,
India, Canada, South Africa & In graph C: China and Kuwait have been removed because they were anomaly and need

separate consideration) [ CITATION Ric18 \l 2057 ]

FDI hits the BOP of the host country immediately with the amount invested. After the
investment, if the products are sold in the host country, the BOP is less effected in the long
term with positive impact on employment. But if the subsidiary is used as a hub to distribute
products around, it affects the host’s economy very positively. For example, Nissan, Toyota,
and Honda have major assembly plants in the UK which are used as the base for serving the
rest of Europe. This not only increases employment but also put a continuous positive impact
on the BOP. In the mobile phones sector, for example, the Chinese subsidiaries of foreign
MNCs — primarily Nokia, Motorola, Ericsson, and Siemens — accounted for 95% of
China’s exports [CITATION Moo \l 2057 ].
2.1.3 Labor and Wages
In green field investment, FDI creates jobs both directly and indirectly in the host country.
For example, Toyota’s investment in France in 1997 not only created 2000 direct jobs but
also created the opportunity of 2000 additional indirect job in the supporting industries. (Jack,
1997) In 2005 Hyundai’s investment in Alabama created 3000 indirect job along with 5500
direct jobs [CITATION Moo \l 2057 ].
If instead of Greenfield investment, if FDI takes in the form of acquisition, employment is in
fact reduced due to streamlining and restructuring of operation by the MNC. However, once
the MNC becomes established in the host country, it grown rapidly generating more and
more employment [CITATION Moo \l 2057 ]. OECD found between 1989 and 1996, the

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workforce of France and UK saw a growth of 1.7% in the foreign firms and a decrease of
2.7% in the local firms. In the US, the workforce of foreign firms grew by 1.4% per year,
compared with 0.8% per year for domestic firms.
It may seem that the FDI cause to transfer the job from home country to host country. It is
true in many cases. The US workforce saw steady decrease in workforce from 2.4M to
650,000 in textile and apparel between 1973-2005 [CITATION Moo \l 2057 ].

But in other case, FDI is more like a growth beyond the borders for the company and not
mere expatriation of its operations. In many scenarios this growth creates better and
sophisticated job opportunities in the home country especially in high value-added field. For
example, Samsung is a Korean company that has assembly plants in many countries. But the
manufacturing and R&D activities are done back in Korea that has significantly increased the
number of high values adding job in Korea.

Table 2: FDI effect on home country: Samsung’s outward FDI in mobile phone industry

2.1.4 Growth of Supporting Industries and Spill-over Effect

FDI has many indirect positive economic effects on the host country. One of the best effects
is the inception of related and supporting industries. For example, the year Uber started
working in Bangladesh in 2015-16 followed by Pathao, the motorcycle industry saw an
increase of 165% in sales (BRTA).
450000 406897
400000
332057
350000
300000
250000
200000
114616
150000
90685
100000
50000
0
2011 2012 2013 2014 2015 2016 2017 2018 2019
Figure 2: Number of motorcycle registration per year [CITATION Moo \l 2057 ]
At the same time, where MNC is thriving in the host country, the local entrepreneur may try
to copy the ideas and technology with proper customization which sometimes even result in

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highly successful companies. For example, following the foreign tech companies, China has
established giant companies like Huawei and Xiaomi.

FDI not only helps the host to thrive, but also industries like supply chain management,
customer relationship management, transportation and storage, product design, and
promotion grow in the home country. Especially Research and development and innovations
come rapidly in the home country.
2.1.5 Knowledge Transfer
FDI makes it possible to transfer and homogenize both technology and management skills.
“Technology Transfer” is a broad set of processes covering the flows of know-how,
experience and equipment. IBM entered Japan in 1960 with their mainframe technology.
Japan was a conservative country in question of foreign investment back then. In the context
of Bangladesh, Samsung has recently started assembling mobile in Bangladesh including
their flagship Note10+. These require transfer of technology and know how about how to
make these advanced smartphones. [ CITATION Muh20 \l 2057 ] Sometimes companies
even update a community with technology for making the ground for their products. For
example, Google is working on project loon, where they will use giant balloons to enable
mobile network operators to expand LTE coverage to areas once thought of as un-servable
and also to spread internet connectivity everywhere. [ CITATION Loo20 \l 2057 ]
Beside technology transfer, efficient management practices also shared between countries.
Efficient companies like Unilever, General Motors, Ford etc. run their operation in different
countries and in the process educate the locals with their management practices. These locals
later join different local companies and share their experiences in MNCs. Even the home
country learns to invent and practice efficient management system when managing these
gigantic firms.
2.2 Social Impacts
2.2.1 Higher Wages, Better Lives
MNCs generally pay higher than local companies. In a study in Malaysia, it was found
foreign company pay higher by two fifth or more than local companies. [ CITATION
ERI14 \l 2057 ] At the same time MNC also offer better working condition to uphold their
reputation. Overall, they offer a better wage and life for their employees.
2.2.2 Better Legal Structure
Because of the proven economic benefits of the FDI many developing countries try to attract
FDI for their growth. The MNCs look for the ease of doing business before investing in a

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country. For this UN ranks countries based on how favorable the conditions are for doing
business in the country.

