Foreign Investment in Bangladesh Estimated deficit of investment if we want to achieve 8% growth rate And How much of it can be fulfilled

with F.Investment? The target set in the election manifesto of AL was , by 2013 they want to achieve a growth rate of 8 % and by 2017 want to increase it further to a level of 10% and sustain it up to 2021! Our current investment/GDP ratio is 23 percent. With this we are enjoying a growth rate around 5.5%. So in order to have an 8% growth we need to increase our inv/GDP ratio to a level of 33%. At a low level of GDP, sometimes such a high level of savings is neither feasible nor desirable, because huge current consumption has to be sacrificed for initial years in order to achieve future growth and prosperity. Such trade off is not voluntarily possible in a democratic country under a normal regime. Two ways are possibleColonial Plunder or Domestic Plunder known as internal colonization. The case of capitalism and socialism. Another new alternative is Foreign Aid and Foreign Investment Our 2008-09 estimated growth rate was 5.9%. budget Total Govt. expenditure was 15.3 % of GDP (i.e. 941.40 billion Tk). Public Dev. Exp was 3.7% of GDP (230 billion tk). Of which 1.5 percent is foreign aid, another 20% investment is now coming from the domestic private sector. So another 10% ie 690 billion tk must be financed externally. 10 b. dollar inflow of external investment will be needed. Either aid should increase or foreign investment must come. The question is who is going to do that and under what terms and conditions?

Pros and Cons of Foreign Investment Rezwanul Islam (P-Alo, 9-2-2010) is against portfolio foreign investment in the capital market for its volatility and bad experiences from the recent global economic crisis and Asian crisis. More recently Debopriya Bhattacharya has raised the question of whether some money from the stock market had already fled away to the foreign country. [So called sri Lankan company, some says actually behind the scene there are local people!] DFI has better prospects. On the one hand it brings new capital, technology, knowledge and management ideas and contributes to both growth and employment.. However these positive effects will largely depend upon certain parameters and under certain conditions the net effect finally become even negative!

Its net effect will depend upon following parameters: 1. Ownership (Example of Tata/Kafco/Cairn/Canco Phillip) 2. Technology Transfer scope---green field investment or brown field investment. 3. Capital Intensity---Employment effect will be less. 4. Profit Transfer or Reinvestment. 5. Substitute or supplement to the domestic market. (e.g. steel mills/rerolling mills) 6. Import intensity.

Studies on Foreign Investment: Findings An old study by Sadrel Reza and Md. Alli Rashid, (1997) Foreign Investment in Bangladesh, Dhaka (Read This and try to find out latest stuies on Foreign Investment in Bangladesh) . Some important negative findings of that study were: 1. From 1977 to 1990, less than 25 % F.Inv. went to industry, that industrial investment also enjoyed huge subsidy or incentive since they were located mainly in the EPZ, About 70 percent F.Inv. was in trade and net f. Inv was only 13.83% of the gross F.Inv. 2. Largest F.Inv case is KAFCO and it has become a longterm burden! 3. WB said, Clearly in Bangladesh context, the nature of private capital inflows has implied little augmentation of foreign exchange reserves. The bulk of FDI in the power sector so far is made of imports (e.g. pre-fabricated barge mounted power plants), so are capital costs (about 80% of PSCs) of IOCs engaged in the gas sector, and much of the foreign investment and lending in the telecom sector finance imports of telecommunication equipment. So is the case with the foreign inv. In manufacturing within and outside EPZ. 4. EPZ was opened in 1977. from 1977 to 1990 of the total F.Inv. only 23.76% was in industry, 69.11% was in trade. Most of the f.inv. was financed from local profit. Net financial inflow or import of capital goods was only 12.8% of the total F. Inv. 5. Foreign inv. is mainly going to those developing countries who have not only cheap but also skilled labour and those who have a developed infrastructure. In 2004 ILO carried out a survey of F.Inv. in 37 developing countries and found that the net effect was negative.

Desirable Areas Of Foreign Investment One must first look into the source of the f. capital, is it a green field investment or a brown field investment (i.e. extension of old plants!), how much profit is repatriated and how capital intensive and import intensive is the foreign inv.

The most important. Is whether it competes with and substitutes the local venture or whether it spurs local investment through forward and backward linkages. Infrastructure or manufacturing investment is better than investment in natural extractive industries.

