Transcript BOI - BPATC

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
Contents
10:50-11:50 Session 1: Conceptual Issues
1.
2.
3.
4.
5.
6.
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
1. FDI Statistics : Global and Bangladesh
2. Examples of FDI impact on Economic Development
3. Maximizing FDI benefits: Policy Issues
Board of Investment
FDI and Economic Development
Session 1:
Conceptual Issues
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Board of Investment
FDI and Economic Development
1. What is FDI?
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FDI and Economic Development
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.
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What is FDI?
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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FDI and Economic Development
2. Ideological
Views on FDI?
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Ideological Views on FDI
Broadly, there are three types of conflicting views on
foreign direct investment.
Radical
View
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Pragmatic
Nationalism
Free
Market
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FDI and Economic Development
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.
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Ideological Views
Radical View
 Radical view was popular (1945-80) among
-
-
Communist countries (China, Cuba)
Socialist countries in Africa
Nationalistic countries (Iran, India)
 By end 1980s radical view was in retreat
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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
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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.
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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
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FDI and Economic Development
3. Why Firms
Invest Abroad?
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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
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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)
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4. FDI Benefits to
Host Economy
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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
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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.
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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
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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
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5. What is Economic
Development?
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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)
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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
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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 …
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FDI and Economic Development
6. FDI and
Economic
Development
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FDI and Economic Development
FDI & Economic Development
Contribution of FDI economic development is identified by its
quality. The quality of FDI can be determined by:
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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.
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FDI and Economic Development
Session 2:
Bangladesh Aspects
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1. FDI Statistics:
Global & Bangladesh
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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.
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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%).
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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 ($156 bl.)
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Perspectives on FDI Inflows in 2008
Region
FDI/GFCF (%)
Europe
12.7
North America
12.5
Africa
29.0
Latin America
15.5
Asia
10.7
South Asia
Bangladesh
8.5
5.9
Least developed
30.2
FDI supplements domestic resources
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2008
In Million US$
Afghanistan Bangladesh
India
Maldives
Nepal
Pakistan
752
603
5,438
1
6
15
5,590
Bhutan
15
30
73
1,086
666
300
243
25,127
2007
41,554
FDI Inflow in 2007 and 2008: South Asia
Sri Lanka
Source: World Investment Report 2009
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FDI Inflow in 2008: Bangladesh
For the first time FDI inflow reached US$ 1 bill mark.
1086.3
In Million US$
845.3
792.5
666.3
578.6
2000
354.5
328.3
350.3
2001
2002
2003
460.4
2004
2005
2006
2007
2008
Source: Enterprise Survey, Bangladesh Bank
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FDI Inflow in 2008: Bangladesh
FDI Inflow: Distribution by Components
FDI Components
FDI Inflow
(Mill US$)
Growth
%
2007
2008
a. Equity Capital
401.6
809.3
102%
b. Reinvested Earnings
213.2
245.7
15%
c. Intra-Company Loans
51.5
31.3
-39%
Total
666.4
1,086.3
63%
Source: Enterprise Survey, Bangladesh Bank
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FDI Inflow in 2008: Bangladesh
FDI Inflow: Distribution by Sectors
2007
(US$ Mill)
2008
(US$ Mill)
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
Sector
Source: Enterprise Survey, Bangladesh Bank
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FDI Inflow in 2008: Bangladesh
FDI Inflow: Distribution by Sources/Countries
2007 (US$ Mill)
75.17
142.55
83.27
19.55
36.61
27.68
120.36
55.46
25.67
18.67
61.38
666.37
Source: Enterprise Survey, Bangladesh Bank
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2008 (US$ Mill)
373.4
130.57
102.19
70.72
57.15
44.64
40.91
39.85
33.47
31.68
161.73
1,086.31
Source: Enterprise Survey, Bangladesh Bank
Source Country
Egypt
UK
UAE
Malaysia
Japan
South Korea
USA
Hong Kong
Norway
Netherlands
Others
Total FDI
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FDI and Economic Development
2. Examples of FDI impact on
Economic Development
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FDI and Economic Development
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.
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FDI and Economic Development
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.
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Board of Investment
FDI and Economic Development
3. Maximizing FDI benefits:
Policy Issues
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FDI and Economic Development
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 :
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.
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FDI and Economic Development
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.
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FDI and Economic Development
Thank You
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