Table of Contents EXECUTIVE SUMMARY 4 I. INTRODUCTION 5 II. FOREIGN DIRECT INVESTMENT (FDI) 7 III.

DETERMINANTS OF FOREIGN DIRECT INVESTMENT 9 IV. BANGLADESH AS A POTENTIAL DESTINATION 13 IV. GOVT. INITIATIVES & TRADE POLICIES 19 V. FDI THAT RESHAPES BANGLADESH ECONOMY 26 VII. BARRIERS TO FDI 28 VIII. ENDING SUMMARY 30 IX. RECOMMENDATION 31 X. BIBLIOGRAPHY 32

LIST OF ILLUSTRATION

Figure Chart 01. Chart 02: Chart 03. Table 04.

Present Scenario of FDI Sector wise FDI percentage Actual FDI inflow 2002-2004 Reasonable business cost

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EXECUTIVE SUMMARY

At the beginning of the report, need to develop an idea about the vicious circle and saving investment gap that establishes the need for external source of inve st able funds in Bangladesh. Then, will be discussed on the main source of exter nal invest able funds in Bangladesh with some statistics. After that the report condensed on the foreign direct investment which is one of the major sources and is of high potential for the development of our country. At the earlier stage o f the discussion, it briefly exposes foreign direct investment. This segment exp lained foreign direct investment and tried to find out the rationale behind it a nd its major determinants. The present situation of foreign direct investment in Bangladesh comes next in the report. This part shows us foreign direct investme nt in Bangladesh is increasing gradually though still not up to the satisfactory level with some necessary statistics. The government of Bangladesh has taken th e policy of liberalizing trade, exchange and investment regime, current account convertibility offering special incentive package to the foreign investors etc t o enhance foreign direct investment in Bangladesh. Still then the foreign direct investment is lower than the neighboring countries mainly because of poor accom plishment of the new, liberal investment policies, slow government decision maki ng corruption, labor militancy, sometimes uncertain law and order situation, poo r infrastructure, inadequate commercial laws and courts and policy instability e tc. The foreigners perceive Bangladesh as a country of natural disaster and poli tical instability which is another reason for the low flow of invest able funds. Conclusively, the report also clarifies the matter that this influential foreig n direct investment may cause negative impact on our balance of payment if it is not managed efficiently. To refrain from this situation we should take care of our foreign exchange reserve, which is at an alarming position at present. We mu st enhance our export income as well as decrease import expense to keep our fore ign exchange reserve at a safe position that the repayment for profit and divide nd to the foreign investors can be done comfortably.

I. INTRODUCTION

A. Origin of the Report: Foreign direct investment plays a very important role in the economy of a least developed country (LDC) like Bangladesh. This is because of the fact that the in vest-able fund is very much scarce in the country. Recently Government of Bangla desh has implemented quite a number of steps for attracting foreign investors. T hese steps have resulted into enhancement of the foreign direct investment. To g et a clear picture of the current foreign direct investment position in Banglade sh and what would be the prospect of it and what actions are taken by the govern ment and what the future holds for us we have availed this opportunity to select the topic for the study. B. Problem and Purpose: (a)Problem Statement: The report seeks to address the following problem: " To seek the information of present scenery of Foreign Direct Investment in Ban gladesh" (b)Purpose: The report has two Purposes (i)Primary Purpose: The Primary Purpose is: To fulfill the requirement of Theory and Practice of International Business course under EMBA curriculum in Dhaka University (ii)Secondary Purpose: The secondary Purpose is: To acquire practical knowledge on "Foreign Direct Investment in Bangladesh" C. Scope: This report will basically illuminate the foreign direct investment in Banglades h. Therefore, it will not cover other sources of foreign inflow of capital i.e. portfolio investment and foreign loan/grant which also play an important role in our economy D. Limitations: Though the report has endeavored to discus all the aspects of foreign direct inv estment in Bangladesh, some of the limitations could not be avoided like: The report does not use any primary data as the source of information due to lac k of logistic support and time constraint. Unavailability of very recent data causes the report to use data whatever is ava ilable. Lake of time because our final examination of all subjects are happening at the same time

E. Methodology: The data for the study has been collected from the secondary sources. Different books, journals, and Internet sources are consulted for collection of necessary data and information. F. Acronyms: FDI- Foreign Direct Investment LDC Least Developed Countries BDG Bangladesh Government FY Financial Year GDP Gross Development Product BOI Board of Investment EPZ Export Processing Zone MOU Memorandum of Understanding KAFCO- Karnaphuli Fertilizer Company Limited BAT- British American Tobacco BEPZA- Bangladesh Export processing Zones Authority IRR- Internal Rate of Return G. Report Preview: At the outset the report presents various facets of prevailing foreign direct in vestment situation of the country like what is Foreign Direct Investment (FDI), Present FDI Scenario in Bangladesh as An (FDI) destination, Investment Climate,

Incentives to Foreign Investors, Barriers to FDI, the risks involved and the man agement of foreign direct investment in the country. Prospective Sectors, Major (FDI) In The Pipeline (Tata, Asia Energy).Thereafter, Major companies ( Telecomm unication sectors like GP, Warid, Banglalink, AKTEL etc, BAT, Unilever, BATA, KA FCO, CHEVRON Etc) those puts impact on our economy is discussed, then the Facili tators those are helping for foreign direct investment like BOI, BEPZA, Banglade sh bank, Privatization commission, Register of joint stock companies . We are tr ying to discuss about the need of FDI for Bangladesh, Key ways to attract foreig n investor, some debate about FDI. Finally we are trying to find the major part of the repot then we tried to recommend about "Foreign Direct investment" with o ur little knowledge.

