TRENDS IN FOREIGN DIRECT INVESTMENT OF POWER, GAS &

PETROLIUM SECTOR

INTERNATIONAL BUSINESS ENVIRONMENT

BTM 4605

SUBMITTED TO
Ms. Farjana Nasrin
Lecturer, BTM

DEPARTMENT OF BUSINESS & TECHNOLOGY MANAGEMENT

ISLAMIC UNIVERSITY OF TECHNOLOGY (IUT,OIC)
 SUBMITTED BY

Almusabbir Sakib
170061009
Shadman Sakib
170061024
Alvi Rahman
170061028
Zubayer Ojhor
170061035
Arman Sarkar
170061038

Submitted to: December 12,2020

Abstract:

The world economy is experiencing significant changes and one of the most remarkable trends in
the world economy over the past decades has been increasing globalization and the rising global
economic integration, reflected in terms of the rising share of international trade and foreign
direct investment (FDI). Foreign direct investment is one of the most important indicators of
economic growth in any country especially developing and under developing countries which
can make substantial progress in reducing poverty, supported by sustainable economic growth.
Furthermore, a higher gross domestic product (GDP) may be generated by the attraction in
sector-wise investment in a country. Since Bangladesh is a developing country, the importance
of FDI cannot be overlooked in this country. Rather factors such as a young talented workforce,
sound economic growth and the infrastructural development which are necessary to attract
investments are visible in Bangladesh. So foreign investors have poured funds here, giving a
sharp rise in FDI, despite global slowdown. Many sectors in Bangladesh are attracted by FDI
which includes- power sector, agricultural and agro-industrial products, light engineering,
pharmaceuticals, software and ICT products, as well as transportation and communication. The
power sector alone had attracted investments worth $1.01 billion, where China contributed $834
million, followed by $730 million in the food sector, and $430 million in the textile sector. This
paper is going to point out the factors which affects the FDI elements in Bangladesh, FDI in
specific sector (power sector), net inflow of FDI and challenges to attract FDI in Bangladesh.

Keywords: Foreign direct investment (FDI), Economic growth, Development, Gross domestic
product (GDP), power sector.

What is FDI?

FDI which stands for foreign direct investment is an investment in the form of a controlling
ownership in a business in one country by an entity based in another country. Foreign direct
investment occurs when a firm invests directly in facilities to produce or market a product in a
foreign country.

FDI net inflow:

FDI net inflows are the value of inward direct investment made by non-resident investors in the
reporting economy.

FDI net outflow:

FDI net outflows are the value of outward direct investment made by the residents of the
reporting economy to external economies.

Forms of FDI:
There are two main forms of FDI. They are-

1. Greenfield investment (The establishment of a new operation in a foreign country)

2. Mergers and acquisitions.

1. Greenfield investment:

Greenfield investments are a type of foreign direct investment where a company starts its
operation in the other countries as its subsidiary and invests in the construction of offices, plants,
sites, building products, etc. thereby managing its operations and achieving the highest level of
the controls over its activities.

Example:

Starbucks, Coca-Cola and McDonald’s are the leading companies which have invested in
Greenfield projects around the world.

2. Mergers and acquisitions:

Merger:
Merger refers to a phenomenon where two separate entities combine forces to create a new, joint
organization. Here the weaknesses of the separate companies are being ruled out by the joint
organization.

Example of Merger:

1. Exxon corp. and Mobil corp.

2. Disney and 21st Century Fox

Acquisition:

The takeover of one company by another company is termed as acquisition.

Types of acquisitions:

1. Minority (where the foreign firm takes a 10%- 49% interest in the firm's voting stock)

2. Majority (foreign interest of 50%-99%)

3. Full outright stake (foreign interest of 100%)

Example of acquisition:

1. Disney and Pixar

2. Google and Android.

FDI scenarios in Bangladesh:

There have been some fluctuations in the foreign direct investments in Bangladesh. But if we
look at the investments, we will see that over the years the foreign direct investments have
increased significantly which means investors of foreign countries are realizing the potential of
Bangladesh as a developing country and feeling that it is safe to invest in this country. That’s
why FDI in Bangladesh is on the rise.
From Table-1, we can easily say that FDI investments in Bangladesh is constantly increasing
(detailed interpretation of the given table is discussed later). Because of the rising FDI, the GDP
of the country is also on the rise which is ultimately contributing to the economic growth of
Bangladesh.

Foreign investors in Bangladesh:

Not all countries invest equally in Bangladesh. The major investors are- United States of
America, China, South Korea, India, Egypt, the United Kingdom, the United Arab Emirates and
Malaysia. The investment by U.S.A. is decreasing rapidly and on the other hand, China is
increasing its investments in Bangladesh throughout the years.
 Fig-1: Foreign investment in Bangladesh (For the year 2018)

Fig-1 shows the investments made by different investors in Bangladesh in the year 2018. From
the figure, we can say that, China is the biggest investor with almost 50% of the foreign
investments. On the other hand, the investment made by U.S.A. is declining to a great extent
because of tax reforms and anti-globalist policies.

