FDI

Foreign Direct Investment (FDI)and Economic DevelopmentDr. Syed A SamadExecutive Chairman

02 March 2010Government of BangladeshPRIME MINISTERS OFFICEBoard of Investment

Contents10:50-11:50Session 1: Conceptual IssuesWhat is FDI?Ideological Views on FDIWhy Firms Invest Abroad?FDI Benefits to Host EconomyWhat is Economic Development?FDI and Economic Development

12:00-13:00Session 2: Bangladesh AspectsFDI Statistics : Global and BangladeshExamples of FDI impact on Economic DevelopmentMaximizing FDI benefits: Policy Issues

Board of Investment Copyright . BOI. 2010FDI and Economic Development

Session 1: Conceptual Issues


1.What is FDI?


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.


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.


2.IdeologicalViews on FDI?


Ideological Views on FDIBroadly, there are three types of conflicting views on foreign direct investment.RadicalViewPragmaticNationalismFreeMarket


Ideological ViewsRadical ViewMarxist views that FDI exploits less-developed host countries throughExtracting profitsGiving nothing of value in exchangeInstrument of domination not developmentKeep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology.


Ideological ViewsRadical View

Radical view was popular (1945-80) amongCommunist countries (China, Cuba)Socialist countries in AfricaNationalistic countries (Iran, India)

By end 1980s radical view was in retreatCollapse of communism Bad economic performance of countries that embraced the radical viewStrong economic performance of countries who embraced capitalism rather than the radical view


Ideological ViewsFree 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.


Ideological ViewsPragmatic Nationalistic View

FDI has benefits and costs.Allow FDI if benefits outweigh costs.Block FDI that harms indigenous industryAttract FDI that is in national interestTax breaksSubsidies


3.Why FirmsInvest Abroad?


Why Firms Invest AbroadReasons Behind FDI Firms want a presence in foreign marketsFirms want control over growth of these foreign markets - To gain first mover advantages - To ward off competitors - To determine locations, advertising and otherrelated strategic decisions in the firms interest


Why Firms Invest AbroadReasons Behind FDI Transportation costs are highMarket Imperfections (Internalization Theory)-Impediments to the free flow of products between nations- Impediments to the sale of know-howFollow the lead of a competitor - strategic rivalryProduct Life Cycle - however, does not explain when it is profitable to invest abroadLocation specific advantages (natural resources)


4.FDI Benefits toHost Economy


FDI Benefits to Host Economya. Resource-Transfer EffectsCapitalTechnologyManagementb. Employment EffectBrings jobs that otherwise would not be createdDirect: Hiring host-country citizensIndirect: Jobs created by local suppliersJobs created by increased spending by employees


FDI Benefits to Host Economyc. Balance of Payments EffectsHost country benefits from initial capital inflow when a Multinational Company (MNC) establishes business.- Host country records current account debit on repatriated earnings of MNCHost 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.


FDI Benefits to Host Economya. Resource-Transfer EffectsCapitalTechnologyManagementb. Employment EffectBrings jobs that otherwise would not be createdDirect: Hiring host-country citizensIndirect: Jobs created by local suppliersJobs created by increased spending by employees


FDI Benefits to Host Economyd. Effect on Competition and Economic GrowthIncreased- productivity growth - product and process innovation- greater economic growthFDI can- Increase market competition Lower prices Create greater consumer choiceStimulate capital investments


5.What is EconomicDevelopment?


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 GrowthDevelopment as Modernization - process of social change.Development as Distributive Justice - as improving basic needsDevelopment as a Mode of ProductionDevelopment as to achieve lasting satisfaction of human needs and improvement of the quality of life (sustainability)


What is Development? Todaros 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 processes2.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 respect3.Increasing peoples freedom to choose by enlarging the range of their choice variables, e.g. varieties of goods and services


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 What is Economic Development?


6.FDI and EconomicDevelopment


FDI & Economic DevelopmentContribution 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; orResearch and development (R&D) activity of affiliates: such activities have substantial positive externalities.


Session 2: Bangladesh Aspects


1. FDI Statistics:Global & Bangladesh


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.Trends in Inward FDI


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%).Regional Trends in FDI Inflows


Global Trends: FDI Outflows in 2008Outflows 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.)


Perspectives on FDI Inflows in 2008RegionFDI/GFCF (%)Europe 12.7 North America 12.5Africa29.0Latin America15.5 Asia10.7 South Asia8.5Bangladesh 5.9Least developed30.2FDI supplements domestic resources


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


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In Million US$Source: Enterprise Survey, Bangladesh BankFor the first time FDI inflow reached US$ 1 bill mark.FDI Inflow in 2008: Bangladesh


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FDI Inflow: Distribution by Components Source: Enterprise Survey, Bangladesh BankFDI Inflow in 2008: Bangladesh


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Source: Enterprise Survey, Bangladesh BankFDI Inflow: Distribution by Sectors FDI Inflow in 2008: Bangladesh


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Source: Enterprise Survey, Bangladesh BankFDI Inflow: Distribution by Sources/CountriesFDI Inflow in 2008: BangladeshSource: Enterprise Survey, Bangladesh Bank


2.Examples of FDI impact on Economic Development


FDI Impact on Economic Development - GeneralFDI 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.


FDI Impact on Economic Development - BangladeshThere 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 infrastructureTechnology transfer;Employment generationAccess to capital; andProduct and process innovation FDI played a significant role in development of Telecom, energy, power and cement sectors in Bangladesh.


3. Maximizing FDI benefits: Policy Issues


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.


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.


Thank You

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FDI

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