Foreign Direct Investment in Bangladesh

As a developing country, Bangladesh needs FDI for its ongoing development process. Since independence, Bangladesh is trying to be a suitable location for FDI. Special zones have been set up and lucrative incentive packages have been provided to attract FDI. However, the total inflow of FDI has been increasing over the years. In 1972, annual FDI inflow was 0.090 million USD, and after 33 years, in 2005 annual FDI came to 845.30 million USD and to 989 million USD in 2006.

The magnitude of FDI played a minor role in the economy of Bangladesh until 1980, a crucial year of policy change. The Government of Bangladesh (GOB) enacted the ‘Foreign Investment Promotion and Protection Act, 1980’ in an attempt to attract FDI. Except five industries, which are reserved for the public sector: defense equipment and machinery, nuclear energy, forestry in the reserved forest area, security printing and minting, and railways, FDI is allowed in every sector of the economy.

Table 1 shows total FDI inflow (including that in Export Processing Zones, EPZs) over the last 11 years, 1995-2005. Data reveals that in 1999 there was a sudden fall in FDI, and again in 2001, mainly because of serious political unrest, which discouraged foreign investment, and it took several years to regain the confidence of foreign investors. It stabilized afterwards but remained below the average reached during 1997-2000. In spite of Bangladesh’s comparative advantage in labour-intensive manufacturing, adoption of investment friendly policies and regulations, establishment of EPZs in different suitable locations and other privileges, FDI flows have failed to accelerate. However, in 2005 substantial improvement has been achieved.

 Table 1: The Aggregate and Sector-wise FDI inflow, 1995-2005 (calendar year) (USD in million)

  1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Agriculture & Fishing (Total)  0 0.3 1.4 1.4 2.9 15.2 1.1 1.6 4.1 1.7 2.3
Power, Gas & Petroleum  3.2 47 242.1 235.2 83.5 301 192.4 57.9 88.1 124.1 208.3
Manufacturing  45.5 89.2 162.4 139.8 191.8 193.5 132.2 142.9 165.2 139.4 219.3
Industry (Total)  48.7 136.2 404.5 375 275.3 494.5 324.6 200.8 253.3 263.5 427.6
Trade &Commerce  41.3 92.3 158.9 164.3 27.5 53.2 27.6 63.7 44 66.6 130.5
Transport & Telecom.  1.7 1.5 5.9 25.3 0.5 5.4 0.9 48.5 45.9 127.5 281.9
Other Services  0.6 1.3 4.6 10.5 2.9 10.3 0.3 13.7 2.9 1.1 3
Services (Total)  43.6 95.1 169.4 200 30.9 68.9 28.8 125.9 92.8 195.2 415.4
Total FDI to Bangladesh  92.3 231.6 575.3 576.5 309.1 578.6 354.5 328.3 350.2 460.4 845.
Note: Enterprise Survey, the source of the current data set is conducted by Statistics Department of Bangladesh Bank on a calendar year basis.

There have been several shifts globally in the concentration and composition of FDI among sectors. The first major compositional shift was within manufacturing from import-substitutes to export oriented manufacturing. A more recent shift of FDI has been towards services. The presence of these global changes is also evident in Bangladesh economy and has been driven in particular by the opening up of service industries to FDI. With the country’s accession to the World Trade Organization (WTO), service sectors like power and energy, banking, insurance and telecommunications are being liberalized and progressively opened up. Owing to comparative advantage and an accommodative policy regime, a large chunk of FDI has gone into the ready-made garment (RMG) sector for establishing backward linkage industries, telecommunication, power, oil and gas exploration sector. Table 2 depicts the pattern of FDI inflow in different sectors and the growth rate during 1995-2005. In fact, there is substantial change in the pattern of FDI inflow in the new millennium and the foreign investors are looking at sectors like telecom, banks, power and energy, where profit growth is likely to be high, which may alter the sectoral composition in the days to come.

Table 2: Sector-wise FDI inflow and growth, 1995-2005 (In million USD)

Year 

fdi_ag 

fdi_in  

fdi_sr 

gr_ag 

gr_in  

gr_sr 
1995 0 48.7 43.6 3.1 6.9 3.9
1996 0.3 136.2 95.1 5.9 5.8 4.5
1997 1.4 404.5 169.4 3.2 8.3 5
1998 1.4 375 200 4.7 4.9 5.2
1999 2.9 275.3 30.9 7.4 6.2 5.5
2000 15.2 494.5 68.9 3.2 7.5 5.5
2001 1.1 324.6 28.8 0.1 6.5 5.4
2002 1.6 200.8 125.9 3.2 7.3 5.4
2003 4.1 253.3 92.8 4.1 7.6 5.7
2004 1.7 263.5 195.2 2.2 8.3 6.4
2005 2.3 427.6 415.4 4.5 9.6 6.5

Source : Statistics Department, BB & BBS                                                                                                      

Note: ‘fdi_ag’ means FDI inflow in agriculture sector, ‘fdi_in’ means FDI inflow in industrial sector and ‘fdi_sr’ means FDI inflow in service sector. Again ‘gr_ag’ means output growth in agriculture sector, ‘gr_in’ means output growth in industrial sector and ‘gr_sr’ means output growth in service sector.
The emergence of new sources of FDI, may be of particular relevance to low-income host countries like Bangladesh. Indeed, the role of developing and transition economies as sources of FDI is increasing with the passage of time. Transnational Corporations (TNCs) from developing and transition economies have become important investors in many LDCs. Bangladesh also depends on 36 countries across the globe for FDI. Among the sources, 21 countries belong to the developing and transition economies. Table 4 illustrates the total FDI inflow in Bangladesh over the last 11 years from 1995 to 2005 from different countries across the world. Table 3 depicts that near about 70 percent of annual FDI has been received from only 11 countries.

Table 3: Country-wise FDI inflow, 1995-2005 (calendar year) (In million UDD)
Country  1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Denmark  0.78 2.23 0 0.03 0.14 22.5 4 3.1 14 18.8 18.3
Egypt  0 0 0 0 0 0 0 0 0 19.9 48.4
Hong Kong-China  2.73 5.94 21.63 13.14 20.52 14.8 5.8 17.1 11.7 13.9 53.1
Japan  6.61 5.37 51.31