Topic:

Impact of Foreign Direct Investment on Economic Growth

in Bangladesh

Supervised by,
Assistant Professor Noor Nahar Begum
FBS, BUP

Submitted by,
Kazi Naim Noor Arnob
ID: B1405058
BBA 2014, Finance

Date of Submission: 29.03.2018

 Topic:
Impact of Foreign Direct Investment
on Economic Growth in Bangladesh
 LETTER OF TRANSMITTAL

March 29, 2018

Noor Nahar Begum
Assistant Professor,
Faculty of Business Administration
Bangladesh University of Professionals

Subject: Submission of Internship Report

Dear Madam,
This is a great honor for me to present my internship report titled “Impact of Foreign Direct
Investment on Economic Growth in Bangladesh”, authorized under your supervision, as a
partial requirement for the completion of Internship. This report endeavors to analyze the
learnings and experiences of my three months internship period at Nestle Bangladesh
Limited.

I am thankful to you for your kind support and supervision, in the preparation of this report
and sincerely hope that I would live up to your expectations regarding the quality of my
work. I tried to put my best effort for the preparation of this report. Yet if any shortcomings
arise, it will be my pleasure to answer any clarification and suggestion regarding this report.

Sincerely Yours,

Kazi Naim Noor Arnob

ID: B1405058
BBA 2014, Finance
 STATEMENT OF AUTHORSHIP

I hereby declare that I am the sole author of this bachelor report and that I have not used any
sources other than those listed in the bibliography and identified as references. I further
declare that I have not submitted this thesis at any other institution in order to obtain a degree.

Date: (Signature)

iv
 ACKNOWLEDGEMENT

At the very outset, I am very much thankful to almighty Allah for giving me strength,
courage and ability to accomplish the internship program as well as the internship report in a
scheduled time in spite of various complications.
It gives me immense pleasure to thank a large number of individuals for their cordial
cooperation and encouragement which has contributed directly or indirectly in preparing this
report. First of all, I would like to express my gratitude to my internship supervisor Noor
Nahar Begum for her guidance and feedback which made everything clear to me to complete
this report. At first, I was so confused that whether I would be able to make a fruitful report
but with her assistance, I found a way to do everything immaculately and in time. She kept
me on track to complete this report and her suggestions and feedback were very dynamic in
making this report as impeccable as possible.
Moreover, I must show my gratitude to my supervisor of Nestle Bangladesh Limited,
Abdullah Mohammad Naheyan Hye, Category Business Manager, who willingly took my
responsibility and gave me lot of time and shared his working experiences with me. His
guidance showed me a way not only to understand the office culture but also how to deal
with all the co-workers of the organization.
I would also like to express my sincere thanks to all the employees of Finance and Control
Department who helped me during my work tenure and made my experience an unforgettable
one. People from these departments helped me to gain more practical knowledge which made
my Internship journey more fruitful.

Kazi Naim Noor Arnob

1405058
BBA-2014, Finance

v
 CERTIFICATE OF SUPERVISION

This is to certify that Mr. Kazi Naim Noor Arnob has worked under my supervision in
preparing the thesis entitled “Impact of Foreign Direct Investment on Economic Growth in
Bangladesh” submitted in fulfillment of the requirement for the award of the degree of
Bachelor of Business Administration in the Department of Business Administration,
Bangladesh University of Professionals. This report is prepared with sincerity and dedication
carried out by Kazi Naim Noor Arnob alone and to the best of my knowledge.

