Foreign Exchange Dealing and International

Banking
CB – 602

Term Paper

Topic: Opportunities of Foreign Investment In Bangladesh

Prepared for:
Shibli Rubayat Ul Islam
Associate Professor
Department of Banking
University of Dhaka

Prepared by:
Mudabbir Alam Tipu
ID # 50815023
Department of Banking
University of Dhaka

Date of Submission: 22 August 2009

Foreign Direct Investment (FDI) the acquisition of managerial control by a citizen or
corporation of a home nation over a corporation of some other host nation. Corporations
that widely engage in FDI are called multinational companies, multinational enterprises,
or transnational corporations. FDI traditionally implies export of real capital from home
to the host nation, but even when economic investment results from FDI, capital may not
be transferred from the home nation to the host one. Rather, multinational corporation
may acquire/utilise real capital from local (or a third-nation) sources. On the supply side,
FDI in Bangladesh originated in imperfections in its FOREIGN EXCHANGE MARKET as well as
in its financial market and its market for technology. Also the 'eclectic theory' of
multinational firms applies in its case as FDI is induced here by imperfections in the
market of real goods and factors of production. On the demand side, however,
Bangladesh invites FDI for industrial growth, in particular welcoming establishment of
manufacturing firms and service sector enterprises that would sell their products within
the country and also export outside it.

Some records of BOI

Records of the BOARD OF INVESTMENT (BOI), the only available source of information on
FDI in Bangladesh, suggest that FDI flows in the country are not very encouraging.
The GARMENT INDUSTRY has attracted the highest number of joint ventures and hundred per
cent foreign ownership enterprises. Consumer products top the list based on volume of
invested capital. TEA is the oldest sector to involve FDI while the Karnafuli Fertiliser
Company (KAFCO) is the largest individual FDI unit in the country. The total number of
FDI units established during the period between 1947-1971 was only 22, and was
dominated largely by units in sectors such as drugs and pharmaceuticals, and electric
goods.

Bangladesh initially adopted a policy of nationalisation of all large and medium

industries. Consequently, there was no new inflow of FDI in the country until 1977.
Subsequent governments experimented with various industrial policies, but because of
very uncertain political situation in the country, the FDI flows remained negligible until
1993. Only 220 FDI units were registered in Bangladesh between 1977 and 1993, but
subsequently, FDI has experienced a fairly high annual growth. The number of FDI units
registered in the country during the period from July 1996 to May 1999 was 425. The
expected volume of total investments in these enterprises accounted for Tk 288.8 billion.
These created employment for more than 94,000 persons. This expansion is attributable
largely to the relative stability of economic policies and the establishment of an improved
political, social and economic environment. Sectors that now attract FDI are readymade
garments, TEXTILES and fabrics, chemicals, PAPER and paper products, equipment and
spares, PRINTING, packaging, plastic products, metal industries, food processing, electrical
goods, pharmaceuticals etc. Of late, oil and NATURAL GAS,
electricity, TELECOMMUNICATION, CEMENT, HOTELS AND RESTAURANTS, and hospitals and clinics
have become sectors favoured by many foreign investors. The choice of FDI in initial
years was limited in low investment, quick yield projects, while recent years show some
diversification in lines of high-tech, capital intensive projects as well as of preferential
distribution within the traditional sectors and sub-sectors. The share of AGRICULTURE,
construction, storage and communication, however, remains historically low and account
for less than 3% of the total FDI.

Significant changes have taken place over time in the geographic origin of FDI flows in
Bangladesh. Source leaders during the pre-independence period were developed market
economies such as UK, North America and Japan. Hong Kong, Thailand, Singapore and
India started to participate in FDI in Bangladesh in the 1970s while Asian countries such
as China, Malaysia, Pakistan and South Korea began to invest in a relatively big scale in
the 1990s. Nevertheless, industrially developed countries still dominate in FDI in
Bangladesh, and other than UK, USA and Japan, notable sources of FDI in the country
are Netherlands, Germany and Canada.

FDI Elements in Bangladesh

FDI in Bangladesh consists primarily of three elements: cash capital and capital
equipment brought in and reinvested earnings. These components have fluctuated
considerably in the last two decades. In the beginning of this reference period, these three
components were in the ratio of 26:4:70, which, towards the end, changed to 8:2:90. The
difference implies that the net transfer of resources into Bangladesh from abroad is fairly
negligible, and that FDI contributes very little in terms of transfer of 'hardware'
technology.