Sector wise FDI inflow in Bangladesh:

Foreign investments are made in different sectors of Bangladesh at a varying rate. The main
sectors include- agriculture, manufacturing, power, service, trade and commerce and transport
and communication. A sector wise FDI inflow is provided below:

Table 2: Sector wise FDI inflow (Amount in Million USD) in Bangladesh, FY 2001- FY
2017
Thus, we can see from Table-2 that, investments have varied over the years and the highest
investment was made in manufacturing sector and the lowest investment was made in agriculture
sector over the years. But in recent years, significant FDI rise took place in power sector and
banking sector of Bangladesh.

Table 3: Top FDI receiving sectors in Bangladesh in 2019

Thus, the importance of power sector is increasing day by day due to its increasing contribution
in FDI sector of Bangladesh.

Factors affecting FDI inflows in Bangladesh:

 Regulatory Uncertainty
Bangladesh's market environment illustrates a high regulatory uncertainty that
discourages foreign investors from entering the region. When selecting host countries,
investors evaluate the clarity of current legislation, the reliability of government officials
and compliance with laws and regulations. Bangladesh also struggles to deliver on
commitments that indicate a lack of cohesion due to bureaucratic involvements that
discourage investors
 Restriction in profit settlement
Bangladesh Bank sometimes establishes obstacles in profit return, one of the
prerequisites for FDI, which hinders the flow of FDI. This means that overseas buyers
face problems in getting back their capital or dividends. Regional contemporaries,
including India, Vietnam, and Indonesia, have streamlined laws on investment to
encourage FDI, and Bangladesh needs to follow a similar strategy.
  High taxation and VAT Policies
To encourage investors to move, countries have restructured their tax policies. For
instance, India has reduced the corporate tax rate from 30% to 22%, and new firms in the
manufacturing sector will enjoy a tax rate of 17%. Moreover, there are no VAT criteria in
India, Vietnam, Thailand, to develop factories in the economic zone, which is 15 percent
in Bangladesh. In the sense of competition, the corporate tax rate and VAT policies need
to be updated to inject high FDI inflows into the country
 Ease of Doing Business
The level of ease of doing business in the host nation plays a crucial role in making
investment decisions. Bangladesh is failing to build investor trust as the World Bank's
Ease of Doing Business Index is seriously lacking. Bangladesh ranked 168 in 2019 out of
190 countries, rising in the index from its previous position to 176th. However, the nation
lags the South Asian countries, putting itself in tough competition. While Bangladesh is
known for its low labor costs, the ease of doing business in other countries trumps this
advantage for investors.

Some other factors affecting the inflow of FDI are discussed in the later part of this article.
Power sector of Bangladesh-An Overview:

Power sector of Bangladesh is a developing sector. Bangladesh’s power sector is one of the
fastest growing in South Asia. The growth in terms of capacity addition has been remarkable --
increasing from 5% to 28% from 2012 to 2018 according to the World Bank and the Bangladesh
Power Development Board.
Domestic and industrial sectors are the key power demand drivers in the country. Key industries
driving growth in the country are RMG manufacturing, infrastructure development, and
pharmaceutical.
We can expect electric power consumption per capita in Bangladesh to increase significantly as
demand is expected to increase in line with GDP growth and the government’s master plan to
generate 24,000MW of electricity by 2021, 40,000 MW by 2030, and 60,000 MW by 2041.
Bangladesh has continuously added power capacity at an impressive growth rate in the last five
years.

Power Generation:
Power generation is referred as the process of generating power from different available sources
of energy.

Power transmission:
Power transmission is the movement of energy from its place of generation to a location where it
is applied to performing useful work.

Power Distribution:
This is the final stage in delivery of electric power.

Power Plant:
A power plant is assembly of systems or subsystems to generate electricity. The power plant
itself must be useful economically and environment friendly to the society.

List of Power Plants in Bangladesh:

 Nuclear Plant:
Rooppur Nuclear Power Plant is under-construction. The two units of VVER
1200/523 generating 2.4 GWe are planned to be operational in 2023 and 2024.

 Coal Fired:
Name Status Capacity(MW)
 Barapukuria Power Station Constructed 525
Matarbari Power Station Under-Construction 1200
Payra Thermal Power Under-Construction 1320
Plant
Rampal Power Plant Under-Construction 1320

 Oil and Gas-fired Thermal:

Name Status Capacity(MW)
Ashuganj Power Station Constructed 1627
Ghorasal Constructed 950
Shikalbaha Constructed 250
Siddhirganj Constructed 260
Orion Group (4 plant) Constructed 400
Lakdhanavi Bangla Power Constructed 52.2
Limited
Desh Energy Constructed 200
Doreen Power Generations Constructed 165
and Systems Limited

 Karnafuli Hydro Power Station:

