IRole of FDI:

Foreign direct investment (FDI) is a potent weapon of developing the Bangladesh economy and
can play an important role in achieving the country’s socio-economic objectives including
poverty reduction goals. In a capital-poor country like Bangladesh, FDI can emerge as a
significant vehicle to build up physical capital, create employment opportunities, develop
productive capacity, enhance skills of local labor through transfer of technology and managerial
know-how, and help integrate the domestic economy with the global economy. This policy note
provides an assessment of the current situation of FDI in Bangladesh and examines its impact
on the country’s balance of payments.
Current Situation of FDI in Bangladesh :
Since the last decade, there has been a considerable change in global flows of trade and
finance including a surge in FDI. Despite being a recent phenomenon, several underlying
factors have contributed to increasing the FDI inflow in Bangladesh, such as trade and
exchange liberalization, current account convertibility, emphasis on private sector led
development, liberalization of the investment regime, opening up of infrastructure and services
to the private sector-both domestic and foreign, and above all the interest of foreign investors in
energy and telecommunication sector. It is argued that more open trade policies are associated
with the presence of foreign firms and economy-wide technological and productivity gains in
developing countries like Bangladesh. There also exists evidence of a strong positive correlation
between increasing share of FDI in GDP and diversification to high-technology exports in
countries that have open trade regimes. Still, FDI constitutes a low share in GDP or gross
investment of the country. Over the last decade, FDI as a share of GDP varied between 1.4
percent in FY98 and 0.5 percent in FY04. In FY05, the share rose to 1.3 percent due mostly to
the large inflow of FDI to the telecommunications sector (Chart 1). As a ratio of gross
investment, FDI varied between a low of 1.2 percent in FY04 and a high of 3.2 percent in FY98.
Thus, given its low share in GDP and gross investment, it is expected that FDI is not likely to
have a significant impact on various sectors as well as on important macroeconomic indicators
of the Bangladesh economy.
The volume of FDI inflows to Bangladesh since FY98 is given in Table 1. Over the 1998-2007
period, the aggregate FDI inflow to Bangladesh was USD 5,510 million. Of this, equity was USD
2,986 million (54 percent), reinvested earnings amounted to USD 1,634 million (nearly 30
percent), and intra-company loans constituted USD 890 million (16 percent) (Chart 2). After a
relatively high inflow in FY98, there was a declining trend in FDI inflow up to FY04 with an
exception in FY01. In FY05, there was an abrupt growth in FDI inflow amounting to USD 804
million. However, when FDI and debt inflows are seen in the context of associated remittances
on account of dividend/profit repatriation, disinvestments, and debt amortization, it is observed
that over the 10-year period (1998-2007), the outward remittances constituted 65 percent of the
total inflow. It may be mentioned that the surge in FDI in the energy and telecom sectors in
Bangladesh is associated with heavy import content and little impact on foreign exchange
reserve accumulation. This also raises a long term concern relating to the country’s ability to
generate sufficient foreign exchange to finance remittance of profits and income originating from
foreign investment. An associated concern is the rapid accumulation of foreign debt obligations
of various maturities by the private sector; the outstanding stock of private-sector debt has now
reached a significant level. The rapidly accumulating private sector debt gives rise to interest
and principal payments in foreign exchange over and above official debt obligations to bilateral
and multilateral agencies.
As a developing country, Bangladesh needs FDI for its ongoing development pro-cess. Since
independence, Bangladesh is trying to be a suitable location for FDI. However, the total inflow of
FDI has been increasing over the years. In 1972, annual FDI inflow was 0.090 million US$, and
after 33 years, in 2005 annual FDI reached to 845.30 million US$ and to 989 million US$ in
2006 (UNCTAD-2005, Bangladesh Investment Handbook 2007-BOI). Contribution of FDI was
not remarkable until 1980, a year of policy change. This year government enacted the ‘Foreign
Investment Promotion and Protection Act, 1980’ in an attempt to attract FDI. Enacting the Act
government opens all sectors for FDI other than defense equipment and machinery, nuclear
energy, forestry in the reserved forest area, secu-rity printing and minting, and railways (Foreign
Investment Promotion and Protection Act,1980). The FDI inflows since 1995 were:Foreign
Direct Investment in Bangladesh: Problems and Prospects
Table I: FDI inflows from1995-2006 (US$ in million)
Year FDI Inflow
1995 92.3
1996 231.6
1997 575.3
1998 576.5
1999 309.1
2000 578.6
2001 354.5
2002 328.3
2003 350.2
2004 460.4
2005 845.3
2006 989
The table shows a fluctuating trend of the FDI inflows over the last 12 years. Data reveals that in
1999 there was a sudden fall in the FDI, and again in 2001, 2002 and 2003 the falling trend
continued for many reasons. Among others serious political unrest during the period was a
major factor that discouraged foreign investment in these years and it took quite some time to
regain the confidence of foreign investors. It stabilized afterwards but remained below the
average achieved during 1997-2000. Later on during next two years period it becomes alive
again. The following graphical presentation gives us clearer picture of the FDI inflows over the
years.
Exhibit I: Shows FDI inflow trend form 1995-2006 (US$ in million). This graph portrays
inconsistent proceedings of the FDI in Bangladesh since 1995. It is a matter of great concern
that inspite of Bangladesh’s comparative advantages in labor-intensive manufacturing, adoption
of investment friendly policies and regulations, estab-lishment of EPZs in different suitable
locations and other privileges, FDI flows have failed to be accelerated (Robin, A.I. 2006).
However, the year 2005 and 2006 show a substantial improvement in FDI achievement.
Causes of rising FDI in BD:
Now a day’s Bangladesh is trying her best to attract foreign direct investment to boost up her
economic condition. Bangladesh has liberalized a number of policies so that she can attract
more foreign direct investment into the country.It is usually considered that foreign capital
inflows can boost up domestic capital. It is believed that FDI accelerates economic activities and
eventually causes economic growth. Itincreases employment opportunities. FDI brings highly
productive resources into the recipient economy. This causes positive effects on the
employment creation not only in the sectors that attract FDI inflows but also in the supportive
domestic industries.
GDP
Gross domestic product (GDP) is the market value of all final goods and services produced
within a country within a given period. There are many factors to accelerate GDP. It is assumed
that the GDP is influenced by FDI Inflow. If the explanatory power of FDI Inflow, the
independent variable is high over Gross domestic product (GDP), the dependent variable, the
assumption will be proved.
Export
There are many factors that can affect export. It is assumed that FDI Inflow is one of the
prominent factors that influence the export. If the explanatory power of FDI Inflow, the
independent variable is high over export, the dependent variable, the assumption will be proved.
Domestic Investment
There are many factors that can affect domestic investment. It is assumed that FDI Inflow is one
of the prominent factors that influence the domestic investment through increasing
competitiveness. If the explanatory power of FDI Inflow, the independent variable is high over
domestic investment, the dependent variable, the assumption will be proved.