FDI apparently does not have significant long-term impact on the technological base of
the country because of concentration of FDI in relatively low technology industries. Even
in the case of industries where technological diffusion is possible, such as
pharmaceuticals, operations have been confined mainly to bottling and packaging; only
rarely has manufacturing come into the scene. A shift of FDI related pharmaceutical
industries from production of drugs to that of cosmetics, toiletries, PESTICIDEs, INSECTICIDEs
etc. allowed some transfer of technology through licensing, introduction of new
processes, and training of local production and management staff. In other FDI related
sectors such as the electrical and engineering industries, investments have been
predominantly in imports of components/parts for assembling rather than in real
manufacturing. External aid and donor agencies and foreign experts of local agents of
multinational companies traditionally play a significant role in decisions on choice of
technology.

The investment plans in Bangladesh do not have appropriate built-in mechanisms for
progressive development of technology capability in terms of research, engineering
design, and local manufacture of the various components of plants, machinery and
infrastructure.
Type of investment in Bangladesh

Bangladesh invites FDI in joint ventures as well as in arrangements like technical

licensing, counter trade, co-production agreements, management agreements, marketing
assistance, turnkey operations, and combined turnkey and management contracts.
Incidences of technical collaboration are in evidence in sectors like cigarette, chemical
and pharmaceuticals (with UK firms), electric goods (with South Korean firms), standard
paints (with Thai firms) etc. Marketing collaboration has occurred with sterling zone
companies in the tea industry and in readymade garment industry. Licensing agreement is
predominant in chemicals and pharmaceuticals sectors. A number of indigenous firms
produce TNC brand products under license but without equity participation.

FDI in Bangladesh makes a direct contribution in terms of additions to the investible

funds and mobilisation of local resources for investments in manufacturing, trade and the
services sectors. New investments, including FDI, generate additional employment, train
local executives and workers, make thrusts into the export market, introduce improved
technologies, open up new horizon for R&D expenditures, and above all, create new
sources of tax revenue for the government. The contribution of FDI in employment
generation in the country however, is quite insignificant. FDI provides employment to
about 1.5% of the total industrial employment and less than 0.2% of the total
working POPULATION of the country.

Factors contributing to the attraction of the FDI

Bangladesh is a signatory to the Multilateral Investment Guarantee Agency (MIGA) and

the Overseas Private Investment Corporation (OPIC). This provides a guarantee to
foreign investors against loss caused by non-commercial risks, the risks of currency
transfer, war and civil disturbances. The foreign Private Investment (Promotion and
Protection) Act 1980 ensures legal protection to FDI in the country against
nationalisation and expropriation and guarantees repatriation of capital and dividend.
Also, the various types of INSURANCE facilities offered by nationalised and private
companies seem to provide adequate facilities for coverage of operational risks.

The industrial policy of the government provides extensive incentives and facilities to
attract FDI in Bangladesh. These include tax holidays, concession in import duty on
machinery, repatriation of profits dividends, invested capital and capital gain, and salaries
of foreign personnel and exemption of tax on these incomes, exemption of export
oriented industries from paying local taxes, up to 90% financing of the L/C value of
export products. The government has liberalised the trade regime and significantly
reduced non-tariff restrictions. Foreign investors in Bangladesh have access to
domestic CAPITAL MARKETs for working capital in the form of loans from commercial banks
and development financial institutions. They also have access to the services of the
country's STOCK EXCHANGEs. Export-oriented industries of the thrust sector (toys, luggage
and fashion articles, leather goods, diamond cutting and polishing, stationery
goods, SILK cloth, gift items, cut and artificial flowers and orchid, vegetable processing,
and engineering consultancy services) are provided cash incentives, venture capital, and
other facilities. The establishment ofEXPORT PROCESSING ZONEs (EPZ) proved to be an
effective step in attracting FDI in Bangladesh and government permission to allow
creation of private EPZs in the country has been a welcome decision.

The cultural environment in Bangladesh has a number of elements that can be identified
as favourable for FDI. The population has a high degree of ethnic and communal
harmony. Conservatism on religious grounds is not extreme and foreigners are exempted
from restrictions on this count. Major political parties of the country have almost
identical economic programmes. All of these favour liberalisation, which will enable the
country to fit in the globalisation process.

Despite the FDI friendly policies of the government and a culture of hospitality to
foreigners, FDI records in the country in terms of the number of projects implemented as
compared to those officially registered is frustrating. Of the 365 FDI projects registered
during 1996 - 1998, only 72 went into production in end 1999 and 27 were in process of
implementation, while the remaining 266 languished only as the file-cases.