Kaptai dam is the one and only dam of Bangladesh that is used to generate hydro-electric
power.
 Solar Power Projects:
Implemented Projects: Under the Hill Tracts Electrification Project BPDB has already
implemented three solar projects in Juraichori Upazilla, Barkal Upazilla and Thanchi
Upazilla of Rangamati District. Under 1st, 2nd and 3rd Phases, 1200 sets Solar Home
Systems of 120 Wp each, 30 sets Solar PV Street Light Systems of 75 Wp each, 3 sets
Solar PV Submersible Water Pumps of 1800 Wp each, 6 stes Solar PV Vaccine
Refrigerators for the Health Care Centers of 360 Wp each and 2 sets 10 kWp capacity
Centralized Solar System for market electrification has been installed. So, a total of
173.81 kWp Solar PV Systems have been installed in Juraichori, Barkal and Thanchi
upazilla of Rangamati District under the Hill Tracts Electrification Project.
BPDB implemented 20.16 KWp Solar PV System and that was inaugurated by Prime
Minister at the Office of the Prime Minister on December 2009.
Recent Situation of Bangladesh’s Power Sector:

Faced with a severe power crisis in 2009, Bangladesh adopted the Power Sector Master Plan
(PSMP) 2010 for 2010–2030. The generation plan is based on achieving 8% growth and
ensuring electricity for all by 2021. Based on these targets, the PSMP 2010 has set the installed
generation capacity target at 23,000 MW (MW) by 2020, 24,000 MW by 2021, and 40,000 MW
by 2030.
The increase in power generation has been significant between June 2010 and June 2015, as total
installed capacity increased from 5823 MW to 13,540 MW during this period. The population's
access to electricity increased from the 2010 baseline of 48%–72% in 2015. Per capita electricity
consumption also increased from 220 kW-hour (kWh) to 371 kWh, but it is still considered as
one of the lowest in the world.
Bangladesh's power sector is heavily reliant on gas. In 2010, around 84% of the power-installed
capacity was gas based, around 4% was coal, 4% hydro, and the remaining 8% was oil based. In
2015, with a competing demand for gas and its continuing supply shortage, gas-based installed
capacity has fallen to 63%. The contribution of coal and hydro are also negligible; they fell by
2% each, while 4% of power was import-based and the remaining 29% liquid-fuel-based. As of
June 2015, out of a total installed capacity of 11,532 MW, the public sector's contribution was
52%, while the private sector contributed 44%.
Although the generation capacity has substantially increased in the Sixth Five-Year Plan (2011–
2015), the costs of electricity production have been increasing along with the continuing
operational deficit in the power sector. The Seventh Five-Year Plan (2016–2020) addresses these
two major issues by adopting low-cost and efficient sources of electricity by relying more
on base-load power plants rather than rental, while the choice of power imports is moved
towards a regional base, especially with India, Myanmar, Bhutan, and Nepal. Additionally, the
choice of primary fuel has shifted from reliance on gas to imported coal, and a small increment
was registered in renewable energy, such as solar and wind power.

Why FDI is needed in the power sector in Bangladesh:

For the growing power sector, Bangladesh needs new power plants. As a result, some mega
projects like Rooppur Nuclear Power Plant is under-construction.
The installation of power plants requires large capital outlays and concomitant sophisticated
technological requirements. In Bangladesh, the investment requirements for power generation
beyond 2015 are estimated at USD 7.5 billion by 2021 and a further USD 21 billion by 2030,
which is beyond the ability of the public and the private sectors in Bangladesh. As such, the
Bangladeshi government encourages the foreign direct investment (FDI) inflows in this sector,
with supportive policies already implemented (e.g., tax exemption on royalties, technical know-
how and technical assistance fees, and on the interest of foreign loans). FDIs to the power sector
in 2004–2005 amounted to USD 30 million, accounting for 4% of total FDI flows, while in
2015–2016, they increased to USD 208 million, accounting for around 10% of total flows. In
2015–2016, FDI flows into the power sector were close to those in gas and petroleum, and
banking.

Figure: Investment Required in the Power Sector of Bangladesh

Current Outlook of FDI in Power sector of Bangladesh:

Foreign investment in the electricity sector of Bangladesh is going up remarkably every year
compared to other countries in the world. In last one year, a total of $2.5 billion has been
invested in the power sector to generate 2,000 MW power in private in sector.
It is also expected that another $15 billion investment will be made in the power sector by 2021,
according to sources concerned. Power sector analysts said that investment-friendly environment
has been created in the country due to prevailing political stability in the country in the last
decade and the government is taking newer projects in the sector. According to sources at Power
Division, the total amount of investment in the electricity sector between the time-period of 2009
and 2017 is $8.9 billion. Of this, $4.8 billion was invested in the public sector while it is $4.1
billion in the private sector.
Bangladesh government has signed agreements with several countries, including Germany,
Singapore, and Malaysia. It is expected that investment from those countries will come very
soon. Moreover, several countries, including Saudi Arabia, Vietnam have expressed interest in
investing in the promising sector. Recently, Reliance Power, India’s largest energy company, has
agreed to build the largest gas-based power plant with the capacity of 718 MW at Meghnaghat in
Narayanganj. Meanwhile, a group of companies of United Arab Emirates led by Metito Utilities
and JinkoPower has won a bid to build a 45-55 MW grid-tied PV array in Rangunia upazila of
Chittagong district. Upon completion of the work, it will be able to generate 45 MW to 55 MW
of electricity. Bangladesh will be able to buy solar power at an affordable price for twenty years.

Figure: Proportion of FDI in the Bangladeshi power sector, 2004–2015. Source: Bangladesh
Bank.

