1.

1: Foreign Direct Investment

FDI stands for Foreign Direct Investment. Foreign direct investment (FDI) refers to long term participation by country A
into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise.
Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. Foreign
investment can be a significant driver of development in poor nations. It provides an inflow of foreign capital and funds, in
addition to an increase in the transfer of skills, technology, and job opportunities. Many of the East Asian tigers such as
China, South Korea, Malaysia, and Singapore benefited from investment abroad. The Commitment to Development
Index ranks the "development-friendliness" of rich country investment policies. The foreign direct investor may acquire
voting power of an enterprise in an economy through any of the following methods:
 by incorporating a wholly owned subsidiary company
 by acquiring shares in an enterprise
 through a merger or acquisition of an unrelated enterprise
 Participating in joint venture with another investor

1.2: Covid-19 and foreign direct investment in Bangladesh

The coronavirus pandemic has created impact over 200 countrie s. Although it is too early to fully assess the
devastation to people, societies, and nations, the economic loss is the gravest concern after the health crisis.

Economic crisis includes loss of domestic productivity, reduced employment and loss of foreign income (for
example, income in the ready-made garments sector and international remittances). Foreign direct investments
(FDI) have declined drastically worldwide which has also negatively impacted Bangladesh.

The implications of coronavirus on foreign investments in Bangladesh and how the Bangladesh Government
may maximize FDI post-coronavirus inflow:

Economic Situation between 2019-2020 fiscal year:

1. Foreign direct investment growth: FDI stimulates economic growth by injecting foreign capital, removing
constraints to the balance of payments, increasing employment, and enhancing marketing and management
skills. During fiscal year (FY) 2019, FDI in Bangladesh increased by 51%, to US$3.9 billion -- a record high.
During the first seven months of FY 2020 -- from July 2019 to January 2020 -- the net FDI inflow was $1.69
billion, which is 4% higher than during the same period of FY2019.

2. Trading partner’s investment: According to the Bangladesh Bank, China was the largest investor during
FY 2019, with a net FDI inflow of $1.16 billion. The energy sector received the highest amount of gross FDI
($1.27 billion).

3. Gross domestic product: Bangladesh has experienced a record 8.15% growth in GDP in FY 2019 -- from
7.86% FY2018. The World Bank and the Bangladesh Bureau of Statistics (BBS) projected that Bangladesh’s
GDP growth would rise between 7.2 % and 8.2 % in FY 2020. Yet the emergence of coronavirus in late 2019
disrupted economic growth worldwide, including in Bangladesh. The Asian Development Bank (ADB)
estimates that coronavirus-induced GDP losses in Bangladesh will be $3 billion, or 1.1 %.

Industrial Scenario of Bangladesh during Covid-19:

Export-oriented ready-made garments (RMG) and international remittances have been the most hard-hit areas
of foreign revenue. RMG manufacturers have lost more than $3 billion due to order cancellations by foreign
buyers so far, and knitwear manufacturers are facing a similar loss.

Together, RMG and knitwear manufacturer losses constitute about 18 % of the total revenue of the garments
sector, which accounts for 84 % of the country’s export market. What is worse, many of the buyers may not
sustain the crisis and be back to full-scale operation anytime soon or ever again.

Similarly, international remittances have declined sharply due to business closures in other countries and the
return of the migrant workers after the outbreak, particularly from the Middle East and Europe. During the
month of March 2020, international remittances dropped by $172 million, or 11.8 %, compared to March 2019.

Remittance inflows, which amounted to over $18 billion in 2019 -- are a key source of income for millions of
rural households and low-income families in Bangladesh. Thus, the country will face double blows -- a huge
loss in income from two of its prime sources of foreign revenue and a substantial rise in unemployment.

The coronavirus pandemic has had significant, universal impact, which will likely reshape investment
priorities. Due to the widespread economic impacts of coronavirus in investee countries, there will likely be
significant competition among them for foreign investments in the future.

Reaction to Bangladesh Government:

There is a lot of ambiguity around the pandemic -- in particular, when it will end and how severe the impact
will be -- and the Government of Bangladesh should act fast to (1) identify investor countries for the post -
coronavirus period, (2) identify and prioritize sectors for foreign investment, and (3) prepare an action plan and
mobilize activities. These actions are outlined below.

