1. Foreign Direct Investment (FDI) and Economic Development
Government of Bangladesh
PRIME MINISTER’S OFFICE
Board of Investment
Foreign Direct Investment (FDI) and Economic Development
Dr. Syed A Samad
Executive Chairman
02 March 2010

2. Contents
10:50-11:50 Session 1: Conceptual Issues
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
FDI Statistics : Global and Bangladesh
Examples of FDI impact on Economic Development
Maximizing FDI benefits: Policy Issues

3. Session 1: Conceptual Issues

4. 1. What is FDI?

5. 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.

6. What is FDI? FDI has three components:
Equity capital is the foreign direct investor's purchase of shares of an enterprise in a country other than its own.
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.
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.

7. 2. Ideological Views on FDI?

8. Ideological Views on FDI
Broadly, there are three types of conflicting views on foreign direct investment.
Radical
View
Pragmatic
Nationalism
Free
Market

9. 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.

10. Ideological Views Radical View
Radical view was popular ( ) among
Communist countries (China, Cuba)
Socialist countries in Africa
Nationalistic countries (Iran, India)
By end 1980s radical view was in retreat
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

11. 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.

12. Ideological Views Pragmatic Nationalistic View
FDI has benefits and costs.
Allow FDI if benefits outweigh costs.
Block FDI that harms indigenous industry
Attract FDI that is in national interest
Tax breaks
Subsidies

13. 3. Why Firms Invest Abroad?

14. 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 firm’s interest

15. 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)

16. 4. FDI Benefits to Host Economy

17. FDI Benefits to Host Economy
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

18. FDI Benefits to Host Economy
c. Balance of Payments Effects
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.

19. FDI Benefits to Host Economy
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

20. FDI Benefits to Host Economy
d. Effect on Competition and Economic Growth
Increased
- productivity growth
- product and process innovation
- greater economic growth
FDI can
- Increase market competition
Lower prices
Create greater consumer choice
Stimulate capital investments

21. 5. What is Economic Development?

22. 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)

23. What is Development? Todaro’s 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’ self-esteem 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

24. 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 …

25. 6. FDI and Economic Development

26. FDI & Economic Development
Contribution of FDI economic development is identified by its quality. The quality of FDI can be determined by:
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.

27. Session 2: Bangladesh Aspects

28. 1. FDI Statistics: Global & Bangladesh

29. 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.

30. 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%).

31. 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.)

32. Perspectives on FDI Inflows in 2008
Region FDI/GFCF (%)
Europe
North America 12.5
Africa 29.0
Latin America 15.5
Asia 10.7
South Asia 8.5
Bangladesh
Least developed 30.2
FDI supplements domestic resources

33. FDI Inflow in 2007 and 2008: South Asia
In Million US$
Source: World Investment Report 2009 33 33

34. 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

35. FDI Inflow in 2008: Bangladesh
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%
Source: Enterprise Survey, Bangladesh Bank 35 35

36. FDI Inflow in 2008: Bangladesh
FDI Inflow: Distribution by Sectors
Sector
2007
(US$ Mill)
2008
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
Source: Enterprise Survey, Bangladesh Bank 36 36

37. FDI Inflow in 2008: Bangladesh
FDI Inflow: Distribution by Sources/Countries
Source Country
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
18.67
31.68
Others
61.38
161.73
Total FDI
666.37
1,086.31
Source: Enterprise Survey, Bangladesh Bank
Source: Enterprise Survey, Bangladesh Bank 37 37

38. 2. Examples of FDI impact on Economic Development

39. 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.

40. 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.

41. 3. Maximizing FDI benefits: Policy Issues

42. 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 :
A sound macroeconomic environment, which depends on monetary and fiscal policies and conditions such as stability of interest rates and status of fiscal accounts;
Appropriate institutions, which depend on the existence of effective legal and regulatory structures, a competition authority and investment promotion and facilitation institutions; and
Adequate basic infrastructure, which implies adequate supplies of power, water, land, transport and communications.

43. 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.

44. Thank You