Determinants FDI in the power sector of Bangladesh:

Factors affecting the decision of multinational enterprises to conduct FDI in the power sector can
be grouped into four main areas: regulatory, political, macroeconomic, and social prospects.
Some Examples of determinants for a firm's decision to conduct FDI in the power sector include:
i. Government commitment to contracts
ii. Land acquisition/rent/lease of land
iii. Tax exemption
iv. Avoidance of double taxation
v. Protection of Foreign Investors Act (1980)
vi. Profit repatriation controls
vii. Presence of government guarantee
viii. Time and efficiency of staff to complete the procedure
ix. World-class security package
 x. Protection of property rights
xi. Quick allocation of work permits
xii. Approval of central bank for transferring capital
xiii. Environmental regulations
xiv. Need for internationally accepted Environmental and Social Impact Assessment for large
projects
xv. Property registration
xvi. Regulation on health, hygiene, and safety of workers
xvii. Responsiveness of needs and time frame of investors
xviii. Level of administrative competence
xix. Construction permit
xx. Bangladesh Arbitration Act 2001

To invest in a foreign country, a firm need to have three different types of advantages:
(1) Ownership,
(2) Locational, and
(3) Internalization.
For FDI to take place, all three advantages must be present simultaneously. Examples of
ownership advantage are access to patents, specific entrepreneurial skills, scale economies, or
superior technology. Ownership advantages make it possible to move between different locations
and can thus be transferred to a foreign country. For FDI to take place, the ownership advantage
also has to be profitable for internalization by the firm rather than the market taking care of
transactions such as selling or leasing. If an internalization advantage is missing, the firm will
serve the foreign market through exports rather than through investing in order to produce
locally.
Finally, there must also exist some forms of locational advantages specific for the geographical
location that would eventually trigger actual investment. Locational advantages are country
specific and cannot be transferred to another location such as low input costs, existence of raw
materials, or special tax regimes. The eclectic paradigm focuses on economic efficiency as the
ultimate determinant of location choice for multinational enterprises (MNEs).

Determinants affecting FDI inflow:

Regulatory Factors:
1. Government's commitment to contracts

This factor is rated as the most influential in attracting FDI to the Bangladeshi power sector from
the regulatory category. All respondents unanimously agreed that it represents the guiding rule
for doing business as a means to see contractual obligations honored, revenues secured, and
creating the confidence that investors' interests are protected. All respondents agreed that
Bangladesh has set a good track record with IPPs and there have not been any instances of
payment defaults per se. This is in line with the literature arguing that foreign investors in
developing countries would like to see the “rules of the game” remain credible and not altered at
the government's convenience once they have made investment decisions based on such rules.

2. Land acquisition/rent/lease of land

Access to land is a major issue for setting up power plants in Bangladesh, and this factor is rated
as the second most important. The cost, availability, and difficulty in procuring land are some of
the major concerns when making investment choices in Bangladesh. Moreover, there are other
sensitive issues, such as resettlement and rehabilitation of the affected people, who primarily
depend on the agricultural land for their livelihood, and costly litigation and ownership issues, as
there are multiple titles of land ownership, which makes the entire land acquisition process
costly, time consuming, and risky. Additionally, when investors are successful in acquiring large
tracts of land in a suitable place, there are several pockets the landowners do not want to give up
and use them as a bargaining tool for raising prices, thus creating additional costs for the
investors. However, for some respondents, this was not a major issue, as they have been
provided with lease land from the government due to their strong affiliations with the political
process or had the recourse to make available their own private land to complement the land
acquisition process.

3. Tax exemption

This factor is also significant in influencing FDI in the power sector. In Bangladesh, power
companies are exempt from corporate tax for 15 years. Apart from conventional thermal power
plants, renewable companies are also exempted from corporate income tax for 10 years. These
measures are part of the fiscal incentives given by the government to draw large-scale private
investment in this sector. Additionally, as the future fuel mix would be heavily drawing on coal,
the government has also recently introduced incentives for coal-based power plants to come
under the provision of the 15-year tax break if these could bring their operation online by June
2020.

Tax exemption is a key determinant to drawing FDI to the power sector. Moreover, this incentive
is helping the government ensure a lower tariff from private companies, which helps for the
subsequent mitigation of losses for the off-taker when selling subsidized power to end users.

Economic and Financial Factors

1. Economic growth and development

Bangladesh has experienced a robust and resilient economic growth performance over the past
decade. Its real gross domestic product grew at a healthy rate of around 6% .
This factor is rated as very influential in attracting FDI in the power sector. Both private and
government respondents unanimously agreed that, by any standards, the Bangladeshi economy
has performed well. Bangladesh is giving top priority to infrastructure development, including
power with large capacity improvements having been achieved, largely from private sources,
which is helping draw foreign investment. Moreover, Bangladesh's current sovereign rating by
Moody's with a Ba3 stable outlook, which is positive for foreign investors in the country.

2. Gas transmission line

This factor is the most important variable in the economic, including infrastructure and financial,
category. Natural gas is the primary source of fuel for power generation in Bangladesh. Gas price
is highly subsidized in the country, which is one sixteenth of the international level. This creates
a proclivity to run power plants on this cheaper and clean fossil fuel and have less greenhouse
gas emissions.