Figure 3: Criteria for conditions for doing business

They give score to the country based on 12 criteria. The countries try to attract FDI by
scoring better in these criteria. The legal structure of the country is on the criteria. As a result,
the countries try to score better by improving their legal structure. Thus, FDI positively
influence the legal system of a country. At the same time the positive influence is also true
for infrastructure development and labor conditions.
2.2.3 Multicultural Environment
Countries that receive a high amount of FDI from multiple countries, gets the technology,
management and people from foreign countries working at their home. These people from
different countries have different cultures, food habit and beliefs. Working together, people
share their cultures and beliefs which generally lead to a more considerate society.
2.3 Environmental Impact
It is generally considered that FDI in developed countries has a positive impact on
environment because of the regulation and sharing of green technology. However, in case of
developing countries, there is pollution haven theory that states that “polluting industries will
relocate to jurisdictions with less stringent environ- mental regulations.” Though to date,
there have been a number of researches that contradict with this theory.
In a research, environmental regulation was seen to have insignificant effect on the flow of
FDI as a whole. But when production and non-production FDI were considered separately,
environmental regulation was seen to have significant effect on production FDI. The research
concluded, “The results indicate that environmental regulations are determinants of FDI in
the production part, while environmental regulations do not have a significant effect on FDI
decisions when the entire FDI is considered.”[ CITATION Yoo17 \l 2057 ]
Theoretically, the impact of FDI on environment can be both positive and negative. However,
in a research based on 65 primary studies with 1006 elasticity, it was found that “the
underlying effect of FDI on environmental emissions is close to zero, however, after
accounting for heterogeneity in the studies, it was found that FDI significantly reduces
environmental emissions.” [CITATION Bin20 \l 2057 ]

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3. FDI and Sustainable Development – Bangladesh
Bangladesh, a South Asian country with a population of 163 million [CITATION htt \l 1033 ]
is currently one of the fastest developing countries worldwide. With the median age of the
population being 27.9 years (2020 est.) and adult literacy of 73.9% (2017 est.), a substantial
economic upsurge is anticipated in upcoming years. Despite the political instability and poor
infrastructure, the GDP growth rate of 7.4% (2017 est.) continues to rise every year. The
RMG sector has been the backbone of Bangladesh’s economy by contributing to 80% of the
exports. Around 56.5% of the GDP comes from the service sector and another 29.3% from
industry and only 14.2% from agriculture, even though more than half of the people work in
the agriculture sector[ CITATION CIA \l 1033 ]. This rise in the country’s GDP is also a
contribution of the rising Foreign Direct Investment (FDI). In the past years the amount of
FDI invested in Bangladesh from various countries have risen significantly which has
ultimately led the country towards increased sustainable development.
3.1 Total FDI Inflow in Past Five-years and Trend
3,500,000,000 Looking at the year-wise FDI
2,940,222,419.73 inflows, the substantial
3,000,000,000
2,602,962,095.37 increase is quite noticeable.
2,500,000,000 The data for 10 years, 2008
to 2018, according to the
2,000,000,000
World Bank is shown in
1,500,000,000
figure 8. This graph

1,000,000,000901,286,583.13 representing the data for the

decade clearly shows a rising
500,000,000
trend in the foreign
- investments in Bangladesh.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
On one hand, the FDI growth
is developing the infrastructures and overall economic conditions of Bangladesh, on the
other, these developments are attracting more FDI for the country. When this FDI rise is
Figure 4: FDI inflows in Bangladesh from 2008 to 2018[ CITATION Wor \l 1033 ]
compared to other
economic, environmental, and social factors, the relationship between foreign investments in
Bangladesh and the country’s overall sustainable development becomes more evident.

