Investment climate and FDI in Bangladesh

1. Paper presented by
Dr. Md. Shamsul Arefin
Director General
ACC, Bangladesh
1
Investment Climate andInvestment Climate and
Foreign Direct InvestmentForeign Direct Investment
(FDI) in Bangladesh(FDI) in Bangladesh
May 16, 2014 Dr. Md. Shamsul Arefin

2. 2
Contents:Contents:
1. What is Investment Climate
2. What is FDI
3. Current situation of FDI in Bangladesh
May 16, 2014 Dr. Md. Shamsul Arefin

3. What is Investment Climate?What is Investment 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.

4. 4
Cycle of Investment Climate
May 16, 2014 Dr. Md. Shamsul Arefin

5. 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.

6. 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.

7. 7
 Risk factors for FDI are minimum in Bangladesh
 Bangladesh never posted negative economic growth during the
past 30 years
 Bangladesh 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
May 16, 2014 Dr. Md. Shamsul Arefin

8. 8
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.
May 16, 2014 Dr. Md. Shamsul Arefin

9. 9
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 ofMay 16, 2014 Dr. Md. Shamsul Arefin

10. 10
Characteristics of FDI
1. 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
May 16, 2014 Dr. Md. Shamsul Arefin

11. 11
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.
May 16, 2014 Dr. Md. Shamsul Arefin

12. 12
•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 ForeignWhat are Foreign
Investors looking for?Investors looking for? Factors affecting FDI
May 16, 2014 Dr. Md. Shamsul Arefin

13. 13
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
May 16, 2014 Dr. Md. Shamsul Arefin

14. 14
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
May 16, 2014 Dr. Md. Shamsul Arefin

15. 15
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
May 16, 2014 Dr. Md. Shamsul Arefin

16. 16
 Tax exemption on royalties, technical know how and technical
assistance fees and facilities for their repatriation
 Tax exemption on interests on foreign loans
 Tax exemptions on capital gains from transfer of shares by the
investing company
 Remittances 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
May 16, 2014 Dr. Md. Shamsul Arefin

17. 17
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
May 16, 2014 Dr. Md. Shamsul Arefin

18. 18
• 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
May 16, 2014 Dr. Md. Shamsul Arefin

19. Inflows of Foreign Direct Investment
There 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

20. YearYear Proposed LocalProposed Local
InvestmentInvestment
Proposed ForeignProposed Foreign
InvestmentInvestment
Total 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 Statistics
March, 2012 Source: Bangladesh Economic Review-2011

21. 21
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 Commission
Privatization of State Owned Enterprises (SOE’s)
4. Sectoral regulatory bodies like BTRC, BERC
Telecom Regulatory Commission & Energy Regulatory Commission
5. Line Ministries and Agencies
For Power, MOPEMR and Power Development Board
BSCIC, Handloom Board etc. are generally responsible for
development of SMEs and Cottage industries by the domestic firms.
May 16, 2014 Dr. Md. Shamsul Arefin

22. 22
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
May 16, 2014 Dr. Md. Shamsul Arefin

23. 23
1. Investment Counseling
2. Visa on Arrival (pre-registration)
3. Foreign/JV/Local Investment
a. Registration of New Industries
b. Visa Recommendation
c. Approval of Work Permits
d. Recommendation for IP, Machinery
Clearance Certificate
e. Recommendation for IRC, Bonded
Warehouse
f. Recommendation for Land
Acquisition
g. Approval of Royalty and Technical
Assistance Fees
h. 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
May 16, 2014 Dr. Md. Shamsul Arefin

24. 24
 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)
May 16, 2014 Dr. Md. Shamsul Arefin

25. 25
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
May 16, 2014 Dr. Md. Shamsul Arefin

26. 26
4,418
5,161
5,313
5,752
6,467
5,986
6,548
7,603
8,655
10,526
12,178
14,111
15,565
16236
7,152
7,520
8,006
8,374
9,335
9,658
10,903
13,147
14,746
17,157
21,269
22,570
21388
8,540
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 Bangladesh
US$ Million
Source: Bangladesh Economic Review, Bangladesh Bank
May 16, 2014 Dr. Md. Shamsul Arefin

27. 27
367
603
394 388
564
394 379
284
804
745
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
May 16, 2014 Dr. Md. Shamsul Arefin

28. 28
1,719 1,739 1,523 1,602 1,307 1,583
2,470 2,705 2,930
3,484
5,077
6,149
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
May 16, 2014 Dr. Md. Shamsul Arefin

29. 29
 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.
May 16, 2014 Dr. Md. Shamsul Arefin

30. 30
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. May 16, 2014 Dr. Md. Shamsul Arefin

31. 31
"Our TREASURE is in our highly laborious PEOPLE!"
"...Discover the Potential"
May 16, 2014 Dr. Md. Shamsul Arefin

32. May 16, 2014 Dr. Md. Shamsul Arefin 32