UNIVERSITY OF DHAKA

DEPARTMENT OF INTERNATIONAL BUSINESS

Course Name: International Investment & Financial Market

Course Code: IB-513

Assignment On “Trends, Obstacles & Remedies of Foreign Investment”

Submitted To
Asmina Akter
Lecturer
Department of International Business
University of Dhaka

Submitted By
MD. Rafiquel Islam
ID:1072

Date of Submission: 30/04/2021

 Abstract
This assignment explores the historical performance of Bangladesh in regards to foreign
investment inflow by sorting out the foreign investment inflow data of the last two decades. The
paper also provides an overall trend and a sector-wise analysis of foreign investments in
Bangladesh. This work aims to try and understand the trends and driving forces that compels
countries to invest in Bangladesh and theorize what might be the causes that are barring them
from doing more so. Ultimately some remedies for those predicaments have been provided. This
paper hopes to give the readers a decent understanding of how Bangladesh as a whole is doing
when it comes to attracting foreign investments and various aspects related to that.
 Table of Contents

1. Introduction...............................................................................................1
2. Historical Data on Foreign Investment Inflows........................................2
3. Foreign Investment Inflow by Sectors......................................................3
4. General Trend Evaluation.........................................................................5
5. Sector Wise Trend Evaluation..................................................................7
6. Obstacles to Foreign Investment Inflow...................................................8
7. Ways to Increase Foreign Investments....................................................11
8. Conclusion..............................................................................................13
9. Data Source and References...................................................................14
 Introduction
The role of investments, particularly foreign direct investment (FDI) and foreign portfolios (FPI),
is regarded as some of the most important contributors to economic growth. The past quarter-
century has witnessed a remarkable increase in foreign investment flows all over the world. This
is because many countries, especially developing countries, see foreign investments as an
essential element in their overall strategy for economic development.

Foreign Direct Investment (FDI) is the investment of funds by an organization from one country
into another to establish lasting interest. Reinvestment of profits from overseas operations and
intra-organizational loans and borrowings to overseas subsidiaries are also categorized as FDI.
The meaning of FDI is not restricted only to the international movement of capital. Its definition
also encompasses the global movement of elements that are complementary to capital, such as
skills, processes, management, technology, etc.

There is a difference between FDI and FPI, wherein the investor purchases equity of foreign
companies. FPI means only equity infusion and does not imply the establishment of lasting
interest.

FDI can be Greenfield, wherein an organization creates a subsidiary concern in another country
and builds its business operations there from the ground up. Alternatively, FDI can be a
brownfield where an organization expands through cross-border mergers, acquisitions, and joint
ventures by either leasing or purchasing existing facilities for its production.

The Bangladesh government has actively sought to attract foreign investment, particularly in
energy and infrastructure. Many incentives have been implemented through industrial policy,
growth strategy through exports, and a public-private partnership program. The Government
seeks to develop specific sectors by granting companies involved in these areas incentives and
favorable conditions. These include agricultural and agro-industrial products, light engineering,
leather footwear, leather goods, pharmaceuticals, software, ICT products, and shipbuilding. As a
developing country, foreign investments are vital for the economic growth of Bangladesh, and
the recent slumps in foreign investment inflow are a matter of concern.

1
Historical Data on Foreign Investment Inflows of BD (Net) in Millions
USD

Period Equity Capital Reinvested Intra-Company Total Inflows

Earnings Loans
1999-00 152.98 80.71 149.53 383.22
2000-01 372.27 81.00 110.66 563.93
2001-02 230.11 84.66 86.16 400.93
2002-03 163.98 164.97 50.23 379.18
2003-04 111.23 161.38 11.55 284.16
2004-05 361.14 297.11 145.53 803.78
2005-06 447.22 198.64 98.75 744.61
2006-07 464.50 281.00 47.24 792.74
2007-08 545.69 197.71 25.29 768.69
2008-09 535.42 336.61 88.56 960.59
2009-10 515.14 331.10 66.78 913.02
2010-11 249.95 445.19 83.90 779.04
2011-12 454.10 542.35 198.43 1194.88
2012-13 761.03 645.64 323.96 1730.63
2012-14 233.84 795.78 450.72 1480.34
2014-15 528.03 1141.34 164.50 1833.87
2015-16 505.55 1154.45 343.53 2003.53
2016-17 1006.74 1253.00 195.07 2454.81
2017-18 614.76 1253.44 712.24 2580.44
2018-19 1195.20 1363.46 1330.33 3888.99
 Foreign Investment Inflow by in BD Sectors in Million
USD
Period Agriculture Mining Power, Gas Manufacturing Construction Trade & Transport, Services Others
and fishing and & Commerce Storage &
Quarrying Petroleum Communication
1999-00 2.88 - 106.57 225.79 - 44.12 0.47 3.32 0.07