1. Identify and prioritize investor countries

This will likely be influenced by six key factors and we should not neglect the greatest source of FDI
worldwide:

a) The degree of coronavirus devastation across investor countries : Countries that suffer more from
coronavirus will likely concentrate on nation-building versus investing internationally. Among Bangladesh’s
dominant investors, Western European countries and the United States have been disproportionately affected by
coronavirus than East Asia, which suggests that East Asia may be more receptive to investing in Bangladesh.
China has recently emerged as the leader in FDI in Bangladesh, replacing USA and UK. Other leading East
Asian countries that have investments in Bangladesh are Japan and Singapore. In fact, Japan has been a
consistent economic partner and contributor to Bangladesh’s socio -economic developments since independence.

b) Identify less-affected countries within affected regions: The fatality rate in Germany and Norway is 4.1 %
and 2.7 %, respectively, which is much lower than Italy (13.7 %) and Spain (10.2 %). In 2018, Germany and
Norway had a net FDI inflow of $135 million in Bangladesh, which is much lower than the leading investors.
So, two countries can be considered for increased FDI.

c) Attract investors that may be redirecting funds: Since coronavirus originated from China, there has been
international backlash against the country for the virus’ spread and consequent economic disruptions. Some
countries like Japan have already decided to move production plants from China. With an adequate campaign
and the right incentives, Bangladesh can make itself an attractive place for the countries cur rently investing in
China to redirect their investments.

d) Draw countries with low interest rates and low growth : Low interest rates motivate private companies
and citizens in a country to borrow money, but because of the low growth or returns domesticall y, they may be
encouraged to invest in foreign countries where interest or growth rates are higher.

Interest rates have been falling globally, and the coronavirus pandemic has made them drop even further. In
fact, in many European countries interest rates are now negative. In contrast, the interest rate in Bangladesh is
substantially higher, making it very suitable for such foreign investment.

e) Middle Eastern countries should not be ruled out: Middle Eastern countries may have stopped their
development work because of the coronavirus crisis, but they will eventually start such work. Bangladesh
would be a good contender for providing labor supply to the Middle East because it has necessary experience
and a large pool of unskilled labor.

f) Attract US investments: Although the United States is fourth in terms of FDI inflows in Bangladesh, it is
the greatest source of foreign investments worldwide (about $6 trillion) and should be pursued. In addition,
because of the ongoing trade war between the United States and China, the United States’ imports from China
dropped by about $60 billion in 2019.nBangladesh should exploit this dynamic and market itself as a promising
import base for the United States moving ahead.

2. Identify sectors for investment

Although many sectors will continue to draw foreign investments after the pandemic subsides, some sectors
may lose their funding and some new ones may emerge after the coronavirus crisis is over. The government
may explore the following sectors to attract FDI post-coronavirus:
a) Health care: Health care has received limited foreign investment in Bangladesh to date despite being less
susceptible to risks compared with other sectors (it is not affected by seasonality and recession -proof).

In addition, healthcare expenditure is arguably the highest priority item after food and shelter as long as one
can afford it. In Bangladesh, there is a strong need for quality healthcare. Every year, Bangladeshis make about
one million foreign trips for medical reasons, spending over $2 billion.

Currently, there are only a few hospitals in Bangladesh that have foreign investments or are joint ventures. In
these circumstances, additional investments in healthcare can be justified.

b) Pharmaceuticals: As the pharmaceutical sector is closely tied to healthcare, there may be new opportunities
for FDI in this sector too. FDI has been low in this sector -- in 2018, FDI in pharmaceuticals and chemicals was
$46.8 million, which was only 1.3 % of the total net FDI inflow that year. In addition , market penetration of
multinational companies is low, too.

According to the International Monetary Fund (IMF), there were 257 registered pharmaceutical companies in
Bangladesh in June 2019, of which about 150 were fully functional. Among them, only six w ere multinational,
accounting for 10 % of the total revenue of $2.6 billion generated by pharmaceuticals for the domestic market.
Low FDI may be due to Bangladesh’s reliance on imports for pharmaceutical raw materials (Active
Pharmaceutical Ingredients or API), mostly from China and India, amounting to about $500 million a year.

Although an industrial plot has been allocated by the government in Munshiganj to produce API locally, the
production process is very slow and should be expedited to attract potential foreign investors.

Needless to say, if the healthcare sector grows substantially with FDI injection after the coronavirus crisis, the
demand for locally-produced medicines may also rise, leading to a sizable expansion of the pharmaceutical
sector.

c) Information and communication technology (ICT): ICT leaders such as Wipro, IBM, and Infosys have
already entered the IT market of Bangladesh through joint ventures with local companies.

