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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. 10:50-11:50 Session 1: Conceptual Issues What is FDI? Ideological Views on FDI Why Firms Invest Abroad?
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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
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 Contents
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 investmentinvolving 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 capitalis the foreign direct investor's purchase of shares of an enterprise in a country other than its own. • Reinvested earningscomprise 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 transactionsrefer to short- or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises.
Ideological Views on FDI Broadly, there are three types of conflicting views on foreign direct investment. Radical View Pragmatic Nationalism Free Market
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.
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 • 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
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.
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
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
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)
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
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.
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
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
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)
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
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 …
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.
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 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 ($156 bl.)
Perspectives on FDI Inflows in 2008 Region FDI/GFCF (%) Europe 12.7 North America 12.5 Africa 29.0 Latin America 15.5 Asia 10.7 South Asia 8.5 Bangladesh 5.9 Least developed 30.2 FDI supplements domestic resources
FDI Inflow in 2007 and 2008: South Asia In Million US$ Source: World Investment Report 2009 33
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
FDI Inflow in 2008: Bangladesh FDI Inflow: Distribution by Components Source: Enterprise Survey, Bangladesh Bank 35
FDI Inflow in 2008: Bangladesh FDI Inflow: Distribution by Sectors Source: Enterprise Survey, Bangladesh Bank 36
FDI Inflow in 2008: Bangladesh FDI Inflow: Distribution by Sources/Countries Source: Enterprise Survey, Bangladesh Bank Source: Enterprise Survey, Bangladesh Bank 37
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.
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.
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.