Noor Nahar Begum

Lecturer
BUP, FBS

vi
Table of Contents

Abstract 1

1.0 Introduction 2

1.1 Background of the Study 5

1.2 Problem Statement 6

1.3 Objectives of the Study 6

1.3.1 Broad Objectives 6

1.3.2 Specific Objectives 6

1.4 Scope of the Study 7

1.5 Limitations of the Study 7

2.0 Theoretical Framework 8

2.1 Greenfield Investment 9

2.2 Merger and Acquisition 10

2.3 Joint Venture 10

2.4 Horizontal FDI 11

2.5 Vertical FDI 11

3.0 Literature Review 12

4.0 Methodology 21

4.1 Data Collection technique 24

4.2 Result Analysis 24

5.0 Findings and Discussions 26

6.0 Recommendations 29

6.1 Ensuring Business Friendly Environment 30

6.2 Ensuring Quality Education 30

6.3 Ensuring Political Stability 30

vii
6.4 Improved Quality of Infrastructure 31

6.5 Provide enough Gasoline 32

6.6 Economic Reformation 32

7.0 Conclusions 33

References 34

viii
ix
Abstract
In analyzing economic growth, foreign direct investment has become a very crucial
component, especially for developing countries. This paper aims to study the impact of
foreign direct investment (FDI) in Bangladesh. In order to carry out the study, a multiple
regression model was set up to study the relationship between Gross Domestic Product
(GDP) and FDI and inflation (CPI). GDP in the model is the dependent variable and the
independent variables are FDI and CPI. The model was found out to be statistically
significant showing a positive correlation between GDP and FDI but a negative relationship
between GDP and inflation. In order to attract FDI within the country, a number of
recommendations are given. For higher economic growth, FDI is a very crucial factor. It
allows higher mobility for technology, increase healthy competition and increase domestic
input. FDI refers to an investment made to acquire lasting interest in enterprises operating
outside of the economy of the investor. Further, in cases of FDI, the investor´s purpose is to
gain an effective voice in the management of the enterprise. The foreign entity or group of
associated entities that makes the investment is termed the "direct investor". The
unincorporated or incorporated enterprise-a branch or subsidiary, respectively, in which
direct investment is made-is referred to as a "direct investment enterprise". Some degree of
equity ownership is almost always considered to be associated with an effective voice in the
management of an enterprise; the BPM5 suggests a threshold of 10 per cent of equity
ownership to qualify an investor as a foreign direct investor.

1
1.0 INTRODUCTION

2
1.0 INTRODUCTION

Foreign Direct Investment (FDI) is considered as one of the essential factors for overall
development process of a developing country like Bangladesh. Industrial development is an
important pre-requisite for economic growth of a developing country. Bangladesh is basically
a country of agrarian economy. For her economic development, industrial economy is
imperative. So Bangladesh is gradually moving from agrarian economy to industrial
economy. In the age of globalization, it has become a burning issue to exchange views, ideas,
capital and human resources. Government of Bangladesh is trying to create a favorable
investment environment through introducing economic policies, incentives for investors,
promoting privatization and so on. Therefore, the contribution of FDI is necessary in the
enhancement of a country’s economic growth.

In the context of the new theory of economic growth, FDI is considered as an engine of
growth of mainstream economics and accounts for more than half of the private capital flows
between countries in the world (Thilakaweera, 2011). FDI definition will be followed in
accordance with the International Monetary Fund (IMF), ‘investment that is made to acquire
lasting interest in an enterprise operating in an economy other than that of the investor, the
investor’s purpose being to have an effective voice in the management of the enterprise’. The
same definition followed by United Nations Conference on Trade and Development
(UNCTAD) in its World Investment Report (2006) and Bangladesh Board of Investment
(2004). Economics has the power to change the global world. Bangladesh needs economic
development to survive in this world. There are varieties of components which can boost up
the economy of a country. Foreign Direct Investment (FDI) is a well-known factor in the case
of economic growth. After fulfilling all the basic needs, Bangladesh is unable to gather
enough domestic savings to invest in lucrative projects as it is an under-developed country. In
response to this, FDI is used to be one of the major components for the economic growth of
Bangladesh. Shaari, Hong and Shukeri (2012), Hetes, Moldovan and Miru (2009), Z. K.
Kang (2010) confirms that FDI can enhance economic growth. FDI in any country not only
represent the investment of the foreign nation but it also transfers the better and current
technological innovations, enhanced human resource and administrative ideas, well trained
labor force and management skill. However, Ludosean (2012) and Athukorala (2004) found
that FDI is not the initiative of economic growth. FDI leads to international trade and
economic growth (Oladipo, 2010).