Problems that have restricted FDI potentials in the country include excessive bureaucratic
interference, alleged irregularities in processing papers, lack of commitment on the part
of local investors, inordinate delays in selecting projects for feasibility studies, and
frequent changes in policies on import duties for raw materials, machinery and
equipment. Overlapping administrative procedures and absence of a transparent system
of formalities often confuse not only investors proposing projects, but also staff and
personnel assigned for discharging procedural responsibilities. Frequent transfers of top
and mid level officials in various ministries, directorates and departments affect
continuity and prevent timely implementation of strategic, procedural, and even routine
duties. Many foreign companies feel disturbed and ultimately are discouraged by
disruptions in the production processes in the country because of frequent power failures,
poor infrastructure support, and labour and political unrest. An additional problem is the
lack of professional personnel, i.e., the technical, managerial and innovative skills in the
country needed to efficiently handle entrepreneurial function including risk taking,
planning and coordination and control.

The standardised set of procedures required to be followed for FDI in a new venture in
Bangladesh starts with meeting of the foreign investor with BOI member to communicate
the investment proposal and submission of an application for registration. The BOI issues
the registration letter after scrutiny and collection of clearance from the Department of
Environment. The company is then asked to submit a Memo and Articles of Association
for incorporation with the SECURITIES AND EXCHANGE COMMISSION and registration with
Registrar of the Joint Stock Companies and also with the Chief Inspector of Factories and
Establishments. Upon completion of registration formalities, the company can purchase
and acquire land, construct factory and office premises, open letter of credit in any
commercial bank for import of machinery and equipment and release of consignment at
customs point. This apparently easy looking process however, is often difficult to put into
practice. Foreign investors often find problems in infrastructure, law and order, and
enforcement of contracts.

Bangladesh has an advantage in labour costs, which can be converted into an exportable
product, but the advantage has many difficulties. The factories in the country have to deal
with constraints beyond their control, such as, power failures, poor communications or
increased transaction costs and cumbersome procedures in customs in many government
offices. The political instability, including frequent hartals, etc, are real hazarts. However,
the situation is expected to improve if the political commitment of the government to
promote and protect FDI in the country can be increased and the policy environment can
be changed from one that is regulatory to one that is supportive/complementary in nature.

Economic supremacy is the dominant feature of the present-day world. In order to

survive, we have no option but to attain economic development. Foreign investment is
recognised as a key ingredient for economic growth for the least developed countries
(LDCs) and for Bangladesh, being one of the LDC with a domestic savings rate -- which
in quite insufficient for investment after fulfilling its basic needs -- the importance of
foreign investment is undeniable.

Today investing in a developed country is not viable due to very high labour cost and
other factors. As a result, global investors are seeking for opportunities to invest in the
developing countries or LDCs for the best return. But as an LDC, we have a lot to do to
attract such investments in our own interest. Foreign direct investment (FDIs) will create
employment, increase efficiency of our labour, encourage technology transfer and
develop new exportable sectors for us.

Recent trend in FDI

Foreign investment in Bangladesh unfortunately, is not satisfactory. According to the

UNCTAD, in 2003 Bangladesh had achieved only 0.05 per cent foreign investment,
while the proportion was 0.9 per cent in India, 0.52 per cent in Vietnam, 10.2 per cent in
Indonesia and 70 per cent in China.

In Bangladesh, most foreign investments have gone into the energy sector (mineral
resources / mining). Comparatively foreign investment in the manufacturing sector is not
high. This may be due to the fact that Bangladesh has a small domestic market and is not
fully capable of consuming quality goods due to low purchasing power.

Indian's Tata group was expected to invest $2.0 billion in Bangladesh. The group had
plans to set-up a $ 700 million basic steel industry in Ishwardi to produce hot rolled coil
and other basic steel products. It also wanted to invest $ 700 million in two 500 megawatt
power plants near Ishwardi. Its proposal also included investment of a $ 600 million
fertiliser plant in Chittagong.
The Tata group would need 200 mmcfd gas per day in the initial stage, which would rise
to 3500 mmcfd once the plants went into full operation. The group planned to invest $
1.50 billion in the first phase and $ 0.50 billion in the next phase. Tata wanted a 20-year
guarantee of gas supply at a price and an agreed formula which was considered not viable
for the state. Till now Tata has no investment in Bangladesh, but it has strong trade
relations with the country. Tata group's $ 2.0 billion investment is expected to be at least
five times the total foreign investment received by Bangladesh in the past few years. Now
Tata may not be too keen to invest in Bangladesh but it was not our fault because they
demanded what was not feasible for us.