2000-01 15.72 - 313.78 183.95 - 35.25 5.40 9.83 -

2001-02 0.95 - 176.12 143.99 - 55.30 20.71 3.86 -

2002-03 2.41 - 58.07 196.22 - 49.24 61.74 11.50 -

2003-04 4.11 - 87.44 90.94 - 55.31 43.76 2.60 -

2004-05 2.07 - 198.40 235.51 - 101.80 263.96 2.04 -

2005-06 1.37 - 209.32 120.94 - 142.19 269.01 1.07 0.71

2006-07 4.57 - 229.93 147.46 - 103.84 305.12 1.82 -

2007-08 3.65 - 157.92 128.92 - 171.26 299.92 7.02 -

2008-09 19.14 - 46.89 183.96 0.68 122.53 579.62 7.77 -

2009-10 10.95 - 73.66 233.74 0.19 128.80 445.99 19.68 -

2010-11 11.53 - 127.19 330.25 0.36 234.82 54.50 20.39 -

2011-12 49.50 - 244.94 414.98 1.01 272.75 179.04 32.60 0.03

2012-13 29.72 0.13 93.67 712.88 6.85 295.05 527.09 65.18 0.06

2012-14 28.99 - 50.43 757.47 4.08 276.86 272.54 77.39 12.58

2014-15 29.22 - 279.98 737.54 7.85 468.02 205.98 74.40 30.88

2015-16 36.57 0.27 430.16 825.85 4.21 320.93 273.61 92.83 19.10

2016-17 43.26 -0.01 467.93 869.43 24.32 309.73 601.28 104.44 34.43

2017-18 14.50 -0.09 696.56 1005.65 50.14 411.01 166.10 199.76 36.81
2018-19 39.19 0.02 1328.65 1493.75 37.47 550.21 232.47 197.33 9.90

TOTAL 350.30 0.32 5377.61 9039.22 137.16 4149.02 4808.31 934.83 144.57

From this chart, we find that historically, the top 3 sectors of Bangladesh that attracted the
highest grossing foreign investments are-

1. Manufacturing sector at 9039.22 Million USD total.

2. Power, gas, and petroleum sector at 5377.61 Million USD total.

3. Transport storage and communication sector at 4808.31 Million USD total.

Besides the top three, there has been significant foreign investment in trade and commerce,
standing at 4149.31 Million USD total.

Other miscellaneous sectors stand at a total of 1567.18 Million USD total.

Here is a graphical presentation of some significant sector and the foreign investment they
received, derived from the Bangladesh Bank database-

This graph tells us that the manufacturing sector is still the highest sector receiving foreign
investment, combining investments in food, textile, and others. FDI inflows into Power Sector
reached US$ 711.98 million during January-June, 2019 which was increased by US$ 206.12
million or 40.75% compared to July-December 2018 (US$ 505.86 million).
 General Trend Evaluation
To put things into perspective, here is a line chart of foreign investment inflows in Bangladesh,
derived from World Bank data-

In 1980, to encourage FDI inflows, Bangladesh adopted the Foreign Private Investment Act. The
intention behind the act, as mentioned earlier, was mainly to generate a new source of capital
source for the country. Despite the fluctuations in the flow of FDI inflows into Bangladesh, there
has been a general upward trend in the inflow since 1994. FDI inflow into Bangladesh has
increased sharply from 1995 to 2014. One of the factors contributing to this tremendous increase
has been the exploratory investment of many corporations into the nation's natural gas reserves.
The capacity of the resources was estimated to be greater than 10 trillion cubic feet by the U.S.
Geographical Survey (UNCTAD report 2000). Provided with such ability, the Bangladesh
government finally liberalized the energy sector to attract more FDI.
Along with the energy sector liberalization, the Government also eased capital controls by
decreasing bureaucracy to allow private firms to undertake foreign loans without government
permission. Foreign investment inflow in Bangladesh has gone up tremendously since the dawn
of the 21st century. There have been some obvious drops in some years here and there. After
peaking in 2015, it has been gradually doing down in recent time. Despite the steep drop in 2016
and 2017, Bangladesh Bank statistics have also shown that the net inflow of FDI in the country
declined by 19.50 percent in the first nine months (January-September) of 2020 and stood at
around
$1.74 billion. The amount was $2.15 billion in the same period of 2019.