3
FDI can be defined long term investment of a “parent” enterprise from “home” economy into
a subsidiary, affiliate, or branch enterprise in a foreign “host” economy. FDI flows include
assets, property (e.g. parent company technology, branding, and skills) and \ or capital
investment (greater than 10% of total shares in a company), reinvested earnings (retained
profits in an affiliate, or intra company loan / debt transaction (long term borrowing/ lending)
between firm and affiliate enterprises. FDI stocks are the value of capital and reserves
(including retained profit) attributable to a parent enterprise. Other type of foreign investment
is portfolio investment (shareholder investment in less than 10% of a company’s capital) and
bonds/loans are obtained from foreign banks. FDI stocks are the value of capital and reserves
(including retained profit) attributable to a parent enterprise. Other type of foreign investment
is portfolio investment (shareholder investment in less than 10% of a company’s capital) and
bonds/loans are obtained from foreign banks. The relationship between Foreign Direct
Investment (FDI) and economic growth has been an interested issue for several decades. In
the new growth theory, FDI is an important factor which contributes to economic growth
through technology transfer efficiency improvement. FDI affects economic growth in several
ways.

Broadly, foreign direct investment includes "mergers and acquisitions, building new
facilities, reinvesting profits earned from overseas operations and intra company loans". In a
narrow sense, foreign direct investment refers just to build new facilities a lasting
management interest (10 percent or more of voting stock) in an enterprise operating in an
economy other than that of the investor. FDI is the sum of equity capital, other long-term
capital, and short-term capital as shown the balance of payments. FDI usually involves
participation in management, joint-venture, transfer of technology and expertise. Stock of
FDI is the net (i.e., inward FDI minus outward FDI) cumulative FDI for any given period.
Direct investment excludes investment through purchase of shares.

Foreign direct investment (FDI) has become to be known as one of the most effective method
of drawing flows from external sources. The use of this technique has also become a
significant aspect of building capital in developing countries around the world. However, the
share of investment from these countries in other states has been declining over the past
years. For developing countries, the positive impact of foreign direct investment is becoming
increasingly popular as a tool for economic growth and strengthening (Muhammad2007).

4
The strongest positives of implementing FDI is the increase technological advancement
between the investor and country. Having foreign direct investment in a developing country
enables the employment and exploitation of natural and human resources, to implement
innovative businesses practices, in terms of management and marketing, and facilitates in
reduction of budget deficit. Another benefit of FDI is that it does involve the risks and
regulations of external debt and adds value to the human capital through provision of on the
job training. For countries that face a scarcity of capital and technological expertise usually
experience growth slower than those that do. According to a number of studies, foreign direct
investment can serve as a means of transfer of technology and knowledge (Dunning &
Hamdani 1997).

FDI is one example of international factor movements a foreign direct investment (FDI) is a
controlling ownership in a business enterprise in one country by an entity based in another
country. Foreign direct investment is distinguished from portfolio foreign investment, a
passive investment in the securities of another country such as public stocks and bonds, by
the element of "control". in aggregate productivity, increased opportunities of employment,
greater outflow of exports and exchange of technological

1.1 Background of the study

The report, titled “Impact of Foreign Direct Investment on Economic Growth in Bangladesh”
will be equipped to satisfy the partial requirement of my Internship for my BBA Program of
Bangladesh University of Professionals supervised by Noor Nahar Begum, Assistant
Professor, Bangladesh University of Professionals.

A foreign direct investment (FDI) is an investment made by a company or entity based in one
country, into a company or entity based in another country. Foreign direct investments differ
substantially from indirect investments such as portfolio flows, wherein overseas institutions
invest in equities listed on a nation's stock exchange. Entities making direct investments
typically have a significant degree of influence and control over the company into which the
investment is made. Open economies with skilled workforces and good growth prospects
tend to attract larger amounts of foreign direct investment than closed, highly regulated
economies.

5
1.2 Problem Statement

My research question is FDI is not only limited to transfer or foreign money but also works
for growth of an economy. My research also focuses on how FDI influenced through
economic factors and how FDI revenue can change export revenue from the perspective of
Bangladesh.

1.3 Objectives of the Study

1.3.1: Broad Objective
The core objective of this study is to evaluate the impact of Foreign Direct Investment (FDI)
on the economic development of Bangladesh. To attain the objective, this paper has
conducted statistical analyses of the relationships between FDI and its impact on selected
macroeconomic indicators such as Gross Domestic Product and Inflation Rate.

