An assignment on critical analysis of FDI policy

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Despite some policies reforms, Bangladesh could not attract handsome flow of FDA as yet. Furthermore, the lion’s share of FDA is being repatriated. The main focus of this paper is to reveal some general eaters of FDA, to find out the problems associated with attracting FDA and to suggest remedial measures to overcome those problems. The paper analyses the trends of FDA inflow and repatriation as well as what Bangladesh is doing presently to attract handsome flow of FDA. 1. FDA and its Concepts The term FDA refers to investment that is made to acquire a lasting interest in an enterprise operating abroad, the investor”s purpose being to have an effective voice in the management of the enterprise. In other words, FDA is an international financial flow with the intention of controlling or participating in the management of an enterprise in a foreign country. 1. 2 Importance of FDA In Bangladesh the country”s savings-investment gap had been mainly bridged by external economic assistance.

However, after the cold war era, the availability of foreign aid is decreasing gradually. As a result, there is now widespread support for the need for FDA in Bangladesh. If the economy is to grow faster, as is being envisaged, there is the need for larger inflow of FDA in Bangladesh with a view to creating jobs for vast labor force, increasing foreign exchange earnings, acquiring new and modern technology and management skills, accelerating overall growth ND development of the economy. Transferring more advanced technology and organizational forms directly to NC affiliates in the host country triggering technological and other spillovers to domestically owned enterprises assisting human capital formation contributing to international trade integration helping to create a more competitive business environment enhancing enterprise development and improving environmental and social conditions Transmission Mechanisms: FDA Direct technology transfer to affiliates Technological and other spillovers Human capital formation International trade – integration

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Competitive business environment Enterprises development Improvement of environmental and social conditions Enhanced Economic Growth Poverty Reduction Fig. : Transmission mechanisms between FDA and poverty reduction 3 Bangladesh is a winning combination with its competitive market, business- friendly environment and cost structure for FDA, some of the opportunities are as follows: O Industrious Low-Cost Workforce: Bangladesh offers a well-educated, highly adaptive and industrious work-force with the lowest wages and salaries in the region. 7. 3% of the population is under 25, providing a youthful group for recruitment. The country has consistently developed a skilled workforce catering to investor”s needs. English is widely spoken, making communication easy. C] Strategic Location, Regional Connectivity and Worldwide Access: Bangladesh is strategically located next to India, China and SEAN markets. As the South Asian Free Trade Area (SAFEST) comes into force, investors in Bangladesh will enjoy duffer access to India and other member countries. Strong Local Market and Growth: Bangladesh has proved to be an attractive investment location with its 146. 6 million populations and consistent economic growth leading to strong and growing domestic demand. C] Low Cost of Energy: Energy prices are the most competitive in Bangladesh. Transportation on green compressed natural gas is less than 20% of the diesel price. 0 Proven Export Competitiveness: Bangladesh enjoys tariff-free access to the European Union, Canada, Australia and Japan.

In Europe, Bangladesh enjoys 60% of the market share and is the top manufacturing exporter amongst 50 least developed countries. CLC Competitive Incentives: Bangladesh offers the most liberal FDA regime in South Asia, allowing 100% foreign equity with unrestricted exit policy, easy remittance of royalty, and repatriation of profits and incomes. C] Export Processing Zones: Bangladesh offers export- oriented industrial enclaves with infrastructural facilities and logistical support for foreign investors.

The country is also developing its core infrastructures, including roads, highways, surface transport and port facilities for a better business environment. In Global Ranking Competition of Economics Zones out of 700 Economic Zones globally 200 participated in the competition. All the zones were evaluated on a 10 point scale on the basis of some set criteria. Among the top 10 of the two categories Chitchatting Export Processing Zone, Bangladesh scored 3rd position n the “Best Cost Effectiveness” and also 4th position in the “Best Economic Potential” for 2010-2011. 1. Major Obstacles to FDA in Bangladesh Though Bangladesh has most attractive FDA policies in SACRA region and though there is an evidence of boom of FDA flow in energy sector, the overall scenario of FDA inflow to Bangladesh is not at all satisfactory. The following factors can be identified as major obstacles to FDA in Bangladesh: a) Poorly developed socio-economic and physical infrastructure b) Lack of skilled people at various levels c) Unreliable energy supply d) Corruption ) Administrative complexity and non-transparency f) Poor implementation of existing policies g) Low labor productivity h) Frequent change in gobo. Leslies i) Unhealthy trade union practices j) Underdeveloped money and capital markets and regulations on these markets 4 k) Less improved seaport facilities & malpractices at the port l) Deteriorating law and order situation m) Political instability and disturbances n) High cost of doing business o) Irredentism and corruption in getting infrastructural facilities p) Unfriendly legal system As the FDA showed a great impact on GAP consequently economic so the overspent should focus on increasing GAP growth.

