Investment climate & fdi 15 05-2014 - copy

Paper presented by

Dr. Md. Shamsul ArefinDirector General ACC, Bangladesh

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Investment Climate and Investment Climate and Foreign Direct Investment Foreign Direct Investment

(FDI) in Bangladesh (FDI) in Bangladesh

April 7, 2023 Dr. Md. Shamsul Arefin

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Contents:Contents:1. What is Investment Climate

2. What is FDI

3. Current situation of FDI in Bangladesh


What is Investment What is Investment Climate?Climate?Investment climate can be defined as the “policy, institutional and behavioural environment, both present and expected, that influences the returns and risks associated with investment.”

This environment is generally seen as having three main features:

Macroeconomic conditions

Governance and

Infrastructure.

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Cycle of Investment Climate


Key Features of Investment ClimateKey Features of Investment Climate Macroeconomic factors include such issues as fiscal,

monetary, and exchange rate policies. Governance relates to government interactions with

business, which typically mean regulation and corruption, both of which affect the cost of starting and running a business.

Infrastructure refers to the quality and quantity of physical infrastructure (such as power, transport, and telecommunications). More broadly, it can also refer to financial infrastructure (such as banking) – or access to finance.

Apart from the three features mentioned above, the extent of international integration as understood from the country’s trade openness and the availability of a large workforce with sufficient education and technological know-how are also crucial elements of the investment climate.

Foreign Investment ScenarioForeign Investment Scenario Because of the scarcity of domestic resources, there is the

need for more FDI in the country. Even though Bangladesh offers highly attractive incentives for that purpose, the volume of FDI has remained historically low in this country.

In per capita terms, FDI in Bangladesh in 2012 was only $7, as compared to $31 in India and $32 in Pakistan (UNCTAD, World Investment Report 2012).

Among the reasons behind low FDI inflows are such negative factors as weak governance, administrative hassles, poor conditions of infrastructure (roads, ports etc), corruption in public services, poor law and order conditions, and above all, inadequate and erratic supply of power and gas, which discourage investors to invest in Bangladesh.

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Risk factors for FDI are minimum in BangladeshBangladesh never posted negative economic growth

during the past 30 yearsBangladesh has never defaulted in its debt

repayments, nor asked for their rescheduling

Bangladesh has an open, market based economy led by a vibrant and innovative private sector which provides the main stimulus to its growth

Bangladesh is a homogeneous country with no religious, ethnic or other forms of cultural conflicts

Bangladesh has outstanding records in human rights

Positive factors of Investment Climate in Bangladesh


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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.


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Foreign Direct Investment (FDI)

1.FDI stands for Foreign Direct Investment, a component of a country's national financial accounts.

2.Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations.

3.It does not include foreign investment into the stock markets.

4.FDI is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.


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Characteristics of FDI1. It is long-term investment

2.Investment in physical assets

3.Aim is to increase enterprise capacity or productivity or change management control

4. Leads to technology transfer, access to markets and management inputs

5.Entry and exit is relatively difficult

6.FDI is eligible for profits of the company

7.Direct impact on employment of labour and wages


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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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•Rate of interest

•Speculation

•Profitability

•Costs of production

•Economic conditions

•Government policies

•Political factors

Good projects Demand Potential Revenue Potential Stable Policy Environment/Political Commitment Minimum Risk Allocation Framework

What are Foreign What are Foreign Investors looking Investors looking for?for?

Factors affecting FDI


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Business Stage Policy & Regulation

1. General - Bangladesh Industrial Policy (as undertaken time to time)

1. Business start-up - The Companies Act, 1994- Securities and Exchange Commission Act, 1993

1. Protection - The Foreign Private Investment (Promotion & Protection) Act, 1980

1. Export Zones - Bangladesh Export Processing Zones Authority Act, 1980- Bangladesh Private Export Processing Zones Authority Act, 1996

1. Facilitation - The Investment Board Act, 1989

1. Corporate / Personal Taxation and incentives

- Income Tax Ordinance 1984 and related rules and SROs- National Budget- The Finance Act/Bill

1. International Trade (Export & Import)

- Bangladesh Export Policy (as undertaken from time to time)- Bangladesh Import Orders (as undertaken from time to time)

1. Sectoral - Bangladesh Energy Regulatory Commission Act, 2003 (BERC)- Bangladesh Telecommunication Regulatory Commission Act, 2001 (BTRC)- The National Drug Policy, 2005

1. Foreign Exchange - Bangladesh Foreign Exchange Guidelines (issued from time to time)

FDI Policy Frame work in Bangladesh


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Investment Protection

The Foreign Private Investment (Promotion and Protection) Act 1980 provides protection for investment made in Bangladesh against

- expropriation & nationalization

- equitable treatment

- exit and

- profit & capital repatriation.

