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What is International Business International Business is a transaction between two or more countries and is primarily based in a single country, but acquires some meaningful share of its resources or revenues (or both) from other countries. It comprises a large growing portion of the world's total business. Although it's riskier and more expensive it allows for greater variety on different products and services at lower prices. Domestic Business is a transaction within the home country; it acquires all of its resources and sales, and all of its products or services within a single country. A well functioning domestic economy will allow for smooth operations for International Business. The difference between international and domestic business is, first, when international business takes place it affects a variety of components such as profits, employment, wages, and security. These important aspects are sometimes negatively impacted and affect the citizens of the home country. On the other hand, domestic business generates jobs and promotes economic security. According to Daniels, Radebaugh, and Sullivan most companies engage in international business to expand sales, acquire resources, and minimizerisk. When a company wants to expands sales it also expands its competitive realm. The company steps outside the boundaries of its origin to maximize profits and also use it as a balancing factor. For example, if sales are down domestically and sales are up internationally the company will not be at a loss. They actually create a competitive advantage to those companies who limit itself to domestic business only. There are policies and regulations on goods that are being shipped internationally. Engaging in domestic business is better for a country than to have a high volume of imports and low volume of exports from other countries.
Background of International Business in Bangladesh
Following the violent events of 1971 during the fight for independence, Bangladesh with the help of large infusions of donor relief and development aid--slowly began to turn its attention to developing new industrial capacity and rehabilitating its economy. The static economic model adopted by its early leadership, however including the nationalization of much of the industrial sector--resulted in inefficiency and economic stagnation. Beginning in late 1975, the government gradually gave greater scope to private sector participation in the economy, a pattern that has continued. A few stateowned enterprises have been privatized, but many, including major portions of the banking and jute sectors, remain under government control. Population growth, inefficiency in the public sector, resistance to developing the country's richest natural resources, and limited capital have all continued to restrict economic growth.
In the mid-1980s, there were encouraging, if halting, signs of progress. Economic policies aimed at encouraging private enterprise and investment, denationalizing public industries, reinstating budgetary discipline, and liberalizing the import regime were accelerated. From 1991 to 1993, the government successfully followed an enhanced structural adjustment facility (ESAF) with the International Monetary Fund (IMF) but failed to follow through on reforms in large part because of preoccupation with the government's domestic political troubles. In the late 1990s the government's economic policies became more entrenched, and some of the early gains were lost, which was highlighted by a precipitous drop in foreign direct investment in 2000 and 2001. In June 2003 the IMF approved 3-year, $490-million plan as part of the Poverty Reduction and Growth Facility (PRGF) for Bangladesh that aimed to support the government's economic reform program up to 2006. Seventy million dollars was made available immediately. In the same vein the World Bank approved $536 million in interest-free loans. Efforts to achieve Bangladesh's macroeconomic goals have been problematic. The privatization of public sector industries has proceeded at a slow pace--due in part to worker unrest in affected industries--although on June 30, 2002, the government took a bold step as it closed down the Adamjee Jute Mill, the countries largest and most costly state-owned enterprise. The government also has proven unable to resist demands for wage hikes in government-owned industries. Access to capital is impeded. State-owned banks, which control about three-fourths of deposits and loans, carry classified loan burdens of about 50%. The IMF and World Bank predict GDP growth over the next 5 years will be about 6.0%, well short of the 8%-9% needed to lift Bangladesh out of its severe poverty. The initial impact of the end of quotas under the Multi-Fiber Arrangement has been positive for Bangladesh, with continuing investment in the ready-made garment sector, which has experienced annual export growth of around 20%. Downward price pressure means Bangladesh must continue to cut final delivered costs if it is to remain competitive in the world market. Foreign investors in a broad range of sectors have been increasingly frustrated with the politics of confrontation, the level of corruption, and the slow pace of reform. Investors viewed favorably steps taken by the interim government to address corruption, governance, and infrastructure issues, though most believed it was too early to assess the long-term impact of those developments. With the reemergence of Sheikh Hasina in a position of political leadership, and her subsequent interest in international outreach, opportunities to build upon U.S.-Bangladesh economic cooperation exist. For prospective economic cooperation to be further realized, Bangladesh must address its market shortcomings and vulnerabilities in a timely manner. Despite the country's politically motivated general strikes, poor infrastructure, and weak financial system, Bangladeshi entrepreneurs have shown themselves adept at competing in the global garments marketplace. Bangladesh exports significant amounts of garments and knitwear to the U.S. and the European Union (EU) market. As noted, the initial impact of the end of quotas on Bangladesh's ready-made garment industry has been
positive. Downward price pressures, however, mean Bangladesh must continue to cut final delivered costs if it is to remain competitive in the world market. The Bangladesh Government continues to court foreign investment, something it did fairly well in the 1990s in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles, and pharmaceuticals. In 1989, the same year it signed a bilateral investment treaty with the United States, it established a board of investment to simplify approval and start-up procedures for foreign investors, although in practice the board has done little to increase investment. Bangladesh also has established export processing zones in Chittagong (1983), Dhaka (1994), Comilla (2000), Mongla (2001), Iswardi (2005), Uttara (2006), and Karnafully (2007). The most important reforms Bangladesh should make to be able to compete in a global economy are to privatize state-owned enterprises (SOEs), deregulate and promote foreign investment in high-potential industries like energy and telecommunications, and take decisive steps toward combating corruption and strengthening rule of law. Participation in Multilateral Organizations Bangladesh was admitted to the United Nations in 1974 and was elected to a Security Council term in 1978 and again for a 2000-2001 term. Then Foreign Minister Chowdhury served as president of the 41st UN General Assembly in 1986. The government has participated in numerous international conferences, especially those dealing with population, food, development, and women's issues. In 1982-83, Bangladesh played a constructive role as chair of the "Group of 77," an informal association encompassing most of the world's developing nations. It has taken a leading role in the "Group of 48" developing countries and the "Developing-8" group of countries. It is also a participant in the activities of the Non-Aligned Movement. Since 1975, Bangladesh has sought close relations with other Islamic states and a role among moderate members of the Organization of the Islamic Conference (OIC). In 1983, Bangladesh hosted the foreign ministers meeting of the OIC. The government also has pursued the expansion of cooperation among the nations of South Asia, bringing the process--an initiative of former President Ziaur Rahman--through its earliest, most tentative stages to the formal inauguration of the South Asian Association for Regional Cooperation (SAARC) at a summit gathering of South Asian leaders in Dhaka in December 1985. Bangladesh hosted the SAARC summit in November 2005, and Prime Minister Khaleda Zia reassumed its chairmanship. Bangladesh has participated in a wide range of ongoing SAARC regional activities. The head of the then-caretaker government participated in the April 2007 SAARC summit in India. In recent years, Bangladesh has played a significant role in international peacekeeping activities. Over 10,000 Bangladeshi military personnel were deployed overseas on peacekeeping operations as of November 2009. Under UN auspices, Bangladeshi troops have served or are serving in Sierra Leone, Somalia, Rwanda,
Mozambique, Kuwait, Ethiopia/Eritrea, Kosovo, Timor-Leste, Georgia, Congo, Cote d'Ivoire, Western Sahara, Bosnia, and Haiti. Bangladesh responded quickly to President Bill Clinton's 1994 request for troops and police for the multinational force for Haiti and provided the largest non- U.S. contingent. Bilateral Relations with Other Nations Bangladesh is bordered on the west, north, and east by a 2,400-kilometer land frontier with India, and on the southeast by a land and water frontier (193 kilometers) withBurma. India. India is Bangladesh's most important neighbor. Geographic, cultural, historic, and commercial ties are strong, and both countries recognize the importance of good relations. During and immediately after Bangladesh's struggle for independence from Pakistan in 1971, India assisted refugees from East Pakistan, intervened militarily to help bring about the independence of Bangladesh, and furnished relief and reconstruction aid. Indo-Bangladesh relations are often strained, and many Bangladeshis feel India likes to play "big brother" to smaller neighbors, including Bangladesh. Bilateral relations warmed in 1996, due to a softer Indian foreign policy and the new Awami League government. A 30-year water-sharing agreement for the Ganges River was signed in December 1996, after an earlier bilateral water-sharing agreement for the Ganges River lapsed in 1988. Bangladesh remains extremely concerned about a proposed Indian river linking project, which the government says could turn large parts of Bangladesh into a desert. The Bangladesh Government and tribal insurgents signed a peace accord in December 1997, which allowed for the return of tribal refugees who had fled into India, beginning in 1986, to escape violence caused by an insurgency in their homeland in the Chittagong Hill Tracts. The implementation of most parts of this agreement has stalled, and the army maintains a strong presence in the Hill Tracts. Arms smuggling and reported opium poppy cultivation are concerns in this area. Occasional skirmishes between Bangladeshi and Indian border forces sometimes escalate and seriously disrupt bilateral relations. Much to Bangladesh's displeasure, India has erected a barbed-wire fence on part of its border with Bangladesh to prevent alleged illegal migration of Bangladeshis into India. The BNP and other political parties view the Indian Government as a major benefactor of the Awami League and blame negative international media coverage of Bangladesh on alleged Indian manipulation. Former Prime Minister Khaleda Zia, however, visited the Indian capital in March 2006 and reviewed bilateral relations with her Indian counterpart. Two agreements--the Revised Trade Agreement and the Agreement on Mutual Cooperation for Preventing Illicit Drug Trafficking in Narcotic Drugs and Psychotropic Substances and Related Matters--were signed between the two countries during this visit. Indian Foreign Minister Pranab Mukherjee met with the Chief Adviser in Dhaka on February 26, 2007. Mukherjee invited Ahmed to the April 3-4, 2007, SAARC summit in Delhi, and both sides pledged to put Bangladesh-India relations on "an irreversible higher trajectory." Mukherjee again visited Bangladesh after Cyclone
Sidr hit the southwestern coastal districts on November 15, 2007 and offered help to rebuild 10 of the devastated villages. Bangladesh Army Chief General Moeen U. Ahmed paid a six-day visit to India beginning late February 2008 at the invitation of his Indian counterpart. He met with Mukherjee and the Chief Minister of West Bengal province, besides meeting military officials. During this visit, Ahmed announced that passenger trains could start running between Dhaka and Kolkata by April 14. After the return of the Awami League government in January 2009, Prime Minister Hasina made it clear that improved relations with India would be a priority for her government. Foreign Minister Dipu Moni traveled to New Delhi in September 2009 to begin bilateral discussions. Prime Minister Hasina herself traveled to New Delhi in January 2010 to meet with Indian Prime Minister Singh, where they signed several agreements designed to further strengthen their bilateral relationship. Pakistan. Bangladesh‘s complicated relationship with Pakistan reflects the legacy of their shared history and the independence struggle. Landmarks in their reconciliation are: An August 1973 agreement between Bangladesh and Pakistan on the repatriation of numerous individuals, including 90,000 Pakistani prisoners of war stranded in Bangladesh as a result of the 1971 conflict; A February 1974 accord by Bangladesh and Pakistan on mutual recognition followed more than two years later by establishment of formal diplomatic relations; The organization by the UN High Commissioner for Refugees (UNHCR) of an airlift that moved almost 250,000 Bengalis from Pakistan to Bangladesh, and nonBengalis from Bangladesh to Pakistan; and Exchanges of high-level visits, including a visit by Prime Minister Benazir Bhutto to Bangladesh in 1989 and visits by Prime Minister Zia to Pakistan in 1992 and in 1995. • • • President Pervez Musharraf visited Bangladesh in 2002. Prime Minister Shaukat Aziz visited Bangladesh in 2004. Prime Minister Khaleda Zia visited Pakistan in 2006.