The FDI inflow in Bangladesh has gradually grown over the years, the country is still lagging far behind.
In the last fiscal year, Bangladesh received its highest ever amount of FDI; according to the central bank
data, net FDI in 2018-19 stood at $3.88 billion as against $2.58 billion in the previous year. This is
because there has been a one-time investment of $1.47 billion in the form of acquisition of Akij Group's
tobacco business by the Japan Tobacco Inc. Nevertheless, this investment is focused on the domestic
market and thus there is limited scope of recruiting additional workers. Therefore, experts worry that
this sudden rise in FDI may not necessarily translate into a long term positive impact for the country.

Given the current set of challenges, it is imperative that Bangladesh prioritise on adopting and
implementing appropriate reforms to bring about a steady inflow of FDI. At the moment, the country is
focusing on advancing its position in the existing global indices of business climate. On one hand, this
timely measure certainly deserves appreciation. On the other hand, we must also collectively look at the
bigger picture. Because, ultimately it is the cumulative human capital of a country that largely
determines true competitiveness. Consequently, if Bangladesh wants to both attract and reap the full
benefit of increased FDI, it must first and foremost invest in its people. Disorderly and short term
measures are likely to take Bangladesh only a few steps ahead. In order to withstand the competitive
reality of an increasingly globalised and volatile world, long term strategic planning is required to scale
up sustainable inflow of investments.