Moreover, the government is planning to import liquefied natural gas (LNG), which would be
fed through the existing gas transmission pipelines with additional pipelines to be built for
feeding LNG, creating the opportunity for investing in more in gas-based power projects in the
future. Alongside LNG imports, Bangladesh should increase its reserve gas ratio through
accelerated exploration and development of new gas fields for production, augmentation, and
optimization of recovery. The transportation and distribution network would be expanded
accordingly.

3. Skilled labor

Skilled labor is another variable that most respondents rated as a very important in attracting FDI
into the power sector in Bangladesh. There are skilled workers in the country, and foreign firms
can hire technicians and engineers from local universities and colleges. Many companies retain
them by providing better financial packages and job training. Additionally, they give employees
the opportunity to move between locations and across projects as part of a global learning
initiative. However, it is also a fact that the country still needs to improve worker quality, as it
lacks adequate supervisory and management skills, for which employees need to be hired from
neighboring countries, especially semi-skilled and highly skilled workers.

Political factors

1. Coordination and collaboration between ministries

This factor as the most crucial among political factors to attract FDI inflows in the power sector.
However, many private companies revealed that, in Bangladesh, there is still a lack of effective
coordination and collaboration among the different line ministries and departments and other
government agencies that operationalize the power sector. For example, the slow and
uncoordinated services of the Board of Investment (BOI), which is supposed to be a one stop
shop to ensure a wide range of business set-ups and other facilitation services to foreign
investors, but due to a general lag of coordination among various government agencies,
processes get persistently delayed and become cumbersome in the detriment of foreign
companies. Moreover, at the project implementation phase and also on the working level,
investors face hurdles in expediting tasks from various line ministries or in the grant of
concessions for certain provisions already incorporated in policies.

2. Accountability of public officials

Accountability of public officials was identified as another crucial variable in attracting FDI.
However, as in the case of coordination and collaboration, accountability of public officials still
needs to improve.

3. Control of corruption

Corruption is a major issue that prevents foreign investors from participating in the Bangladesh's
power sector. Irregularities and rent capture are considered significant stumbling blocks at the
procurement stage in the Bangladesh's power sector. For example, procurement irregularities
have resulted in persistent problems about procedures and transparency with the World Bank,
especially when large projects with multilateral involvement are bid.

Societal factors
For societal factors, citizen security and accountability are very important factors in affecting
investor decisions to conduct FDI. This may be attributed to the fact that the country's law and
order situation (for example, crime, theft, and other disorders) has seriously deteriorated.
Additionally, there have been kidnappings and killings of foreign nationals.

Effects of power plant characteristics:

FDI determinants are influenced by firm characteristics of power plants, including ownership
(joint venture, wholly owned subsidiary, and consortium), firm size (small, medium, and large),
and contract periods.

Overall Trends in FDI inflow in Bangladesh:

The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a
year). There are two forms of FDI in international investment perspective. They are:
1. Inflow of FDI/Inward FDI: When FDI comes from foreign countries.
2. Outflow of FDI/Outward FDI: When FDI goes to foreign countries.
In more detailed, if an organization, affiliated group of business entity or a citizen invests a
substantial amount of capital as a long-term investment in other countries than his native
country, then an FDI occurs. In this case, the investors countries are known as home countries
and the countries where the investment is done is known as host countries. So, when this FDI
occurs it is always an inflow of FDI for the host countries and outflow of FDI for home
countries. In short, the recipient of FDI is the host country and the investor is the home country.
The past 10 years have seen an increase level of FDI inflow in Bangladesh. From the very
beginning of our independence, Bangladesh tried very hard to draw in FDI for monetary
progress. Like every developing and developed countries, Bangladesh has long been apprised of
the importance of FDI. Throughout the previous decades, the stream of FDI into Bangladesh i.e.
inflow of FDI is comprehensively expanding due to providing facilities and economic
deregulations to the foreign investors, such as, corporate tax holiday, evasion of twofold tax
assessment, holiday for infrastructure investment, cash incentives and export subsidies,
remittance of sovereignty, specialized know-how and technical assistance fees and many more.

Fiscal Year FDI Inflow (In Million USD)

2001 563.93
2002 400.93
2003 379.18
2004 284.16
2005 803.78
2006 744.61
2007 792.74
2008 768.69
2009 960.59
2010 913.02
2011 779.04
2012 1,194.89
2013 1,730.63
2014 1,480.34
2015 1,833.87
2016 2,003.53
2017 2,454.81
2018 3,613.30
2019 2,874.65

Table 1: FDI inflow (net) in million USD from 2001 to 2019 in Bangladesh

Bangladesh offers a number of financial and non-monetary facilities to the outside investors
since it is trying to be a reasonable nation for FDI. The total FDI inflow i.e. stock of FDI is
expanding over the period. In the fiscal year 2001 FDI Inflow was just 563.93 USD million.
After that the inflow was decreased in the fiscal year 2002 and the amount was 400.93 USD
million. Amid the time 2001-2004, normal FDI inflow was about 200-600 USD million and, in
that time, FDI was all the more fluctuating. Again, between 2005 to 2011 fiscal year, the FDI
inflow was roughly between 700-1000 USD million. In the 2012, FDI inflow was 1194.89 USD
million after that FDI was altogether expanding. In the fiscal year 2016 FDI inflow was 2003.53
USD million. In 2017, Bangladesh got 2454.81 USD million and in 2018 Bangladesh got
3613.13 USD million which is the most astounding FDI inflow into Bangladesh over the last
research period. But unfortunately, in 2019 the amount dropped to 2874.65 though it’s an
increased amount regarding other fiscal years. The figure1 demonstrates the graphical
presentation of FDI inflow in Bangladesh. The diagram demonstrates that the rate of foreign
investment was 113.3 USD million per annum in Bangladesh in the study time period.

