Letter of Transmittal

Date: 18th May, 2011 Mohammad Showkat Imran Lecturer in Marketing Department of Business Administration International Islamic University Chittagong Subject: Submission of OCP Report

Dear Sir, With due respect I, the undersigned students of BBA 24th Batch (Major in Finance and Banking), has completed the thesis paper based on the topic Foreign Direct Investment in Bangladesh. Though I am in learning curve, this report has enabled me to gain insight into the real situation of Foreign Direct Investment as well as analysis of trends of the flow of Investment in Bangladesh. During the preparation of the report I did have some problem that has been erased out with your propound supervision and assistance. Without your cooperation and guideline this report would have been an incomplete one. Finally thank you for your supportive thought and kind consideration for formulating an idea. Lastly I would be thankful once again for your support during preparing of this paper, I would be glad to furnish you with any clarification.

Sincerely yours

------------------------M. Mahfuzur Rahman Matric no: B071645 Batch: 24th Program: BBA (Major in Finance and Banking) International Islamic University Chittagong

CERTIFICATE OF APPROVAL

This is to certify that this report is prepared by M. Mahfuzur Rahamn bearing Matric no: B071645, 24th batch, BBA, International Islamic University Chittagong, under Internship program of BBA. This program is an essential part of BBA and purpose of the program is to acquire practical knowledge of the concerned field. He has completed his thesis report titled Foreign Direct Investment in Bangladesh from March 1st, 2011 to May 1st, 2011 successfully under my supervision.

I wish him every success in life.

---------------------------Mohammad Showkat Imran Lecturer in Marketing Department of Business Administration International Islamic University Chittagong

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Students Declaration

This is to notify that this thesis titled Foreign Direct Investment in Bangladesh has been prepared for academic purpose as asked by our BBA program curriculum under the supervision of Lecturer Md. Showkat Imran, Department of Business Administration, International Islamic University Chittagong. It is to be evaluated as a part of our examination on this BBA program. This has not been prepared for any other purpose like reproduce, investigation or publication.

-----------------------------M. Mahfuzur Rahman Matric no # B071645 Batch # 24th Program: BBA (Major in Finance and Banking) International Islamic University Chittagong

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Acknowledgement
It is a great pleasure for me to express my deep sense of gratitude to my honorable supervisor Md. Showkat Imran for assisting me in select this topic & prepare the thesis paper. In the preparation of this thesis paper information has been collected from many papers and articles written by numerous individuals and they are the first to be acknowledged. Without their contribution this analysis would not have materialized. The presentation of this formal thesis paper is of a great expectation in our BBA program and Im quite happy to submit it dully applying that, I think should have to be included. Theoretical knowledge should be valued when it is successfully applied in practical scenario. In this respect I found this thesis paper a great opportunity to deal with practical scenario of the flow of FDI in Bangladesh and also the trends of it. So lastly I would again like to express my heartfelt thanks to my supervisor for providing the theoretical knowledge and valuable guidelines related to real world FDI scenarios in Bangladesh.

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Executive Summary
This thesis paper reflects an overview on foreign direct investment (FDI) in Bangladesh. It also the current trend of FDI inflow towards those countries, to gather with its implication to those economies. It is observed that foreign investment in Bangladesh is not very encouraging. The Garment Industry has attracted the highest number of joint ventures and hundred percent foreign ownership enterprises. FDI in Bangladesh makes a direct contribution in terms of additions to the invertible funds and mobilization of local resources for investments in manufacturing, trade and the services sectors. New investments, including FDI, generate additional employment, train local executives and workers, make thrusts into the export market, introduce improved technologies, open up new horizon for R&D expenditures, and above all, create new sources of tax revenue for the government. The contribution of FDI in employment generation in the country however, is quite insignificant. FDI provides employment to about 1.5% of the total industrial employment and less than 0.2% of the total working Population of the country. The choice of FDI in initial years was limited in low investment, quick yield projects, while recent years show some diversification in lines of high-tech, capital intensive projects as well as of preferential distribution within the traditional sectors and sub-sectors. But in case of Bangladesh the historical trend shows that there is no frequent FDI. The last three years the FDI inflow is decreasing in Bangladesh (Bangladesh Economic Review, 2004 & 2007). This study will compare the macroeconomic factors that cause the FDI inflow. This study explores the factors that contribute to the Some Observation of FDI in Bangladesh and tests whether the variables do really influence the flow of FDI in Bangladesh. Different multiple regression analyses have been used to obtain the economic results of this Observation.