FDI vs FPI:

FDI- Foreign Direct Investment refers to international investment in which the investor obtains a lasting
interest in an enterprise in another country. MostMost concretely, it may take the form of buying or
constructing a factory in a foreign country or adding improvements to such a facility, in the form of
property, plants, or equipment. FDIFDI is calculated to include all kinds of capital contributions, such as
the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company
incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch. The
reinvestment of earnings and transfer of assets between a parent company and its subsidiary often
constitutes a significant part of FDI calculations. FDIFDI is more difficult to pull out or sell off.
Consequently, direct investors may be more committed to managing their international investments,
and less likely to pull out at the first sign of trouble.

On the other hand, FPI (Foreign Portfolio Investment) represents passive holdings of securities such as
foreign stocks, bonds, or other financial assets, none of which entails active management or control of
the securities' issuer by the investor. UnlikeUnlike FDI, it is very easy to sell off the securities and pull out
the foreign portfolio investment. Hence, FPI can be much more volatile than FDI. For a country on the
rise, FPI can bring about rapid development, helping an emerging economy move quickly to take
advantage of economic opportunity, creating many new jobs and significant wealth. However, when a
country's economic situation takes a downturn, sometimes just by failing to meet the expectations of
international investors, the large flow of money into a country can turn into a stampede away from it.

Comparison chart

FDI versus FPI comparison chart

FDI FPI

Management Projects are efficiently managedProjects are less efficiently managed Involvement -
direct or indirect Involved in management and ownership control; long-term interest No
active involvement in management. Investment instruments that are more easily traded, less
permanent and do not represent a controlling stake in an enterprise. Sell off It is more difficult to sell
off or pull out. It is fairly easy to sell securities and pull out because they are liquid. Comes from Tends
to be undertaken by Multinational organizations Comes from more diverse sources e.g. a small
company's pension fund or through mutual funds held by individuals; investment via equity instruments
(stocks) or debt (bonds) of a foreign enterprise. What is invested Involves the transfer of non-
financial assets e.g. technology and intellectual capital, in addition to financial assets. Only
investment of financial assets. Stands for Foreign Direct Investment Foreign Portfolio
Investment

Volatility Having smaller in net inflows Having larger net inflows

foreign Direct Investment (FDI) implies an investment made with an intent of

obtaining an ownership stake in an enterprise domiciled in a country by an
enterprise situated in some other country. The investment may result in the
transfers of funds, resources, technical know-how, strategies, etc. There are
several ways, of making FDI i.e. creating a joint venture or through merger
and acquisition or by establishing a subsidiary company.
The investor company has a substantial amount of influence and control over
the investee company. Moreover, if the investor company obtains 10%
or more ownership of equity shares, then voting rights are granted along with
the participation in the management.
Definition of FPI
Foreign Portfolio Investment (FPI), refers to the investment made in the
financial assets of an enterprise, based in one country by the
foreign investors. Such an investment is made with the purpose of getting
short term financial gain and not for obtaining significant control over
managerial operations of the enterprise.
The investment is made in the securities of the company, i.e. stock, bonds,
etc. for which the overseas investors deposit money in the host country’s bank
account and purchase securities. Usually, FPI investors go for securities that
are highly liquid.

Key Differences Between FDI and FPI

The difference between FDI and FPI can be drawn clearly on the following grounds:

1. e investment made by the international investors to obtain a substantial

interest in the enterprise located in a different country is a Foreign Direct
Investment or FDI. The investment made in passive holdings like
stocks, bonds, etc. of the enterprise of a foreign country by overseas
investors is known as a Foreign Portfolio Investment (FPI).
2. FDI investors play an active role in the management of the investee
company whereas FPI investors play a passive role, in the foreign
company.
3. As the FDI investors gain both ownership and management right
through investment, the level of control is relatively high. Conversely, in
 FPI the degree of control is less as the investors obtain only ownership
right.
4. FDI investors have a substantial and long-term interest in the firm which
is not in the case of FPI.
5. FDI projects are managed with great efficiency. On the other hand, FPI
projects are less efficiently managed.
6. FDI investors invest in financial and non-financial assets like resources,
technical know-how along with securities. As opposed to FPI, where
investors invest in financial assets only.
7. It is not easy for FDI investors to sell out the stake acquired. Unlike FPI,
where the investment is made in financial assets which are liquid, they
can be easily sold.