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3.2 Country-wise FDI Inflow
According to the Foreign Direct
Investment in Bangladesh
Survey Report, January-June
2019,[ CITATION Sta19 \l
1033 ], the principal share of
the foreign investment comes
from People's Republic of
China. It invests about $1,159
million in Bangladesh.
Figure 5: Country-wise FDI inflow in Bangladesh [CITATION Sta19 \y \t \l
Netherlands being the second 1033 ]
highest investor, has sent in
$802.84 million as stated by 2019 data. United Kingdom, Singapore, United States, Hong
Kong, Norway, India, Sri Lanka, Japan are major players in the foreign investments as well.
These inflows have greatly improved the technologies in Bangladesh, as well as the service
and industry sectors.
3.3 Sector-wise FDI Inflow
The Power sector receives the major
share of the foreign investments in
Power
27%
32%
Bangladesh. The improvement in
Food
Banking power production during the past
Textile and Wearing decade clearly signifies the proper use
6%
Telecommunication
7% of the funding. The Food industry is
Others
8% 21% also being developed using around
21.36% of the total foreign
investments. Scarcity of food for the
overall population has substantially reduced. Agriculture industry has been progressing

Figure 6: Sector-wise FDI inflow in Bangladesh[CITATION Sta19 significantly as well. The RMG
\y \l 1033 ]
sector has always been of major
importance for investment opportunities in Bangladesh, but in recent years,
Telecommunication industry is gaining the focus because of the target of increasing
digitization. Other sectors, such as Agriculture, Gas & Petroleum, Pharmaceuticals, Leather,

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Metal Insurance, and Chemical industries altogether take up 27.14% of the FDI received by
the country[ CITATION Sta19 \l 1033 ].
3.4 Impacts of FDI
The sustainable development goals clearly define the targets a country needs to reach in order
to achieve the state of proper sustainable development. FDI has been one of the key factors in
achieving these goals for any country. Creating a link between FDI and the sustainable
development goals, the achievements of Bangladesh are analyzed. Foreign investments in any
country brings with it numerous opportunities for the country’s development prospects. These
developments do not focus on the economic aspects only. Environmental and social
development carries significant importance as well. The level of sustainable development
goals achieved by the country is assessed below based on these three factors.
3.4.1 Economic Impact
Economic development of any country tends to show itself in various ways. Better
infrastructure, highly efficient industries, increased currency value. Moreover, greater exports
and lesser imports, ultimately leading to higher current account value in the Balance of
Payments. In case of Bangladesh, the increased foreign investments have created greater
opportunities for economic development. Infrastructure has significantly improved in the past
years. Following the Rana Plaza incident, foreign investors have demanded upgrading of the
industry infrastructures, and this upgrading process has been quite fruitful so far. On the other
hand, an ambitious target of establishing 100 special economic zones by 2030 has been taken
by the Bangladesh government[CITATION Pro \n \l 1033 ], out of which only 66 are
currently in service.
Domestic Production

274,024,958,9 According to the research conducted

65.89
280,000,000,100 [CITATION Afs12 \l 1033 ], it was

230,000,000,100
concluded that Foreign investments in
Bangladesh have a highly positive
180,000,000,100 149,990,451,0
22.29 relationship with the economic growth,
130,000,000,100 that is, GDP. This correlation was found
by conducting ANOVA hypothesis test
80,000,000,100
on the data collected back in 2012. A
graph plotted with recent data from 2008
to 2018[ CITATION Wor \l 1033 ], as Figure 7: GDP trend from 2008 to 2018[ CITATION Wor \l 1033 ]

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shown in Figure 11, also demonstrates a rising trend in GDP of Bangladesh. Comparing this
trend with the FDI trend shown in Figure 8, it can be settled that FDI has impacted the
growth of GDP of Bangladesh over the past decade, and this validates the aforementioned
positive correlation. Graph plotted with data from more than five decades were also analyzed
and found to have rising trends of GDP with rise in FDI[ CITATION Wor \l 1033 ].
Export Volume
550 [CITATION Afs12 \l 1033 ] also
500 concluded the relationship between
Export volume index (2000 = 100)

450 rise in FDI and the total exports of

400 Bangladesh. The research found a
350 positive correlation between the two
300 factors, and thus the author stated
250 that the exports should rise with the
200
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
rise in foreign investments in the
country. Additional data was
Figure 8: Export volume index from 2008 to 2018[ CITATION Wor \l collected to plot a graph of export
1033 ]
volume index for the decade
2008-2018[ CITATION Wor \l 1033 ], as shown in Figure 12. This graph further strengthens
the claim of the research through its rising trend.
5.4.2 Social Impact
From social perspectives, FDI has quite positively affected the goals of sustainable
development. As a domino effect of greater economic development due to higher FDI inflow,
employment rates have risen, which eventually reduced overall poverty in the country.
Economic growth also facilitated improvement of health services as well as better education
facilities. Overall, FDI has improved the quality of life for the general population of the
country.
Women Empowerment
24.5 The employment of women in
24.21
24 comparison to men have increased with
% of female employment

