Ebook Foreign Direct Investment and Sustainable Growth: A Case Study on Bangladesh
The objective of this paper is to analyze the effects of foreign direct investment (FDI) and its role in driving economic development in Bangladesh. The study will provide a deeper understanding of the relationship between FDI and development by examining the different factors that have affected both economic factors.
The definition of FDI will be followed in accordance with the United Nations Conference on Trade and Development (UNCTAD) and its World Investment Report 2006 , which states that “FDI is 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 (FDI enterprise or affiliate enterprise or foreign affiliate)”. The Bangladesh Board of Investment (2004) maintains the same definition. FDI consists of three core parts: Equity Capital, Reinvested Earnings, and Intra company Loans. Equity Capital, as the name suggests, refers to ownership and a foreign investor’s purchase of shares of an enterprise that is in a country other than his own. Reinvested earnings refer to the investor’s share of earnings that are not distributed back to him, i.e. profits that are not given out as dividends but are kept within the firm (or any of its affiliates) as retained earnings. On the other hand, intra-company loans involve debt transactions in the form of short and long-term lending by the foreign parent company to its affiliates (UNCTAD 2006).
FDI inflows to Bangladesh have increased dramatically in recent years and have had some positive influence on development. However, the extent to which FDI has helped this developing nation has been limited. This paper intends to provide plausible explanations of why this has been the case. The structure of this study will constitute a discussion of the history of FDI followed by a discussion of the history of Bangladesh’s development. After evaluating the two components separately, the paper will examine the relationship between the two. The evaluation will consist of a theoretical module, based on previous studies, and an empirical module, based on data collected on Bangladesh by the World Bank (2006). Economic concepts will be used to discuss details of how FDI inflows enhance the production capacity of the economy and raise employment levels.
This leads to an increase in exports that allows the country to earn foreign currency with which to pay for external debt, import volumes, and further inflows of FDI. The process continues to help sustain economic growth. A series of regressions using the Ordinary Least Squares model will follow to justify the notion that foreign investment significantly contributes to sustainable growth in Bangladesh. The core part of the empirical analyses will consist of time-series data to identify trends of FDI and World Development Indicators (World Bank 2006) since the 1980s, when inflows of foreign capital first emerged in Bangladesh. A number of indicators will be used as metrics of development, including GDP per capita, GDP, telecom distribution, and export volumes. The analyses will examine correlations that may exist between FDI and these development indicators to support the theory.
In focusing on the history of FDI in Bangladesh, the paper will provide an overview of the different policy measures the Government of Bangladesh has implemented since the country’s independence in late 1971. Until 1985, GNP per capita did not manage to grow nearly as fast as other low income countries (Mondal 2003). In trying to overcome this stifled growth, external pressure from foreign donors induced the government to privatize major industries and adopt economic reforms of its investment policies as a means to attract more FDI and boost economic growth (Mondal 2003). Factors that have influenced FDI will also be emphasized, i.e. policy changes, overvalued exchange rates, financial risks, political stability, and tax liabilities.
Contents
Introduction
Chapter I: The History of FDI and the Bangladesh Government’s Investment Policies
Chapter II: The Current Situation of FDI inflows in Bangladesh
Chapter III: The History of Development in Bangladesh
- (i) Post-Liberation Period: 1971-1979
(ii) Period of Sluggish Growth and Instability 1981-1989
(iii) Period of Stable Economic Growth and Significant Development: 1990-1999
(iv) Summary: The Transition of Bangladesh’s Development to its Present State
Chapter IV: The Relationship between FDI and Economic Growth in Bangladesh
- (i) Theoretical Concepts
(ii) Empirical Evidence & Analysis
Concluding Remarks
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