FDI

Government of Bangladesh
PRIME MINISTERS OFFICE
Board of Investment
Foreign Direct Investment (FDI)

and Economic Development
Dr. Syed A Samad
Executive Chairman
02 March 2010
Contents
10:50-11:50 Session 1: Conceptual Issues
1.
2.
3.
4.
5.
6.
What is FDI?
Ideological Views on FDI
Why Firms Invest Abroad?
FDI Benefits to Host Economy
What is Economic Development?
FDI and Economic Development
12:00-13:00 Session 2: Bangladesh Aspects

1. FDI Statistics : Global and Bangladesh
2. Examples of FDI impact on Economic Development
3. Maximizing FDI benefits: Policy Issues
Board of Investment
Session 1:
Conceptual Issues
Copyright . BOI. 2010
Board of Investment
1. What is FDI?
Board of Investment
What is FDI?
Generally Foreign Direct Investment means:
establishing or expanding operations into a foreign
country with transfer of capital
FDI is defined by UNCAD as:
an investment involving a long-term relationship and
reflecting a lasting interest and control by a resident entity
in one economy (foreign direct investor or parent
enterprise) in an enterprise resident in an economy other
than that of the foreign direct investor.
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Board of Investment
What is FDI?
FDI has three components:
1. Equity capital is the foreign direct investor's purchase of
shares of an enterprise in a country other than its own.
2. Reinvested earnings comprise the direct investor's share

(in proportion to direct equity participation) of earnings not
distributed as dividends by affiliates, or earnings not remitted
to the direct investor. Such retained profits by affiliates are
reinvested.
3. Intra-company loans or debt transactions refer to

short- or long-term borrowing and lending of funds between
direct investors (parent enterprises) and affiliate enterprises.
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Board of Investment
2. Ideological
Views on FDI?
Board of Investment
Ideological Views on FDI

Broadly, there are three types of conflicting views on
foreign direct investment.
Radical
View
Pragmatic
Nationalism
Free
Market
Board of Investment
Ideological Views
Radical View
Marxist views that FDI exploits less-developed host
countries through
Extracting profits
Giving nothing of value in exchange
Instrument of domination not development
Keep less-developed countries relatively backward
and dependent on capitalist nations for investment,
jobs, and technology.
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Board of Investment
Ideological Views
Radical View
Radical view was popular (1945-80) among
-
Communist countries (China, Cuba)

Socialist countries in Africa
Nationalistic countries (Iran, India)
By end 1980s radical view was in retreat

-
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Collapse of communism
Bad economic performance of countries that embraced the
radical view
Strong economic performance of countries who embraced
capitalism rather than the radical view
Board of Investment
Ideological Views
Free Market View
Nations specialize in goods and services that they can
produce most efficiently.
Resource transfers benefit and strengthen the host
country.
Positive changes in laws and growth of bilateral
agreements manifest the strength of free market view.
However, all countries impose some restrictions on FDI.
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Board of Investment
Ideological Views
Pragmatic Nationalistic View
FDI has benefits and costs.
Allow FDI if benefits outweigh costs.
-
12
Block FDI that harms indigenous industry

Attract FDI that is in national interest
Tax breaks
Subsidies
Board of Investment
3. Why Firms
Invest Abroad?
13
Board of Investment
Why Firms Invest Abroad

Reasons Behind FDI
Firms want a presence in foreign markets
Firms want control over growth of these foreign markets
- To gain first mover advantages
- To ward off competitors
- To determine locations, advertising and other
related strategic decisions in the firms interest
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Board of Investment
Why Firms Invest Abroad

Reasons Behind FDI
Transportation costs are high

Market Imperfections (Internalization Theory)
- Impediments to the free flow of products between
nations
- Impediments to the sale of know-how
Follow the lead of a competitor - strategic rivalry

Product Life Cycle - however, does not explain when it
is profitable to invest abroad
Location specific advantages (natural resources)
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Board of Investment
4. FDI Benefits to
Host Economy
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Board of Investment

a. Resource-Transfer Effects
- Capital
- Technology
- Management
b. Employment Effect
Brings jobs that otherwise would not be created
- Direct: Hiring host-country citizens
- Indirect:
Jobs created by local suppliers
Jobs created by increased spending by employees
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Board of Investment

c. Balance of Payments Effects
18
Host country benefits from initial capital inflow when a