The government has established measures to attract foreign investors, including 100% corporate tax exemption
for local companies for 10 years, and 100 % equity control for foreign investors.

Still, the net foreign investment in ICT was $246 million including telecommunication, software and IT.
Therefore, there is potential for further expansion.

d) Online communication and transaction: The coronavirus pandemic has transitioned many activities to be
performed online, such as grocery purchases for urban consumers, which may be sustained even after
restrictions are lifted because of convenience.
Besides online purchase, tele-medicine is something that will be quite popular. So, e-commerce may grow
tremendously in the near-term. Moreover, lockdown has forced us to work from home and conduct meetings
through video-conferencing.

As organizations and companies continue to work remotely, this further underscores the tremendous growth
potential in IT infrastructure and software development, which can open up new opportunities for FDI.

e) Cyber security: Closely related to online communication and transaction is cyber security, which protects us
from online threats. In fact, Bangladesh has already been subject to cyber threats multiple times, most notable
of which was the unauthorized international wire-transfer of about $80 million from the central bank. Thus,
cyber security is another area with huge potential for FDI post -coronavirus.

f) Business process outsourcing (BPO): BPO is the process of contracting part of the operations of a business
entity to a third party. Many companies use BPO in foreign countries to keep operational expenses low and get
a competitive advantage. The market of BPO has grown substantially over the years, with a global market of
$89 billion in 2017. Off-shore companies often offer attractive benefits, including tax benefits for companies
that are interested in BPO. Bangladesh, with a large share of young and working age population (median age:
27), can be an attractive destination for BPO

g) Food and agriculture: Despite Government assurance of sufficient production of staples, Bangladesh may
experience a coronavirus-induced food crisis. Coronavirus has had severe impacts throughout the supply chain.

For instance, farmers are left extremely vulnerable amid the pandemic without government intervention,
resorting to selling their harvest at a much lower market price. In underdeveloped agricultural value chains:
most farmers cannot store their products due to insufficient storage facilities.

First, proper planning should be done to maintain the supply chain, reduce price fluctuations, and protect
agricultural producers. Second, there is an urgent need to develop a thriving agro-food processing sector, which
can reduce post-harvest produce loss by 30% to 40 %. In addition, agro-processing has significant foreign
investment potential. Agro-food processing contributes to 1.7% of GDP and 1.5 % of food exports, amounting
to $400 million.

There is already a demand for Bangladeshi food items by Bangladeshi people living in Europe, North America,
and the Middle East, and companies such as PRAN, Square, ACI, and Akij Foods satisfy such needs. In
addition, with a growing economy and urbanization in Bangladesh, the middle class is expected to grow, and so
is the local demand for processed food.

The government has already taken measures to attract foreign investment in this sector, including allocation of
a dedicated agro-processing zone, tax holidays, and cash incentives for agro -processors.
However, more needs to be done. For example, food safety issues are a concern -- the type of pesticides and
fertilizers used do not always comply with the standards for foreign investment, and food safety laws are not
enforced well. In addition, lack of proper storage and quality packaging may be other impediments to attract
foreign investment.

h) RMG: Despite the fact that the RMG sector is experiencing major losses amid coronavirus, RMG remains a
need, not a luxury, for consumers in developed countries.

Firstly, although this need may be suppressed in the short -term, it is expected to rebound as restrictions are
lifted and the crisis ends. Some buyer companies may disappear, but new ones will emerge if there is growth in
demand.

Secondly, some RMG buyers that order from China may consider other countries for their investments, such as
Bangladesh. Bangladesh’s existing manufacturing facilities and skilled employees are the comparative
advantage in this regard.

i) Labour: Once the labour market in foreign countries expands again, these countries will need abundant
unskilled labour, which may not be available domestically. Since Bangladeshi workers have experience
working in Middle Eastern countries, for instance, Bangladesh labour may be preferred to unskilled labour from
other countries. Besides promoting unskilled labour for low-end manual jobs, developing vocational skills
would be a good idea too as it will enable Bangladeshi migrant labourers to compete for higher -level jobs.

3. Prepare an action plan and mobilize activities

Although Bangladesh secured a record high FDI in FY 2019, it was only 1.28% of the country’s GDP.
According to the World Bank, this is slightly less than the global average of FDI inflows (1.39 %) and far less
than Vietnam (6.3 %), a competitor for FDI.