Still to be resolved are the division of assets from the pre-1971 period and the status of more than 250,000 non-Bengali Muslims (known as "Biharis") remaining in Bangladesh but seeking resettlement in Pakistan. Since the Awami League government took office in January 2009, relations have been strained over the issue of trials of war criminals from the 1971 war for independence. Burma. Bilateral ties with Burma are good, despite occasional border strains and an influx of more than 270,000 Muslim refugees (known as "Rohingya") from predominantly Buddhist Burma. About 28,000 refugees are currently officially registered in camps in southern Bangladesh. Thousands of other Burmese, not officially registered as refugees, are squatting on the bank of the river Naaf or living in Bangladeshi villages
in the southeastern tip of the country. Bangladesh and Burmese officials are negotiating a deal to establish a road link between the capitals of the two countries. Russia. The former Soviet Union supported India's actions during the 1971 Indo-Pakistan war and was among the first to recognize Bangladesh. The U.S.S.R. initially contributed considerable relief and rehabilitation aid to the new nation. After Sheikh Mujib was assassinated in 1975 and replaced by military regimes, however, Soviet-Bangladesh relations cooled. In 1989, the U.S.S.R. ranked 14th among aid donors to Bangladesh. The Soviets focused on the development of electrical power, natural gas and oil, and maintained active cultural relations with Bangladesh. They financed the Ghorasal thermal power station--the largest in Bangladesh. Russia conducted an aggressive military sales effort in Dhaka and won a $124-million deal for eight MIG-29 fighters. Bangladesh began to open diplomatic relations with the newly independent Central Asian states in 1992. Bangladesh has signed an agreement with Russia for the construction of a nuclear power plant, and Foreign Minister Dipu Moni visited Moscow in May 2010. China. China traditionally has been more important to Bangladesh than the former U.S.S.R., even though China supported Pakistan in 1971. As Bangladesh's relations with the Soviet Union and India cooled in the mid-1970s, and as Bangladesh and Pakistan became reconciled, China's relations with Bangladesh grew warmer. An exchange of diplomatic missions in February 1976 followed an accord on recognition in late 1975. Since that time, relations have grown stronger, centering on trade, cultural activities, military and civilian aid, and exchanges of high-level visits, beginning in January 1977 with President Zia's trip to Beijing. The largest and most visible symbol of bilateral amity is the Bangladesh-China "Friendship Bridge," completed in 1989 near Dhaka, as well as extensive military hardware in the Bangladesh inventory and warm military relations between the two countries. In the 1990s, the Chinese also built two 210-megawatt power plants outside of Chittagong; mechanical faults in the plants cause them to shut down frequently for days at a time, heightening the country's power shortage. The opening of a Taiwanese trade center in Dhaka in 2004 displeased China, but the Bangladesh Government moved quickly to repair the rift and closed the trade center. In April 2005, Bangladesh and China signed nine memoranda of understanding on trade and other issues during the visit to Dhaka of Prime Minister Wen. In August 2005, former Prime Minister Khaleda Zia visited China. In March 2010, Prime Minister Hasina visited China, in an effort to strengthen the countries’ diplomatic ties and discuss regional and global issues. Bangladesh agreed to continue its embrace of a “one China” policy, and China in return pledged significant development aid to Bangladesh. China also agreed to provide financing for several new infrastructure projects in Bangladesh. Other countries in South Asia. Bangladesh maintains friendly relations with Bhutan, Maldives, Nepal, and Sri Lanka and strongly opposed the Soviet invasion of Afghanistan.
Bangladesh has cordial relations with the government of Afghan President Hamid Karzai, and Bangladeshi non-governmental organizations (NGOs) are active in Afghan reconstruction efforts. Bangladesh and Nepal recently agreed to facilitate land transit between the two countries. Bangladesh is considering importing electricity from Bhutan through India to meet its energy shortfall. U.S.-Bangladesh relations Although the U.S. relationship with Bangladesh was initially troubled because of strong U.S. ties with Pakistan, U.S.-Bangladesh friendship and support developed quickly following Bangladesh's independence from Pakistan in 1971. U.S.-Bangladesh relations are excellent. These relations were boosted in March 2000 when President Clinton visited Bangladesh, the first-ever visit by a sitting U.S. President, when Secretary of State Colin Powell visited in June 2003, as well as when Secretary of Defense Donald Rumsfeld visited in June 2004. A centerpiece of the bilateral relationship is a large U.S. aid program, totaling about $163 million for 2009. U.S. economic and food aid programs, which began as emergency relief following the 1971 war for independence, now concentrate on long-term development. U.S. assistance objectives include stabilizing population growth, protecting human health, encouraging broad-based economic growth, and building democracy. In total, the United States has provided more than $5.5 billion in food and development assistance to Bangladesh. Food aid under Titles I, II, and III of PL-480 (congressional "food-for-peace" legislation) has been designed to help Bangladesh meet minimum food requirements, promote food production, and moderate fluctuation in consumer prices. Other U.S. development assistance emphasizes family planning and health, agricultural development, and rural employment. The United States works with other donors and the Bangladesh Government to avoid duplication and ensure that resources are used to maximum benefit. Since 1986, with the exception of 1988-89, when an aircraft purchase made the trade balance even, the U.S. trade balance with Bangladesh has been negative, due largely to growing imports of ready-made garments. Jute carpet backing is the other major U.S. import from Bangladesh. Total imports from Bangladesh were about $2.6 billion (excluding services) in FY 2005, up from $2.1 billion in 2002. In 2007 total imports reached $3.4 billion. U.S. exports to Bangladesh (some $333 million--excluding services--in 2005, and $456 million in 2007) include wheat, fertilizer, cotton, communications equipment, aircraft, and medical supplies, a portion of which is financed by the U.S. Agency for International Development (USAID). A bilateral investment treaty was signed in 1989. Another trade related issue between the two countries involves the export processing zones (EPZs). The government provides several tax, foreign exchange, customs and labor incentives to investors in the EPZs. One such incentive provided in recent years was an exemption from certain labor laws, which had the practical effect of prohibiting trade unions from the zones. The U.S. Generalized System of Preferences (GSP) law requires the beneficiary country to satisfy certain conditions relating to labor rights. On July 13,
2004, the government passed a bill allowing limited trade unionism in the EPZs effective November 1, 2006. Implementation of the law has been slow, however, and a U.S. labor organization has filed a petition with the U.S. Government to suspend Bangladesh's GSP privileges in the absence of progress on labor rights issues. Relations between Bangladesh and the United States were further strengthened by the participation of Bangladesh troops in the 1991 Gulf war coalition, and alongside U.S. forces in numerous UN peacekeeping operations, including Haiti in 1994, as well as by the assistance of a U.S. naval task force after a disastrous March 1991 cyclone in Bangladesh. The relief efforts of U.S. troops are credited with having saved as many as 200,000 lives. In response to Bangladesh's worst flooding of the century in 1998, the United States donated 700,000 metric tons of food grains, helping to mitigate shortages. In July 2006, the U.S. Navy's hospital ship Mercy visited Bangladesh and U.S. personnel worked with Bangladeshi medical personnel to provide medical treatment to Bangladeshi patients. Between 2005 and 2008, the United States obligated $2.2 million in grant aid funding (Foreign Military Financing) to purchase Defender class small boats for the Coast Guard of Bangladesh, and allocated $934,000 in IMET (International Military Education and Training) for 2007. In addition to heavy flooding at the end of summer 2007, Cyclone Sidr hit the country on November 15, causing widespread devastation and affecting the lives of millions of people. Following the cyclone, U.S. troops and two U.S. naval vessels assisted in the delivery of relief supplies to cyclone victims. USAID provided approximately $36.5 million in food and relief items to Cyclone Sidr-affected people and has continued its support through rebuilding houses for people in the cycloneaffected areas. An additional $80 million will be provided to rebuild livelihoods, strengthen local government, generate economic recovery through income-generation activities, and to plan and construct cyclone shelters in the disaster-prone areas. Additionally, Bangladesh has become a valuable United States ally in our global efforts to defeat terrorism. As part of these efforts, the Government of Bangladesh has begun to address problems of money laundering and weak border controls to ensure that Bangladesh does not become a terrorist safe-haven. Despite porous borders, ungoverned spaces, and poor service delivery, Bangladesh’s strong national identity and moderate Islamic tradition help it serve as a key player in combating extremism. U.S. Development Efforts in Bangladesh USAID is the principal U.S. Government agency providing development assistance in Bangladesh. USAID has had a full-fledged cooperation program in Bangladesh since 1971. It works closely with the Government of Bangladesh, non-governmental organizations, the private sector, and other donors. USAID’s yearly development budget for Bangladesh averages $100 million. In 2009, planned assistance amounted to roughly $163 million, including help for people living in the Cyclone Sidr-affected regions. Since 1971, USAID has provided over $5.5 billion in development assistance, with half of that amount provided in food aid. With USAID assistance, Bangladesh has seen significant improvements in living conditions. Today, Bangladeshis have better access to
health care and electricity, increased agricultural productivity and better nutrition. USAID works with communities in disaster preparedness and to improve their ability to manage emergency food supplies. USAID programs assist Bangladeshi organizations and communities in addressing their needs in the areas of health and family planning, income generation, agriculture and food security, disaster management, democracy and human rights, and education. Increasing Economic Growth. USAID’s most significant contribution in Bangladesh has been to help bring electricity to rural areas. In 1971, only 3% of the population had electricity; today, 44% do. To protect natural resources and empower local people who depend on them for their livelihoods, USAID works with communities to establish management systems that encourage the wise use of aquatic and tropical forest resources and restore habitats and ecosystems. USAID also expands access to global markets by assisting key sectors, such as aquaculture and horticulture, to improve the quality of their products, increase sales, create jobs, and promote investment, particularly for the benefit of women, youth, and small and medium enterprise suppliers. The value of imports doubled between 1971 and 1991 as compared to the value of exports. The trade deficit has declined considerably owing to an increase in exports since 1991. A closer look at the trade statistics of the country reveals that in 1989-90, imports exceeded exports by 120%. This percentage came down to 56% in 1996 and 62% in 1997. The economy of Bangladesh was once riding on jute, its major produce. In the late 1940s, its share of the world jute export market was 80%, which came down to 70% in the 1970s. Unfortunately, the trend of polypropylene products across the globe led to a setback for the jute industry of Bangladesh Bangladesh Imports: Commodities Here are the major import commodities of Bangladesh :
• • • • • • •
Machinery and equipment Chemicals Iron and steel Textiles Foodstuffs Petroleum products Cement
Bangladesh Imports: Partners The following were Bangladesh’s import partners as of 2008:
• • • •
China: 15.8% India: 15.7% Kuwait: 8.1% Singapore: 7.6%
Bangladesh Exports: Commodities Here are the major export commodities of Bangladesh:
• • • •
Garments (totaling $12.3 billion in FY09) Frozen fish and seafood Jute and jute goods Leather
Bangladesh Trade: Export Partners The following were Bangladesh’s export partners as of 2008:
• • • • • • •
United States: 24% Germany: 15.3% United Kingdom: 10% France: 7.4% The Netherlands: 5.5% Italy: 4.5% Spain: 4.2%
Bangladesh Trade: Growth The government of Bangladesh undertook significant steps during the 1980s. Consequently there was a tremendous increase in the export of ready-made-garments and knitwear, which garnered maximum foreign exchange for the country. Cheap labor and low conversion costs are the major factors behind the growth of Bangladesh’s garment industry. Over 3 million Bangladeshis (90% women) are employed in this industry. Bangladesh shares excellent trade relations with the US, showing noteworthy trade surplus with the latter. The country is an active partner of the Asia Pacific Trade Agreement and the World Trade Organization. A number of export processing zones have been set up by the government to enhance economic growth by attracting foreign investment.