Why would foreign investors come to Bangladesh? Because the government has given
the highest priority to attract foreign investment, making Bangladesh otherwise an
attractive location The foreign investors have following advantages in Bangladesh:

a. The country has cheaper labour force;

b. Tax holiday up to 12 years;

c. Bangladesh allows 100% foreign ownership;

d. Permanent residentship for foreign nationals investing more than US $ 75000 or

equivalent amount;

e. Concessionary financial benefits similar to the local investors;

f. Lower inflation rate compared to other Asian countries;

g. A wide range of tax exemptions;

h. Facilities for repatriation of invested capital, profits and dividends;

i. Multiple entry visa facilities for visiting foreign investors;

j. Reinvestment of reportable dividend treated as new investment;

k. Bangladesh enjoys MFN and GSP facilities from a number of countries including
USA; and

l. Bangladesh has two seaports for export and provides relatively low cost establishment.
The potential areas for investment in Bangladesh include: agriculture, fisheries, agro-
based industries, chemicals, light industries, natural gas and oil exploration, textile,
tourism, energy sector, telecommunications, etc.

Although the prospects for foreign investment in Bangladesh are otherwise bright, we
have at the same time some barriers to investment.

Such barriers include, mainly, the following:

Political instability: a common problem in Bangladesh. Though we expected substantial

change in our political environment, we are not observing any positive signs yet. This is a
major disincentive for foreign investors.

Corruption: Corruption is the main problem in Bangladesh at present. It plays a negative

role in attracting foreign investment here.

Lack of infrastructural facilities: Modern communication system is essential for foreign

investment. But Bangladesh's poor infrastructure hinders the prospect of foreign
investment. Only one operational port and one Dhaka-Chittagong highway are not
sufficient for industrialisation of Bangladesh.

Trade union: Most of the trade unions of the country have political ties with the parties in
power and opposition. This hampers industrial production and pollutes the with
environment. As a result, production targets fail, the industry incurs losses.

Long procedure: Redtapism, indecision, delays in decision making etc., are the common
features of our bureaucracy which frustrate investors. Currently, the period for
investment in China is six days, this is 166 days for Bangladesh.

Negative image: Bangladesh is known to the world as a country of corruption, political

unrest, natural calamities and poverty. Militancy is now being added to create a negative
image abroad.

Some Suggestions to solve the problems

The Nobel Laureate Mr. Amaryta Sen, however, was positive about our country. He said
though there are problems and lackings in various sectors, the country very bright future
it is going to attract some important foreign investment in the near future. Not only this
Bangladesh has developed its manpower rapidly.

Our demand to our policy makers is 'make Amaryta Sen's word a practical scenario for
Bangladesh.'

The writer is Assistant Secretary, The Federation of Bangladesh Chambers of Commerce

and Industry (FBCCI)
Bangladesh is virtually located as a bridge between the emerging markets of South Asia
and fastest growing markets of South East Asia and ASEAN countries. With the
proposed concept of a "Bay of Bengal Growth Triangle" with its apex Chittagong port
extending south-west to Calcutta, Madras and Colombo and the south-eastern arm
extends through Yangon, to Thailand, to Penang with the third arm to Colombo, this
region should have growing attention of the investment world. Bangladesh has the
potential to be an entry port to the region, a potential small scale Singapore, for the region
covering Bangladesh, Nepal, Bhutan, eight north-east Indian states (of Assam,
Meghalaya, Monipur, Imphal, Arunachal, Nagaland, Mizoram and Tripura) and resource-
rich northern Myanmar, a land locked region. Bangladesh is poised to become a regional
hub where activities relating to assembling, manufacturing, trading and services, would
be some of the areas that are picking up over the years. This geopolitico-economic
location of Bangladesh indicates its history of being a nation of sea-farers, traders and
suppliers.

Bangladesh is a developing democratic polity on the Westminister model; secular, but not
a theocratic state. Bangladesh is a moderating influence in a consistently volatile and
often mutually hostile South Asian scenario.

The current macroeconomic situation in the country is, by and large, stable, characterized
by a manageable fiscal deficit and a quite low current account deficit. The stable
macroeconomic situation is an outcome of a mixture of prudent monetary and fiscal
policies that are being pursued. The external current account deficit has also been low.
This reflects the continued high growth of exports, increased flows of remittances,
moderate growth in money supply as well as that of imports.

The country has a policy of private sector led, liberal economic approach; export
oriented, gradually transforming into assembling & manufacturing; seeking for rapid
expansion of the service sector. Also looking for substantial joint venture and Direct
Foreign Investment (DFI) from abroad in medium and large-scale industries and
enterprises, including infrastructure building.