II. FOREIGN DIRECT INVESTMENT (FDI) A. Preface FDI is defined as an investment involving a long-term relationship and reflectin g a lasting interest and control by a resident entity in one economy (foreign di rect investor or parent enterprise) in an enterprise resident in an economy othe r than that of the foreign direct investor (FDI enterprise or affiliate enterpri se or foreign affiliate). FDI implies that the investor exerts a significant deg ree of influence on the management of the enterprise resident in the other econo my. Such investment involves both the initial transaction between the two entiti es and all subsequent transactions between them and among foreign affiliates, bo th incorporated and unincorporated. FDI may be undertaken by individuals as well as business entities. Flows of FDI comprise capital provided (either directly o r through other related enterprises) by a foreign direct investor to an FDI ente rprise, or capital received from an FDI enterprise by a foreign direct investor. FDI has three components: equity capital, reinvested earnings and intra-company loans. Equity capital is the foreign direct investor's purchase of shares of an enterprise in a country other than its own. Reinvested earnings comprise the di rect investor's share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the dir ect investor. Such retained profits by affiliates are reinvested. Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises. B. An Overview of Foreign Direct Investment 1. Historical Back ground The amounts of foreign direct investment in Bangladesh have been disappointing, although foreign companies are beginning to invest in the oil and gas and energy sectors. It has been estimated that over 200 foreign firms have invested in Ban gladesh, of which 26 operated prior to independence in 1971. Bangladesh's invest ment performance from 1992-94 stagnated at only 12-13 percent of GDP; it increas ed to nearly 17 percent in FY96, but it is generally held that only an investmen t/GDP ratio of at least 20-25 percent and a GDP growth rate of over 7% can begin to alleviate poverty on a large scale. 2. Present scenario of FDI in Bangladesh Bangladesh received US$ 679 million as Foreign Direct Investment in fiscal year 2006-07. In FY05, FDI flow was $845 million and in FY04 the FDI flow was $460 mi llion, according to latest statistics of Bangladesh Bank. A bit drop from previo us year, the country fared well in last fiscal year in view of political unrest. In spite of all this, the Board of Investment has set an ambitious target of US$1 billion FDI in the current fisca

l year. Chart: 01 3. Current Share of FDI in different Sectors Telecommunications sector ropes in major foreign investment in the country, foll owed by oil and gas sector. According to the Board of Investment (BOI), investme nt in telecommunications sector claim 39 percent of the total FDI, textiles 20 p ercent, chemical industries 8 percent, oil companies 20 percent, banks 11 percen t and power companies 2 percent. 4. FDI Target and Achievement The 4th FDI Inflow Survey found that, in 2004, total FDI inflow in Bangladesh was US$ 660.8 million indicating 49.7% growth over the last year ( Figure: 3). Simultaneously, the FDI amount is also 10.13% higher than the strategic FDI targ et set by BOI under its Mid-term Strategic Plan 2003-06.

Chart: 3 III. DETERMINANTS OF FOREIGN DIRECT INVESTMENT The unpredictability of autonomous FDI flows, in both scale and direction, has g enerated a substantial research effort to identify their major determinants. An extensive literature based generally on three approaches - aggregate econometric analysis, survey appraisal of foreign investors' opinion, and econometric study at the industry level - has failed to arrive at a consensus. This can be partly attributed to the lack of reliable data, particularly at the sect oral level, a nd to the fact that most empirical work has analyzed FDI determinants by pooling of countries that may be structurally diverse. The investors mainly consider th e followings for massive investment A. Size of the Market Econometric studies comparing a cross section of countries indicate a well-estab lished correlation between FDI and the size of the market (proxies by the size o f GDP) as well as some of its characteristics (for example, average income level s and growth rates). Some studies found GDP growth rate to be a significant expl anatory variable, while GDP was not, probably indicating that where the current size of national income is very small , increments may have less relevance to FDI decisions than growth performance, a s an indicator of market potential. In contrast, India, Pakistan and, to a certain extent, Bangladesh, have large ma rkets but received proportionately relatively small (below 1%) FDI flows in 1986 -95. Some analysts interpret this as evidence of high potential for increased FD I flows in the future; others stress that constraints are still restraining the channeling of foreign investment to these countries. For the majority of low-inc

ome countries that fail to attract large FDI flows, their small domestic markets are often cited as the main deterrent. Given other economic and political short comings, most investors are doubtful about the value of installing a factory unl ess they can achieve a `critical mass' for their products. Regional integration is often perceived as a positive means of compensating for small national market s. There is currently no clear evidence of the degree of this influence on FDI f lows. Some investors expect positive spillover effects from the free trade areas , but the benefits may well be concentrated in the economically stronger states. B. Openness: Whilst access to specific markets - judged by their size and growth is important , domestic market factors are predictably much less relevant in export-oriented foreign firms. A range of surveys suggests a widespread perception that `open' e conomies encourage more foreign investment. One indicator of openness is the rel ative size of the export sector. Singh and Jun's 1995 study indicates that expor ts, particularly manufacturing exports, are a significant determinant of FDI flo ws and that tests show that there is strong evidence that exports precede FDI fl ows. China, in particular, has attracted much foreign investment into the export sector. In Bangladesh, on the other hand, foreign investors have been attracted to the m anufacturing sector by its lack of quota for textiles and clothing exports to th e European Union and US markets. Garment exports, for example, rose from virtual ly nil in the 1970s to over one-half f its export earnings by the early 1990s. In contrast, most low-income SSA econo mies have remained more inward-oriented.