Despite major growth in FDI inflow into Bangladesh since 1994 Figure 3 shows that the average
FDI inflow has remained below 6% of GDP during the period of our study. Factors that are
working as a hindrance to FDI inflow are lack of infrastructure, government bureaucracy,
corruption, and most importantly political unrest.
 Sector Wise Trend Evaluation
Instead of the overall FDI, the sectoral comparison provides some interesting findings.

In 1995 Bangladesh government opened up the mobile telecommunications sector to attract joint
ventures and millions of dollars in FDI in this sector. The graph above provides an overview of
the FDI inflows into the major sectors of the economy from 1996-2014. It exhibits a dominance
of FDI inflow in the telecommunication sector during the years 2005-2008. This is mainly
because of the absence of ground telephone infrastructure in Bangladesh, where the mobile
service provided an attractive alternative. However, total FDI inflow to Bangladesh dropped by
approximately 34% between 2008 and 2009. According to UNCTAD's World Investment Report
2010, this drop can be explained by a 60% decrease in the telecom sector during that period. The
uncertainty surrounding the renewal of mobile operator licenses, which were to expire in 2011,
contributed to this downturn. Investments in this sector never returned to the 2008 level of
$641.4 million.
The capital inflow into gas and petroleum was the highest in 1998 ($230.4 million) and then
started to decline except for one or two years. The decline was more significant since 2005
because of recent blowouts in the gas fields that have led to lawsuits by the country against
foreign corporations.
Other sectors that deserve mention are the banking and the textile industry. Foreign investors
have been investing in the Banking sector since the1990s, when Bangladesh started to adopt
various financial liberalization policies.
Like the Banking industry, the Textile and Wearing industry has also been growing and
attracting significant FDI because of gradually improving labor standards and relatively lower
wages.
Analysis of the inflow of FDI into sectors indicates that there have been significant shifts in the
industries. During the 90s, Gas, Petroleum, and Telecom attracted the major FDI inflow into the
country. Investigation of FDI inflow clearly shows that Gas and Petroleum sector FDI inflow has
declined tremendously, and the Telecom sector is showing a recent decline as well. In the last
five years, FDI flow to the Banking and Textile sectors has been growing.

There has been a shift in recent years towards the service sectors. This shift is attributed to the
country's agreement in 1995 with the World Trade Organization to liberalize the service sectors
like power and energy, banking, insurance, and telecommunications. One notable surprise is the
lack of FDI into the power sector despite the country's dire need for power supply. This is
perhaps due to the political resistance of the public to hand over power supply to foreign
companies.