The following facts deserve attention in relation to assessment of Bangladesh as an

investment

i) Bangladesh has never defaulted in its debt-service liabilities to multi-lateral and

bilateral donors.
ii) Bangladesh grow over 21 million metric tons of food grains, basically rice and some
wheat and potatoes which is enough to feed the population of the country, and for
building reserve stocks.
iii) Bangladesh never experienced negative growth during last 27 years of it's
independence.
iv) Bangladesh exports readymade garments, knitwear, brand name wind cheaters,
walking shoes, leather goods, shoes and other products, urea fertilizer, pharmaceutical,
shrimps and prawn, vegetables, jute and jute products etc. to sophisticated markets of EU,
USA, Japan and many other countries. Garments and related export account for more
than US $4 billion.
v) The frequency and intensity of natural disasters are far less in Bangladesh than those in
the Philippines, Japan and even the USA, Bangladesh is located outside the major
earthquake zones.

Reforms and liberalization

A significant array of reforms, deregulation and liberalization have been carried out over
the recent years in policies relating to virtually every sector of the economy including
financial reforms with the aim of globalization challenges for the economy through
introduction of international competitiveness and productive efficiency.

We have opened up our economy. We are one of the top exporters of readymade
garments to USA and Europe. Our shrimp and leather products exports are rising sharply.
We have removed all barriers to investment and business. Government is offering
unparalleled facilities to investors. 100% foreign investment is allowed, excepting four
reserved items/areas: i.e.

(a) production of arms and ammunition and other defense equipment, and machinery,
(b) forest plantation and mechanized extraction within the bounds of reserved forests,
(c) production of nuclear energy and
(d) security printing (currency notes) and minting.

All other areas are open to private investment. We are providing tax holidays and duty
free import of capital machinery, raw materials import for export manufacturing.
Expatriates' work permits are easily obtained and unhindered remittance of dividends,
capitals, gains on capital etc. are allowed. We have eliminated licensing system and
simplified government approval procedure for investment in Bangladesh.

Government has enacted a law in the parliament enabling the private investors to set up
private Export Processing Zones (EPZ). The units in private EPZ will enjoy facilities
similar to those in government EPZs. The Private Power Generation Policy has been
formulated paving the way for private investment in power generation for which a new
Electricity Act and a regulatory commission is on their way. Private investments have
already been allowed in gas exploration, gas development, power generation and other
mining & exploration activities.

An attractive investment destination

Following are some positive aspects which make Bangladesh an attractive location to
foreign investors:

i) We have opened up our economy with rapid liberalization of import policies helping
globalization of our economy;
ii) According to a Survey of the Economist-risk factors for FDI in Bangladesh are
minimum compared to many other countries of this region;
iii) Cost of production especially cost of labor both skilled and semi-skilled is
comparatively lower;
ix) Cost of living is also quite low and reasonable and there is no communal or ethnic
problems;
v) English language is widely spoken and understood;
vi) Working capital loan as well as term loan from local commercial banks allowed to the
industries setup with foreign capital;
vii) Citizenship by investing a minimum of US $5,00,000 or by transferring US
$10,00,000 to any recognised financial institutions (non-repatriable);
viii) Permanent residentship is granted to an expatriable by investing a minimum of US
$75,000 (non-repatriable);
ix) Avoidance of Double Taxation Agreements and Bilateral Investment Promotion
Treaties have been signed with many countries including U.K.

Legal security for investment

i) Foreign Private Investment (Promotion and Protection) Act, 1980 ensures legal
protection to foreign investment.
ii) Bangladesh is a member of Multi-Lateral Investment Guarantee Agency (MIGA),
Overseas Private Investment Corporation (OPIC) of USA and International Centre for
Settlement of Industrial Disputes (ICSID)
iii) Member of World Intellectual Property Organization (WIPO) and World Association
of Investment Promotion Agencies (WAIPA).

Private Investment Trend

Board of Investment (BOI), the government's investment promotion agency, is at the

forefront of the country's efforts to attract and facilitate investment. Board of Investment
headed by the Hon'ble Prime Minister, was created in 1989 to implement governments'
investment policy and promote private participation in the industrial sector. As a result of
reformed policy measures undertaken by the government, private investments especially
foreign investments in the country have increased manifold. This has been achieved due
to adoption of various programmes including holding of seminars/symposium, bilateral
talks, press briefings and other interactive processes at home and abroad.