1.3.2: Specific Objective

The objectives of this report are:
 To analyze the current scopes of FDI
 To analyze the of foreign direct investment in our recent development
 To understand what motivates a foreign direct investment
 To understand how countries invest overseas
 To understand the underlying factors of foreign direct investment
 To recommend what should be done to attract more foreign money

6
1.4 Scope of the Study
We would like to know about the monetary and non-monetary incentives Bangladesh is
offering to FDI investors? Analyze FDI flow into Bangladesh during last ten years. Which
sectors are getting more attention of the FDI investors? What are the potential sectors for
investment in Bangladesh? What government could do more to attract FDI into Bangladesh?

1.5 Limitations of the Study

This research is mainly result of and FGD along with review of available secondary
literatures. Respondents are mainly academicians, businessmen, and trade body professionals.
If higher government officials from the respective offices and foreign investors wants to
invest into Bangladesh could cover then the research could be more useful. Time was another
constraint.

7
2.0 THEORETICAL
FRAMEWORK

8
2.0 THEORETICAL FRAMEWORK
FDI can be classified into five different types which include:

(1) Greenfield investment,

(2) Merger or acquisition,

(3) Joint venture,

(4) Horizontal FDI, and

(5) Vertical FDI (Ball & McCulloch, 1999).

They are discussed in the following sections,

2.1 Greenfield investment

The term "green field investment" refers to a project where a company builds operations in a
foreign market starting from scratch, or a so-called green field. These projects are foreign
direct investments that provide the highest degree of control for the sponsoring company
when compared to other methods of FDI, such as foreign acquisitions or buying controlling
stakes in a foreign company.

This type of involvement is completely different from indirect investments, such as the
purchase of foreign securities, in which case companies may have little or no control in
operations, quality control, sales and training. In green-field projects, a company’s plant
construction, for example, is done to its own specifications, employees are trained to
company standards and fabrication processes can be tightly controlled.

A company that wishes to own a foreign subsidiary outright may start from a Greenfield
investment by building new facilities or expanding existing facilities (Ball & McCulloch,
1999). The establishment of industrial plants and facilities at export processing zones (EPZs)
are examples of Greenfield investment in Bangladesh.

9
2.2 Merger and Acquisition

Mergers and acquisitions (M&A) is a general term that refers to the consolidation of
companies or assets. M&A can include a number of different transactions, such as mergers,
acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.
In all cases, two companies are involved. The term M&A also refers to the department at
financial institutions that deals with mergers and acquisitions.

A merger or acquisition occurs when a foreign firm purchases the existing assets of a local
firm (Ball &McCulloch, 1999). For example, in 2004, a major global telecommunications
firm called Orascom purchased 100% of Sheba Telecom (Pvt.) Ltd. in Bangladesh. This
acquisition was used to start a business known as “BanglaLink,” a wholly-owned subsidiary
of Orascom.

2.3 Joint Venture

A joint venture (JV) is a business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task. This task can be a new
project or any other business activity. In a joint venture (JV), each of the participants is
responsible for profits, losses and costs associated with it. However, the venture is its own
entity, separate and apart from the participants' other business interests.

A common use of JVs is to partner up with a local business to enter a foreign market. A
company that wants to expand its distribution network to new countries can usefully enter
into a JV agreement to supply products to a local business, thus benefiting from an already
existing distribution network. Some countries also have restrictions on foreigners entering
their market, making a JV with a local entity almost the only way into the country.

A joint venture can be established in several ways. A joint venture can be established when
an international company joins with a local company (or with another international company)
to form a corporate entity. Alternatively, the international company could join with the
government of the country of investment to form a corporate entity (Ball & McCulloch,

10
1999). For example, GrameenPhone (GP) in Bangladesh is a JV formed by Telenor of
Norway and Grameen Telecom of Bangladesh.

Shahjahan Ali et al (2014) studied that there is a positive long run relationship between FDI
and Economic Growth. From the error correction mechanism, the absolute value of error
correction coefficient is relatively small, thus the departure of short run fluctuation to long
run equilibrium is slight and the adjustment extent is small, and indicates that the promoting
effect of foreign direct investment on gross domestic product is relative stationary in
Bangladesh at present. At the end, the result of Granger causality test advocates two way
causality from foreign direct investment to gross domestic product.