A developing country, Bangladesh was the world’s 48th largest economy as of 2008, as graded by the International Monetary Fund. At US$1,500, the per capita income of the country is much lower than its neighbors India and Pakistan. During the first decade of the 21st century, Bangladesh’s economy grew at a rate of 6%-7% annually.
Importance of International Business in Bangladesh
Bangladesh will be benefited in several fields by practicing international business. These are given below: 1. Expand Sales. Going international will allow Bangladesh to increase the size of the market to which they offer their products. 2. Acquire Resources. Foreign capital, technology, labor, components all can help Bangladesh become more competitive. 3. Diversify Sources of Sales and Supplies. By operating in multiple countries, local firms help protect themselves from economic downturns in any single country. In the same way, having suppliers in multiple countries helps protect the firm from shortages due to economic, social, or political disruptions in any single country. 4. Minimize Competitive Risk. Bangladesh expands internationally to competitors’ home markets in order to maintain a competitive balance across markets. 5. Expansion of Technology. Air travel, the internet, e-mail, e-commerce, direct dial international phone calls, fax, and other technologies have brought down the cost and increased the efficiency of doing business internationally. 6. Liberalization of Cross-Border Movements. The World Trade Organization and other international trade agreements have reduced barriers to the movement of goods and services across national boundaries. 7. Development of Supporting Services. International banking, international document delivery, and other services have tremendously simplified the conduct of international business. 8. Increase in Global Competition. It is becoming increasingly important that Bangladesh have international operations in order to be able to shift production across countries and take advantage of new production location and marketing opportunities to stay ahead of other international competitors. 9. Exports are goods and services produced in one country and then sent to another country. Imports are goods and services produced in one country and then brought in by another country. Information about exports and imports helps us to explain the impact of international business on the economy. 10. Foreign direct investment (FDI) is equity funds invested in other nations. Industrialized countries have invested large amounts of money in other industrialized nations and smaller amounts in less developed countries (LDCs), such as those in Eastern Europe, or in newly industrialized countries (NICs), such as Hong Kong, South Korea, and Singapore. Most of the world’s FDI is in the US, the European Union (EU), and Japan. As nations have become more affluent, they have pursued FDI in geographic areas that have economic growth potential. The Japanese, for example, have been investing heavily in the EU in recent years. 11
Over 50 per cent of world trade and over 80 per cent of foreign direct investment is conducted by three regional economic hubs: the US, the EU and Japan. Collectively, these areas are referred to as the “triad”. The triad is a group of three major trading and investment blocs in the international arena.
Factors affecting International Business
The factors of a country’s international business depend on two factors: its objectives and the means by which it tends to achieve them. Likewise its operations affect and are affected by two sets of factors: physical/social and competitive Operation Objectives • • • Means Modes • • • • • • Importing and exporting Tourism and transportation Licensing & franchising Turnkey operations Management contracts Direct & portfolio investment (including joint ventures) Sales expansion Resource acquisition Risk minimization
Functions • • • • • Marketing Global manufacturing & supply chain management Accounting Finance Human resources
Overlying Alternatives • • Choice of countries Organization & control mechanisms
Operating environment Physical & social factors
• • • • • • •
Political policies & legal practices Cultural factors Economic forces Geographical influences
Competitive factors Competitive product strategy Country resources & experience Competitors in each market
Financial factors affecting International business of Bangladesh
Fluctuating Currency Values
Why do Currencies Fluctuate? We’re all aware that currencies move up and down relative to each other. Just ask any holidaymaker how a difference in the exchange rate can make them feel richer or poorer when they travel abroad. For example, if the pound rises in value against the American dollar, anyone on a shopping spree in New York can buy more with their pounds. Exchange rates Exchange rates specify how much one currency is worth compared to another. For example, an exchange rate of 1.19 Euros to the pound means that each £1 you have will be worth €1.19 when you go to Europe. A huge amount of money is exchanged every day - by some estimates, about $3.2 trillion worth of currency changes hands every day. In addition to the official exchange rate, you might find that you're charged commission when you want to change some currency, or that you’re quoted a less favorable rate. This is because exchange bureaus want to make a profit on their dealings. Supply and demand A market-based exchange rate will change whenever the values of currencies change. A currency will usually become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply. This does not mean that people no longer want money; it just means that they prefer to hold their wealth in some other form, possibly another currency. Increased demand for
a currency is due to either an increased ‘transaction demand’ for money, or an increased ‘speculative demand’ for money. The transaction demand for money is related to the country’s level of business activity, gross domestic product and employment levels. For example, the more people that are out of work, the less the public as a whole will spend on goods and services, resulting in a drop in the value of a currency.
The Bangladeshi government tightly controls the exchange rate of the taka against the U.S. dollar and major regional currencies. During the last decade the value of the currency showed a steady decline, mainly due to the devaluation of many of the neighboring currencies Exchange rates: Bangladesh Taka (Tk) per US$1 Jan 2001 54.000 2000 52.142 1999 49.085 1998 46.906 1997 43.892 1996 41.794 SOURCE: CIA World Factbook 2001 [ONLINE]. In 1995 the Bangladeshi taka was valued at 40.278 taka per US$1; in January 2000 the value of the taka declined to 51.000 taka per US$1. According to the IMF, the Bangladesh Central Bank has followed a policy of gradual depreciation of the taka against the U.S. dollar since the middle of the 1990s, devaluing the taka in gradual steps of 1 to 2 percent 2 or 3 times a year. The taka's market value has been protected by the large sums of foreign currencies Bangladesh receives every year through aid transfers and through remittances from overseas workers. The taka is still not fully convertible. The government periodically revises its exchange control regulations, introducing further liberalization of the controls. The government lifted restrictions on the repatriation of the profit and dividends from foreign direct investments (in the industrial sector); however, non-residents are not allowed to buy money market instruments or treasury bills. During the period between 1970 and 1980 inflationary pressure was relatively small, as the country's economy was closed to outside influences and was tightly controlled by the government. In the 1990s consumer prices became more volatile, fluctuating between a low of 2.9 percent and a high of 8.9 percent a year, due to the liberalization and gradual opening up of the national economy to international competition. The Bangladeshi banking system suffers from a lack of capital and poor management. Other problems include banks' exposure to corruption and to bad loans
allegedly made to politically well-connected businessmen. There are 43 private banks in the country, including 29 domestic and 14 foreign banks, but most of them are active in major urban areas (Dhaka and Chittagong). The foreign banks are represented by such names as the Scotiabank of Canada and Societe Generale of France. The 1997 Asian financial crisis did not bring damages in the scale of the economic and financial downturn in Indonesia, although it did negatively affect Bang-ladeshi exports. This escape was mainly due to the limited size of the Bangladeshi market, existing currency exchange controls and the relatively closed nature of its economy. Nevertheless, the Bangladeshi taka depreciated between 1997 and 1999 at a faster rate, declining from Tk43.892 in 1997 to Tk49.085 in 1999. Bangladesh has 2 stock exchanges, the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE; opened in 1995). Share prices shot up after the 1996 parliamentary election and market capitalization reached US$6.0 billion in November 1999; however, share prices fell dramatically the following year, with some shares losing up to 60 or 70 percent of their value. The all share indexes both in the DSE and the CSE still remain far below those of the 1996 levels. Influences of exchange rate fluctuation Misalignment of Exchange Rate The prevention of misalignment implies that the actual exchange rate should correspond to the estimate of equilibrium exchange rate. It is not easy to either define the equilibrium exchange rate or to estimate it. That would be a complex exercise in itself and is beyond the scope of the present paper. However, a recent study has undertaken such an exercise for Bangladesh (ADB, 2002,a). The study concludes that the misalignment between the actual and equilibrium exchange rate for the period 1997 to 2001 has been small and has progressively narrowed since 1998. During 2001, the misalignment was only 2.2 per cent. It will also be recalled from table 1 that exchange rate policy certainly succeeded in preventing appreciation of the real effective exchange rate throughout the 1990s. In fact there has been more or less consistent depreciation of REER, the index rising to 116.2 in the year 2000 with 1991 as the base year. There was only one year, 1994, in which there was any noticeable appreciation and in that year the index fell to 102.2 compared to 104.6 in the preceding year. It can thus be concluded that the exchange rate regime has avoided any major misalignment in the exchange rate. Exports and Current Account Balance Table provides the perspective on export performance of Bangladesh in comparison with the other major South Asian economics.
TABLE AVERAGE ANNUAL GROWTH RATE OF EXPORT OF GOODS AND SERVICES Country Bangladesh India Pakistan Sri Lanka 1990-1999 13.2 11.3 2.7 8.4 Period 2000-2001 10.3 9.3 8.9 3.5
Source: World Bank, 2001 and ADB, 2002 b. It is evident from table that Bangladesh has performed better than the other major South Asian countries. However, improved export performance can not be the sole objective of exchange rate policy. What happens to the overall current account balance is an important consideration. Table presents data on current account deficit. Country Bangladesh India Pakistan Sri Lanka 1997 2.1 1.3 6.4 2.6 1998 1.1 1.0 3.2 1.4 Years 1999 1.4 1.1 4.1 3.6 2000 1.0 0.6 1.9 6.5 2001 1.1 0.5 0.9 3.4
Source: ADB, 2002 b It is quite clear that Bangladesh’s achievement in terms of containing current account deficit is by no means unsatisfactory. It has done consistently better than Sri Lanka, and better than Pakistan in all the recent years excepting 2001. The only country with which Bangladesh compares somewhat unfavorably is India, but that should not come as a surprise even to a casual observer in view of India’s high savings rate and level of industrialization.
Experience shows that countries have developed with different degrees of inflation Nevertheless, a consensus has emerged that high and unstable inflation rates are not conducive to development. High inflation reduces return to savers and thus acts as a disincentive to save and invest. In particular, saving in financial form is likely to be discouraged. This complicates the task of mobilis Dhaka ing savings for productive investment. The viability of financial and capital market institutions which act as crucial intermediaries between savers and investors is impaired. High inflation is also likely to distort the pattern of investment in favor of real estate, gold or other forms of property as
hedging devices without adding much to an economy’s productive capacity. The international competitiveness of the economy is badly eroded by inflation. It generally encourages capital flight, exacerbates income distribution, gives rise to inequities in income distribution and aggravates poverty. Last but not the least, a high rate of inflation seriously undermines the popularity of the government. The discussion of inflation in the context of exchange rate regime becomes relevant because of two major considerations. First, a change in the exchange rate is almost certain to cause a change in the domestic prices of tradable. Second, the prices of non-tradable are also likely to be affected because the non-tradable often use tradable inputs and the demand switch generated by initial change in the exchange rate may not elicit corresponding supply response from the non-tradable sector to leave prices unchanged. In the backdrop of the above arguments, it is useful to look at the performance of Bangladesh in respect of inflation. The relevant data are presented in the following table. TABLE – INFLATION IN BANGLADESH AND SELECTED SOUTH ASIAN COUNTRIES Country Bangladesh India Pakistan Sri Lanka South Asian Average Source: ADB, 2002 b It is obvious from the data that Bangladesh has done reasonably well in terms of inflation criterion. During the past decade, its inflation rate never reached double-digit level. In every year except 1999, the inflation rate in Bangladesh has been comparable to or lower than the South Asian average. Year 1996 6.6 4.6 10.4 14.6 5.8 1997 2.5 4.4 11.3 7.1 5.2 1998 7.0 5.9 7.8 6.9 6.3 1999 8.9 3.3 5.7 5.9 4.2 2000 3.4 7.2 3.6 1.2 6.2 2001 1.6 4.7 4.4 11.0 4.6
As noted before, remittances by Bangladeshi workers employed abroad play an important role in moderating the country’s trade deficit. The country’s performance in respect of remittances can be gauged from the table below
Bangladesh Bank (BB) is the central bank of the country and responsible for issuing Bangladeshi currency and maintaining its value. BB administers the foreign exchange regulations. It has been continuing to liberalize foreign exchange regulations in
conformity with the government’s reform agenda in macro economic policies with a view to create an environment conducive to investment and productivity. The major aspects of exchange control include:
• • • • • • • • • • •
Convertibility of Bangladesh Taka Opening of Bank Account by a Foreign Investor Bringing in Cash from Abroad by a Foreign Investor Transfer of Capital and Capital Gains Remittance of Proceeds from Liquidation of Industrial Undertaking Remittance of Royalty, Technical Know-How & Technical Assistance Fees Transfer of Profit and Dividend Accruing to a Foreign Investor Repatriation of Savings, Retirement Benefits & Salary of Foreigners Employed in Bangladesh Local Borrowing Borrowing from Abroad Investment Facilitating Measures
Similar to other countries in South Asia, Bangladesh has a narrow tax base and the revenue is generated mainly from indirect taxes. Income Tax There are three income-tax rates, applicable to income above Tk 100,000 • 0% on the first TK 100,000 • 10% on the next TK 50,000 • 18% on the next Tk 125,000; • 25% on the balance Corporate Tax The corporate tax rate is 35 per cent for publicly traded companies and 40 per cent for all other companies. Corporate tax rates are competitive within the region. Capital Gains Tax Capital Gains from the transfer of shares of public limited companies listed with a stock exchange are tax-exempt. In computing capital gain, deductions are made from the full value or sales proceeds or the fair market price (whichever is higher) of the capital assets. Dividend Income The dividend income which is received by shareholders (other than companies) is tax-exempt. However, this benefit is not available to shareholders of private limited companies. Royalties 18
Royalties and technical know-how fees received by any foreign collaborator, firm, company or expert are also tax-exempt.