From the analysis of investment trend, it reveals that from 1991-1992 to 1999-2000 as
many as 10412 industrial projects both local & foreign have been registered with BOI
having total investment outlay of US$ 19074 million with employment opportunities of
1442568 persons. During that period a total of 998 industrial projects both under joint
venture and 100% direct foreign investment was registered with Board of Investment
having proposed investment of US$ 11667million with employment opportunities of
257159 persons.
The top investing countries are USA, UK, Malaysia, Japan, Hong King, Singapore,
Republic of Korea. France, India, Germany, China, in that order. During the fiscal year
1999-2000, 135 projects involving an estimated foreign investment of US $2119 million
have been registered with Board of Investment. Several major oil companies e.g. Shell,
UNOCAL, etc. have already invested. Burlington Resources have notified their intent to
have major investment in gas and oil exploration. The French TNC LaFarge, the world's
largest cement producer is setting up a US $240 million cement factory with 1.2 million
MT initial capacity, to be raised to 2.4 MT in phase-wise. Several international telecom
companies have set up successful joint ventures and others are expected to make
substantial investment in infrastructure projects.

It has been recognised that an important source of funding the economic activities for
faster growth is foreign investment. On the outset let me refer to some research studies
which show that Bangladesh economy has the potential to grow by around 8.0 per cent
per year during the coming years, for which at least 20 per cent investment rate is needed.
Since our saving investment gap is very wide, domestic savings can not meet the
requirement. We have changed our trade policy from an inward looking import
substitution policy to export-led growth. Despite notable diversification and
achievements, our exports are limited to a few commodities and destinations of exports
are confined to only a few countries.

Remittances by the Bangladeshi workers have played a significant role in bridging the
gap of savings and investment. We have to see how these funds are utilised in productive
sectors and not fully spent in consumption and speculative purposes. While recognising
the contribution of foreign aid to meet our resource requirements, we have to reduce our
dependence on it.

Foreign direct investment (FDI) is pivotal in providing Bangladesh the necessary finance
and capital to achieve sustainable growth as well as poverty alleviation. FDI inflows have
been able to increase GDP by raising the economy's output capacity and employment
level. At the same time, it has also contributed in improving per capita income level.
Overall, FDI can provide the necessary support for Bangladesh to progress further and
realise higher growth levels by utilising all its resources to their fullest potential.

With a view to attracting foreign investment, Bangladesh is providing incentives like:

Accelerated depreciation; concessionary duty on imported capital machinery; tax
facilities; tariff rationalisation; rationalisation of import duties and work permit for
foreign nationals. As a result of the incentives provided and changes in our monetary,
fiscal and trade policies, there is an upward trend in foreign investment. It reached as
high as US$ 804 million in the fiscal year 2004-05 followed by US$ 743 million in FY
2005-06 and US$ 760 million in FY 2006-07.

We must recognise the major problems that an investor faces while investing in
Bangladesh and find ways to solve them. The major problems are:
(a) Political instability and policy discontinuity, (b) Lengthy and time consuming
procedures of the government and para-statal agencies, (c) Corruption, (d)
Underdeveloped infrastructure, (e) Lack of adequate institutional capacity.

I would like to talk more on the investment climate and the enabling environment.

On many accounts the investment climate of Bangladesh is reasonably good. In last

fifteen years there were radical changes in the country. Foreign investment is actively
encouraged and promoted in Bangladesh with the Bangladesh government implementing
a number of market oriented proactive investment policies. Incentives being offered to
investors are, in addition to some already mentioned: duty free imports for 100 per cent
exporters; and tax exemptions on technology remittance fees, on interest on foreign
loans; and on capital gains by portfolio investors.

Trade has been liberalised and duties reduced, with customs bonded warehouses available
to assist exporters. There is no discrimination against foreign private investors regarding
investment incentives or export and import policies. There are no limits either on the
repatriation of profits or income and the local currency is fully convertible on current
account. Procedures for foreign direct investment have been simplified and the Board of
Investment (BoI) provides registration and other services. However, licencing regulations
apply to private sector activities in both the energy and telecommunications sectors.
There are performance requirements, which do not generally present problems for foreign
investors.

A conducive legal framework has been established by enacting enabling laws. Investment
in Bangladesh is now well protected by law and supported by fiscal, monetary, trade,
industrial and foreign exchange policies.

However, having said about the environment, I think we have to highlight the following
issues. Firstly, the government intends to continue with these policies. Further, reforms
undertaken by the government will ensure strong conducive policy environment.

Secondly, regulatory bodies like the Bangladesh Bank (BB), Security Exchange
Commission (SEC), Board of Investment, Bangladesh Telecommunication Regulatory
Commission (BTRC), Energy Regulatory Commission (ERC) and newly formed the
Better Business Forum (BBF) and Regulatory Reforms Commission (RRC) are expected
to deliver more responsive and efficient system to give quick results for facilitating
foreign investment. Thirdly, the cost of doing business should be reasonable. Cost of
production in Bangladesh is less compared to some other developing countries and cheap
labours are available. But lack of proper infrastructure may result in some rise in
production costs.