2.4 Horizontal FDI

Horizontal FDI refers to the situation where a company invests in the same type of industry
abroad that they are involved in at home (Foreign Direct Investment, 2009). In the JV
example described above, Telenor was a major competitor in the telecommunications market
in Norway, prior to entering the Bangladesh telecommunications market by forming a JV
with local firm Grameen Telecom.

2.5 Vertical FDI

Vertical FDI has two forms: (1) Backward vertical FDI involves investing in an industry
which provides inputs for the investing firm’s domestic productions; and (2) Forward
Vertical FDI involves investing in an industry which sells the output of the investing firm’s
domestic production.

11
3.0 LITERATURE REVIEW

12
3.0 LITERATURE REVIEW

FDI became an important issue nationally and internationally these days. J. Dunning, S.
Hymer and R. Vernon are undoubtedly the world’s leading scholars who worked a lot on the
subject of multinational corporations and international business and they mainly focus on
FDI, which is an important element of economic development in all countries, especially in
the developing ones. Though it has been observed from a few empirical studies that the
effects of FDI are complex considering economic development, FDI would transfer new
technology, increases managerial skills, know how, expand productivity, international
production network, creates linkages to foreign markets and reduces unemployment. These
are the positive effects on economy for which many countries get attracted to these and invest
in FDI, Caves (1996).

Foreign direct investment represents a veritable source of foreign exchange and technological
transfer, especially to a developing economy like Nigeria. It can be analyzed in terms of
inflow of new equity capital (change in foreign share capital), re- invested earning
(unremitted profit), trade and supplier’s credit, net inflow of borrowing and other obligations
from the parent company or its affiliates (Nwankwo et al, 2013). Olopoenia (1985) observed
that foreign investment could be seen as an additional factor of production and as a
supplement to the national savings effort of the capital importing country. This is meant to
relax both the foreign exchange and savings constraint on the rate of growth of output in the
recipient country.

Agada and Okpe (2012) saw FDI as an attempt by individuals, groups, companies and
government of a nation to move resources of productive purpose across its country to another
country with the anticipation of earning some surplus. Otaola (20012), asserted that FDI has
emerged as the most important source of external resource flows to developing countries
overthe years and has become a significant part of capital formation in these countries,
though their share in the global distribution of FDI continue to remain small or even
declining. Caves (1996) also observed that the rationale for increased efforts to attract more
FDI stems from the belief that FDI has several positive effects. Among these are productivity
gains, technology transfers, and the introduction of new processes, managerial skills and
know-how in the domestic market, employee training, international production networks, and
access to markets.

13
Previous studies on the Foreign Direct Investment (FDI) and economic growth in Nigeria and
other countries provided inconclusive evidence. Lall (2002) opined that FDI inflow affects
many factors in the economy and these factors in turn affect economic growth. This review
shows that the debate on the impact of FDI on economic growth is far from being conclusive.

The role of FDI seems to be country specific and can be positive, negative or insignificant,
depending on the economic, institutional and technological conditions in the recipient
countries. For instance, Solomon and Eka (2013) investigated the empirical relationship
between Foreign Direct Investment and economic growth in Nigeria. The work covered a
period of 1981-2009 using an annual data from Central Bank of Nigeria statistical bulletin. A
growth model via the Ordinary Least Square method was used to ascertain the relationship
between FDI and economic growth in Nigeria. The result of the OLS techniques indicated
that FDI has a positive but has insignificant impact on Nigerian economic growth for the
period under study. Alejandro (2010) explained that FDI plays an extra ordinary and growing
role in global business and economics. It can provide a firm with new markets and marketing
channels, cheaper production facilities access to new technology products, skills and
financing for a host country or the foreign firms which investment, it can provide a source of
new technologies, capital processes products, organization technologies and management
skills and other positive externalities and spillover that can provide a strong impetus to
regional economic growth. Obwona (2001) noted in his study of the determinants of FDI and
their impact on growth in Uganda that macroeconomic and political stability and policy
consistency are important parameters determining the inflow of Foreign Direct Investment
(FDI) into Uganda and that Foreign Direct Investment (FDI) affects growth positively but
insignificant. Foreign Direct Investment (FDI) also contributes to economic growth via
technology transfer.