C. Labor Costs and Productivity: Empirical research has also found relative labor costs to be statistically signi ficant, particularly for foreign investment in intensive-intensive industries an d for export- oriented subsidiaries. However, when the cost of labor is relatively insignificant (when wage rates var y little from country to country), the skills of the labor force are expected to have an impact on decisions about FDI location. Productivity levels in sub-Saha ran Africa are generally lower than in low-income Asian countries, and attempts to redress the skill shortage by importing Foreign workers have usually been frustrated by restrictions and delays in obtai ning work permits. The lack of engineers and technical staff in these countries is reported as holding back potential foreign investment, especially in manufact uring; it lessens the attractiveness of investing in productive sectors. D. Political Risk: The ranking of political risk among FDI determinants remains somewhat unclear. In general, so long as the foreign company is confident of being able to operate profitably without undue risk to its capital and personnel, it will continue to invest. Large mining companies, for example, overcome some of the political ris ks by investing in their own infrastructure maintenance and their own security f orces. Moreover, these companies are limited neither by small local markets nor by exchange-rate risks since they tend to sell almost exclusively on the interna tional market at hard currency prices. Specific proxy variables (e.g. number of strikes and riots, work days lost, etc. ) have proved significant in some studies; but these quantitative estimates can capture only some aspects of the qualitative nature of political risk. Surveys c arried out in South Asia and sub-Saharan Africa appear to indicate that politica l instability, expressed in terms of crime level, riots, labor disputes and corr uption, is an important factor restraining substantial foreign investment.

E. Infrastructure: Infrastructure covers many dimensions, ranging from roads, ports, railways and t elecommunication systems to institutional development (e.g. accounting, legal se rvices, etc) Studies in China reveal the extent of transport facilities and the proximity to major ports as having a significant positive effect on the location of FDI withi n the country. Recent evidence seems to indicate that, although telecommunicati ons and airlines have attracted FDI flows (e.g. to India and Pakistan), other mo re basic infrastructure such as road building remains unattractive, reflecting b oth the low returns and high political risks of such investments. Surveys in sub-Saharan Africa indicate that poor accounting standards, inadequat e disclosure and weak enforcement of legal obligations have damaged the credibil ity of financial institutions to the extent of deterring foreign investors. Bad roads, delays in shipments of goods at ports and unreliable means of communicati on have added to these disincentives. F. Incentives and Operating Conditions: Most of the empirical evidence supports the notion that specific incentives such as lower taxes have no major impact on FDI, particularly when they are seen as compensation for continuing comparative disadvantages. On the other hand, removi ng restrictions and providing good business operating conditions are generally b elieved to have a positive effect. In China, the `open-door' policy and enhanced incentives for investing in the sp ecial economic zones contributed to the initial influx of FDI. Further incentive s, such as the granting of equal treatment to foreign investors in relation to l ocal counterparts and the opening up of new markets (e.g. air transport, retaili ng, banking), have been reported as important factors in encouraging FDI flows i n recent years. The lack of transparency in investment approval procedures and an extensive bure aucratic system deters foreign investors. In 1991, Bangladesh and Pakistan imple mented reforms allowing foreign investors to operate with 100% foreign ownership but still failed to attract significant flows (as a proportion of GNP) because of political instability and an over-extended bureaucracy. Nigeria, in contrast, continues to attract foreign investment as an oil-exporting country despite its erratic and relatively inhospitable policies. With regard to the remaining lowincome countries with small FDI inflows, surveys indicate that the lack of a cle ar-cut policy with respect to foreign investment and excessive delays in approva l procedures are amongst the most important deterrents. Although a number of Afr ican countries set up `one-stop investment shops' during the 1980s in order to simpli fy approval procedures, the increased workload created bottlenecks. G. Privatization: Though privatization has attracted some foreign investment flows in recent years (e.g. Nigeria in 1993 and Ghana in 1995), progress is still slow in the majorit y of low- income countries, partly because the divestment of state assets is a h ighly political issue. In India, for example, organized labor has fiercely resis ted privatization or other moves, which threaten existing jobs and workers' righ ts. At a regional level, 1994 figures show 15% of FDI flows to Latin America as derived from privatization, but only 8.8% in sub-Saharan Africa and 1.1% in Sout h Asia. A number of structural problems are constraining the process of privatiz ation. Financial markets in most low- income countries are slow to become competitive;

they are characterized by inefficiencies, lack of depth and transparency and the absence of regulatory procedures. They continue to be dominated by government a ctivity and are often protected from competition. Existing stock markets are thi n and illiquid and securities debt is virtually non-existent. An under-developed financial sector of this type inhibits privatization and discourages foreign in vestors. IV. BANGLADESH AS A POTENTIAL DESTINATION A. Bangladesh as a FDI Destination: The Industrial Policy 1991 and its recently announced amendments, the associated reforms in trade policies and fiscal and taxation policies now augur well for i nvestment by the foreign nationals and companies and also non-resident Banglades hi nationals. No approval is required for any investment by the foreign investor s in any sectors of the economy except for a few areas (strategic ones) which ar e still reserved for public investment only. The foreign investment (promotion & protection) Act, 1980 guarantees protection to foreign investment against natio nalization and also guarantees equitable treatment. Bangladesh is a signatory of Multilateral Investment Guarantee Agency (MIGA) of the World Bank group, Overse as Private Investment Corporation (OPIC) and International Center for Settlement of Investment Disputes (ISCID) and therefore, also guarantees investors protection against political and other risks. Following facilities are also available for foreigners and non-resident Bangladeshis. B. Investment Climate: Bangladesh offers an unparalleled investment climate compared to the other South Asian economies. Bangladesh is a largely homogenous society with no major inter nal or external tensions and a population with great resilience in the face of a dversity (e.g. natural calamities). Bangladesh is a liberal democracy and mostly a one race and one religion country. The population of this country irrespectiv e of race or religion have been living in total harmony and understanding for th ousands of years. Broad non-partisan political support for market oriented refor m and the most investor-friendly regulatory regime in south Asia. Trainable, ent husiastic, hardworking and low-cost (even by regional standards) labor force sui table for any labor-intensive industry. Geographic location of the country is id eal for global trades with very convenient access to international sea and air r oute. Bangladesh is endowed with abundant supply of natural gas, water and its s oil is very fertile. Although Bengali is the official language, but English is g enerally used as second language. Majority of even moderately educated populatio n can read, write and speak in English. As a result of low per capita GDP of onl y US$ 386, present domestic consumption is not significant. However, it should a lways be considered that there exists a middle class with some purchasing power. As economic growth picks up, the purchasing power will also grow substantially. And in a country of more than 130 million people, even a small middle class may constitute a significant market. Furthermore, Bangladesh products enjoy duty fr ee and quota free access to almost all the developed countries. This access to t he global market is further helped by the fact that policy regime of Bangladesh for foreign direct investment by far the best in South Asia. Most Bangladeshi pr oducts enjoy complete duty and quota free access to EU, Japan, USA, Australia an d most of the developed countries. However, for apparel export to USA, we have c ertain quota regime which is generally favorable to Bangladesh.