Obstacles to Foreign Investment Inflow

The country ranked 168th out of 190 economies in the World Bank's 2020 Doing Business
ranking. Bangladesh suffers from a negative image; the country is impoverished, under-
developed, subject to devastating natural disasters and socio-political instability.
Arguments supporting FDI in developing countries suggest that recipient countries need to fulfill
some preconditions to create a favorable business environment. It has certain advantages to both
the host country and the investor. Host countries' macroeconomic policy, tax regime, regulatory
practices are critical determinants for attracting FDI. The foreign investors also benefit from
penetrating a market, gaining access to raw materials, diversifying business activity, better-
rationalizing production processes, and overcoming some exporting drawbacks, like trade
barriers and transport costs. Internal factors of host countries are essential determinants for
attracting FDI. Host country location-related factors that mainly comprise natural resources,
cheap labor, proximity to markets, and political, economic, legal, and infrastructural factors play
a significant role in motivating investors. Other factors such as resource seeking, import
substituting, and export platforms also create supporting conditions for FDI inflows in
developing countries.
With that being said, here are some common obstacles that stop or discourages other countries
from seeking to invest in Bangladesh,-
1. Political aspects are the most influential barriers impeding FDI in the power sector, followed
by economic and financial, societal, and regulatory aspects. The individual factors, land
acquisition/rent/lease, corruption, political interference, and inadequate gas transmission system,
and a long independent power producers' approval process are key obstacles deterring FDI in the
power sector.
2. Failure to resolve the dispute settlement mechanism, implement one-stop services and provide
required logistics and trade facilitation to the foreign investor.
3. Irregularities and corruption added to the cost of doing business here in Bangladesh.
4. Poor corporate governance and lack of quality manpower are the two significant impediments
holding back foreign direct investment (FDI) in Bangladesh.
5. The need for skills development is now seriously considered a major impediment at the policy
level, and vocational training and higher education need to be aligned with the requirements of
foreign investment companies.
6. Poor services have been discouraging foreign investors for years to make Bangladesh their
investment destination.
7. The regulatory environment in Bangladesh is weaker than in peer countries, and it is emerging
as a major roadblock to attracting equity capital. Some unnecessary regulations have also created
complexity to make a smooth investment in the country as well.
8. In the past, foreign investors preferred investing in power plants, private hospitals, banks, and
non-bank financial institutions. Now, they are thinking of investing in fintech, pharmaceutical
industries, LNG plants, and agro-based manufacturing units, and Bangladesh has not developed
those industries to the point where they become lucrative for foreign investors.
9. The lock-in period for a foreign investor in the country is three years, which is excessively
higher than in many other competing nations. The lock-in period means investors, who hold 10
percent shares in a company or directorship, cannot sell shares within the stipulated period. This
means the exit from Bangladesh is complex, and that deters foreign investors often.
10. Despite the volume of domestic consumption is large, the size of the population per capita
income has not reached a satisfactory level.
11. Restrictions on movement across the globe to tackle the spread of COVID19 have also
turned out as a critical obstacle for the expansion of FDI in recent times.
12. Economic growth of a country largely depends on technological progress, which stimulates
FDI. It includes more modest advances, the implementation of better business processes, and the
adoption of new technologies. In this area, again, Bangladesh lags in comparison to its
competitors in terms of technological advancements.
13. The country has a bureaucratic system that is not at all compatible with an investment
environment. The concrete implementation of investment-related policies is pro-longed to
obstruct both local and foreign investors.
14. The political situation in Bangladesh is highly vulnerable because of the continuous hostility
among the political parties, which pollutes the entire investment environment. Unfortunately,
Bangladesh is an exception where most of the political violence is centered on industries. Even
EPZs are not exempted by any means.
15. Government control and management have been extremely ineffective and inefficient. The
country is suffering from the inefficiency of state-owned entities in telecommunication, energy,
ports, aviation, railways, banking, and many other sectors. All these sectoral inefficiencies push
the total cost of local and foreign businesses extensively high.
16. The politically influenced government agencies are functioning as regulatory bodies without
any operational autonomy. So an effective and rapid response towards providing the necessary
services to investors is absent in Bangladesh.
17. Bangladesh provides various favorable investment facilities and incentives under the
liberalized industrial policy. Bodies like the Export Processing Zones are there to promote export
orientation and privatization-based growth strategy. However, in reality, none of these favorable
policies and procedures are implemented. Thus foreign investors are being discouraged.
18. The system of legal suits and actions prolonged over the years puts business investors in a
dilemma about placing their precious capital in businesses in Bangladesh.
19. Each year, the Government declares a Fiscal Policy that quite often goes adverse to the
investors and disrupts their regular business and operations plans and strategies both in the short
and long run.
 Ways to Increase Foreign Investments
A happier news for the nation is that Bangladesh places 65th position among 155 countries in
Ease of Doing Business in the World Bank report. This ranking is based on 39 indicators
grouped into ten categories. It recognizes Bangladesh as one of the most accessible locations for
doing Business in south Asia, better than Sri Lanka and India. Besides, persistent growth in FDI
is the best testimony of a favorable business climate prevailing in Bangladesh. So there is hope,
and given that Bangladesh fixes what needs to be fixed, it can certainly attract a lot more foreign
investment and walk towards greater economic prosperity.
To triumph over all the stated impediments, the Government of Bangladesh and relevant bodies
can consider various measures effectively as follows,-

1. Ensure Good Governance: Good governance can bring about efficient and productive
Government, necessary reformation in the judicial system, fiscal policy, infrastructural reforms,
and eradication of corruption and dishonesty to lead a country to achieve handsome investment.

2. Coordinated Government Agencies: To make the business environment and

activities smooth and efficient, coordinated government agencies (ministries, departments,
regulatory bodies, etc.) must.