Figure: Demonstration of rate of FDI per annum in Bangladesh

Key Takeaways:
 In 2019, we see a drastic drop in FDI inflow in Bangladesh from 3613.30 USD (in
Million) to 2874.65 USD (in Million)
 Net inflow is the summation of equity capital, earnings reinvestment and intra-company
loans.
 Net Inflow of FDI = Equity Capitals + Earnings Reinvestment + Intra-Company Loans
General Factors Affecting the Overall Trends in FDI:

NET INFLOW OF FDI IN BANGLADESH

3,613.30

2,874.65
2,454.81
2,003.53
1,833.87
1,730.63

1,480.34
1,194.89
960.59

913.02
803.78

792.74

779.04
768.69
744.61
563.93

400.93

379.18

284.16

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

From the above figure, we can see a rapid growth in FDI inflow in Bangladesh. It has become
possible for several reasons.
 With a population of more than 150 million people, Bangladesh represents one of the
world's largest market. Historically, import tariffs made it difficult to serve this market
via exports and licensing, so FDl was required if a company wanted to tap into the
country's huge potential.
 Many foreign firms believe that doing business in Bangladesh requires a substantial
presence in the country to build the crucial relationship networks.
 A combination of cheap labor and tax incentives, particularly for enterprises that
establish themselves in special economic zones, makes Bangladesh an attractive base
from which to serve Asian or world markets with exports.
 The Bangladesh government has committed itself to invest a substantial amount of
money in infrastructure projects over the following years in future.
 Economic growth, deregulation and privatization program helped a lot for attracting these
huge amounts of FDI inflow in Bangladesh.

FDI in Different Sectors:

Agricultural sector has been a significant contributor to the economy of a developing country,
especially in terms of employment generation and national output. In the study it is found that
there is a positive relationship between Gross Domestic Product (GDP) and the three
independent variables (Domestic Saving, Government Expenditure on Agriculture and Foreign
Direct Investment on Agriculture). The findings confirmed the positive development witness by
the agricultural sector is developing rapidly making the sub sector production very vibrant in the
economy. Following table indicates that the average FDI inflow on Agriculture and Fishing
sector was 17.28 USD million from fiscal year 2001 to 2017, upper limit was 49.50 USD million
in 2012 and lower limit was 0.95 USD million in 2002.

The given shows that average FDI inflow on manufacturing sector was 359.75 USD million from
fiscal year 2001 to 2017, Maximum was 869.43 USD million in 2017 and Minimum was 90.94
USD million in 2004. It is found in the study that Foreign Direct Investment in manufacturing
sector has a positive effect on economy growth. The following figure shows that average growth
rate per annum in manufacturing sector is 46.348 USD million over the study period in
Bangladesh.
The average FDI inflow in Power, Gas and Petroleum sector was 190.93 USD million from 2001
to 2017, Maximum was 467.93 USD million in 2017 and Minimum was 46.89 USD million in
2009. The rate of increment of FDI in Power, Gas & Petroleum sector is 8.7159 over per annum
in Bangladesh.
FDI inflow in of Services sector was 30.41 USD million from 2001 to 2017 on an average,
Maximum was 104.44 USD million in 2017 and Minimum was 1.07 USD million in 2006.The
rate of increment of FDI in Services part is 5.9401 USD million over per yearly. The average
FDI inflow in Trade and Commerce was 183.09 USD million from 2001 to 2017, Maximum was
436.88 USD million in 2015 and Minimum was 35.25 USD million in 2001.The figue-2
demonstrates that the rate of increment of FDI in Trade and Commerce part is 21.748 USD
million over per year.
FDI always helps to create new employment and the inflow of FDI in service sectors and
construction and development sector, which help to attain substantial sustainable economic
growth and development through creation of jobs. The average FDI inflow in Transport, Storage
& Communication sector was 258.01 USD million from 2001 to 2017, Maximum was 601.28
USD million in 2017 and Minimum was 5.40 USD million in 2001. The rate of increment of FDI
in Transport, Storage & Communication sector is 21.664 over per annum.