C. High IRR For most of the business Internal Rate of Return is very high in Bangladesh. Tha t means investors can get back their invested money very quickly. They can reinv est it. It indicates that profitability is very high here. Thats why they choose Bangladesh for investment D. Incentives to Foreign Investor: The democratic government is highly keen to stimulate the economy and transform a poverty-stricken economy to NIE within short time. Government has liberalized the industrial and investment policies in recent years by reducing bureaucratic control over private investment and opening up many areas. Major incentives are as follows: (1) Tax Exemptions: Generally 5 to 7 years. However, for power generation exemption is allowed for 1 5 years. (2) Duty: No import duty for export oriented industry. For other industry it is @ 5% adval orem. (3) Tax Law: Double taxation can be avoided in case of foreign investors on the basis of bila teral agreements. Exemption of income tax up to 3 years for the expatriate employees in industries specified in the relevant schedule of Income Tax ordinance. (4) Remittance: Facilities for full repatriation of invested capital profit and divided. (5) Exit: An investor can wind up on investment either through a decision of the AGM or EG M. Once a foreign investor completes the formalities to exit the country, he or she can repatriate the sales proceeds after securing proper authorization from t he Central Bank. (6) Ownership: Foreign investor can set up ventures either wholly owned on in joint collaborati on with local partner. (7) Tax Holiday: Tax holiday facilities will be available for 5 or 7 years depending on location of the industrial enterprise. Dhaka and Chittagong Divisions (excluding 3 hill t ract districts of Chittagong Division) 5 years Khulna, Sylhet, Barisal and Rajsh ahi Divisions And 3 Chittagong hill tract districts 7 years Tax holiday faciliti es will be provided in accordance with the existing laws. The period of tax holi day will be calculated from the month of commencement of commercial production. Tax holiday certificate will be issued by NBR for the total period within 90 day s of submission of application. This facility can be availed of by industries se t up within June 30, 2000 ADB (8) Concessionary Duty on Imported Capital Machinery: Import duty, at the rate of 5% advalorem, is payable on capital machinery and s pares imported for initial installation or BMR/BMRE of the existing industries. For 100% export oriented industries, no import duty is charged in case of capita l machinery and spares. Value Added Tax (VAT) is not payable for imported capita l machinery and spares. (9)Incentives to Non-Resident Bangladeshis (NRBs): Investment of NRBs will be treated at par with FDI. Special incentives are prov ided to encourage. NRBs for investment in the country. NRBs will enjoy facilitie s similar to those of foreign investors. Moreover, they can buy newly issued sha res/ debentures of Bangladeshi companies. A quota of 10% has been fixed for NRBs in primary public shares. Furthermore, they can maintain foreign currency depos its in the Non-resident Foreign Currency Deposit (NFCD) account. (10) Other Incentives: Tax exemption on royalties, technical know-how fees received by any foreign coll aborator, firm, company and expert.T4x exemption on the interest on foreign loan

s under certain conditions. Avoidance of double taxation in case of foreign inve stors on the basis of bilateral agreements. Exemption of income tax up to 3 year s for the foreign technicians employed in industries specified in the relevant s chedule of income tax ordinance. Tax exemption on income of the private sector p ower generation company for 15 years from the date of commercial production. Fac ilities for full repatriation of invested capital, profit & dividend.6 months mu ltiple entry visa for the prospective new investors. Re-investment of reportable dividend treated as new investment. Citizenship by investing a minimum of US$ 5 ,00,000 or by transferring US$ 10,00,000 to any recognized financial institution (non-reportable).Permanent residents hip by investing a minimum of US$ 75,000 ( non-reportable).10 percent products of the enterprises, located in both public a nd private EPZs will be allowed to be exported to domestic tariff area against f oreign currency L/C on payment of applicable duties and taxes.100% percent expor t-oriented industry outside EPZ will be allowed to sell 20% percent of their pro ducts in the domestic market on payment of applicable duties and taxes. E. Reasonable Business Cost: .Table: Doing Business in Bangladesh - Summary of Costs Land (US$) Average price of developed land in the different industrial belts varies dependi ng on location (price per square meter). 10.0-15.0 Construction Average per square meter 100-125 Gas Tariff 64 Average per 000 cubic meter Power Tariff Average per kW/h 0.07 Human Resources: Labor Force Average per month depending on skill level 50-100 Human Resources : Management Mid-Level : Average US$ per annum 6000 Top-Level : Average US$ per annum 30000 Sea Freight (in US$ Approx.) Destinations 20 FCL 40 FCL Major European Ports 900 1,800 USA - East Coast (NY) 2,000 3,000 USA - West Coast (LA) 1,900 2,550 Canada (Toronto / Montreal) 2,700 3,700 Australia (Melbourne) 800 1,600 New Zealand (Auckland) 1,250 2,400 Hong Kong 500 900 UAE (Dubai) 800 1,600 Tax Structure Personal Income: On the first Tk. 100,000 Nil On the next Tk. 50,000 10% On the next Tk. 150,000 18% On the balance 25% Corporate Income: Industrial companies with Public Share 35% All Other Public and Private companies 40%