3. Dynamic and Independent Govt. Agencies: More dynamic government

agencies can facilitate investment in Bangladesh. That is why the independence and dynamism
of state agencies like Bangladesh Bank, Investment Promotion Agencies, Bangladesh Board of
Investment, etc., are essentially suggested to enhance FDI in Bangladesh.

4. Accountability and Transparency: More accountability and transparency are

recommended for the development, efficiency, and competence of Government and regulatory
bodies in the work of investment.

5. Developing Diplomatic Relation: Bangladesh should maintain a good relationship

with the developed countries and developing countries for a significant share of FDI by
developing countries.

6. Devoting Efforts to Shift FDI Track: In recent years, foreign investments are
going to RMG, telecommunication, power, and energy, or other profitable areas. Bangladesh
should provide appropriate attention to attract more FDI in the industrial and the infrastructural
regions like construction of roads and highway (especially in building large bridges, flyovers,
underground ways, etc.), assuring enough inducing competitive advantages to investment these
sectors.
7. Political Reformation: In Bangladesh, Politics, volatile in nature, pushes the FDI
downstream. The politician's desire seemed to capture the governing power of the country only
instead of serving the nation. This evil desire has been ruining the country for many years in
every aspect. Thus political reformation is a requisite of time for Bangladesh.

8. Ensuring Power and Energy: Nowadays, Bangladesh is badly suffering for lacking
power supply, and it is a significant obstacle in the smooth inflow of FDI. So the recipient
country has to ensure the necessary supply of power and energy.

9. Abolishing Bureaucracy: Bureaucratic complexity should be avoided as it irritates

foreign investors.

10. Developing skilled human resources : Bangladesh can only become a significant
hub for FDI when it can boost quality human resources, not before. We need to revisit our
education system and see what steps can be taken to graduate from the schooling system with
analytical skills.

11.Revising foreign investment-related laws: The Central Bank of

Bangladesh should revise the foreign exchange transaction guidelines,
aiming to bring in more FDI. Considering the current economic situation, the registration process
must be relaxed and a foreign investor-friendly tax policy. Moreover, the customs act and
bankruptcy act also need to be revised right now. Experts suggest that the absurdly long lock-in
period for foreign investors must be changed to 1 year from 3 years.

12. Dealing with COVID19: The current pandemic and Bangladesh's COVID situation
slowly getting worse is a matter of great worry for the country. The Government needs to take
utmost measures to bring the situation under control, not just for the safety of the citizens but
also to reassure foreign investors.
 Conclusion
Foreign investment is a strategic option for a country and a critical factor in national economic
development. Most governments attempt to attract foreign investors by liberalizing the
investment environment, fiscal reforms, and incentive packages. FDI can transform a country's
economic scenario within the shortest possible time. It is not merely access to funding but also
provides transfer of technical know-how and management expertise. It is also a stabilizing factor
in any economy. The inflow of foreign investments had not improved in Bangladesh to a great
extent. Inadequate infrastructure coupled with bureaucratic complexities and a wide range of
corruption kept investors away. Foreign investment is badly needed in emerging economies of
the world. Amid the Covid-19 pandemic, emerging economies like Bangladesh are in big
trouble.
Despite historically going through many ups and downs, Bangladesh is not full of hindrances for
foreign investors. Opportunities and prospects are also available in this host country. Over time
the quarrelsome political environment has been changed, and hopefully, a new era of investment
for the native and foreign investors can be started. If the authority focuses on what's essential and
does its best to make the country into a gold mine for foreign investors, which is certainly not
impossible, the Government can prosper greatly.
 Data Source and References
1. https://www.bb.org.bd/pub/halfyearly/fdisurvey/fdisurveyjanjun2019.pdf

2. https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx

3. https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?end=2018&lo
cations=BD

4. https://core.ac.uk/download/pdf/268112743.pdf

5. https://thefinancialexpress.com.bd/economy/bangladesh-sees-slump-in-fdi-
inflow-as-foreign-investment-falls-worldwide-1611557589

6. https://www.researchgate.net/publication/332550832_Foreign_Direct_Invest
ment_in_Bangladesh_Problems_and_Prospects_Foreign_Direct_Investment
_in_Bangladesh_Problems_and_Prospects

7. https://www.emerald.com/insight/content/doi/10.1108/IJDI-11-2018-
0182/full/html

8. https://www.thedailystar.net/business/news/fdi-edges-down-first-time-7yrs-
2015229