VAT Bangladesh has replaced the sales and excise tax by the more modern value added tax (VAT). The VAT is imposed at a flat rate of 15 per cent. Excise duties do exist on a few items and a turnover tax may be imposed on small-scale activities which cannot be taxed through the VAT. Tariffs Tariff is the unweighted average of effectively applied rates for all products subject to tariffs calculated for all traded goods. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years. Micro credit has been a major driver of economic development in Bangladesh and although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from garment industry. The biggest obstacles to sustainable development in Bangladesh are overpopulation, Purchasing power parity Theory that predicts that currency exchange rates between two countries should equal the ratio of the price levels of their commodity baskets GDP (Purchasing power parity of Bangladesh) • $242.2 billion (2009 est.) • $229.1 billion (2008 est.) • $216.6 billion (2007 est.) Note: data are in 2009 US dollars Sales price Shows the gross security sale price, net of commissions. Option Adjustments: For exercised call options, the writer's sale proceeds have been increased by the amount received for the call. For exercised put options, the holder's sale proceeds have been reduced by the cost of the put.
Fiscal Policy generally refers to the use of TAXATION and government expenditure to regulate the aggregate level of economic activity in a country. Fiscal policy in Bangladesh basically comprises activities, which the country carries out to obtain and use resources to provide services while ensuring optimum efficiency 19
of the economic units. The policy influences the behavior of economic forces through public finance. Major objectives of the fiscal policy of Bangladesh are to ensure macroeconomic stability of the country, promote economic growth, and develop a mechanism for equitable distribution of income. The main tools to achieve these objectives are variation in public revenue, variation in public expenditure, and management of public debt. These are reflected in the budgetary operations of the government, prepared and implemented on year-on-year basis.
Monetary policy, both in developed and developing economies, seeks to maintain price stability, accompanied by sustained output growth in the face of internal and external shocks faced from time to time. For developing economies like Bangladesh with significant underemployment/under exploitation of production factors, supporting higher output growth is an overriding priority. Monetary policy of Bangladesh Bank (BB) therefore aims at maintaining price stability while permitting monetary expansion needed to support output growth at sustained high rate.
Balance of Payments (BOP)
A Balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarises international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Balance of Payments Scenario of Bangladesh (FY91-FY03)
(In Million US$) Source 1991-92 1994-95 1995-96 1999-00 2000-01 Trade Balance -1532 -2361 -3063 -2641 -2011 Export, fob (including 6419 EPZ) 1994 3473 3884 5762 Imports, cif (including -8130 EPZ) -3526 -5834 -6947 -8403 Services (net) 68 -89 -104 192 -915 Income (net) -89 -41 55 -221 -264 Current transfers 1435 1827 1821 2672 2171 Worker's Remittances 848 1198 1217 1949 1882 Current account balance -118 -664 -1291 2 -1019 Capital account (net) 357 489 331 283 432 Financial account 590 706 446 760 413 Direct investment 4 6 7 194 174 Portfolio investment 6 61 -21 0 0 Other investment 580 639 460 566 239 Error and omissions -312 -79 -363 -720 -52 Overall Balance 517 452 -877 325 -226 Financing items -517 -452 877 -325 226
Source: Computed from CPD-IRBD Database and Bangladesh Bank Data
2002-03 -2207 6492 -8699 -688 -195 3418 3062 328 392 218 92 2 124 -123 815 -408
Economic Factors affecting International Business of Bangladesh
Bangladesh Distribution of family income - Gini index
Bangladesh is ranked 94 in the field of distribution of family income in the world. This index measures the degree of inequality in the distribution of family income in a country. The index is calculated from the Lorenz curve, in which cumulative family
income is plotted against the number of families arranged from the poorest to the richest. The index is the ratio of (a) the area between a country's Lorenz curve and the 45 degree helping line to (b) the entire triangular area under the 45 degree line. The more nearly equal a country's income distribution, the closer its Lorenz curve to the 45 degree line and the lower its Gini index, e.g., a Scandinavian country with an index of 25. The more unequal a country's income distribution, the farther its Lorenz curve from the 45 degree line and the higher its Gini index, e.g., a Sub-Saharan country with an index of 50. If income were distributed with perfect equality, the Lorenz curve would coincide with the 45 degree line and the index would be zero; if income were distributed with perfect inequality, the Lorenz curve would coincide with the horizontal axis and the right vertical axis and the index would be 100. Bangladesh GDP (purchasing power parity) GDP (purchasing power parity): $242.2 billion (2009 est.) $229.1 billion (2008 est.) $216.6 billion (2007 est.) Note: data are in 2009 US dollars This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year. A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. This is the measure most economists prefer when looking at per-capita welfare and when comparing living conditions or use of resources across countries.
National Income a measure of money value of all goods and services produced in a country in a particular time, generally a year. The five different concepts of national income are Gross National Product (GNP), Net National Product (NNP), National Income (NI), Personal Income, and Disposable Income. Table Contribution of different sectors to national income (%) Sectors 1972-73 Agriculture 49.57 Mining & quarrying Manufacturing 7.91 Construction 4.39 Power, gas, water & sanitary 0.26 Transport, storage & communication 10.52 Trade services 7.97 Housing services 9.41 Public administration and defense 2.27 Banking and insurance 1.08 1979-80 41.22 0.01 11.23 4.75 0.31 11.55 9.78 8.94 2.80 1.58 1989-90 36.85 0.01 8.75 5.84 1.20 10.18 8.35 9.0 4.44 2.05 1998-99 29.34 0.02 9.05 5.95 1.65 10.95 9.05 9.35 5.93 1.91
Professional and Miscellaneous Services 6.62
Using measures of economic growth can give distorted pictures of the level of income in a country – the income distribution is not taken into account. A small proportion of the population can own a large amount of the wealth in a country. The level of human welfare for the majority could therefore be very limited. GDP – Gross Domestic Product The value of output produced within a country during a time period GNP – Gross National Product The value of output produced within a country plus net property income from abroad GDP/GNP per head/per capita Takes account of the size of the population Real GDP/GNP Accounts for differences in price levels in different countries National Income – Problems with using GDP/GNP Reliability of data? How accurate is the data that is collected? Distribution of income? How is the income distributed – does a small proportion of the population earn a high percentage of the income or is income more evenly spread? Quality of life? Can changes in economic growth measure changes in the quality of life? Does additional earnings power bring with it additional stress, increases in working hours, increased health and family problems? Impact of exchange rate? Difference in exchange rates can distort the comparisons – need to express in one currency, but which one and at what value? Black/informal economy? Some economic activity not recorded – subsistence farming and barter activity, for example Some economic activity is carried out illegally – building work ‘cash in hand’, drug dealing, etc. Work of the non-paid may not be considered but may contribute to welfare – charity work, housework, etc. Human Development Index • HDI – A socio-economic measure • Focus on three dimensions of human welfare: • Longevity – Life expectancy 23
• Knowledge – Access to education, literacy rates • Standard of living – GDP per capita: Purchasing Power Parity (PPP)
Inflation & economic growth
Relationship between inflation and economic growth remains controversial or somewhat inconclusive; several empirical studies confirm the existence of either a positive or negative relationship between these two major macroeconomic variables. Moreover, with time a general consensus evolved that low and stable inflation promotes economic growth and vice versa (Mubarik, 2005). This further raises the question how low inflation should be. The answer evidently depends on the nature and structure of the economy and varies across countries.
According to Jassin O'Rourke, lowest labor costs are still in Bangladesh, at 22 US cents per hour or five times lower than in China's richest coastal areas. Labor costs include wages, social charges, and a series of bonuses. There may be very large differences in labor costs within a country as minimum wages may vary depending on economic zones. In addition to Bangladesh, Cambodia, Pakistan and Vietnam are other apparel exporters taking advantage of extremely low labor costs at 33 cents, 37 cents and 38 cents per hour, respectively. By contrast, China's lowest labor costs are at 55 cents in the country's inland and remote areas while labor costs may now reach US$1.08 in certain areas of coastal provinces.
Purchasing power parity
PPP may be legitimately tested by carrying out nonstationarity tests on the real bilateral exchange rate since the latter can be interpreted as a measure of deviation from PPP. While the real exchange rate may be subject to short-run variation, a necessary condition for PPP to hold in the long-run is that the real exchange rate be covariance stationary, and thus has a tendency to revert to a stable equilibrium level over time. In fact, nonstationarity of the real exchange rate implies invalidity of long-run PPP as the divergence of purchasing power across the countries considered (expressed in the same currency) would become theoretically infinite. Whether long-run PPP holds or the real exchange rate is stationary has important economic implications. First, the degree of persistence in the real exchange rate can be used to infer the principal impulses driving exchange rate movements. In particular, if the real exchange rate is highly persistent (for example close to a random walk), then the shocks are likely to be supply-side, whereas if there is little persistence, then the shocks may principally be aggregate demand-based (Rogoff, 1996). Second, since the real exchange rate is commonly regarded as a measure of international competitiveness, it reflects an important policy-relevant variable particularly in developing countries, like Bangladesh, where exports have been the principal source of economic growth in the 1990s. In fact, as Bangladesh's export base is hardly diversified with textiles and clothing being the dominant export goods, Bangladesh is particularly vulnerable to increased competition from other Asian countries that produce labor intensive garments. Finally, estimates of PPP exchange rates are often used for practical purposes, such as determining the degree of misalignment of the nominal exchange rate and the appropriate policy response, the setting of exchange rate parities, and the international comparison of national income levels. These practical uses of the PPP concept, and in particular the calculation of PPP exchange rates, would obviously be affected if the real exchange rate would be non mean-reverting, thereby containing a unit root.
Factors contributing to underground economy • • • • • • • Large number of taxpayers maintains no accounts or non-formal accounts. Large number of non-banking transactions (cash transaction or barter) Under reporting value of asset. Under reporting value of asset. Illegal income remained unreported for obvious reason. Weak enforcement of laws Agriculture sector basically remains outside the tax net.