F. Prospective Sectors Power, energy, garment, textile, jute, IT, leather, ceramic, light engineering, frozen food, agro-based industries and gas-based industries are the prospective sectors for investment. The sector offers immense opportunity as they enjoy both

domestic and export markets and fiscal incentives. G. Lofty Marginal productivity of Capital Bangladesh is a labor intensive country. It lacks capital resources like modern technology, heavy machineries, Expertise and so on. So the marginal productivity is very high here then other developed countries. It means that the same amount of capital resources can earn more profit here. It attracts the foreigners to i nvest here. H. Bilateral investment agreement The Foreign Investment Act includes a guarantee of national treatment. National treatment is also provided in bilateral investment treaties for the promotion an d protection of foreign investment which have been concluded with 14 countries: the USA, Belgium, China, France, Germany, Italy, Malaysia, the Netherlands, Paki stan, Romania, South Korea, Thailand, Turkey and the UK. Separate bilateral agre ements for avoidance of double taxation have already been signed with 20 countri es which include: Belgium, Canada, China, Denmark, France, Germany, India, Italy , Japan, Malaysia, Pakistan, Poland, Romania, Singapore, South Korea, Sri Lanka, Sweden, Thailand, the Netherlands and the UK. Double taxation avoidance negotia tions are also being held with USA, Iran, the Philippines, Qatar, Australia, Nep al, Turkey, Indonesia, Cyprus, Norway, Finland and Spain. I. Major FDI in the Pipeline: Some major investment proposals are pending with Board of Investment. Indian gia nt Tata Group has been negotiating with the Bangladesh government for a US$ 3 bi llion investment in power, steel and fertilizer sector. Indian legendary entrepr eneur Ratan Tata visited Bangladesh to expedite Tata investment in Bangladesh. L ondon-based Asia Energy is waiting for government approval for a US$ 2.5 billion investment in coal and power sector. In 2005, UAE-based Abu Dhabi Group signed a land-breaking MOU with the Board of Investment of Bangladesh for a US$ 1 billi on investment in telecommunications, pharmaceutical, hospitality, energy and tou rism sectors. Apart of the MOU, the groups concern Warid Telecom has so far inves ted over US$ 500 million (Taka 3,500 core) in Bangladesh which makes it the single largest investor from the Middle East. Global Oil & Energy L td UK, the offshore investment wing of Ispat Industries, a firm owned by Indias M ittal family, seeks to investment in power and energy sector. Indias Eassar Group also has placed a big investment proposal in the country. IV. GOVT. INITIATIVES & TRADE POLICIES A. Export Policy The Export Policy 1997-2002 has been designed to operate in the imperative and o pportunity of the market economy with a view to maintaining growth of export and narrowing down the gap between import payment and export earning. (1)Objectives of Export Policy: Diversify the range of exports and improve their quality Set up backward-linkage industries and services and promote use of local inputs in export products to maximize value addition particularly in textile sector; Extend fiscal and other incentives to attract entrepreneurs both local and forei gn to invest in export-oriented industries; Consolidate existing market and explore and develop new ones. Take advantage of the post Uruguay Round liberalized and globalize international market Develop an export infra-structure And develop trained human resources in export sector.

(2) Strategy of Export Policy: The main elements of the long term export strategy are as follows : Remove all bottlenecks to achieve the objectives of export policy; Provide policy support to private sector operators on a continuous basis to ensu re competitiveness Strengthen support services and infrastructure for exports and export-oriented i ndustries; Priority will be given to build such infrastructure; Develop managerial and entrepreneurial skills through HRD programmers; Design an appropriate export development program to broaden and diversify the co untrys export base which is central to the export strategy; Build long term capability to export by developing new products through adaptati on and increased R&D activities; Maximize utilization of financial and other assistance extended by WTO to the LD Cs; Ensure maintenance of ecological balance and pollution free environment in the p roduction of exportable goods; Extend technical and marketing assistance for development of new products and th eir marketing. (3)Thrust Export Sectors The following sectors have been declared as thrust sectors in the current Export Policy : Leather and Leather Goods Readymade Garments Computer Software Agro-Processing Industry Commodities under the Crash Programmed Toys luggage and fashion items, electronics, silk fabric, leather goods, Diamond cutting and polishing, jewelers, stationery goods, cut and artificial flower an d orchids, gift items vegetables and engineering consultancy and services. Soft term credit will be provided for product development of these items in addi tion to marketing facilities etc. B. Import Policy Liberalization of imports through removal and significant reduction of tariff a nd non-tariff barriers and gearing up customs administration for speedy clearanc e of goods. At present maximum tariff rate is 37.5%. Rationalization of the tariff structure to remove disincentives to domestic prod uction arising from tariff anomalies; this involves lowering of duties, particul