23.5
23.36
23
increased industrialization in the
22.5 country. A sudden surge in % of
22
female employment can be seen from
21.5 21.39
21 2016 to 2018 in the graph
20.5
20.66 shown[ CITATION Wor \l 1033 ].
20
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Figure 9: % of female employment from 2008 to 2018[ CITATION
Wor \l 1033 ]
With greater employment, more women are now independent and self-sufficient. This
eventually indicates the rise in women empowerment. The major reason behind this is the
economic development of the country which can be further traced back to greater FDI inflow.
72.32
72.5 Quality of Life
72
Over the last decade, the life
71.5
expectancy of the total population has
Life Expectancy

70.93
71
70.5 increased more than 3 years, with
70 around 2 year rise in the past five
69.5
69.07 years[ CITATION Wor \l 1033 ]. This
69
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 growth clearly indicates an
improvement in the overall quality of life of people. If the economic growth due to FDI
inflow is compared with these values, it can be concluded
Figurethat theExpectancy
10: Life conditions of life
from 2008 has CITATION Wor \l
to 2018[
1033 ]
upgraded for overall population.
3.4.3 Environmental Impact
In case of environmental aspects, Bangladesh is not progressing towards sustainable
development through the rising inflows of foreign investments. Rather, the increased
economic development has led the country towards much more amplified level of pollution
than previously existed. Additionally, land available to produce food and such resources are
also reducing overall due to more factories being built in agricultural areas.
Carbon Footprint
0.5 Since the use of renewable
0.47
CO2 emissions (metric tons per capita)

0.48
energy is still not a popular
0.46
0.44 concept in Bangladesh, the
0.42
0.4 country mostly relies on natural
0.38
0.37 reserves of energy. The evolving
0.36
0.34 economy has brought with it an
0.32
increased use of these natural
0.3
2008 2009 2010 2011 2012 2013 2014
resources, and thus, the carbon
footprint of the country is rising
day by day. Higher rate of deforestation to build factories and industries has also significantly
contributed to the carbon footprint. A study on FDI, economic growth, energy consumption
Figure 11: CO2 emissions (metric tons per capita) from 2008 to 2014 and environment in
Bangladesh has shown the

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existence of a relationship between rise in FDI and energy consumption. This concludes that
economic growth in Bangladesh will be harmed if restriction on energy consumption is put to
action. On the other hand, huge environmental damage is to come if the FDI inflows are not
controlled through proper regulations[CITATION Sar16 \n \l 1033 ]. Additional data was
collected to demonstrate the rising trend of CO2 emissions in metric tons per capita from 2008
to 2014. About 0.1 metric tons per capita increase in six years is quite significant considering
the size of the economy of Bangladesh[ CITATION Wor \l 1033 ].
Agricultural Land
71.2 Using data collected from the
71 70.99 World Bank database, the
Agricultural land (% of land area)

70.8 following graph was plotted to

70.6 70.63 analyze how much the agricultural

70.4 land has been affected over the

70.39
70.2 70.12 years 2008 to 2016. Although the

70
agricultural land (% of land area)
69.90 has increased from 2014 to 2016,
69.8
2008 2009 2010 2011 2012 2013 2014 2015 2016
the overall trend of the data is
decreasing. Excessive
Figure 12: % of land area from 2008 to 2016[ CITATION Wor \l 1033 ] industrialization may be one of
the reasons for this fall, which will eventually lead to the conclusion that increasing FDI is
affecting the amount of agricultural land available for food production.
Thus, environmental goals for sustainable development are still way too far to reach for
Bangladesh. If Bangladesh government takes necessary measures to balance the negative
effects of economy and focuses on environmental benefits, sustainable development could be
achieved in near future.

Therefore, it can be established that the FDI inflows have substantially helped Bangladesh to
reach a number of economic and social goals of sustainable development, but greater efforts
are required in order to attain the environmental goals in near future.

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Conclusion
Although Foreign Direct Investments (FDI) is considered a key driver to sustainable growth
and development which focuses not only to the economic aspect of development but also to
the social and environmental protection of a nation, investment projects aiming to achieve the
Sustainable Development Goals through impact investment has always been a matter of
dispute. Certainly, FDI has a significant strong positive impact on economic growth as it
flows from one country to another to capitalize on different comparative advantages of host
country leading to positive growth on GDP and other economic indicators. Additionally, FDI
positively influence the legal system, infrastructure and labor conditions of host country and
in turn, have impactful contribution on social and human development on moderate basis.
But, when comes to the point of environmental protection, the contribution of FDI gets
insignificant and inconclusive to some extent and the impact can be both positive and
negative depending on the context of nations. The cases of two countries discussed in the
paper have revealed the same findings as a whole.

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