Social Factors affecting International Business in Bangladesh
Apart from the benevolent social services by some business firms, the new concept of CSR is an emerging one. Businesses are driven by government, labor unions consumer groups and above all by considering CSR as a long time investment in PR. In the context of Bangladesh, it is more relevant for the export-oriented industry. Globalization has made CSR practice an imperative for Bangladesh business. CSR concentrates on benefits 25
of all stakeholders rather than just the stockholders. Awareness and sense of necessity for practicing CSR is becoming more and more pronounced as the country has to adapt itself to the process of globalization. But the overall status of CSR in Bangladesh is still very meager. Lack of Good Governance, absence of strong labor unions or consumer rights groups, and inability of the business community to perceive CSR as a survival precondition in export and PR investment local market constitute some of elements undermining the evolution of CSR practices. Some untoward incident like boycott from the importer has taught the local business community about the immense importance of CSR and adoption of this modern and competitive practice is gradually increasing in Bangladesh.
CSR in Historical Perspective
CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis. (Green Paper, 2001) Socially responsibility means not only fulfilling legal expectations, but also going beyond compliance and investing ‘more’ into human capital, the environment and in rapport-building with stakeholders. It is relevant in all types of companies and in all sectors of activity, from MSMEs to Multinational Enterprises (MNEs). “A number of companies with good social and environmental records indicate that these activities can result in better performance and can generate more profit and growth. (Green Paper, 2001) Research (Industry week, 15 January 2001) has shown that about one half of the above average performance of socially responsible companies can be attributed to their CSR image while the other half is explained by their performance. Socially responsible companies are expected to deliver above-average financial returns. (Green Paper, 2001) CSRhas some internal dimensions such as: human resources management, health and safety at work, adaptation to change and management of environmental impact and natural resources. The external dimensions include local communities, business, partners, suppliers and consumers, human rights and global environmental concerns. Again, CSR may be as simple as sponsoring social service oriented entertainment events. In essence, ‘CSR is positive rapport with the society’. In a Bangladesh context, several multinational companies and local companies practice CSR. While the multinationals are influenced by their own ESRB disposition, most of the business concerns in Bangladesh do not rate high in practicing CSR unless being pressured by the foreign buyers in case of export oriented business.
CSR Implications to Business Activities
Companies are facing the challenges of adapting effectively to the changing environment in the context of globalization and in particular in the export sector. Although Consumer Rights Movement, enforcement of government regulations and a structured view regarding the economic importance of CRS are not yet so widespread in the corporate world in Bangladesh, companies have gradually attaching more importance to CSR in the local market as well. They are increasingly aware that CSR can be of direct economic value. Companies can contribute to social and environmental objectives, through integrating CSR as a strategic investment into their core business strategy, management instruments and operations. This is an investment, not a cost, much like
quality management. So, business organizations can thereby have an inclusive financial, commercial and social approach, leading to a long term strategy minimizing risks linked to uncertainty.
CSR as Community Development
CSR in Bangladesh can also contribute a lot to community development. The corporate house can develop the community by creating employment, providing primary education, contribution to infrastructure development like road and high-ways and addressing environmental concerns. This is more relevant for a country like Bangladesh where the government interventions in these fields being augmented by corporate alliance can go a long way in developing the economy, society and environment.
CSR Applications and Realities in Bangladesh
CSR concepts and practices in Bangladesh have a long history of philanthropic activities from the time immemorial. These philanthropic activities included donations to different charitable organizations, poor people and religious institutions. Till now, most of the businesses in Bangladesh are family owned and first generation businesses. They are involved in the community development work in the form of charity without having any definite policy regarding the expenses or any concrete motive regarding financial gains in many instances. Moreover, most of the SMEs fall under the informal sector having low management structure and resources to address the social and environmental issues. These limitations drive the top management of local companies to think only about the profit maximization rather than doing business considering the triple bottom line: profit, planet and people (CSR definition of Lotus Holdings). The discussions on CSR practices in Bangladesh in its modern global terms, are relatively new, but not so for the concept itself. Because, being a part of the global market, it is difficult to ignore CSR standard specifically in the export sector. In general, it is true that in Bangladesh, the status of labor rights practices, environmental management and transparency in corporate governance are not satisfactory, largely due to poor enforcement of existing laws and inadequate pressure from civil society and interest groups like Consumer Forums. Globally, as CSR practices are gradually being integrated into international business practices and hence is becoming one of the determining factors for market accesses, it is becoming equally instrumental for local acceptability. A focus on CSR in Bangladesh would be useful, not only for improving corporate governance, labor rights, work place safety, fair treatment of workers, community development and environment management, but also for industrialization and ensuring global market access.
Prospects and Future of CSR in Bangladesh
Bangladesh is a developing country. Because of global competitiveness and demand, the CSR practices and standards are being implemented in Bangladesh. But we are yet go a long way. There are challenges to implement CSR properly in Bangladesh. Ultimately CSR practices should be better practiced in Bangladesh for better and enhanced performance. In the publication “Good Governance and Market-Based Reforms: A Study of Bangladesh, Fara Azmat and Ken Coghill relates Good Governance with CSR by discussing the good governance indicators of regulatory quality, rule of law and control 27
of corruption in the context of Bangladesh and analyses how lack of good governance indicators affects the success and sustainability of reforms and contributes to the lack of business ethics and CSR in Bangladesh.
What is Culture
• The sum total of beliefs, rules, techniques, institutions, and artifacts that characterize human populations – Learned – Interrelated – Shared – Defines the boundaries
Culture Affects All Business Functions
Marketing Variation in attitudes and values requires firms to use different marketing mixes • P&G Japanese Camay commercials Disneyland Paris Human Resource Management Evaluation of managers • Production and Finance – Attitudes toward authority – Attitudes toward change
Culture is: • Aesthetics • Attitudes and beliefs • Religion • Material Culture • Language • Societal organization • Legal characteristics • Political structures Aesthetics • Culture’s sense of beauty and good taste – Art conveys meaning – Colors, symbols, numbers--Nike air – Architectural style differences
Attitudes and Beliefs • Attitudes Toward Time Vary across cultures 28
Difficult area for some Americans Directness and drive • Perceived to be rudeness Deadlines • Liability abroad • Attitudes toward Achievement and Work Germans put leisure first and work second The demonstration effect • Result of having seen others with desirable goods Job Prestige • The distinction between blue-collar workers and office employees Religion • Responsible for many of the attitudes and beliefs affecting human behavior – Work Ethic • Protestant work ethic – Duty to glorify God by hard work and the practice of thrift • Confucian work ethic – Drive toward hard work and thrift; similar to Protestant work ethic
Bangladesh is one of the largest Muslim countries in the world. About 80 percent of Bangladeshis are Muslims. Most Bangladeshi Muslims are Sunnis, but there is a small Shia community. Hinduism constitutes about 12 percent of the population. Hindus in Bangladesh in the 1990s were almost evenly distributed in all regions, with concentrations in Khulna, Jessore, Dinajpur, Faridpur, and Barisal. There are significant numbers of Buddhists and Christians in Bangladesh. In the Chittagong Hills, Buddhist tribes formed the majority of the population and their religion appeared to be a mixture of tribal cults and Buddhist doctrines. According to the 1981 census, there were approximately 600,000 Buddhists in Bangladesh, representing less than 1 percent of the population. In the 1990s, Christianity had about 600,000 adherents, mainly Roman Catholic, and their numbers were growing rapidly. Bangladesh also has a very small number of tribal community that obey a different type of religious beliefs. Material Culture Material Culture – All human-made objects – concerned with how people make things (technology) and – who makes what and why (economics) Language 29 •
Most of the Bangladeshi people speak in Bengali Translation – The ability to speak the language well does not eliminate the need for translator
Back Translation – To avoid translation problems • Japanese hotel: “You are invited to take advantage of the chambermaid.” • Bangkok dry cleaner: “Drop your trousers here for best results.” Language Issues Technical words do not exist in all languages Usually use English Many cultures avoid saying anything disagreeable
Understanding National Cultures
• Hofstede’s Dimensions of Culture • Individualism versus Collectivism • • • Large versus Small Power Distance Strong versus Weak Uncertainty Avoidance Masculinity versus Femininity
Individualism versus Collectivism • Collectivistic cultures – people belong to groups that are supposed to look after them in exchange for loyalty Individualistic cultures – People look after only themselves and the immediate family
Large versus Small Power Distance • Power distance – the extent to which members of a society accept the unequal distribution of power among individuals • In large-power-distance societies – employees believe their supervisors are right; employees do not take any initiative in making nonroutine decisions
Strong versus Weak Uncertainty Avoidance • Uncertainty avoidance – Degree to which members of a society feel threatened by ambiguity and are rule-oriented 30
Employees in high uncertainty-avoidance cultures tend to stay with their organizations • Japan, Greece, and Portugal Those from low uncertainty-avoidance nations are more mobile • United States, Singapore, and Denmark
Masculinity versus Femininity (Genderism/ Sexism) • the degree to which the dominant values in a society emphasize assertiveness, acquisition of money and status – Masculinity • achievement of visible and symbolic organizational rewards – Femininity • emphasize relationships, concern for others, and the overall quality of life
Political & Legal Factors affecting International Business in Bangladesh
Political and legal forces are law frames that an organization can or cannot perform. These political and legal forces have a dramatic impact on every business that operates. In the remaining phase of the assignment we look into some of the industries in Bangladesh and how these forces are impacting such industries.
Real Estate Industry
Impacts: Must obtain registration from the authorities concerned. Project designs should be approved. Tax has been imposed on complementary goods. Lack of initiative by not financing. Lack of monitoring which leads consumers to purchase in unfair prices. Corruption rate in these organizations is very high. Filling low lands forcefully. Take over lands forcefully. Extortion rate is high in these organizations.
Impacts: There have been minor corruptions in the telecom industry according 2 the report of Transparency international Bangladesh but still it has had a negative impact on the entire telecom industry as a whole. The regulatory body of the telecom sector is government influenced and as such there are increased fees, less competition, high costs and low quality service.
Government regulations do not allow telecom companies to reduce call rates according to their desires. Strict labor laws set by the govt. make it difficult for these industries to handle their labor department. Payments such as bribes might have to be made to govt. officials in order to implement certain changes in the industry. The Bangladesh govt. has made VOIP illegal so that they can monitor international calls through their own channels and gain more from the telecom providers. The Bangladesh Govt. is also not allowing new firms to invest in this sector and as such they are preventing more potential competition.
The Garment Industry
The inactions of the Govt. of Bangladesh has allowed massive violence in this sector. Govt. intervention in this sector is very noticeable. Strict Labor laws set up by the govt. makes it difficult to operate. Since there are no trade unions in the RMG sector, workers are often given shelter and guidance by political parties indirectly. The local political leaders get the opportunity to make influence and pressure on Employers. Export is hampered due to severe corruption at sea ports. Due to incorporation by government official problems are seen in introducing new products.
Country risk assessment
Political risk • Political Risk is an amorphous and vague term. • Relates to governmental and societal issues Political Risk may occur due to • Nationalization or expropriation of property • Civil disorder (anarchy, insurrection, etc.) • External relations (war, boycotts, etc.) • Currency Inconvertibility Micro Risks (your firm’s industry) Macro Risks (every ones industry) Difficulty distinguishing economic and political risk Pervasiveness • Macro polices o Fiscal policy, monetary policy, overall government regulation, etc. • Micro policies o Regulation of specific industries and specific transactions 32
Trade and foreign commerce o Caveat • Government as contractor Legitimate role of Government (economic) • Stability (protect civic order) • Legal system (enforce contracts) • Property rights • Individual (consumer) rights • Collective goods • Market failures (regulation of banking systems)
The legal system of Bangladesh is based on a common law system. However, unlike other common law jurisdictions, Bangladesh’s Supreme Court has the power to not only interpret laws made by the Parliament but also declare them null and void and enforce fundamental rights of the citizens. Although founded on the English common law system, the laws of Bangladesh take a statutory form which are enacted by the legislature and interpreted by the higher courts.