arly on industrial inputs and capital machinery; and Making foreign exchange convertible in current account transactions. A key objec t of tariff rationalization was to create a neutral trade regime by eliminating anti-export bias resulting from high tariffs and Quantitative Restrictions (QRs) . The government is committed to the reduction of tariffs as part of its liberal ization programmer under WTO. Like tariff rationalization, significant progress has been made in removing QRs. whereas almost 25 per cent of all items under 4-digit headings of imports were subject to QRs in 1990, now only 119 items covering only 2 per cent of imports a re so disposed. Of these, only 27 items are restricted for trade reasons. C. Industrial Policy The Fifth Five Year Plan of Bangladesh envisages that Bangladesh will have withi n a decade a sizable industrial sector where manufacturing will account for at l east 25 per cent of the gross domestic product (GDP) in place of present 11.3 pe rcent and at least 20 per cent of the employed workforce in place of present 7.7 percent. E. Facilities in the Export Processing Zones To assist in the establishment of export-oriented industries, an Export Processi ng Zone has been set up in the port city of Chittagong. To provide facilities fo r setting up air-freighted, another Export Processing Zone is being developed at Savar near Dhaka. In this area industries may be established entirely through f oreign investment or through joint ventures of local and foreign investors of en tirely through local initiative. Infrastructural facilities which are essential for industries existing in the areas like warehouses, communication water supply , electricity, gas etc. Besides, the following facilities are provided to indust ries situated in these areas: Income tax exemption for 10 years and income tax rebate of 50% on export earning after this period Duty free import of raw materials, machinery, construction materials and other m aterials used in manufacturing process Income tax exemption on salaries of foreign executives and technicians for three years Tax exemption on interest on foreign loans Tax exemption on royalties, technical know-how and technical assistance fees Tax exemption on the profits on accounts of transfer of shares by foreign compan ies Reallocation of running manufacturing units from abroad EPZ Export linkage materials required for production of goods to be exported will be allowed to be exported through back-to-back LC by recognized export oriented in dustries which operates through bonded warehouse facilities to be interior of th e country Offshore banking facilities Backward linkage industries to supply materials for production in the EPZ will b e encouraged. F. Classification of Investment in the EPZs (1) Type A:

One hundred percent foreign investment including investment made by Bangladeshis living abroad. Under this type of investment, the total investment cost includi ng the construction, raw materials cost and requirement for the whole of working capital have to be met through the foreign investors own source of foreign curr ency. (2) Type B: Joint collaboration of projects by foreign investors and Bangladeshi investors l iving within the country. Under this type of investment, the expenditure of the project will be met as per ratio of investment of the local and foreign partners

. But the cost of all imported machineries must be met by the foreign partner. (2) Type C: Hundred percent investments made by Bangladeshi investors residing in Ba ngladesh. Under this type of investment, the cost of machineries, spare parts, r aw materials and other imported goods will have to be met through supplier credi ts/ non- repairable foreign currency, credits/pay as you earn scheme and through any other approved arrangements. G. Thrust Sector Industries Agro-based industries Artificial flowers Computer Software and Information Technology Electronics Frozen food Cut flower Gift items Infra-structure Jute products Jewelers and Diamond and Polishing Leather Oil and Gas Seri-culture and silk industry Stuffed toys Textiles industries and Tourism. H. Reserved Industrial Sectors Arms and Ammunition and other defense equipment and machinery Production of Nuclear Energy Security printing (currency notes) Forest Plantation and Mechanized extraction within the bounds of Reserved forest s. H. Telecommunications Policy The aim of the TP, 1998 is to develop a national sound telecommunication infrast ructure to support the economy and welfare of the country by providing satisfact ory telecommunication facilities. The strategic vision of the Government is to f acilitate Universal Telephone service throughout the country at an affordable co st without compromising performance. To achieve this Governments role as a servic e provider will diminish as the private sectors role increases and its ability to formulate policy, regulate and facilitate will be strengthened through a new Te lecommunications Act and the establishment of new institutions including a Telec ommunication Regulatory Board which will become the guardian of the Act and fulf ill its regulatory functions. I. Energy Policy Due to overriding importance of energy in socio-economic development, the Govern ment of Bangladesh has given urgent attention to the overall development of ener gy sector. It involved survey, exploration, exploitation and distribution of ind igenous natural gas; survey and exploitation of hydropower; survey of coal and p eat; establishment of petroleum refining facility and distribution systems; and establishment of power generation plants and networks for transmission and distr ibution of electricity. During last two decades about 20% (percent) of total pub lic sector investment was allocated for the development of energy sector. In 19 90 only 2.2 % of total households (mostly in urban areas) had piped natural gas connections for cooking and 10 % of households had electricity connections and o

nly 3.9% of total households used kerosene for cooking. The Government has decid ed to formulate National Energy Policy (NEP) to ensure proper exploration, produ ction, distribution and rational use of energy sources to meet the growing energ y demand of different zones, consuming sectors and consumers groups on a sustain able basis. J. Foreign Exchange Policy Liberalization of Exchange Control Regulations In its bid to liberalize Banglade shs foreign exchange policies, Bangladeshi Taka was declared convertible for curren t external transactions, on March 24, 1994. To facilitate investment it has also been decided that prior approval of the Ban gladesh Bank is no longer required for : Remittance of profits to their head offices by foreign firms and companies Issuance of shares to non-residents against investments for setting up industrie s Remittance of dividends on such shares to the non-resident investors Portfolio investment by non- residents including foreign individuals / enterpris es in shares and securities through stock exchanges Remittance of sale proceeds including capital gains of portfolio investments of non-residents through stock exchanges Opening of letters of credit by banks against suppliers credit and other foreign borrowings contracted by industrial enterprises in the private sector in accorda nce with general guidelines prescribed by BOI interest of LIBOR + 4%, repayment period not less than 7 years ) or with specifi c approval of BOI Remittance in repayment of principal and payment of interest of such loans Remittance of technical fees and royalties against technical assistance / royalt y agreements in conformity with BOI guidelines Remittance of savings of expatriate personnel at the time of their leaving Bangl adesh out of the salaries and benefits stated in their employment contracts as a pproved by BOI Extension of term loans by banks on normal banking considerations to foreign fir m and Extension of working capital loans to all foreign owned/ controlled industrial a nd trading firms/companies by banks on the basis of banker-customer relationship and normal banking practice. K. Manpower and Labor Policy Bangladesh offers a substantial manpower reserve skilled, unskilled, educated an d otherwise . There is a good supply of easily trainable low cost labour in the country.