In Bangladesh USA emphasizes a particular type of F. Inv. Yes. US ambassador Marry Ann Peters, told in a meeting of Am-ch. On 15 th. Aug. 2001 that in the next 100 days program the Govt. should undertake the following 5 point programme: Implementing agreement between the govt. and Stevedoring Services of America (SSA) and sign the 450 m $ project as quickly as possible, For maximum return gas should be exported to India, this will help to meet foreign exchange deficit(?), Govt. should do more to attract f. Inv. In the telecommunication sector, Govt. should do more to attract f. Inv. For power sector, Should prepare an action plan for the garments sector. Thus it is clear that topmost priority is assigned in the F.Inv. in PORT, GAS, ELECTRCITY and TELEPHONE.

How you can attract foreign investment under better terms and conditions? Number one precondition is better investment climate. WDR 2005 defines investment climate as A set of location specific factors shaping the opportunities and incentives for firms to invest productively, create jobs and expand. The definition is broad enough and is a function of various factors: 1. Geopolitics: e.g. South Korea, Taiwan, Singapore. 2. Large Market: China, India. 3. Cheap labour: Bangladesh. 4. Cheap Raw materials, minerals, energy resources, etc.----Middle East, certain African and LA countries. 5. Good Governance. 6. Better Infrastructure. 7. High profit and security of investment. 8. High Domestic investment

What important constraints are perceived to be the major constraints against business operation in Bangladesh by the businessmen in B.D? Poor infrastructural facilities are the number one constraint and that covers: electricity electricity=73.2 [to this also add transport and port ]and customs hazards.

Lack of good governance and corruption, etc. is the second largest constraint., corruption=57.9 Tax admin= 50.7 In B.D 97.3% reported that they had to pay on average 2.8% of sales value as bribe. In terms of % paying bribe , is the highest in the whole world! Second is Albanya(84.5%), third is Kyrgyzstan (82.4%) . But in terms of % of sales value, the top scorer is Cambodia (6.6%), then Kenya (5.5 percent and then Philippine and Indonesia (4.6%), then Bulgaria (4.2%), then Pakistan (3.6%)) and then Bangladesh (2.8%), last is China (2.2%). [S-WB, WDR, 2005.]

Finance is the third largest constraint.: Finance=45.7, Last constraint is the poor quality of human resources. Labor skills==20% and Other Constrains mentioned by the investors: Licensing=22.5, Tax rate=35.8, labour legislation=11% , Policy uncertainty=45.4 One should also note that the SME and informal enterprises have been disproportionately affected by these constraints.

[This is based on survey of 1001 firms in six sectors of B.D. garments, textiles, food and food processing, leather and leather products, electronics, chemical and pharmaceuticals.] Selm Raihan noted that cross country regression results show that net FDI flow is significantly related with GNI, Total Population, Gross Capital/GDP ratio and geographic dummies (S. Asia, China, Sub Sahara, etc.). But all soft constraints related to governance do not have any significant impact on FDI! [ S= Trade and Industrial Policy Environment in Bangladesh with special reference to some non traditional export sector, ed by abdur Razzaque and Selim Raihan, Unnayan Shamonnoy and Pathak Shomabesh, 2007, Dhaka]

What is the Government strategy to finance investment? Main Investment should occur in the physical and social Infrastructure. Past experience shows that the main investment source for physical and social infrastructure is foreign donation and public investment. Foreign donation is likely to decline or become costly in future.

So huge public investment will be needed to fill the gap or private investment both local and foreign should be encouraged under socially acceptable terms and conditions.. One innovative proposal by the current Government is PPP. The question is will PPP be really more competitive and reduce COST AND CORRUPTION or will it be a bribe to the private sector instead of Bureaucracy? In transport sector the return is slow and uncertain, so it is relatively harder to attract private investment in this field. PPP is actually a follow up of previous IPP in 1996. PPP showed past success in 1998-99. Two successful large scale electricity generation plants in Meghna ghat, Haripur, were built by the private sector. Three support funds have been kept for projects under ppp: 100 cr. Taka for technical consultancy and preparing the projects, 300 cr. Taka to give subsidy to PPP projects, called viability gap funding and 2100 cr. Tk. For investment in the field of infrastructure. The challenge for PPP is to create a Govt, institution that will ensure transparency, accountability of both public and private sector and harness the energy and initiative of the market and private sector. Besides local private investment, we need to encourage foreign inv. But for attracting foreign investment we must first create favourable conditions for the domestic investors. Special Economic zones will be created with ensured supply of electricity, transport and communication in backward areas of the country.