In addition, Bilateral Investment Treaties and Tax Conventions (agreed with 28 countries) provide further protection to investments.

FDI Policy Frame work in Bangladesh


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Investment Incentives Fiscal Incentives• Corporate tax holiday (outside EPZs):

5 to 7 years for selected sectors• Accelerated depreciation on cost of

machinery for new industries in lieu of tax holiday

• Reduced Corporate Tax for 5 to 7 years in lieu of tax holiday and accelerated depreciation

• Avoidance of double taxation under bilateral tax convention

• Tariff concessions on import of capital machinery

• Tariff concessions on import of raw materials of the export oriented industries

• Bonded warehousing facility

Financial & Other Incentives• Cash incentives and export

subsidies ranging from 5% to 20%

• Funds for export promotion, export credit guarantee scheme, permission for domestic sales up to 20% by export-oriented companies outside EPZ.

• Remittance of royalty, technical know-how and technical assistance fees

• Citizenship by investing a minimum of US$ 5,00,000

• Permanent resident permits on investing US$ 75,000


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Tax exemption on royalties, technical know how and technical assistance fees and facilities for their repatriation

Tax exemption on interests on foreign loansTax exemptions on capital gains from transfer of

shares by the investing companyRemittances of upto 50% of salaries of the

foreigners employed in Bangladesh and facilities for repatriation of their savings and retirement benefits at the time of their return

No restrictions on issuance of work permits to project related foreign nationals and employees

Other facilities and incentives for foreign Investors


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Facilities for repatriation of invested capital, profits and dividends

Provision of transfer of shares held by foreign share holders to local investors

Reinvestment of remittable dividends would be treated as new investment

Level playing field: foreign owned companies duly registered in Bangladesh will be on the same footing as locally owned ones

Foreign investment in Bangladesh is secured

Other facilities and incentives for foreign Investors


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• Infrastructure projects (Power Generation, Gas and Oil Exploration, Industrial Parks, High-tech Parks, etc.)

• Composite Textiles and Ready Made Garments with backward linkages

• Steel and Engineering• Infocom Services (IT and IT enabled

services);• Textile and other Industrial

Machinery and Parts thereof• Frozen Shrimp, Frozen Fish for

export• Finished Leather and Leather goods• Home Appliances• Telecommunication equipment Semi-

Conductor

• Fresh Fruits & Vegetables, Cooked/Semi Cooked Food items, Canned Juice, Dairy and Poultry, Livestock and Fisheries

• Automobile• Central Effluent Treatment Plants in

Industrial Areas• Paper from green jute and Allied Products• Hotel & Motel• Manufacturing of bicycle and two wheeler

for export• Jute products • Tourism• Shipbuilding• New forms of social capital with mass

transit networks, urban sewerage system, river reclamation, forestry and clean energy projects.

Sectoral Opportunities


Inflows of Foreign Direct InvestmentThere was an inflows of $666m foreign direct investment in 2009 which raised significantly in 2010 to $1086m. As of 2011, inflows of foreign direct investment recorded to $1136.38m.

Inflows of foreign direct investment during 2007-2011

YearYear Proposed Local Proposed Local

InvestmentInvestmentProposed Foreign Proposed Foreign

InvestmentInvestmentTotal Proposed InvestmentTotal Proposed Investment Growth %Growth %

ProjectProject BDTBDT ProjectProject BDTBDT ProjectProject BDTBDT

2005-20062005-2006 17541754 1837018370 135135 2498624986 18891889 4335643356 124.62124.62

2006-20072006-2007 19301930 1965819658 191191 1192511925 21212121 3158331583 -27.15-27.15

2007-20082007-2008 16151615 1955319553 143143 54335433 17581758 2498624986 -20.89-20.89

2008-20092008-2009 13361336 1711717117 132132 1474914749 14681468 3186731867 27.5427.54

2009-20102009-2010 14701470 2741427414 160160 62616261 16301630 3367833678 5.675.67