(1) Employment conditions : The minimum age for workers in Bangladesh is 18 years in factories and establish ments. In the private sector, the dignity of labor is ensured in accordance with the principles enunciated in the ILO convention and recommendations. (2) Labor Laws : In Bangladesh 44 labor laws are now in operation. These relate to (a) wages and employment, (b) trade union & industrial disputes, (c) working environment and ( d ) labor administration and related matters. The main labor laws are : (i) Wo rkmens Compensation Act, 1923 (ii) Payment of Wages Act, 1936 (iii) Maternity Ben efit Act, 1936 (iv) Employment of Labor (Standing Orders) Act, 1965 (v) Shops & Establishments Act, 1965 (vi) Factories Act, 1965 (vii) Industrial Relations Ord inance, 1969 (3) Wages and fringe benefits : In the public sector, wages and fringe benefits of the workers are determined by the government on the recommendation of the National Wages Commission establish ed from time to time. Such Commissions were appointed in 1973, 1977, 1984, 1989 & 1992. Wages & fringe benefits declared by the government in 1997 have 20 grade s of wages. In the private sector, the wages & fringe benefits of the workers an d employees are determined through collective bargaining process. Sometimes priv ate industries follow the public sector wages & salary structure for their worke rs and employees respectively. (4) Working hours: Workers in the public or private sector remain at their job for eight and a half hours daily (including half an hour for meal or rest), with Friday as weekly ho liday making 48 working hours a week . Work in excess of these, is paid as overt ime. The rate of overtime is 2 hours pay for 1 hour job. (5) Registration under Factories Act Any manufacturing company employing ten or more workers (with or without use of power) is required to be registered under the Factories Act, 1965 (Act IV of 196 5) with the office of the Chief Inspector of Factories and Establishment. The Ac t is primarily to regulate working conditions and to ensure safety measure in th e factory. (6)Clearance from the department of environment A certificate in respect of proper arrangement for anti-pollution and safety mea sures will be required from the Department of Environment before setting up an i ndustry. (7)Support Service Institutions The following institutions extend industrial support service to the industries u nder both public and private sector:- Bangladesh Council for Scientific and Indu strial Research (BCSIR). Bangladesh Industrial Technical Assistance Centre (BITA C) ,Bangladesh Institute of Management (BIM) ,Bangladesh Standard and Testing In stitution (BSTI) ,Bangladesh Institute of Development Studies (BIDS) (8)Chamber of Commerce and Industries Undertakes research works and formulates various possibilities of commercial and industrial exploitation of the existing indigenous resources. Undertakes qualit y control measures for various industrial products. Provides vocational and tech nical training for the apprentices of engineering industries. Provides personnel training for management of staffs of various industries. Sets up national stand ard for industrial products. Responsible for enforcing standardization (quality & specification) through issue of certificates. Undertakes research programmed of various fields of industries including training of executives of both private and public agencies responsible for industrial management, industrial financing and evaluation of schemes. Publishes periodicals on various research studies. Extend Support services to the private sector and assist public sectors in formulation of various public policies relating to Trade, Commerce and Industry.

V. FDI THAT RESHAPES BANGLADESH ECONOMY Foreign direct investment played pivotal role in bolstering Bangladesh economy. The investment ushered the era of industrialization and development of service s ector in the country. The investment has generated huge employment opportunities and improved living standard and lifestyle of the countrymen. The investments t hat contributed to national up liftmen are: Unilever, Grameenphone, Bata, Unilev er, Berger, BAT, BOC, KAFCO, AKTEL, Banglalink, Chevron, Cairns, etc. VI. FDI FACILITATORS A. Board of Investment (BOI) Board of Investment (BOI) is the prime FDI facilitating and executing wing of th e government. Attached directly with Chief Advisers Office, the office is respons ible to attract both local and foreign investment and help the investors impleme nt the projects.

(1) Major Functions of BOI include: Providing necessary facilities and assistance in the establishment of industries . Providing safety and security to properties of foreign investors Providing work permit to foreign investors Implementing investment related GOB policies. Preparing investment schedule. Registering private sector industrial projects; and Identifying competitive investment sectors and facilitating investment by provid ing information and services. The BOI also includes a Utility Service Cell that offers pre-investment counseli ng, facilitation of utility connections, and assistance with import clearance an d warehousing licenses. BOI offers Welcoming Service to the visiting foreign investors. The service incl udes reception at airport, hotel booking, transport arrangement and drawing up i tinerary in accordance with the need of the foreign investors visiting Banglades h. (2)Bangladesh Export Processing Zones Authority (BEPZA): In order to stimulate rapid economic growth of the country, particularly through industrialization, the government has adopted an Open Door Policy to attract foreign investment to Bangladesh. The Bangladesh Export Processing Zones Authori ty (BEPZA) is the official organ of the government to promote, attract and facil itate foreign investment in the Export Processing Zones. The primary objective o f an EPZ is to provide special areas where potential investors would find a cong enial investment climate, free from cumbersome procedures. BEPZA runs eight expo rt processing zones in Chittagong, Dhaka, Mongla, Ishwardi, Comilla, Uttara (Nil phamari), Adamjee (Narayanganj) and Karnaphuli (Chittagong). A total of 264 ente rprises in EPZs, 60 of which is 100 percent foreign owned, export over US$ 1 bil lion a year. 10 percent products of the enterprises, located in both public and private EPZs will be allowed to be exported to domestic tariff area against fore ign currency L/C on payment of applicable duties and taxes. Major Functions of BEPZA include: Promotion of foreign (FDI) & local investment Promotion of export