The Constitution of Bangladesh created the Supreme Court of Bangladesh with two divisions, the High Court Division and the Appellate Division. As the apex court, the High Court division has been vested with the power to hear appeals and revisions from subordinate courts and also to issue orders and directives in the nature of writs to enforce fundamental rights and to grant other relief available under the writ jurisdiction.
• • • • • • • Labour Courts decide labour disputes. Administrative Tribunals decide service disputes of public servants. Income Tax Appellate Tribunals decide income tax disputes, custom and excise matters. VAT Appellate Tribunals decide disputes regarding custom and excise duties and VAT. Court of Settlement decides disputes relating to abandoned properties. Artha Rin Adalats decide money claims of banks and other financial institutions. Insolvency Courts declare defaulting borrowers as insolvent.
Alternative Dispute Resolution
Civil Procedure Code (Amendment) 2002 The Civil Procedure Code (Amendment) Act 2002 has been enacted to introduce Alternative Dispute Resolution (ADR) system for early and consensual disposal of civil 33
suits. Section 89A and 89B have been inserted to allow parties to settle their disputes in suits through mediation or arbitration. Arbitration Arbitration is increasingly being employed as a means of getting around the judiciary and the length of time it can take to resolve cases. Arbitration in Bangladesh has proved to be a successful and efficient means of resolving disputes arising out of commercial matters. Businesses, especially those with foreign concerns, have now begun to write arbitration clauses into their standard contracts.
Double taxation can be avoided in case of foreign investors on the basis of bilateral agreements. Exemption of income tax up to 3 years for the expatriate employees in industries specified in the relevant schedule of Income Tax ordinance.
Bangladesh currently has 47 labor laws in force relating to wages and employment, trade union & industrial disputes, working environment and labor administration. The main labor laws are stated below: Workmen's Compensation Act 1923, Payment of Wages Act 1936 Maternity Benefit Act 1936 Employment of Labour (Standing Orders) Act 1965 Shops & Establishments Act 1965 Factories Act 1965 Industrial Relations Ordinance 1969
Labor factors affecting International business of Bangladesh
International Business is when corporations conduct business within in the global market. In order to be successful, international business requires a great deal of strategy. It is important to understand not only the political, cultural, monetary aspects but also the basics of labor forces and how they influence international business.
Labor quality is an essential component to consider. Prior to finalizing business contracts and moving to expansion, the labor force should be analyzed in order to determine whether the right skill levels are available to profitable conduct business. There are several factors that influence the quality of labor such as education, experience
and proficiency. There are also factors that affect the price of labor for example larger supplies of labor, lower demand for labor, lack of labor unions and lack of governmental rules & regulation.
The same factors that affect the quality of labor also affect the quality of labor. Factors such as capability, creativity, managerial skills, knowledge, ability to learn new things and adaptability to changing environment must be considered while hiring candidates.
Labor mobility “consists of changes in the location of workers both across physical space (geographic mobility) and across a set of jobs (occupational mobility).” Labor mobility allows the workers to improve economic conditions if where they live is not a match for their skill.
Minorities and or traditional societies are another important group to consider. This group is defined as “a relatively smaller number of people identified by race, religion, or national origin who live among a larger majority.” An advantage for to hiring minorities in a foreign country would be the immediate availability of labor. A disadvantage would be discrimination as they may be viewed as inferior to the majority.
Labor market is the market in which there are many different firms. The pool of available potential employees with the necessary skills within commuting distance from an employer A company must study the labor market when considering whether to invest in a country Sources include Foreign Labor Trends Handbook of Labor Statistics Yearbook of Labor Statistics
International Labor Trends
Aging of population In most gerontological literature, people above 60 years of age are considered as 'old' and taken to be the 'elderly' segment of the population of a country. In last two decades, Bangladesh has been experiencing two transformations and has passed through two demographic changes. They are firstly, the rapid population growth
in urban areas and secondly, the demographic transition having lower fertility with higher longevity. Rapid growth of urbanization and the growth of population in urban areas are mostly occurred due to rural-urban migration. In this process of rural-urban migration, mostly young and young adults are prone to migrate, leaving aged people behind, causing more aged people in rural areas. This is in conformity with the situation faced by many developing countries of the world. Life expectancy at birth rose steadily and in the Economic Review of 2005, published during last budget had reached nearly 65.4 years for females and 64.5 for males, and the average is 64.9 years. While the retirement age from a government position is 57 and from the private sector 60 years old, "formal retirement" is not an option for poor older people in Bangladesh, as they must work to survive. The majority of poor older people, both men and women either work or have worked in the non-formal sector and do not "retire" until they are no longer physically capable of working. In our country, population above the age of sixty has reached over 7.2 million. The life expectancy is increasing on account of improved health services education and technology. The ageing is also becoming a subject of concern for the national planners dealing with socio-economic programs. Rural to Urban shift Rapid growth of rural-urban migration might be related with the unchanging fertility in urban area. Although, Bangladesh is predominantly rural country, in recent years is has experienced rapid urbanization .In 1974, only 9 percent of the population was urbanized, which increased to 23 percent in 2001.Have one of the highest rate of growth of urban population: 5.6 percent Rural-Urban Migration in Bangladesh. Increased number of garment industries in urban areas adds a new dimension not only in the economy of the country but also urbanization process. Rural poor migrate to urban area in search of employment and income .Unplanned urbanization mushrooming slums and squatters. This pattern of rural-urban migration may have implication for contraceptive as well as fertility. Unemployment Unemployment is a great concern in Bangladesh. Every year hundreds of thousands student are coming out from college and university. Though it is one of the major responsibilities of the Government to provide job to those young generation but the Government is failed to meet the job demand among the large population. Only a tiny fraction of total jobless is managed by different government offices and private organization but a majority remain unemployed. Bangladesh is ranked 172 in unemployment rate in the world. Child Labor In 2002 - 03, the Bangladesh Bureau of Statistics (BBS) conducted the second National Child Labor Survey (NCLS). According to the survey, there are 4.9 million
working children— 14.2 per cent of the total 35.06 million children in the age group of 514 years. The total working child population between 5 and 17 years old is estimated at 7.9 million.
• • •
The proportion of boy and girl child workers, in the age group of 5-17 years, is 73.5 per cent and 26.5 per cent, respectively; The total number of working children aged 5-17 years in rural areas is estimated at 6.4 million as against 1.5 million in urban areas; As many as 93.3 per cent of all working children in the age group of 5-17 years operate in the informal sector. Agriculture engages 4.5 million (56.4 per cent children), while the services sector engages 2 million (25.9 per cent), and industry, 1.4 million (17.7 per cent); A total of 1.3 million children are estimated to be working 43 hours or more per week. More boys than girls are engaged in this form of child labour across all age groups.
Forced labor Millions of people in Bangladesh are still subjected to forced labor. Detailed figures are not available, but it is estimated that nowadays slavery is more widespread than at any previous time in history. The universal condemnation of forced labor has not been able to impede the emergence of its modern forms, like trafficking in human beings, the fastest growing manifestation of forced labor affecting up to four million people in 2001 .Furthermore, traditional forms of forced labor such as chattel slavery and bonded labor are still widespread. The number of bonded laborers alone has been estimated at 20 million persons, documenting the significance of the problem. Nevertheless, the existence of forced labor is still denied by some states and making use of it is too often exempted from punishment. Hence, in spite of indisputable progress made by many states, especially by enacting adequate legislation to fight forced labor, the effective elimination of forced labor remains far away. Sexism Women workers in Bangladesh can be characterized as young, and mainly single, although some of them are divorced, abandoned, or married. They provide a flexible supply of labor and work in low-paying jobs for long hours both at the workplace and at home. In rural areas, 83 percent of the employed women aged 15 years and over were engaged as unpaid helpers (BBS 1996). This is mainly due to rising labor costs in nonfarm activities. Women's increased participation, over time, is in manufacturing and agriculture rather than in personal services and household activities. However, female agricultural activities are mostly concentrated in post harvesting and livestock rearing, which have relatively lower returns than other activities. Brain Drain Business leaders noted that scientists and engineers are not available as were needed in view of growing demand emanating from industrial and commercial activities in the country. More importantly, country’s potential skilled people are increasingly
migrating to other places for better wage and living standards. As a result, businesses are suffering from lack of skilled personnel.
Physical & environmental factors affecting International Business of Bangladesh
Topographically Bangladesh may be divided into alluvial plains and hilly areas. More than 90 percent of the total area of Bangladesh is low land, an alluvial plain formed by the sediments of the several great rivers and their tributaries and distributaries which traverse the country. There are, however, some local variations in the nature and extent of the plain land. Low hills are found in the north-eastern extremities of Bangladesh, east of Comilla. These are part or extension of the Khasia-Garo-Jainta and the Tippera Hills of India. But the more important hilly areas arc concentrated in the Chittagong hill districts which are geologically the offshoots of the Arakan Yoma running through Eastern India to Burma. The Chittagong Hills are steep sloped parallel ranges, largely covered with tropical forests. These Hills rise steeply to narrow ridge lines, generally no wider than 120 feet and no higher than 2000 to 3000 feet. The highest hill in Bangladesh is Keokradang (4,034 feet) in the south-east end of Bandarban district.
Bangladesh has a tropical monsoon climate characterized by wide seasonal variations in rainfall, high temperatures, and high humidity. Regional climatic differences in this flat country are minor. Three seasons are generally recognized: a hot, muggy summer from March to June; a hot, humid and rainy monsoon season from June to November; and a warm-hot, dry winter from December to February. In general, maximum summer temperatures range between 38 and 41 °C (100.4 and 105.8 °F). April is the hottest month in most parts of the country. January is the coolest (but still hot) month, when the average temperature for most of the country is 16–20 °C (61–68 °F) during the day and around 10 °C (50 °F) at night.
Natural resources are most important for a country. There are many countries which are directly depends on natural resources. Bangladesh is a developing country. Area of Bangl adesh is small. We have also some natural resources. Some are renewable and some are n on-renewable. Water Resources
Water is the available renewable natural resources of Bangladesh. Bangladesh is endowed with plenty of surface and groundwater resources. The surface water resources comprise water available from flowing rivers and static water bodies as ponds, beels and haors. Surface water inflows of the country vary from a maximum of about 140,000 m3/s in August to a minimum of about 7,000 m3/s in February. Two main rivers, the brahmaputra and the ganges account for more than 80% of stream flows. Forest Resources The Forest is another renewable natural resources of Bangladesh. There are 16% o f total land are forest area of Bangladesh. Forest type Based on their ecological characters, the forests of Bangladesh can be divided into 1. Tropical wet evergreen, 2. Tropical semi-evergreen, 3. Tropical moist deciduous, 4. Tidal, and 5. planted forests.
Oil and gas There are 22 discovered gas fields in Bangladesh of various sizes. The total re serve of 20 gas fields is about 26 Tcf (trillion cubic feet). Gas in most of the fields is dry, in a few fields it is wet, with considerable amounts of CONDENSATE, eg at Beanibazar (16 bbl/mmcfg), Jalalabad (15 bbl/mmcfg), and Kailashtila (13 bbl/mmcfg). Currently, natural gas accounts for more than 70% of the total commercial energy consumption and the major part of the future energy demand would be met from it. Power sector ranks the highest (44%); fertiliser sector ranks the second (28%); and industry, domestic, commerci al and other sectors together rank third (22%) in gas consumption. Currently 12 gas fields under public and private sectors are in production with gas supply between 900 and 930 mmcfg per day.
