THE ROLE OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN BANGLADESH
Bangladesh is one of the countries in Asia that has benefited from foreign direct investment inflow. Foreign Direct Investment (FDI) has emerged as the most important source of external resource flows to developing countries over the years and has become a significant part of capital formation in these countries, despite their share in global distribution of FDI continuing to remain small or even declining. The role of the foreign direct investment (FDI) has been widely recognized as a growth-enhancing factor in the developing countries (Khan, 2007). Foreign Direct Investment (FDI) can play an important role for accelerating the economic growth (Chow, P. 1987), developing countries have begun to aggressively compete for FDI opportunities (Oman, C. 2000) Globalization is changing the strategies of multinational companies (MNCs) and the way developing countries compete for FDI. FDI encourages the transfer of new business, technology and knowledge (De Mello, 1997) and it allows the host economy or country to promote its products more widely in international arena.
The foreign direct investment (FDI) is considered as one of the major sources of employment generation, technology transfer, and managerial capacity building, and increasing market efficiency in any country. Now come to the point that, why companies go for FDI investment? This is because global competition among the multinationals is rising tremendously. Factors of production e.g. land, labor, capital are becoming costlier in the developed world. As a result, producing economy product by maintaining satisfactory quality is a major threat to the TNCs & MNCs.
On the other hand, export earnings, remittance and the foreign direct investment (FDI) are three major sources of revenue of a least developed country. Therefore, governments are offering special packages to the foreign investors for attracting FDI. Developing countries are somehow in an advantageous position to attract FDI than the least developed countries (LDC). But some LDC has absolute advantage over the developing countries in comparison of land and labor cost.
As a result, growth of Bangladesh’s FDI inflow was around US$ 308-356 million for long fifteen years (1980-1995) which started with an amount of US $ 0.090 million in 1972. With Bangladesh government’s opening up energy and telecom sectors in mid 90s FDI inflow raised dramatically. This flow raised into USD 1.13 billion, 1.29 billion in 2011and 2012, respectively. If we would like to compare Bangladesh’s performance with other South Asian Countries like India earned US $ 28 billion FDI inflow, Pakistan earned US $ 8.5 billion FDI inflow in 2012 (World Investment Report, 2014).
In Bangladesh, there is a need to explore policy options to increase competition in the financial market through diversification of products using cost saving and efficient technology. The higher the non interest income of a financial institution the lower the spread. It seems that banks are not interested in value added services as credit default swap, options, future, hedging etc. as they can earn substantial profit without these initiatives with traditional credit to borrowers.
There are some challenges ahead of the government before the upcoming budget of FY15-16 arising from less interest toward infrastructure development, declining foreign direct investment, lack of confidence of private investors, unstable transportation service, narrow tax revenue base and week tax collection, non-implementation of Public Private Partnership, risk of natural disaster, implementation of new pay scale, fractious political environment, low level of per capita income, lack of fiscal and labor market reform during current FY 14-15. Besides, some challenges are arising for the next FY 15-16 that may include whitening the black money, easing the income tax return, training and development of teachers of primary and secondary schools, reducing corporate tax, utilization of internal resources, implementation of modernization plan of government revenue collection, identifying and removing tax fraud by NBR, decentralization of national budget to districts level, cutting yield rate of hot selling savings tools, implementing the conditions arising from budgetary support of World Bank etc.
In the upcoming budget, education, health and human resources development will get preference in spite of fuel and energy sector to bring the GDP growth rate to 7%-8%. The directors of state-owned Commercial Banks will be trained as these banks are backward in automation. We are observing a shifting from MDGs to SDGs, GDP growth rate acceleration, removing barriers of female participation to economic activities and measures to get rid of political turmoil and maintaining macroeconomic stability
Bangladesh is a least developed country (LDC) located at South Asia. About 31.5% of its population are living below the poverty line (The Household Expenditure Survey, 2010). There are 56.7 million workable population in Bangladesh with 2 million unemployed population (Labor Force Survey, 2010). Another 1.8 million educated workforce is entering into the job market per year (Begum and Abdin, 2015). Providing employment opportunity to such a huge population is quite difficult task for the government as well as local private sector. Therefore, government is welcoming foreign investment into Bangladesh to facilitate employment opportunity, foster economic growth and poverty alleviation. Government is offering many fiscal and non-fiscal incentives to the FDI investors.
From a global perspective, the relationship between FDI and economic growth, and the stability of this growth, is a central consideration as host countries evaluate the trade-offs associated with foreign entry. This has been considered in the context of longer-term performance, stemming from the argument by Romer (1993) that an idea gap has held back growth in emerging markets. If an idea gap has impeded growth, FDI can induce a catch-up process. The most robust evidence on FDI and aggregate growth is found in studies of developing countries. For example, analyses of inward investments to Greece, Taiwan, Indonesia, and Mexico show a significant positive contribution to these countries’ growth. Research using detailed industry-level data finds that growth spillovers across industries depend on the industries into which FDI flows. The spillovers and growth ramifications are expected to be strongest when foreign affiliates and local firms compete most directly with each other, as may be the case in previously protected industries.
FAQ of this Topic:
What are the role of foreign direct investment on Economic growth in Bangladesh?
Bangladesh is one of the countries in Asia that has benefited from foreign direct investment inflow. Foreign Direct Investment (FDI) has emerged as the most important source of external resource flows to developing countries over the years and has become a significant part of capital formation in these countries.
What is the strongest evidence for FDI and overall growth in studies of developing countries?
The strongest evidence suggests for FDI particularly through increase capital formation, technology transfer, and human capital development.