Fourthly, as the reforms and development of financial market is an ongoing process, we

should take quick and bold steps to accelerate reform measures for banks, leasing
companies, insurance companies and capital market.
Fifthly, as the establishment of good governance and political stability are preconditions
for accelerated investment, Bangladesh has made considerable progress in the financial
sector. The recent measures to ensure transparency and accountability in the financial
sector will also help the investors.

The potential contribution of capital market in financing development is yet to be realised

in Bangladesh. This is evidenced by the fact that market capitalisation is only 10.5 per
cent of GDP. Given the size of the population of Bangladesh and steady growth of its
GDP, there exists significant opportunities for utilising the capital market as a vehicle for
raising long-term investment fund.

One of the important characteristics of a well functioning equity market is its efficiency
in information system in the stock markets. Informational inefficiency cannot ensure the
fair price of the stock for the investor, and may create an opportunity for the speculator to
gain abnormal return. Ensuring the proper credit rating for all companies can play a vital
role in this regard in order to reduce the asymmetric information, which eventually helps
the capital market to become more efficient.

Bangladesh is a country of communal harmony where abundant labour power is available

than any other country in Asia. Significant volume of foreign investment has already
poured in the country during the last 10 years. Generation of huge number of SMEs,
success in micro credit and NGO activities, good yields in agriculture sector due to high
yielding varieties, record level of foreign remittances, rapid spread of
telecommunications services, acceleration of export earnings are taking the economy at a
higher level with a reasonable rate of growth. Moreover, we can claim now Bangladesh is
one of the safest, profitable and attractive ground for the foreign investors.

The prospect of the Bangladesh economy, in the future, is positive as we are sincerely
working to consolidate our reforms and taking further actions to create enabling
environment for business and economic activities.

In 2005 the famous investment firm of the USA, Goldman-Sachs listed Bangladesh as
one of the new emerging countries (N-11). Price Waterhouse Cooper in their report of
March 2008, included Bangladesh as one of the new emerging countries (E- 13).
According to that report the 13 new emerging countries have the potential to grow
significantly faster than the established OECD countries. Bangladesh Bank has recently
taken several steps to bolster the real sectors of the economy. These steps aim to increase
domestic output in agriculture, manufacturing and service sectors. The stance of the
policies of Bangladesh Bank is directed to increase the much needed employment
opportunities of huge number of people. Recently, we have taken steps in simplifying
foreign borrowing by the private sector. We are also taking steps in rationalising the
foreign exchange transactions to encourage increased FDI and foreign portfolio
investment in Bangladesh.
We are aware that the outlook for environment for Bangladesh will be quite challenging
and all of us: government, regulatory agencies, banks, financial institutions, private
stakeholders and foreign investors must work together to make Bangladesh a middle
income economy by the end of this decade. To reach our goal our sincere and effective
co-operation is of utmost importance to us.

Survey by Bangladesh Bank

Distribution of reporting enterprises

The survey in FDI is conducted by Bangladesh Bank on half yearly basis. For the current
survey (for the period January-June, 2008) FDI returns were sent to 629 enterprises.
Among them 303 enterprises are located in EPZ areas and the rest 326 are in Non-EPZ
areas. Out of the total 629 enterprises, 288 (45.79%) enterprises submitted FDI returns,
of which 163 (53.8%) from EPZs and 125 (38.34%) from Non-EPZ areas. FDI data in
connection with the rest of 341 (54.21%) enterprises, 201 and 140 enterprises registered
with BOI and BEPZA respectively were not included in the survey report because there
were 316 non-response and 25 untraced enterprises. On the other hand, during the period
July-December, 2007, out of 510 enterprises, 210 (41.17%) submitted their FDI returns.
Among these 210 enterprises, 100 are located in Non-EPZ areas and 110 located in EPZ
areas. The data relating to the 300 enterprises which were not included in the survey
report because of non-response and untraced enterprises .Out of 300 non-response
including missing enterprises, 217 are located in Non-EPZ areas and 83 located in EPZ
areas. Though the number of enterprises submitted FDI returns were not so satisfactory
yet the survey captured the major enterprises of higher FDI.
FDI inflow survey findings:
i) Total FDI inflows increased by US$ 198.63 Figure 2: Half yearly Time Series Data
on FDI Inflows million or 69.69% to US$ 483.66 million during January-June, 2008
compared to the decrease of US$ 96.31 million or 25.26% and a decline of US$ 30.07
million or 7.31% FDI Infliow (In million US$) respectively during the July
December,2007 Jan- Jul- Jan- Jul- Jan- Jul- Jan-Jun,05 Dec,05 Jun,06 Dec,06 Jun,07
Dec,07 Jun,08 and January-June,2007.