The following are some of the major factors that influence firms to choose to locate their investment in any particular developing country. O Macroeconomic Factors: Investment is driven by profit, and foreign investors will always prefer a country with a buoyant business sector (measured in terms of GAP growth rate, rate of inflation, level of industrialization, etc. ). So Bangladesh should try to increase the GAP growth rate, lowering the inflation rate can attract the foreign investors; the country should improve the level of industrialization or making improving some industry.

C] Governance: A country”s general structure of governance and the institutions that govern interactions between business and government determine the burden that firms face in complying with government regulations, the quality of government services, and the extent to which corruption is associated with the procurement of these services. Regulations in developing countries may tend to be more complex and bureaucratic than necessary, associated with corruption, and often are not intended to correct market failures or protect consumers. The government of Bangladesh should make fair regulations for FDA and provide he security of investment. ] Infrastructure: The better the infrastructure of the host economy, the more attractive it is to foreign investors. The following infrastructure factors as important in attracting FDA, these include: C] Good base of related and supporting industries (suppliers, sub-contractors, university research centre, business services and raw materials) D Comfortable and secured transport facilities (road, rail and air) as well as port system Low cost and availability of utilities (telecommunications, energy and water) Environmental regulations and procedures C] Availability of sites and premises.

Bangladesh should ensure these infrastructural facilities to attract the foreign investors to invest in Bangladesh. The communication system, roads, availability of raw materials and energy are more important factors to the foreign investors, so the government should provide all of the facilities. 0 Access to Finance and International Integration: Access to finance significantly influences a firm”s propensity to invest by foreign investors. Businesses invest in projects where the expected benefits exceed the cost of investment.

However, this can only be achieved where businesses do not face credit constraints unrelated to heir own performance. Credit constraints are less likely in countries with well- developed and well-functioning financial systems. So Bangladesh should ensure the financial facilities and international integration like giving credit, regional co- operation, and well financial system to attract the FDA in Bangladesh. Providing the financial needs 5 is the key factors of doing business in a country the government should ensure the free flow of fund and regulation of collecting the funds of the foreign investors.

O Political Stability: Political certainty and transparency is a ere influential determinant for developing countries to attract FDA. Political uncertainty in a potential host country may unexpectedly change the ћrules of the game” under which businesses operate. Political factors like frequent changes of government, critical attitudes of opposition political parties towards FDA lack of transparency in the public service, degree of nationalism, incidence of corruption, and possibilities of terrorism are seriously considered by investors in pre-investment decision making.

Instability in a host country”s government or monetary and fiscal policies results in more uncertain investment outcomes and attracts from firm value that depress the foreign investors so the government should make the stable political system in the country and the system should be fair for every foreign country. 0 Knowledge Infrastructure and Skilled Labor Force: One of the fundamental requirements of economic growth of a country is its knowledge infrastructure and the level of human development. Education, training, health and social services are tools for human resources development.

A systematic assessment of availability of human resources is necessary before formulating any policy for attracting FDA. Such policies should be designed to: Identify critical shortages of skilled manpower in the various sectors of the economy and take measures to address the reasons for the shortage, Develop knowledge development strategies for creating a skilled labor force that foreign investors find advantageous for future growth C] Set targets for human resource development based on reasonable expectations of growth.

Bangladesh has a very good labor force but there is lack of educated and skilled labor force to attract the foreign countries for FDA. Bangladesh enjoying the lower cost of producing the ARM product because of huge number of labor force in he country but to attract the FDA the country should create skilled labor force. O Technology: Technological progress plays an important role in economic growth, which encourages innovation and attracts FDA. A well developed technology infrastructure assists the implementation of better business processes.