Multinational Company (MNC) establishes business.
- Host country records current account debit on
repatriated earnings of MNC
Host country benefits if FDI substitutes for imports of

goods and services.
Host country benefits when MNC uses its foreign

subsidiary to export to other countries.
Board of Investment

a. Resource-Transfer Effects
- Capital
- Technology
- Management
b. Employment Effect
Brings jobs that otherwise would not be created
- Direct: Hiring host-country citizens
- Indirect:
Jobs created by local suppliers
Jobs created by increased spending by employees
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Board of Investment

d. Effect on Competition and Economic Growth
20
Increased
- productivity growth
- product and process innovation
- greater economic growth
FDI can
- Increase market competition
Lower prices
Create greater consumer choice
- Stimulate capital investments
Board of Investment
5. What is Economic
Development?
21
Board of Investment
What is Development?
Development is not purely an economic phenomenon but
rather a multi-dimensional process involving reorganization
and reorientation of entire economic and social system.
Development is seen in various ways:
- Development as Economic Growth
- Development as Modernization - process of social change.
- Development as Distributive Justice - as improving basic
needs
- Development as a Mode of Production
- Development as to achieve lasting satisfaction of human
needs and improvement of the quality of life (sustainability)
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Board of Investment
What is Development? Todaros view:

Development is process of improving the quality of all human
lives with three equally important aspects. These are:
1. Raising peoples living levels, i.e. incomes and consumption,
levels of food, medical services, education through relevant
growth processes
2. Creating conditions conducive to the growth of peoples selfesteem through the establishment of social, political and
economic systems and institutions which promote human
dignity and respect
3. Increasing peoples freedom to choose by enlarging the range
of their choice variables, e.g. varieties of goods and services
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Board of Investment
What is Economic Development?

Economic Development means,
Sustained increase in the economic standard of living of a
country's population, normally accomplished by increasing its
stocks of physical and human capital and improving its
technology.
- Creation of physical capital;
- Employment and training of the human resources;
- Utilization and improvement of technology;
Lets see some facts on Bangladesh economy
24
Board of Investment
6. FDI and
Economic
Development
25
Board of Investment
FDI & Economic Development

Contribution of FDI economic development is identified by its
quality. The quality of FDI can be determined by:
-
26
The extent of localization of affiliates output: how much linkage

foreign affiliates have with the local economy;
Its contribution to the development of modern industries: foreign
affiliates entering into relatively technology-intensive industries,
which are new to the host country, bring more benefits;
Its extent of export-orientation: FDI in export-oriented units can
have substantial balance of payments benefits and positive
external effects; or
Research and development (R&D) activity of affiliates: such
activities have substantial positive externalities.
Board of Investment
Session 2:
Bangladesh Aspects
27
Board of Investment
1. FDI Statistics:
Global & Bangladesh
28
Board of Investment
Trends in Inward FDI

Current global financial and economic crisis exerted a dampening
effect on FDI. FDI flows declined by 14% to $1,697 billion in 2008
from a record high of $1979 billion in 2007.
Effects varied - inflows to developed countries plunged by 29% to
$962 billion.
Inflows to developing countries continued to increase by 17% to
$621.
Inflows to South-East Europe and the CIS continued to increase by
26% to $114.
Three largest recipients are: USA ($316 bl.), France ($118 bl.) and
China ($108 bl.).
UK lost the 2nd position.
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Board of Investment
Regional Trends in FDI Inflows

Inflows divergent in different regions
Inflows to EU : $503 bl. (-40%)
Inflows to South, East and South-East Asia : $298 bl.
(17%); Bangladesh:$1086 ml. (63%)
Inflows to North America : $361 bl. (-5%)
Inflows to Latin America and the Caribbean: $144 bl. (13%)
Inflows to West Asia : $90 bl. (16%).
Inflows to Africa : $88 bl. (27%).
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Board of Investment
Global Trends: FDI Outflows in 2008

Outflows amounted to $1858 bl.- declined by 13%.
$1507 billion originated in developed countries declined
by 17%.
EU outflows declined by 26% to $944 bl.
Developing country outflows increased by 3% to $293 bl.
Three largest sources: USA ($312 bl.), France ($220 bl.),
Germany ($156 bl.)
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Board of Investment
Perspectives on FDI Inflows in 2008

Region
FDI/GFCF (%)
Europe
12.7
North America
12.5
Africa
29.0
Latin America
15.5
Asia
10.7
South Asia
Bangladesh
8.5
5.9
Least developed
30.2
FDI supplements domestic resources
32
Board of Investment
FDI Inflow in 2007 and 2008: South Asia
In Million US$
Source: World Investment Report 2009
33
33
Board of Investment
FDI Inflow in 2008: Bangladesh

For the first time FDI inflow reached US$ 1 bill mark.
In Million US$
Source: Enterprise Survey, Bangladesh Bank
34
34
Board of Investment