Zhang (2001) argued that Foreign Direct Investment has positive growth impact that is
similar to domestic investment along with partly alleviating balance of payment deficit in the
current account. He opined that via technology transfer and spillover efficiency, the inflow of
direct foreign investment might be able to stimulate a country economic performance.

Ewe-Ghee Lim (2001) summarized recent arguments and findings on FDI and its correlation
with economic growth focusing on literature regarding spillovers from FDI and found that
while substantial support exists for positive spillovers from FDI, there is no consensus on
casualty. Otepola (2002) also examined the importance of direct foreign investment in

14
Nigeria. The study empirically examined the impact of FDI on growth. He concluded that
FDI contributes significantly to growth especially through exports. Ricardo, Hwang and
Rodrick (2005) argued that Foreign Direct Investment (FDI) provide a path for emerging
nations to export the products developed economies usually sell, in effect increasing their
export sophistication. Many developing countries pursue FDI as a tool for export promotion,
rather than production for the domestic economy. Typically, foreign investors build plants in
nations where they can produce goods for export at lower costs. Bende-Nabende (2002) also
found that direct long term impact of Foreign Direct Investment (FDI) on output is significant
and positive for comparatively economically less advanced Philippines and Thailand, but
negative in the more economically advanced Japan and Taiwan. In the same line, Ariyo
(1998) studied the investment trend and its impact on Nigeria’s economic growth over the
years. He found that only private domestic investment consistently contributed to raising
GDP growth rates during the period considered (1970–1995).

However, Alfaro et al, (2003) affirmed that the contribution of FDI to growth depends on the
sector of the economy where the FDI operates. He claimed that FDI inflow to the primary
sectors, tends to have a negative effect on growth, however, as for the service sector, the
effect of DFI inflow is not so clear. Durharm (2004) for example, failed to establish a positive
relationship between Foreign Direct Investment (FDI) and growth but instead suggests that
the effects of Foreign Direct Investment (FDI) are contingents on the absorptive capability of
host countries. Nwankwo et al, (2013) investigated the impact of globalization on foreign
direct investment in Nigeria since the world has become a global village. The methodology
used is purely descriptive and narrative and the data used is secondary. It was found out that
foreign direct investment (FDI) has been of increased benefit to Nigeria in the area of
employment, transfer of technology, encouragement of local enterprises etc. But there are
certain impediments to the full realization of the benefits of foreign direct investment.
Adelegan (2000) also explored the seemingly unrelated regression model to examine the
impact of FDI on economic growth in Nigeria and found out that FDI is pro-consumption and
pro-import and negatively related to gross domestic investment. In the same line, Ogiogio
(1995) reported negative contributions of public investment to GDP growth in Nigeria for
reasons of distortions. Oyinlola (1995) also conceptualized foreign capital to include foreign
loans, direct foreign investments and export earnings. Using Chenery and Stout’s two gap
model (Cheneryand Stout, 1966), he concluded that FDI has a negative effect on economic
development in Nigeria.

15
According to the study done by Pardeep Agrawal (2000) on economic impact of foreign
direct investment in south Asia by under talking time -series, cross- section analysis of panel
data from five south Asian countries India, Pakistan, Bangladesh, Srilanka, and Nepal that
there exist complementarily and linkage effects between foreign and national investment.
Further he argues that, the impact of FDI inflows on GDP growth rate is negative prior to
1980, mildly positive for early eighties and strongly positive over the late eighties and early
nineties.

Getinet and Hirut (2006) studied the nature and determinants of foreign direct investment in
Ethiopia over the period 1974-2001. The study gives an extensive account of the theoretical
explanation of FDI as well as reviewing the policy regimes, the FDI regulatory framework
and institutional set up in the country over the study period. It also undertakes empirical
analysis to establish the determining factors of FDI in Ethiopia.

On the other hand, macro-economic instability and poor infrastructure have negative impact
on FDI. These findings imply that liberalization of the trade and regulatory regimes, stable
macroeconomic and political environment, and major improvement in infrastructure are
essential to attract FDI to Ethiopia.