To support innovation, the public sector can undertake R & D activities directly – on its own or with private partners to provide complementary services. Whether singly or in combination the factors canvassed above set a substantial policy agenda those developing countries wishing to attract FDA need to address. As some countries are succeeded to attract the foreign investors by availability of technology. Without the technology the productivity cannot be increased easily so Bangladesh should improve the technological sector to boost the production and attract the foreign investors. 1. FDA Policymakers Must Consider the Following Issues The policy maker of FDA must consider the following issue to promote the more FDA in Bangladesh. The issues are hypothetical and given based on the knowledge gathered from different books, journals, articles and publication so there is prove of the issue. Market liberalizing is key ingredients to attract FDA in developing countries. T] Lack of clear rules, combined with discretionary power wielded by bureaucrats makes it difficult for entrepreneurs to operate efficiently. So the policymaker should make easy, flexible and efficient policies to attract the FDA in Bangladesh. O Transnational corporations will locate foreign affiliates in countries where trade rules and regulations are open and forthright to do the business. 0 Countries interested in increasing inward investment must pay attention to other factors that influence investors” location decisions. Among these factors are business facilitation measures which include: investment promotion policies, incentives, veterinaries services, improvements in amenities, and measures that reduce the “hassle costs” of doing business in a foreign country. Even though FDA promotion programs involve high human and capital costs, developing nations are spending more money on business facilitation measures so that they can compete with more developed countries for FDA inflows. C] When it comes to the economic factors, firms that undertake counterintelligence’s FDA seek not only cost reduction and bigger market hares, but also access to technology and innovative capacity. These resources, as distinct from natural resources, are man-made created-assets. Created-assets include communications infrastructure, marketing networks, technology and an educated workforce.

D Transnational corporations are changing the relative importance of different economic determinants of FDA location. Production costs are keys but the host market is not – access to international markets matter more. Open trade, deregulation and prevarication improve access to markets for goods and services. 0 Countries that liberalize their internal regulatory remarks, sign multilateral trade agreements and join the WTFO will be more competitive in attracting FDA. So the policy makers should consider the above factors and they should ensure the stable economic growth of the country.

The regulations should be free and fair for all of the country and the policy makers should make the policy according to the development of the country. A Review of Import Policies and Regimes in Bangladesh After the independence in 1971 , Bangladesh followed a strategy of a highly restricted trade regime. Characterized by high tariffs and non-tariff barriers to read, and an overvalued exchange rate system, this policy regime was the basis for the import-substitution industrialization strategy of the government.

The inward-looking approach to development was pursued with the aim of improving the balance of payments position of the country and creating a protected internal market for the domestic manufacturing industries. It was also believed that, by replacing the previously imported goods with domestic production, importunateness industrialization strategy would achieve the national objective of economic growth by promoting industrialization and reducing unemployment. Like in many other developing countries, the import-substituting trade policies pursued by Bangladesh failed to deliver the desired outcomes. . 1 Evolution of Import Policies and Quantitative Restrictions Trade policy during 1972-1980 consisted significant import controls. The major administrative instruments employed to implement the import policy during this period were the foreign exchange allocation system and the Import Policy Orders (Ipso). Under the Ipso, items were specified whether their importation were allowed, prohibited or required special authorization. With the exception of a few cases, sciences were required for all other imports.

The argument behind the import- licensing system was that such a system would ensure the allocation of foreign exchange to priority areas and protect vulnerable local industries from 7 import competition. However, the system was subject to criticism for not being sufficiently flexible to ensure its smooth functioning under changing circumstances. Moreover, it was characterized by complexity, deficiency in administration, cumbersome foreign exchange budgeting procedures, poor inter- agency coordination, rigid allocation of licenses and dimensioning procedures. During the asses, a moderate import liberation’s took place.

In 1984, a significant change was made in the import policy regime with the abolition of the import-licensing system, and imports were permitted against letters of credit (L/ C). Since 1986, there had been significant changes in the import procedures and in the Ipso with respect to their contents and structure. Whereas, prior to 1986, the Ipso contained a lengthy Positive List of importable, in 1986 the Positive List was replaced by two lists, namely the Negative List (for banned items) and the Restricted List (for items importable on fulfillment of certain prescribed inductions). Imports of any items outside the lists were allowed.

These changes might be considered as significant moves towards import liberation’s, since no restrictions were then imposed on the import of items that did not appear in the Ipso. With the aim to increase the elements of stability and certainty of trade policy, Ipso with relatively longer periods replaced the previous practice of issuing import policy annually. Since 1990, the Negative and Restricted Lists of importable had been consolidated into one list, namely the ћConsolidated List”. The range of products subject to import ban or restriction has been curtailed bestially from as high as 752 in 1985-86 to only 26 in 2012-15.