FDI Inflow: Distribution by Components
FDI Components
FDI Inflow
(Mill US$)
Growth
%
2007
2008
a. Equity Capital
401.6
809.3
102%
b. Reinvested Earnings
213.2
245.7
15%
c. Intra-Company Loans
51.5
31.3
-39%
Total
666.4
1,086.3
63%
35
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Board of Investment

FDI Inflow: Distribution by Sectors
2007
(US$ Mill)
2008
(US$ Mill)
Telecommunication
201.90
641.39
Textiles & Wearing
102.35
126.36
Banking
79.96
141.76
Food Products
9.84
22.89
Agriculture & Fishing
7.33
14.43
Others
264.99
139.5
Total FDI
666.37
1,086.31
Sector
36
36
Board of Investment
FDI Inflow: Distribution by Sources/Countries
37
37
2007 (US$ Mill)
2008 (US$ Mill)
Egypt
75.17
373.4
UK
142.55
130.57
UAE
83.27
102.19
Malaysia
19.55
70.72
Japan
36.61
57.15
South Korea
27.68
44.64
USA
120.36
40.91
Hong Kong
55.46
39.85
Norway
25.67
33.47
Netherlands
Others
18.67
61.38
31.68
161.73
Source Country
Board of Investment
2. Examples of FDI impact on

Economic Development
38
Board of Investment
FDI Impact on Economic Development - General

FDI is one of the means of achieving the targets of higher
economic growth and development.
The recently industrialized countries in Asia like, South
Korea, Singapore, Taiwan, Malaysia are examples of how
FDI contributed in the economic development.
They made sure that the FDI is in line with their national
development priorities.
In contrast, Angola and Nigeria attracted FDI in sectors
such as mining and petroleum, but has not experienced
the expected growth.
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Board of Investment
FDI Impact on Economic Development - Bangladesh

There is no specific study conducted to measure the impact
of FDI on the economic development in Bangladesh.
General observations indicate that FDI plays significant role
in Bangladesh in terms of:
-
Creation of physical infrastructure

Technology transfer;
Employment generation
Access to capital; and
Product and process innovation
FDI played a significant role in development of Telecom,

energy, power and cement sectors in Bangladesh.
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Board of Investment
3. Maximizing FDI benefits:

Policy Issues
41
Board of Investment
How to Maximize the Benefits?

The relative strengths of the costs and the benefits of FDI depend
on whether the economy has a sound investment climate. An
investment environment is said to be a sound one if the country has
the following :
1.
A sound macroeconomic environment, which depends on
monetary and fiscal policies and conditions such as stability of
interest rates and status of fiscal accounts;
2. Appropriate institutions, which depend on the existence of
effective legal and regulatory structures, a competition authority
and investment promotion and facilitation institutions; and
3.
Adequate basic infrastructure, which implies adequate
supplies of power, water, land, transport and communications.
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Board of Investment
How to Maximize the Benefits?
There is no single winning formula for maximizing

benefits from FDI:
A sound investment environment is needed to
establish linkage with the rest of the economy.
If a country lacks basic infrastructure, linkages of
FDI with the rest of the economy might not be
established and the country, most likely, would not
benefit from FDI.
43
Board of Investment
Thank
You
44

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Government of Bangladesh

PRIME MINISTERS OFFICE

Foreign Direct Investment (FDI)

12:00-13:00 Session 2: Bangladesh Aspects

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

2. Reinvested earnings comprise the direct investor's share

3. Intra-company loans or debt transactions refer to

Copyright . BOI. 2010

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

Ideological Views on FDI

Copyright . BOI. 2010

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

Communist countries (China, Cuba)

By end 1980s radical view was in retreat

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

Block FDI that harms indigenous industry

Copyright . BOI. 2010

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

Why Firms Invest Abroad

Copyright . BOI. 2010

FDI and Economic Development

Why Firms Invest Abroad

Transportation costs are high

Follow the lead of a competitor - strategic rivalry

Location specific advantages (natural resources)

Copyright . BOI. 2010

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

FDI Benefits to Host Economy

Copyright . BOI. 2010

FDI and Economic Development

FDI Benefits to Host Economy

Host country benefits from initial capital inflow when a

Host country benefits if FDI substitutes for imports of

Host country benefits when MNC uses its foreign

Copyright . BOI. 2010

FDI and Economic Development

FDI Benefits to Host Economy

Copyright . BOI. 2010

FDI and Economic Development

FDI Benefits to Host Economy

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

Copyright . BOI. 2010

FDI and Economic Development

What is Development? Todaros view:

Copyright . BOI. 2010

FDI and Economic Development