In the perspective from a traditional macroeconomic point of view, FDI flows from the
country of origin to host countries focusing on the capital flow and collection of revenue
from the investments. On the other hand, the microeconomic view of FDI is not limited to
transfer of capital but it also looks into the motivation of investment across the country of
origin, the intention of investors for investing rather than the flow of investment and stock
(Lipsey, 2002). It has been also observed from the perspective of macroeconomics that FDI
generates employment opportunities, increases production, builds competition among local
businesses and achieves benefit through new technological knowledge and innovative ability
of other firms and countries, Denisia, V. (2010). However, FDI means higher exports,
replacement of bank loan, connection to foreign markets and foreign currencies in the case of
developing countries. The most important way to look at FDI is through Dunning’s Eclectic
Framework or OLI (Dunning, 1993a) where OLI refers to Ownership advantages, Location
advantages and Internalization advantages. Dunning explained that a country of origin should
have ownership advantages over the host country and also extended the concept by
emphasizing on the issue of getting more benefits by applying these OAs in suitable location
where it will be produced in a more efficient manner. After the Second World War FDI

16
became important phenomenon in the international economy. The core objective of FDI
drives a firm to invest the projects abroad rather than export. A number of researchers
explained FDI from their own point of view which is the outcome of their research and all
those new outcomes added some new theories to the previous one. The relationship between
FDI and economic growth has been studied by many researchers all over the world so far.
Even though the topic of FDI and economic growth is general, but the relationship between
FDI and economic growth is reasonably important for less developed countries. There are
many different economists who applied verities of approaches to identify the relationship
between FDI and GDP in different nations in the global world. Authors have made
conclusions consistently with each other, but conclusions of others are not the same even
contradictory. FDI and economic growth has been studied quite extensively mainly based on
developing economies in the recent literature of studies and outputs of the studies recorded
mix results. Some of the studies examined the impact of FDI on economic growth and found
that FDI has positive and significant impact on economic growth in the host country with
time lag. Shaari, Hong and Shukeri (2012) reveal that FDI and real gross domestic product
(GDP) in Malaysia have positive relationship and also found that FDI has given significant
impact on Malaysian economic growth while Hetes, Moldovan and Miru (2009) also showed
that FDI has positive impact on economic growth in the Central and Eastern European
countries. From the perspective of Vietnam, Nguyen (2006) came up with the summary that
both FDI and economic growth are supportive to each other and this is how they have two
way linkages in between them. During 1996–2005, FDI has direct and positive effects on
GDP in Vietnam and it has been also observed by the author that larger economic growth
would had been possible in Vietnam if they had invested more resources in the development
of financial markets, enhancement of training and education and minimizing the technology
gap between Vietnam and foreign firms. P. Srinivasan, M. Kalaivani and P. Ibrahim, (2010)
agreed to Nguyen and concluded that there is a bidirectional relationship between FDI and
GDP in Vietnam. On the other hand Z. K. Kang (2010) came up with the same conclusion of
bidirectional relationship and positive link between FDI and economic growth from the
perspective of Cameroon during the period of 1980–2009. Moreover, he also added here that
domestic investments are less important compare to external remittances particularly in
Cameroon. Market demand, quantity of firms in the market, initial cost to set up any plant,
marginal cost of a firm and FDI policy of the particular host country facts are some major
facts on which the foreign firm’s investment depends on whether they should enter the host
country or not (Qiu& Wang, 2011). Generally, Greenfield investment is not attractive as the