Figure: Sector wise FDI inflow in Bangladesh from fiscal year 2001 to 2017
FDI Inflow in Power & Energy Sector:
Now if we want to focus inflow of FDI in a specific sector such as Power and Energy sector,
then first we have to discuss about the recent outlook of power sector in Bangladesh.
Faced with a severe power crisis in 2009, Bangladesh adopted the Power Sector Master Plan
(PSMP) 2010 for 2010–2030. The generation plan is based on achieving 8% growth and
ensuring electricity for all by 2021. Based on these targets, the PSMP 2010 has set the installed
generation capacity target at 23,000 MW (MW) by 2020, 24,000 MW by 2021, and 40,000 MW
by 2030.
Bangladesh's power sector is heavily reliant on gas. In 2010, around 84% of the power-installed
capacity was gas based, around 4% was coal, 4% hydro, and the remaining 8% was oil based. In
2015, with a competing demand for gas and its continuing supply shortage, gasbased installed
capacity has fallen to 63%. The contribution of coal and hydro are also negligible; they fell by
2% each, while 4% of power was import-based and the remaining 29% liquid-fuel-based.
The installation of power plants requires large capital outlays, which is beyond the ability of the
public and the private sectors in Bangladesh. As such, foreign investors have played a key role in
the power sector. FDIs to the power sector increased from USD 30 million in 2004–2005
(accounting for 4% of total FDI inflows) to USD 53 million (7% of total FDI inflows) in 2010–
2011 and to USD 208 million (10%) in 2015–2016. Although FDI inflows have showed an
increasing trend in the power sector over the past decade, the flows have still been relatively low
compared to other sectors, including gas and petroleum. This was an exception in 2015–2016,
when the share of FDI inflows to the power sector was close to that of gas and petroleum, and
banking and telecommunication.
 Figure: Trend in Grid-based installed capacity from 1998 to 2015

Figure: Proportion of FDI in the Bangladeshi power sector, 2004–2015. Source: Bangladesh
Bank

Reasons for such an investment in power sector are follows:

1. Regulatory Factors
 Government's commitment to contracts
 Land acquisition/rent/lease of land
  Tax exemption
2. Economic and Financial factors
 Economic growth and development
 Gas transmission line
 Skilled labor
3. Political factors
 Coordination and collaboration between ministries
 Accountability of public officials
 Control of corruption
4. Societal factors

Challenges to attract FDI into Bangladesh and ways to overcome such

problems:

As Bangladesh is a developing country, FDI (Foreign Direct Investment) can play a major role in
technical growth, economic stabilization, exports and employment. But there are some major
challenges that we have to overcome to attract FDI in our country. The challenges are:
Complex Bureaucracy
We have complicated bureaucratic system which is not favorable for most of the interested
parties who want to invest. Our investment related policies are so lengthy that many investors
loose interest in midway. Our bureaucracy system is not sufficient and sometimes also dishonest
as it is heavily responsible for low FDI in our country.
To solve this, we have to redesign our bureaucratic system in a way that most foreign investors
will find favorable and will be interested to invest. Also, we have to make investment related
policies time efficient and easy to follow.

Political situation
The political situation in our country is not stable as most of the political parties are hostile
towards each other and it is not suitable for investors for invest. Investors don’t invest in our
industries because most of the hostility is centered towards industries.
Our current political situation improving as it is becoming more stable day by day. To get better
result we have to create policies that will exclude our industries from any internal matter.
Corruption
Because of heavy corruption in our country many investors don’t show interest to invest. Our
whole system is corrupted so not many investors feel comfortable investing here.
To overcome come this we have to tone down our corruption level. That is the only way.

High Inefficiency Cost

Government regulatory and management system is ineffective and very time consuming and
lengthy. Our state-owned services such as telecommunication, energy, dock, railway
transportation etc. are not very efficient. This pushes business cost very high. Because of this,
investors don’t want to invest.
To solve this, our government have to make government services more efficient and effective.
Otherwise, we will keep losing foreign investments.

No Autonomous Regulatory Bodies

Most of our government regulatory bodies are politically influenced as there are no autonomy
operation. Because of this, investors don’t get rapid and effective response when asking for
government services.
To overcome this, we have to create an autonomy panel in every government agency.

Differential Treatment
Because of some regulation sometimes foreign investors don’t get same benefit as local investors
do. This is reason for dissatisfaction of interested foreign investors.
We have to create level field for local and foreign investors as both are necessary for our overall
growth.

Lack of Power
Among developing countries Bangladesh consumes lowest power per capita and insufficient
network coverage of power supply. This discourages investors to invest in power hungry
industries.
We have put more effort in generating and distributing power as it is a must for any industry.
Policy Implementation
In our country we have many policies to encourage foreign investors by giving them some
benefits. But in reality, none of this policy or strategies are in work which makes foreign
investors discouraged.
We have to make sure these policies are implemented and investors are getting benefit from
them.

Tax Corruption
Our tax system is very corrupted because of some dishonest people. Their unethical works
disrupts investors from investing.
Currently our country has introduced many regulations to minimize corruption in tax related
services.

Board of Investment
We have a BOI to assist investors with investment related services. But in reality, this boards
inefficient and ineffective services are on the reason that discourages interested investors.
To make BOI more useful for investors our government have to assign capable and productive
personal at the job.

Legal Absurdity
We have very complex and lengthy process for solving legal disputes. So many investors don’t
like to place their valuable money as investment in Bangladesh.
We have to create different board in court to solve FDI related disputes faster to attract more
investors.