Coal Coal first discovered in the country by Geological Survey of Pakistan (GSP) in 1959 was at great depth. GEOLOGICAL SURVEY OF BANGLADESH (GSB) continued its efforts for exploration that resulted in the discovery of 4 coalfields. BHP Minerals, a US-Australian company, discovered a field in 1997totaling 5 coalfields. All the discovered fields lie in the northwestern part of the county. Details of the Coal fields and quality of the coal are shown below The development of underground Barapukuria Coal Mine, one of the five fields, started in June 1996, which was scheduled to be completed in May 200l, but due to some changes in mine design it will take some moretime. Exploitable coal reserve of
Barapukuriais 64 million ton and annual production has been estimated to be I million ton . A power station will be set up with a capacity of 300MW using this coal.
Nuclear power Conventional nuclear: developed nations are rethinking about nuclear power; fuel availability initial high investment, waste disposal, safety, long construction time and high decommissioning cost are major concern but if overall per unit cost is competitive with coal and safety is ensured nuclear should be considered as one of the fuel options. Fourth Generation Nuclear Power: Gas cooled pebble-bed technology, highly safe, modular (20/40/80 MW), less construction time, reasonable cost but still in the developing stage; May be a prospective candidate for future power generation.
Bangladesh is endowed with plentiful supply of renewable sources of energy. Out of various renewable sources solar, biomass, peat, and hydro-power can be effectively used in Bangladesh (Government of Bangladesh, 1991). Renewable energy practices in Bangladesh are · Solar Energy · Wind Energy · Biomass Energy · Hydro-power energy . Biogas . Wave and Tidal Solar Energy Solar photovoltaic: Solar photovoltaic (PV) systems are in use throughout the country with over 200,000 household-level installations having capacity of about 12 MW (June 2008). Scaling-up of solar PV systems assisted by the development partners are being implemented through the Rural Electrification Board (REB), Local Government Engineering Department (LGED), Bangladesh Power Development Board (BPDB) and other agencies implementing solar energy program. Renewable Energy Research Centre of the University of Dhaka has installed a model 1.1kW grid connected photovoltaic system. There is a strong potential for solar energy within the country. Solar Thermal Power/Concentrating Solar Power (CSP): The technology involves harnessing solar radiation for generation of electricity through a number of steps finally generating mechanical energy to run a generator. This technology needs to be disseminated in the country to supplement the power supply. Wind Energy
Wind Energy has also made some inroads but its potential is mainly limited to coastal areas, and offshore islands with strong wind regimes. These coastal settings afford good opportunities for wind-powered pumping and electricity generation. Presently there are 2 MW of installed wind turbines at Feni and Kutubdia. Biomass Bangladesh has strong potential for biomass gasification based electricity. More common biomass resources available in the country are rice husk, crop residue, wood, jute stick, animal waste, municipal waste, sugarcane bagasse etc. This technology can be disseminated on a larger scale for electricity generation. Biogas Biogas mainly from animal and municipal wastes may be one of the promising renewable energy resources for Bangladesh. Presently there are tens of thousands of households and village-level biogas plants in place throughout the country. It is a potential source to harness basic biogas technology for cooking, and rural and peri-urban electrification to provide electricity during periods of power shortfalls. Hydro Microhydro and minihydro have limited potential in Bangladesh, with the exception of Chittagong and the Chittagong Hill tracts. Hydropower assessments have identified some possible sites from 10 kW to 5 MW but no appreciable capacity has yet been installed. There is one hydro power plant at Kaptai established in the 1960s with installed capacity of 230 MW. Wave Wave in the Bay: 2 - 3 m Potential of wave power: minimum 100 MW Tidal • Average tidal range near the coast: 4 - 5 m • Potential: not estimated
Barriers for Sustainability of Alternative Energy Technology
1. 2. 3. 4. 5. 6. High initial cost Dependence on the weather Lack of awareness Lack of established high-volume supplier-dealer chains. High prices of the components. Lack of fund.
Problems of International Business in Bangladesh
∗ Lack of consistency and continuity of Policies 41
∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗ ∗
Lack of care for the existing foreign investors Lack of industrial development policy Poor coordination among the concerned agencies Pressure from the politicians Absence of the mechanism for solving commercial disputes Corruption Slow processing of official matters Delay in issuing work permits Delay in issuing multiple entry visa Customs clearance Immigration procedure at the airport Delay in the settlement of L/C Payment Insufficient electricity Poor telecommunication, often disconnected Not enough gas supply & pressure Not enough water supply, especially in Chittagong EPZ Chittagong Port is not efficient Roads are not good enough Holidays do not match with the world Labor Union too politically involved Hartal is detrimental to all economic activities Non-availability of statistics Law & Order Situation (Security) Lack of innovation in the ICT sector Migration of potentially skilled people for better wage & living standard
∗ Threat of terrorism ∗ Judicial system in the country is heavily influenced by political interference ∗ Gender discrimination in the context of wages in the workplace, and arbitrary
determination of wages by individual companies are still continuing
Solutions to these problems
Quality of bureaucracy and governance: Appropriate reform measures are needed in the country's administrative system. The bureaucracy needs reorganization in order to bring about a perceptible improvement in its efficiency and productivity. Bureaucratic control and interference in business and investment activities should be minimized on a priority basis. Improvement of law and order situation: Law and order situation needs to be improved through appropriate reforms in law enforcement and introducing other measures. A social consensus is needed to establish the rule of law, avoid political confrontation, and reduce corruption.
Development of infrastructure and human resources: Both the government and private sector need to come forward to invest in infrastructure development. For the purpose, appropriate policies are needed such that the private sector can smoothly operate in providing infrastructure services. Similarly, both public and private universities should come forward in introducing courses/programs that produce graduates with technical and management skills required in modern industrial and other activities. In this context, if the government and the private sector work together to implement effective economic reforms in a successful manner, Bangladesh stands a good chance of being able to participate in the prosperity and growth that are sweeping the rest of Asia. Improvement of port services: Despite recent improvements, the efficiency of port services can be further improved through appropriate measures. Similarly, the custom clearance procedures can be further simplified along with improvement in physical facilities and reforms in the labor management system. Privatization and further reforms: The privatization program of the state owned enterprises needs to be geared up that would stimulate domestic and foreign investments. Several financial institutions and some of the public utilities may be privatized in order to ensure better and more efficient services. The policies should encourage private sector participation in several key sectors like agricultural processing, manufacturing, infrastructure including transportation, telecommunication, power, port, and in the production of high value added products. Modernization of business law: It is important for Bangladesh to modernize and revamp all laws relating to business and investment keeping in view the international practices and requirements of globalization. Setting up of industrial parks: The development of new industrial parks can help in creating a favorable environment of foreign investment. The availability of ready infrastructure along with secure and enabling investment climate can act as a powerful catalyst in attracting foreign investors for investment in profitable ventures. Setting up of new EPZs: The government may come up with a phased program of setting up new EPZs in order to extend facilities to export oriented investors. The private sector may also be encouraged to set up new EPZs. Improving the country’s image abroad: Positive developments regarding the country’s economy, society, and future prospects, including the hospitable investment climate existing in the country and the facilities available to foreign investors, should be projected abroad in an effective manner, especially among the potential investors. Such ‘image building’ efforts would be crucial to dispel the negative images that have persisted for long and discouraged the investors to come forward. In addition to the above, maintaining consistency in policies and actions is important so that no ‘wrong signal’ is conveyed to the investors.
Policies regarding macroeconomic stability: The government should implement appropriate policies to ensure macroeconomic stability in a sustained manner, foster growth promoting and growth accommodating policies, and undertake further actions to reduce poverty at a faster rate. Bangladesh has already achieved 8notable success in this regard and achievements in both economic and social development should be actively publicized abroad to promote a positive image of the country among the prospective foreign investors. Economic and commercial diplomacy: Strengthening economic and commercial diplomacy is a key factor in attracting FDI in the present world characterized by rapid globalization and increasing competition. In this respect, improved bilateral relations with potential investor countries can act as a catalyst to increasing FDI inflows to Bangladesh. Moreover, it is important not only to improve relations with countries that have already invested in Bangladesh, but also to identify potential investors in other countries and undertake appropriate measures to attract them to invest in the country.
The overall perception in terms of administrative inefficiency and ineffectiveness of national parliament continued to remain overwhelmingly negative. Overall composition of public spending is wasteful. The situation as regards grafts has further deteriorated, so has been the case with illegal payments to influence government policies, laws, regulations, and diversion of public funds to favored companies. ∗ Government has to develop the country’s industrial policy ∗ Significant improvements are required in the case of credit distribution system, availability of venture capital, financial auditing and reporting standards, etc. ∗ Government should take appropriate policies and budgetary measures to develop clusters, and ensure technical support to improve quality of products to be competitive in the international market. ∗ For effectiveness of financial services and its openness, the government needs to streamline regulations, accelerate service delivery, and reduce the scope of informal payments. ∗ Money laundering situation has to be improved by strict monitoring mechanism followed by the central bank ∗ By facilitating automation in public institutions, the discretionary exercise of authority by government officials and potential for unofficial costs can be reduced significantly. ∗ Government should promote the use of ICT starting from the school level to the higher administrative level ∗ The use of on-line procedures for government services can reduce bureaucratic delays and discretion, as well as increase speed and consistency of service. ∗ Government should immediately separate the judiciary from the executive, simplifies procedures, and introduces effective mechanisms to ensure transparency and accountability of the judiciary.
∗ Government & other political parties need to assure that there should not be any hartal activity as their political action. Because it totally deteriorates the economical activity on that specific day. ∗ Government need to develop its electricity situation. There should be alternative source of fuel such as natural gas which is used to make electricity. Since the amount of gas is decreasing day by day so the government should use coal, solar energy, hydroelectric energy, atomic energy as alternative source of gas used for producing electricity. ∗ In case of threat of terrorism government needs to improve the security system & the DB police & the NSI people need to be more alert so that the terrorist can’t fulfill their mission. By doing so government can create a positive image toward the foreign investors, which will inspire them to invest. ∗ Companies have developed a number of techniques for managing the risk of terrorism, including developing a benevolent image through charitable contributions to the local community; minimizing publicity in host countries; maintaining a low profile; putting together teams to monitor patterns of terrorism around the world; and increasing security measures abroad. ∗ Government has to ensure effective operationalisation of the Anti- Corruption Commission, sets up an ombudsman agency and implements and monitors governance-related indicators. ∗ The holiday needs to be shifted from Friday to Sunday. But it is to be kept in mind that there should be at least one & half hour break for prayer from 12.30 pm to 2.00 pm on Friday. Otherwise it will create a negative image among the people since most of the people belong to Islam religion. ∗ The infrastructure facility of other sea port situated in Mongla needs to be developed so that the load on Chittagong port is diversified. ∗ Road facilities need to be developed ∗ Bangladesh has the potential to use intra-regional waterways by developing IndiaBangladesh common waterways, which would open scope for transporting at a very low cost. ∗ Government intervention in trade can be used as part of a "get tough" policy to open foreign markets. By taking, or threatening to take, specific actions, other countries may remove trade barriers. But when threatened governments don’t back down, tensions can escalate and new trade barriers may be enacted. ∗ Concern over human rights in other countries plays an important role in foreign policy. Governments sometimes use trade policy to improve the human rights policies of trading partners. Governments also use trade policies to put pressure on governments to make other changes. Unless a large number of countries choose to take such action, however, it is unlikely to prove successful.
∗ Strategic trade policy suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages.
∗ Strategic trade policy also suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage.