List of Acronyms
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ADB BOI BGMEA

BEPZA

Asian Development Bank Board of Investment Bangladesh Garments Manufacturing and Exporters Association
Bangladesh Export Processing Zone Authority Bangladesh Oxygen Company

BOC CSE DSE EPZ FSR FY FDI GDP IFS IMF IIFC IPR MOF NBR PFIs TNCs SME SROs SAARC UNCTAD USD WIR Public Finance Institutions

Chittagong Stock Exchange Dhaka Stock Exchange Export Processing Zone Financial Sector Review Fiscal Year Foreign Direct Investment Gross Domestic Product International Financial Statistics International Monetary Fund Infrastructure Investment Facilitation Center Intellectual Property Rights Ministry of Finance National Board of Revenue

OECD Organization for Economic Cooperation and Development Trans National Corporation Small and Medium Enterprise Statutory Regulatory Orders South Asian Association for Regional Cooperation United Nations Conference on Trade and Development US Dollar World Investment Report vi

TRIPS Trade Related Aspects of Intellectual Property Rights

WTO

World Trade Organization

TABLE OF CONTENTS
Page No. CHAPTER ONE: INTRODUCTORY PART 1.1 1.2 Introduction of the study Rationale of the Study 01 02 03 vii

1.3 1.4 1.5 1.6 1.7

Objective of the study Scope of the study Data Collection Procedure Methodology of the study Limitations of the study

04 04 04 05 05 07 08 08 08 09 09 09 09 10 11 12 13 15

CHAPTER TWO: THEORETICAL ISSUES 2.1 2.2 Foreign Direct Investment Factors Affecting Foreign Direct Investment 2.2.1 2.2.2 2.2.3 2.2.4 2.3 2.4 2.5 2.6 2.7 2.8 Impact of Inflation Impact of National Income Impact of Government Restrictions Impact of Exchange Rates

Necessity of FDI for a country Foreign investment opportunity FDI and GDP of the host country FDI and Interest Rate FDI and Export An objective assessment of environment by a foreign Investor for his decision making process

CHAPTER THREE: ROLE OF MULTINATIONAL CORPORATION OF FDI A REVIEW OF MNCS ACTIVITIES RELATED TO FDI: 3.1 Revenue Related Motives 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.2 3.2.1 Attract new sources of demand Enter profitable markets Exploit monopolistic advantage React to trade restrictions Diversify internationally Fully benefit from economies of scale 19 viii 17 18 18 18 18 18 19 19 19

Cost - Related Motives

3.2.2 3.2.3 3.2.4 3.2.5 3.3 3.4

Use foreign factors of production Use foreign raw materials Use foreign technology React to exchange rate movements

19 20 20 20 20 20 20 21 21

Comparing Benefits of FDI among countries Host Government views of FDI 3.4.1 3.4.2 Barriers that protect local firms or consumers Barriers that restrict ownership

3.5

Impact of the FDI decision on an MNC value

CHAPTER FOUR: FDI OF BANGLADESH & WORLD SCENARIO STATEMENT 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 Significance of foreign investment in Bangladesh The major incentives for foreign direct investment in Bangladesh are FDI and Bangladesh Bangladesh Status Investment Registration in Bangladesh Foreign Private Investment Projects Registered with Bangladesh Recent FDI flows over the world Flow of FDI in South Asia Distribution of FDI by U.S. firms Distribution of FDI in the United States 30 33 34 34 35 24 24 28 29 23 24

CHAPTER FIVE: ADMINISTRATION OF FDI IN BANGLADESH 36 5.1 5.2 5.3 5.4 Structure & Objectives 5.1.1 Objective of BOI Functions & Facilities Business set up at a Glance Terms and Condition of BOI 37 37 37 40 40 42 ix

CHAPTER SIX: TRENDS OF FDI IN BANGLADESH

6.1 6.2 6.3 6.4 6.5 6.6 6.7

FDI Inflow survey in Bangladesh The FDI census in Bangladesh Summary of FDI inflow by components Sect oral Distribution of FDI Trends of FDI Inflow by Sources Investment in EPZs Impact of FDI Barriers on MNCs

43 43 44 47 50 54 57

CHAPTER SEVEN: FINDING, RECOMMENDATION AND CONCLUSION 7.1 7.2 7.3 From the above discussions some key issues regarding FDI in Bangladesh can be focused Future of FDI in Bangladesh Problem of FDI in Bangladesh 7.3.1 7.3.2 7.3.3 7.3.4 7.3.5 7.3.6 7.3.7 7.3.8 7.3.9 Barriers of FDI in Bangladesh Extent of the barriers: Policy legislation and implementation Cost of inefficiency is high indeed Corruption is a disguised form of taxation Policy discrepancy Differential treatment One stop service of BOI Dictated regulatory authority Legal paradox 62 62 63 63 63 63 64 64 64 65 65 65 65 65 66 66 x 61 60 60 61 59

7.3.10 Protection of Intellectual Property Rights (IPR) 7.3.11 Lawsuits 7.3.12 Hassles in implementation 7.3.13 Discretionary authority of tax officials 7.3.14 Registration complexity 7.3.15 Lack of coordination among state entities 7.3.16 Fiscal policy changes 7.3.17 Lengthy customs processing

7.3.18 Infrastructure 7.3.19 Restricted telecommunication access 7.3.20 Power supply 7.3.21 Expensive port 7.4 Recommendation 7.4.1 7.4.2 7.4.3 7.4.4 7.4.5 7.4.6 7.4.7 7.4.8 7.4.9 7.5 Ensuring good governance Accountability and transparency Co-ordination among state agencies Strengthening the regulatory authority Rightsizing the government Judicial and legal reforms Tackling corruption Fiscal reform Infrastructure reform 69 67

66 66 66 68 69 69 69 70 70 70 70 71 72 73 74

Conclusion

BIBLIOGRAPHY-------------------------------------------------------------LIST OF ACRONYMS-------------------------------------------------------

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