2010-20112010-2011 12981298 3997639976 148148 2693526935 14461446 6691266912 98.7198.71

2011-20122011-2012 16041604 497078497078 209209 338910338910 18131813 835989835989 212212

Private Investment StatisticsMarch, 2012 Source: Bangladesh Economic Review-2011

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Private investment in Bangladesh is facilitated by a host of agencies:

1. Board of Investment (BOI)Domestic and FDI (outside EPZs) – the apex Investment Facilitator

2. Bangladesh Export Processing Zones Authority (BEPZA)Domestic and FDI (only in EPZs)

3. Privatization CommissionPrivatization of State Owned Enterprises (SOE’s)

4. Sectoral regulatory bodies like BTRC, BERCTelecom Regulatory Commission & Energy Regulatory Commission

5. Line Ministries and AgenciesFor Power, MOPEMR and Power Development Board

BSCIC, Handloom Board etc. are generally responsible for development of SMEs and Cottage industries by the domestic firms.


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BOI Functions are broadly

categorized into three areas:

1. Investment promotions;

2. Investment Facilitation (approval, permission, recommendations etc. including aftercare) and

3. Policy Advocacy

BOI also works for investment climate improvement.

Board of Investment


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1. Investment Counseling

2. Visa on Arrival (pre-registration)

3. Foreign/JV/Local Investment

a. Registration of New Industriesb. Visa Recommendationc. Approval of Work Permitsd. Recommendation for IP, Machinery

Clearance Certificatee. Recommendation for IRC, Bonded

Warehousef. Recommendation for Land

Acquisition g. Approval of Royalty and Technical

Assistance Feesh. Processing of Foreign Borrowing

4. Facilitation of Setting up Foreign Commercial Offices*

a. Office Approval / Extension

b. Visa Recommendation

c. Approval of Work Permit

5. Facilitation of Utility Services(Gas, Power, Telecom, Water & Sewarage, Environment, Taxation)a. Counseling

b. Recommendation for connectivity / Facilitation

Assistance of Board of Investment


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BEPZA Act, 1980 & Foreign Private Investment Act, 1980

1st EPZ : Chittagong became Operational in 1983

2nd EPZ : Dhaka starts in 1993

Other EPZs : Mongla, Comilla, Ishwardi, Uttara

(Nilphamari), Adamjee &

Karnaphuli

2 new EPZs : Feni & Meghna under Implementation

Bangladesh Export Promotion Zones Authority (BEPZA)


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4.87%4.42%

5.26%

6.00%5.88%

6.19%6.43%6.63%

5.96%

6.27%

5.27%5.94%

5.23%5.39%

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10p

During recession, Bangladesh did better than Malaysia and Vietnam. Bangladesh has the capability (competitiveness) to do even better in the post-

recession period.

Real GDP Growth (%) in Bangladesh


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4,41

8

5,16

1

5,31

3

5,75

2

6,46

7

5,98

6

6,54

8

7,60

3

8,65

5 10,5

26 12,1

78 14,1

11

15,5

65

1623

6

7,15

2

7,52

0

8,00

6

8,37

4

9,33

5

9,65

8

10,9

03 13,1

47 14,7

46 17,1

57

21,2

69

22,5

70

2138

8

8,54

0

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10p

Export Import

International Trade (Export & Import) in BangladeshUS$ Million

Source: Bangladesh Economic Review, Bangladesh Bank


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367

603

394 388

564

394 379

284

804745

793 769

941

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Foreign Direct Investment in Bangladesh in US $ Million

World Investment report of UNCTAD, Bangladesh Bank April 7, 2023 Dr. Md. Shamsul Arefin

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1,719 1,739 1,523 1,602 1,307 1,5832,470 2,705 2,930

3,484

5,0776,149

7,471

10,750

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10R

Foreign Exchange Reserve in Bangladesh in US $ million

Source: Bangladesh Economic Review, Bangladesh Bank April 7, 2023 Dr. Md. Shamsul Arefin

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Impact of FDI in 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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Concluding Remarks 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.

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. April 7, 2023 Dr. Md. Shamsul Arefin

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"Our TREASURE is in our highly laborious PEOPLE!"

"...Discover the Potential"


April 7, 2023 Dr. Md. Shamsul Arefin 32

Economy & Finance

Investment climate & fdi 15 05-2014 - copy