The Bangladesh government has taken various st eps to incentivize FDI in the country. However, since global
foreign investment is estimated to drop by as much as 40 % in the wake of the coronavirus crisis (estimated by
UNCTAD), competition for FDI will heighten, and thus, more work is urgently needed.

Below is a summary of what the government has planned, or what is underway, and recommendations for
creating a more favorable environment for FDI:

1. The Bangladesh Investment Development Authority (BIDA) is preparing a database of 41 countries with
FDI-related information, and planning to develop an active network among the bilateral chambers of these
countries.
This action must be accompanied with continuous follow-ups, identifying sectors of mutual interests for
investments, and removing barriers to such investments. These activities must be expedited and, if possible,
carried out by bypassing bureaucratic long lines and red tape.

2. Bangladesh Economic Zones Authority (BEZA) has offered an incentive package to attract foreign investors
after coronavirus is over, which includes a VAT waiver on land leasing, bonded warehouse facility for local
companies, 100 % waiver on corporate tax for 10 years, and more. BEZA has already received FDI proposals
worth $5.8 billion, which is a good indication that the incentive package is attracting investment.

3. While BIDA is actively exploring new countries for FDI, as mentioned in point 1, exploring opportunities to
increase FDI among existing investors should be pursued as well, especially among countries that are inve sting
less than what they can.

For example, Germany’s net FDI inflow in Bangladesh in 2018 was $26.2 million, which is 0.02 % of
Germany’s total outflow of $159 billion FDI globally that year. Thus, Bangladesh should explore which
countries Germany is investing in, in which sectors it is investing in, and identify actions for incentivizing
Germany to redirect its investments from those countries to Bangladesh. This may apply to other countries, too.

4. Every year, the World Bank ranks economies worldwide on the ease of doing business in those countries. As
Bangladesh has been ranked 168 out of 190 economies in 2020 -- the lowest in South Asia except Afghanistan -
- there is significant room for improvement.

1.3: Positive aspects of FDI

1. FDI help to increase the investment level and thereby the income and employment in host country.

2. The transnational corporations have become vehicles for the transfer of technology, especially to the developing
country.

3. They kindle a managerial revolution in the host countries through professional management of high sophisticated
management technique.
4. The FDI enable the host countries to increase their export and decrease their import requirement.

5. They work to equalize the cost factor of production around the world.

6. FDI provide an efficient means of integrating national economics.

7. The enormous resources enable them to have efficient research and development systems. Thus, they make a
commendable contribution to invention and innovations.

8. FDI helps to increase competition and break domestic monopolies

1.4: Negatives effect of FDI on Host country:

1. Crowding out the effect of FDI: FDI can have both crowding in and crowding-out effects in host country economy.
The main adverse impact of crowding out effect is the monopoly power over the market gained by MNEs. In general,
crowding out might take place due to two reasons:

1) when domestic firms disappear because of higher efficiency and better product quality of foreign subsidiaries.

2) when they are wiped out because these foreign affiliates have better access to financial resources or engage in
anticompetitive practices.

2. Profit Repatriation: When MNEs make investments in foreign countries, their main objective is to maximize their
profit. Some advantageous characteristics of these countries, such as cheap labor force, natural resource abundance, or
high-quality expertise, allow MNEs to enhance their economic performance.

MNEs regularly repatriate their profits from investment in the form of dividends or royalties transferred to shareholders.
It also helps them avoid larger taxes by using transfer prices. However, this profit repatriation results in huge capital
outflows from the host country to the home country and negatively affects the balance of payment of the former. Thus
the host countries often set limits on the number of profits that MNEs can repatriate in order not to have the balance of
payment deficits or reduced foreign exchange reserves. Such a policy can induce these MNEs to invest profits in
different projects within the host country.

3. Dual Economy Effect: FDI, specially made in the developing countries, can lead them to have a dual economy,
which has one developed sector mostly owned by foreign firms and underdeveloped sectors owned by domestic firms.

Since the country's economy becomes overly dependent on the developed sector, its economic structure changes. Often
this developed sector is capital-intensive, while another one is labor-intensive. Therefore, the dual economy effect
hampers the economic development of countries as most of their citizens are located in the non-developed labor-
intensive sector.

This effect is visible in most oil-rich countries, where foreign investments made in the oil and gas sector resulted in the
resource boom and left the agriculture and manufacturing sectors underdeveloped.