Total FDI inflows decreased by US$ 24.06 Figure 3: Yearly Time Series Data on FDI
Inflows million or 3.03% to US$ 768.69 million during the financial year FY-08
compared to the increase of US$ 48.14 million or 6.46% during financial year FY-07
and decrease of US$ 59.17 million or 7.36% during financial FY-05FY-06FY-07FY-08
Table 1: FDI Inflows in Bangladesh during January-June 2008

Review by Components:
i) Equity capital increased by US$ 212.13 million or 127.19% to US$ 378.91 million
during January-June, 2008 compared to the decrease of US$ 68.06 million or 28.98%
during the previous half year and increase of US$ 5.18 million or 2.26% during the same
period January-June,2007.
ii) Reinvested earnings decreased by US$ 5.69 million or 5.59% to US$ 96.01 million
during January-June, 2008 compared to the decrease of US$ 9.84 million or 8.82%
during the previous period July-December,2007 and a decrease of US$ 57.92 million or
34.18% during the same period January-June,2007. iii) Intra-company loans decreased by
US$ 7.81 million or 47.19% to US$ 8.74 million during January-June, 2008 compared to
the decrease of US$ 18.41 million or 52.66% during the previous period July-
December,2007 and increase of US$ 22.67 million or 184.46% during January-
June,2007.

Table 2: Time Series Data on FDI Inflows

FDI inflow by Area:
i) Total FDI inflows of Non-EPZ area increased Figure 4: FDI Inflow for Non-EPZ by
US$ 188.51 million or 76.62% to US$ 434.53 million during the period under review
compared to the decrease of US$ 68.89 million or 21.88% during the previous period
July-December,2007 and decrease of US$ 52.15 million or 14.21% during the same
372.52, 86%period January-June, 2007 of the preceding Equity capital Reinvestment
Intra-Company Borrowing

Total FDI inflows into EPZs increased by US$ 10.12 million or 25.94% to US$ 49.13
million during January-June, 2008 compared to the decrease of US$ 27.42 million or
41.28% during the period July-December,2007 and increase of US$ 22.08 34, 69%
million or 49.79% during January-June,2007.

Figure 5: FDI Inflow for EPZ (In million US$)

FDI inflow by Major Sectors:

i) FDI inflows into Telecommunication Sector increased by US$ 121.44 million or

36.08% to US$ 210.68 million during January-June, 2008 compared to the decrease of
US$ 23.42 million or 20.79 % during the previous period July-December,2007. It also
decreased by US$ 79.39 million or 41.34% during January-June,2007.

ii) FDI inflows into Banking Sector increased by US$ 82.35 million or 221.19% to US$
119.58 million during January-June, 2008 compared to the decrease of US$ 5.51 million
or 12.89 % during the previous period July-December,2007. It also decreased by US$
6.35 million or 12.94% during January-June,2007.

iii) FDI inflows into Gas and Petrolium Sector decreased by US$ 9.51 million or 13.36%
to US$ 61.65 million during January-June, 2008 compared to the decrease of US$
47.87 million or 40.22 % during the previous period July-December,2007. It also
increased by US$ 33.07 million or 38.47% during January-June,2007.

iv) FDI inflows into Textiles and Wearing Sector increased by US$ 17.4 million or
45.78% to US$ 55.41 million during January-June, 2008 compared to the decrease of
US$ 26.33million or 40.92 % during the previous period July-December,2007. It
increased by US$ 23.23 million or 56.51% during January-June,2007.

v) FDI inflows into Power Sector increased by US$ 7.19 million or 80.25% to US$
16.15 million during period under review compared to the decrease of US$ 7.84 million
or 46.67 % during the previous period July-December,2007. It increased by US$ 8.64
million or 105.88 % during January-June,2007.
FDI inflow by Major Countries:
FDI inflows for the period Janyary-June,2008 from major countries arranged in
descending order of magnitude were:
Egypt (US$ 116.41 million) , U.K. (US$ 77.97 million),UAE (US$ 72.27 million),
Switzerland (US$ 61.11 million), Singapore (US$ 28.77 million), USA (US$ 23.78
million), South Korea (US$ 23.50 million), Hong Kong (US$ 18.69 million) ,Netherlands
(US$ 16.56 million) and Pakistan (US$ 11.56 million) which were 24.07%, 16.12%,
14.94%, 12.63%, 5.95% ,4.92%, 4.86% , 3.86% , 3.42% and 2.39% respectively towards
the contribution of total FDI inflow.