Company operations and strategy are below the average standard, this adversely affects their competitiveness in the global market. However, companies are increasingly developing their operational strategy because of intense pressure from the global business players. Instead of traditional comparative advantage in natural resources, low cost labor, companies are trying to focus more on market access, diversification of export, improvement of marketing system, and efficient management system, etc. ∗ Companies have developed a number of techniques for managing the risk of terrorism, including developing a benevolent image through charitable contributions to the local community; minimizing publicity in host countries; maintaining a low profile; putting together teams to monitor patterns of terrorism around the world; and increasing security measures abroad. ∗ Major factors that contribute to competitiveness in the international markets are low cost labor and natural resources. Production processes primarily use labor intensive methods. Ownership and control is slowly but increasingly shifting from foreign companies towards local companies. In terms of corporate governance, there is a lack of accountability of management to the investors and Boards of Directors. Recruitment process has improved, instead of recruiting relatives, senior management positions are being filled up by qualified personnel. Companies are gradually becoming responsive to customers and the need for customer retention. In order to improve the corporate governance, Security and Exchange Commission (SEC) needs to set new regulations for all listed companies and regularly monitor the practices followed by these companies. ∗ Businessmen considered that complying with environmental standards significantly reduced competitiveness in the country. Companies were increasingly considering cleaner production, material flow management, waste reduction, recycling and life cycle management as important factors. These would have positive impact on business competitiveness in the global market. ∗ Access to such services as payment of personal tax, car registration, passport, business permit and e-procurement online would substantially reduce transaction cost and other undocumented costs that are currently borne by businessmen. ∗ Effort should be made to enhance wages, but should also be based on performance. ∗ Significant improvements are required in the case of credit distribution system, availability of venture capital, financial auditing and reporting standards, etc. ∗ Companies need to focus more on corporate governance in order to establish a strong footing in the local market at a time when international orientation of local businesses is becoming increasingly necessary. ∗ Companies need to focus more on market access, diversification of export, improvement of marketing system, and efficient management system. ∗ Public investment in infrastructure development should be of highest priority. Development of domestic infrastructure of the country should be properly linked with regional transport network in order to reap the benefit of enhanced intraregional investment and trade. Public-private partnership would also facilitate establishment of improved transport network in the country. 46
∗ Human resources management and compensation practices in the public sector
should be modernized
The following table provides an overview of the sectors in which the government is seeking foreign direct investment for both domestic and export market oriented industries to make up for the deficient economic investment resources. Natural Gas Exploration (Electricity, Fertilizer and Petro-chemicals) • Bangladesh has a substantial gas reserve of about 20 trillion cubic feet (tcf) • Opportunities exist in developing new plants (barge-mounted and other, large, small and mini), constructing transmission and distribution system, rehabilitating or upgrading existing plants and supplying a variety of support services. Investment opportunities are available on a build-operate-transfer (BOT) basis. The fastest growing industry in Bangladesh with Ready -made Garments (RMG) accounting for more than 75% of total exports. Bangladesh is best placed in the region for textiles and garments because of cheap labor and trade status with the EU. Government incentives for the spinning and weaving industries include a 15% cash subsidy of the fabric cost to exporters sourcing fabrics locally. • Manufacturing of semi-conductors could be established as a potential cottage industry. • Bangladesh is going to be the largest cell-phone market in South Asia. • Investment is mostly confined to information processing. • Bangladesh has a cheaper and rapidly growing IT workforce. • Fish and prawn exports grew at an average 20% in the past decade. • Shrimp processing and export industry is largely dominated by the smaller unorganized sector. • The frozen foods export is the second largest export sector of the country. The average annual growth rate is about 28%. This export-oriented industry 47
Electronics (SemiConductor, Cell Phone Assembly and other Electronics) Information Technology (Data Processing and Software Development) Frozen Foods (Shrimp Farming; Shrimp and prawn exports)
o o o o Leather (Finished Leather and Leather Goods)
Ceramics (Tableware, Sanitary ware and Insulator)
Light Engineering (Machinery Parts and Consumer Items)
Agro-Based Industry (Canned Juice / Fruit and Dairy and Poultry)
includes the following sub-sectors which need proper attention for augmentation of production and export earnings: Hatcheries Sustainable aqua-culture technology Feed meals plants Processing unit for value-added products • Bangladesh has a domestic supply of good quality raw material, as hide and skins are a by -product of large livestock industry. • Adequate government support in the form of tax holidays, duty free imports of raw materials and machinery for 11 export-oriented leather market • Presently Bangladesh produces between 2 and 3 percent of the world's leather market. • Most of the livestock base for this production is domestic which is estimated as comprising 1.8 percent of the world's cattle stock and 3.7 percent of the goat stock. • Tableware industry is labor-intensive and even after spending billions of dollars on automation, developed countries could not reduce the number of workforce. • Bangladesh has a skilled manpower in ceramic industry and the clean gas reserve required for firing is a great competitive advantage for Bangladesh. • Bangladesh, being a gas-rich and low-labor-cost economy, offers to be strategic partners in production and supply of ceramic products. • A growing and increasingly affluent middle class indicates demand for consumer durables. • There is a significant sector of cottage industries engaged in simple electronic goods. • Export-oriented production in light industries has gained momentum in the past few years. • Bangladesh has the basic attributes for successful agro-based industries, namely, rich alluvial soil, a year-round frost- free environment, an adequate water supply and an abundance of cheap labor. • Increased cultivation of vegetables, spices and tropical fruits now grown in Bangladesh could supply raw materials to local agro-processing industries for both domestic and export markets.
Place of Business Foreign companies not registered in Bangladesh can set up a place of business in Bangladesh in the form of a Branch Office or a Liaison Office. Permission will be required from the Bangladesh Bank and the BOI in order to open up a Branch Office or a Liaison Office. Foreign Investment Foreign investors may set up an industrial entity which is wholly owned or set up in collaboration with local investors. There is no requirement to obtain prior permission to set up such enterprises if the entrepreneurs use their own funds. Registration of Foreign Direct Investment Although prior permission is not required, it is advised that a business entity is registered in order to benefit from various facilities and institutional support provided by the government, entrepreneurs and sponsors. EPZ or Industrial Estate If the business is to be set up in an EPZ or industrial estate registration must take place with BEPZA or Bangladesh Small Cottage and Industry Corporation (BSCIC). Any other Businesses If the business is to be set up elsewhere, it must register with the BOI. Manufacturing Firm A manufacturing firm employing ten or more workers must also register with the Chief Inspector of Factories and Establishments. Businesses Requiring Pre -Registration Clearance A Pre- Registration Clearance is required for investment in the following areas as FDIs are discouraged in these areas: a) Ready-made garments b) Banks c) Insurance companies d) Other financial institutions Environmental Regulations All industrial and other projects that may be potentially polluting are required, in accordance with the Environment Conservation Act 1995, to undertake some form of environmental impact assessment. Environmental Clearance
Environmental clearance must be obtained from the Department of Environment. The process takes 15 days for projects with low levels of potentially adverse impact and 30 days for projects with significant impact. Zonal Restrictions There are no regional or zonal restrictions on investment. Investors can set up businesses in any part of the country except in the areas reserved for the armed forces or declared environmental preserves (e.g., the mangrove forests in the Sunderbans).The availability of investment incentives including tariff concessions and tax -holiday periods varies according to location, with the less developed regions providing the best offers. Building and Related Permits A foreign investor will receive assistance to acquire buildings and industrial plots depending on the nature of the business. • • Businesses in the Export Processing Zones (EPZ) Investors can rent custom-made premises within the EPZs.
• Investors need to have the designs of their buildings approved by the city development authorities. • Businesses outside the EPZs
Investors requiring industrial plots to set up factories in areas outside of the BEPZA zones and BSCIC estates may approach the BOI for assistance. BOI requirements for providing assistance are as follows: The company must be registered The Company must have an industrial lay -out plan to justify actual requirements. Labor legislation, relation & supply o Workforce
Bangladesh offers an abundant supply of disciplined, easily trainable and lowcost work force suitable for any labor- intensive industry. Furthermore, there is an increasing supply of professionals, technologists and other middle and low level skilled workers who have received technical training from universities, colleges, technical training centers and polytechnic institutions.
Minimum Age The minimum age for workers in Bangladesh is 16 years in factories and establishments. Contracts 50
Contracts are made in the form of a letter of offer but workers may also be engaged on verbal agreements. ILO Convention Bangladesh is a member to ILO and both the private and public sectors are encouraged to observe the principles so enunciated in the ILO Convention and Recommendations.
Bangladesh currently has 47 labor laws in force relating to wages and employment, trade union & industrial disputes, working environment and labor administration. The main labor laws are stated below: • Workmen's Compensation Act 1923, Payment of Wages Act 1936 Maternity Benefit Act 1936 Employment of Labour (Standing Orders) Act 1965 Shops & Establishments Act 1965 Factories Act 1965 Industrial Relations Ordinance 1969 Wages and Fringe Benefits
Wages and fringe benefits are determined in accordance with the nature of the work and whether it is in the private or the public sector. • Public Sector
In the public sector, wages and fringe benefits of the workers are determined by the government on the recommendation of the National Wages Commission. • Private Sector
In the private sector, wages and fringe benefits of the workers and employees are determined through collective bargaining process. Sometimes private industries follow the public sector wages and salary structure for their employees.
Leave & Holidays
Leave and holidays of the workers & employees are regulated by the Factories Act 1965 and Shops Establishment Act 1965. • Social Security
Workmen Compensation, Maternity Benefit (Tea Estate) Act 1950, Maternity Benefit Act 1939, Employment of Labour (standing orders) Act 1965 deal with provident fund and gratuity.
Labor Union 51
Industrial Relations Ordinance 1969 deals with trade unions in Bangladesh.
Right to Form an Association
Industrial Relations Ordinance 1969 provides that any worker has the right to form an association/union without previous authorization. However, such an association/union can only function as a trade union if registered under the law. • Formation
In any industrial and commercial establishment, a trade union may be formed with 30% of the total number of workers employed. • Disputes
Only the Collective Bargaining Agent is authorized to raise industrial disputes and negotiate with management • Working Hours • Hours 48 hour working week (8 ½ hours daily) and Friday as weekly holiday. • Overtime
Work in excess of 48 hours is paid as overtime. The rate of overtime is double so an hour of overtime work would require the pay of 2 hours work. • Taxation
Similar to other countries in South Asia, Bangladesh has a narrow tax base and the revenue is generated mainly from indirect taxes. Income Tax There are three income-tax rates, applicable to income above Tk 100,000 • 0% on the first TK 100,000 • 10% on the next TK 50,000 • 18% on the next Tk 125,000; • 25% on the balance Corporate Tax
The corporate tax rate is 35 per cent for publicly traded companies and 40 per cent for all other companies. Corporate tax rates are competitive within the region. Capital Gains Tax
Capital Gains from the transfer of shares of public limited companies listed with a stock exchange are tax-exempt. In computing capital gain, deductions are made from the full value or sales proceeds or the fair market price (whichever is higher) of the capital 52
assets. • VAT
Bangladesh has replaced the sales and excise tax by the more modern value added tax (VAT). The VAT is imposed at a flat rate of 15 per cent. Excise duties do exist on a few items and a turnover tax may be imposed on small-scale activities which cannot be taxed through the VAT. • Salaries of foreign technicians
Salaries of foreign technicians are tax exempt for a period of 3 years from the date of their arrival in Bangladesh provided their salaries are for services stipulated under a contract approved by the National Board of Revenue. A technician in this context is a person with specialized knowledge and experience in the industrial arts and sciences. • Nationality of Employee
All nationalities, except for Israeli citizens will be permitted to undertake employment in Bangladesh. • Minimum Age of Foreign Employee
Persons below 18 years of age are not eligible for employment. • Local Experts not Available
Employment of foreign nationals is normally considered for jobs in which local experts/technicians are not available. • Decision made by the Board of Directors
The work permit application must include the decision of the Board of Directors to take on new employees. • Maximum number of Foreign Employees
Number of foreign employees should not exceed 15% of the total employees including top management personnel. • Duration of Employment
Initially employment of any foreign national is considered for a term of 2 years which could then be extended on the basis of merit of the case • Security Clearance
Security clearance must be obtained from the Ministry of Home Affairs.