Import restrictions have been imposed on two grounds: either for trade-related reasons (i. E. , to provide protection to domestic industries) or for non-trade reasons (e. G. , to protect environment, public health and safety, and security). Therefore, only the trade-related restrictions should be of interest to policy reforms and liberation’s. Table 1 show the evolution of import restrictions in Bangladesh at the HAS 4-digit level, where it is found that over the past two decades the number of trader-elated banned items has declined from 275 to 4. 8 2.

Imports into Bangladesh The liberal import policies led to surges in imports into Bangladesh as shown in Figure 2. In 1973 total imports were SIS$ 3,027 million, which rose to ISIS 6,859 million in 1995, and increased further rapidly to SIS$ 21,518 million in 2011. Figure 2: Trend in the Total Imports of Bangladesh (million US$) The main problem with further tariff rationalization is concern about the potential revenue shortfalls of the Government. Although the loss in revenue could arguably be made up either by expanding the domestic tax base or by increasing the VAT net or a combination of both, the tax administration in an

OLD like Bangladesh is not as flexible as in developed countries for undertaking an increased revenue invigilation effort within a short period of time. Also, increasing the rates of revenue generating tax measures such as VAT may be difficult given the poverty situation of the country. An alternative might be to readjust the tariffs so that the highest duty rate is reduced, but on the whole the tariff structure remains revenue-neutral. In this case, however, the average nominal protection given to the domestic import-substituting activities will not decline.

Since Bangladesh embarked on a tariff reform programmer at a very fast pace, t may not be possible to carry on further liberation’s with a similar pace. Nevertheless, it would be unwise to reverse the process of liberation’s and thus the progress achieved in the previous decade. The use of Para-tariffs in recent years has increased the total protection rates, which appears to be incompatible with the liberation’s measures that Bangladesh undertook earlier.

It is, therefore, important to ensure the neutrality of supplementary duty and VAT by applying them to the domestic industries in a non-discriminatory fashion, which could contribute to increased government revenue on the one hand, and educed anti-export bias on the other. In future Bangladesh may opt for an analytical approach to tariff liberation’s. Under this approach there may be scopes to devise the tariff structure in such a way so that it has limited effects on the revenue position of the government, but contributes to lowering high rates of effective protection enjoyed by a number of sectors.

Although the outcome may be diminished or unchanged nominal protection for the whole economy, the efficiency gains achieved through reduction in effective protection can be beneficial to resource allocation. The existing practice of tariff liberation’s programmer has wrongly concentrated on the nominal protection rate and the revenue implications. This is reflected in the higher import- 9 weighted tariff rate for intermediate goods than that for final consumers” goods.

Therefore, a more realistic tariff rationalization programmer can substantially benefit the domestic industry relying on imported intermediate goods. This apparent unrealistic duty structure underlines the need for using an analytical approach to tariff liberation’s measures. However, across the board tariff deduction may not be desirable not only because of the revenue concern of the government but also because of the need for providing some support to domestic industries with significant growth and poverty alleviation effects.

By adopting pro-active and analytical policy regime effective support to the growth of small and informal sector activities with significant poverty alleviation effects can be provided. In fact, policies should be devised in such a way so that trade can act as a tool for development. Furthermore, the strategy and scope of future tariff liberation’s need to be put in the context of intended policy objective. Reduction in import tariffs is to reduce policy-induced anticipate bias, but this does not necessarily imply an improved export response.

The existing level of policy bias against export is relatively low and even keeping aside the problem of potential revenue shortfall, it needs to be emphasizes that while further reduction in anticipate bias through tariff-cuts is one thing, generating export supply response is another matter. Given a weak performance of non-ARM sectors, it appears that in future policy options and/or support measures for exports would be much more difficult and involved than such simple measures s removal of quantitative restrictions and reduction of tariffs.

A Review of the Export Regime and the Export Policy An important element of trade policy reform has been the use of a set of generous support and promotional measures for exports. While the import liberation’s was meant to correct the domestic incentive structure in the form of reduced protection for import-substituting sectors, export promotion schemes were undertaken to provide the exporters with an environment where the previous bias against export-oriented investment could be reduced significantly.

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