(3) Privatization Commission: With the formulation of the Privatization policy in 2001 and the Privatization R egulations in 2007, the commission is operational than ever before to disinvest the loss-incurring state-owned business enterprises. The privatization drive has created huge investment scope for foreign investors. The commission has for far handed over more than 100 enterprises to private management and scores of enter prises are in the pipeline. So, the foreign investors can take part in the open tender process to invest in the sectors. Saudi Prince is in talk with the commis sion to buy Rupali Bank. (4)Bangladesh Bank: Bangladesh Bank, the central bank of the country, was established as a body corp orate in line with the Bangladesh Bank Order, 1972 with effect from 16th Decembe r, 1971. The broad objectives of the Bank are: a) To regulate the issue of the currency and the keeping of reserves; b) To manage the monetary and credit system of Bangladesh with a view to stabili zing domestic monetary value; c) To preserve the par value of the Bangladesh Taka; d) To promote and maintain a high level of production, employment and real incom e in Bangladesh; and to foster growth and development of the country s productiv e resources for the national interest e) Facilitate remittance flow of the foreign investors and easy repatriation (5)Registrar of Joint Stock Companies & Firms: Office of the Registrar of Joint Stock Companies & Firms under the Ministry of C ommerce facilitates registration of local and foreign companies. This Office acc ords registration of Companies, Associations and Partnership Firms under the Com panies Act, other related acts, rules, orders and ensures lawful administration of them. VII. BARRIERS TO FDI A. Political Uncertainty: Unstable Political situation is the prime barrier to foreign direct investment i n the country. There are instances that frequent hartal, shutdown, transportatio n blockade shied away investors to other countries. In the 21st century, foreign companies 24/7 service, so they can not afford to pour in their hard-earned mon ey in a country of strike that hampers productivity. B. Lack of Infrastructure:

Diversification of export Development of backward & forward linkages Generation of employment Transfer of technology Upgradation of skill Development of management Promotion of int l marketing skill / access

Infrastructure is the platform of new investment. Bangladesh sometime loses FDI it can not convince foreign investors on power, telecommunications, port, roads and highways, utility and other facilities. C. Corruption: Corruption plays as a major barrier to overseas investment. Bangladeshs corruptio n perception index discourages foreign investors. D. Excessive Bureaucracy: Excessive bureaucracy leads to delay in taking decision and providing service an d also leave scope for corruption. Many believe Tata and Asia Energy are going t o be victim of excessive bureaucracy and indecision in the government machinery. E. Image Crisis: All these political unpredictability, corruption, bureaucratic bottlenecks natur al calamity, and shortage of infrastructure earn Bangladesh a bad name in world community. In spite of having cheap labor, competitive business cost and lucrati ve incentives, the country often falls victim to image crisis when it comes to F DI.

VIII. ENDING SUMMARY After foreign currency loans and foreign aids, foreign direct investment is the most important source of capital inflow in Bangladesh. Realizing the importance of foreign direct investment in the growth of the country the Government of Bang ladesh has taken different steps to open up its economy towards the foreign inve stors. Trade and exchange liberalization, current account convertibility, libera lization of investment regime are the major steps taken by the government since the early nineties. Besides, the comparative advantage of cheap labor and recent finding of significant amount of natural gas have created a great opportunity f or the investor to invest in Bangladesh. Despite all these initiatives taken by the government, the foreign direct investment in the country is not satisfactory . This is caused by poor implementation of the new, liberal investment policies, slow government decision-making, corruption, labor militancy, a sometimes-uncer tain law and order situation, poor infrastructure, inadequate commercial laws an d courts, and policy instability. Industrial activity is still dominated by inefficient public sector enterprises, which stifle the potential for greater economic performance. The comparative ad vantage in cheap labor for manufacturing is partially offset by low productivity , due to low skills, poor management, and inefficient infrastructure and machine

ry. Besides, the reputation for having widespread corruption in business dealing s discourages foreigners to come to Bangladesh for investment. It is very frustr ating that a recent report by Transparency International listed Bangladesh as th e most corrupt nation in the world for the last few years. There is no doubt tha t foreign direct investment is essential for Bangladesh. But we must not loose s ight of the downside risk of this mode of investment. The repatriation of the pr ofit and dividend gained from the investment that is generally done in foreign c urrency may cause a serious impact on the foreign exchange reserve of the countr y if it is not significantly increased. To overcome this situation, we have to increase the foreign exchange reserve. Fo reign exchange reserve will be increased if there is an increase in export earni ng and decrease in export expenses. To increase export we can export gas through pipeline or can use gas for producing electricity or other products that has a potential international market. We can also supply gas and electricity to our lo cal market, which has still a high demand. Increased power and gas supply may re duce huge foreign exchange used to import generators, their parts and fuel. IX. RECOMMENDATION After all this discussion, we can say that only liberal government policy and in centive packages cant do much to attract massive foreign direct investment. The Government should need an overall approach to overcome inefficiency in decis ion-making, lessen bureaucracy and corruption in government bodies. The Government should also improve our infrastructure; communication facility, p ower supply and distribution by opening up these sectors to the private investor s those considered to be more efficient. We should also be more patient on our political issues and increase cooperation to solve important national problems.

X. BIBLIOGRAPHY Multinational Business Finance by David K. Eiteman, Arthur I. Stinehill, Michael H. Moffet Bangladesh Review & Outlook - 2007, HSBC World Investment Report 2004, Investment Trends In South Asia.

http://www.unctad.org (accessed on August 13, 2007) FDI in Bangladesh 2004, the fourth FDI inflow survey. http//www.boi.gov.bd/FDI_in_bangladesh_2004.pdf (accessed on August 10, 2007)