Yearly Budget
Our government announces budget for every year for every sector. Sometimes this creates
problems for foreign investors plan. This happens because sometimes one-year budget could be
very different from previous year.
Our government should be more careful when creating budget plan. They have to make
favorable plans for foreign investors which will attract more investors.
Lack of communication
Lack of communication between different government agencies disrupts simultaneous
implication of different policies. It takes time and result in high business cost for investors. So,
they lose interest.
We have to create different board which will acts as a bridge between different government
agencies and will make communication between different agencies easy.

Lengthy customs processing

Our customs system is very corrupted and as a result sometimes it takes time longer than usual
and extra money to discharge shipments. Because of this many investors don’t like to invest
here.
Digitalization of customs process can minimize corruption in some areas but it is not enough to
attract investors. Complete change in customs system is needed to eradicate corruption from
there.

Effective ways to attract FDI into Bangladesh:

In order to be a significant recipient of FDI, a nation has to do some improvements in their
policies and market conditions. There are some ways that might effectively help to attract FDI
inflow in Bangladesh.

Open markets that welcome FDI inflows

We have to create open markets with reduced restriction on FDI. These markets will provide
similar transparent and open condition for both foreign and domestic firms. They will have
opportunity to business with ease, imports access, labor market flexibility and property right
protection.
Investment Promotion Agency
An effective could attract foreign investors and could work as a linkage between foreign
investors and domestic firms. Foreign investors can send their requirement to IPA and get access
to suitable infrastructure, skilled workers, technician, engineers. IPA also provides different
investment care and helps investors with reinvestment and follow-up investments.

Targeted sectors
We have to decide in which sectors we need foreign investment to help us prosper. Then we have
to provide assistance in those sectors so more investors invest on those sectors.
 1. Infrastructure upgrade: We have to make sure we have sufficient and quality
infrastructure like airports, docks, railway, power station, communication facility to
attract more investors to invest.
2. Allow competitive pressure: We have to allow pressure from foreign investors to
domestic firms. As a result, domestic firms will raise their level and don’t fall behind
on foreign firms and proper linkage will be crated between domestic and foreign
firms.
3. First-time investment: We have to encourage first-time investors who are not a part
of subsidiary network because they are more likely to work with domestic firms.
4. Diaspora members: We have to encourage foreign investment from investors who
are originally from our country. Because they will have more knowledge of the
market and economy and will also have linkage with local firms.
5. Vendor development program: We have to set up a vendor development program
that will help domestic suppliers to meet foreign customer’s demand.
6. Separate Export Processing Zone: We have to create separate export processing
zones for local and foreign firms. So that there is no discrimination between them
and also, they will able to do business freely.
7. Define us: “Us” should define by firms that are more beneficial to local economy
regardless the nationality of their owners.
8. Patient with domestic economy change: FDI will bring many changes in domestic
economy and it will transform as a whole. We have to accept that and try to cope
with these changes.

Conclusion:

The economy of Bangladesh has been growing relentlessly over the period regardless of
slowdown in the worldwide economy. Thus, we can clearly understand the importance of FDI in
a developing country like Bangladesh. But due to the economic fallout from Covid-19, Global
foreign direct investment (FDI) flows fell 49% in the first half of 2020 compared to 2019,
reveals UNCTAD’s latest Global Investment Trends Monitor released on 27th October. In the
wake of the pandemic, lockdowns around the world slowed existing investment projects and the
prospects of a deep recession led multinational enterprises to reassess new projects. According to
the UNCTAD’s World Investment Report 2020, FDI inflows to Bangladesh fell by 56% to USD
1.6 billion in 2019 compared to USD 3.6 billion in 2018. And due to the pandemic situation,
inflows of foreign direct investment (FDI) to Bangladesh declined further by 31.79% to $1.15
billion in the first half of 2020. But in order to sustain the economic growth of the country,
increasing FDI is a must for Bangladesh. So, Bangladesh Government should take rigorous steps
and rethink and redesign policies that decrease the trade barriers. Because of lowered
international trade barriers, more and more foreign investors will be attracted to invest in
Bangladesh. A comprehensive FDI policy should also be developed with clarified objectives.
Bangladesh Bank should ensure the ease of profit repatriation for the investors of FDI. Foreign
exchange reforms, customs clearance and simplification of taxation are the critical issues that
need more attention. However, the real emphasis should be placed on the effective
implementation of policies for alluring more FDI in the country to maintain strong economic
performance in the long run.

References:

1. https://www.dhakatribune.com/business/2019/05/09/fdi-rises-by-67-in-2018
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2020#:~:text=Global%20foreign%20direct%20investment%20(FDI,Monitor%20released%20on
%2027%20October.&text=%E2%80%9CThe%20FDI%20decline%20is%20more,expected%2C
%20particularly%20in%20developed%20economies

4. https://en.wikipedia.org/wiki/List_of_power_stations_in_Bangladesh

5.https://www.researchgate.net/publication/313616844_Power_Scenario_Of_Bangladesh_A_Bri
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bangladesh

7. UNCTADstat, 2013, United Nations Conference on Trade and Investment,

http://unctadstat.unctad.org/TableViewr/tableView, retrieved on 30.7.2013.
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