17
initial cost for setting up the plant is very high; however, brownfield or cross-border merger
is more likely to be chosen in the case of low marginal cost of domestic firms. Jenkins and
Thomas (2002) and World Bank (2000) pointed out that many scholars have their full faith
on FDI because they believe that FDI has the power to develop human capital, knowledge of
new technology, create new job opportunity, facilitate foreign trade, and increase domestic
investment and tax revenue. These are some major changes which could be possible in any
country because of FDI inflow and these changes could bring employment growth, economic
development and ultimately poverty could be reduced. However, Mayne (1997) describes
that the impact of FDI on poverty depend on some other factors. These are institutions,
policies, economic environment, and labor market quality and investment pattern of the host
country. A study done by Samad (2009) examined the relationship between FDI and
economic growth of nineteen developing countries of South-East Asia and Latin America and
his result shows that Latin American countries had a long run and short run relationships
between GDP and FDI while one country that was Sri Lanka in the East and South East Asia
also indicated long run relationship. Besides that, there was bidirectional relationship in East
and South East Asian countries. Meanwhile, Balamurali and Bogahawatte (2004) examined
the relationship between FDI and economic growth in Sri Lanka. Ludosean (2012) provide
evidence that the FDI does not initiate economic growth and that economic growth is an
important factor in terms of attracting FDI in Romania. However, findings of number of
studies on FDI and economic growth also show that there is no significant relationship
between FDI and economic growth. Study engaged by Athukorala (2004) illustrate that the
regression analyses do not provide support for the view of a relationship between FDI and
economic growth in Sri Lanka. Ousseini, Hu and Aboubacar (2011) found that FDI as
compared with Domestic investment do not have significant impact to the economic growth
in Niger and domestic investment only has positive impact on economic growth. From the
context of the neoclassical models, Solow (1956) pointed out that there is no other effective
channel like FDI that can transfer the knowledge of new technology and develop growth of a
country. According to the law of diminishing marginal return, the impact of FDI on growth
rate of output reduces for an extra input of labor. Therefore, N. Balamurali and C.
Bogahawatte (2004) described that the level of output resulted through FDI but not the
growth rate. FDI has been seen as an effective channel to transfer technology and foster
growth in developing countries within the framework of the neoclassical models (Solow,
1956). The impact of FDI on growth rate of output was constrained by the existence of
diminishing returns of physical capital. Therefore, N. Balamurali and C. Bogahawatte (2004)

18
noticed that the level of output is the outcome of FDI investment and it is difficult to change
the growth of output in the long run. However, modern theory of economic growth viewed
FDI as an engine of growth. After doing a range of studies the World Bank (2002) declares
FDI as the most important tool that can stimulate the economic development of the foreign
country by improving the productivity and export revenue of the foreign country. However,
the behavior and the relationship are not same between foreign multinational companies and
their host countries as different country has different strategies and policies in their own
country. According to Neo-classical growth model, there is a tendency to get higher
productive return and higher growth rate if proper amount of capital has been invested by the
developed countries to the less developed countries as under developed economies do not
have sufficient capital stock. In other words, long term investment like FDI can make
available higher productive growth in the economy where capital stock is limited but for the
short term period. However, this higher productive growth can influence the whole economy
of that particular country for the long term period. From the perspective of the new
endogenous growth theory, Romer (1986) proposed that FDI has the power to increase
growth efficiency that can bring comparative advantages in the less developed economies and
ultimately helps the poor economy to catch-up rich economy in the long run. FDI inflow
plays major role on capital enhancement and other spillover effects on skill development,
technological progress, efficient usage of utilities and green innovations, industrialization,
trade and government investment in Bangladeshi. Todaro and Smith (2003), Hayami (2001)
argues that FDI might fill the gap between investment and domestically mobilized savings as
they believe that improvement of management, technology, labor skills in host countries and
increased tax revenues are the results of FDI flow. Hayami (2001) also added that FDI
sometimes helps a country to come out from crucial situation of underdevelopment. Looking
at two most popular developing countries China and India, Zafar, Imran and Ramzan (2013)
considered FDI as an important tool to market growth. United Nations Conference on Trade
and Development (2005) and UNCTAD (2006) pointed out that FDI is an important element
that can bring globalization to host economies by transferring know-how, upgrading
technology and managing skills exchange. Adhikary (2011) emphasized on strong
unidirectional long-term causal flow which has been recorded from the changes of FDI, trade
openness and capital formation to foster the growth of GDP. In response to this, he
investigated the linkage between FDI, trade openness, capital formation, and economic
growth rates empirically in the context of Bangladesh where time series data gleaned based
on the time period of 1986–2008 and a strong long-run linkage found among the variables.

19
FDI receives more attention from all over the world from the last two decades and plays a
positive role in the process of economic growth. According to Thomas et al. (2008) foreign
multinational corporations became popular by developing new products and technologies
faster compare to local firms, and thus competition increases among local firms to make
similar products like multinationals as well as innovative products. Therefore, Zafar, Imran
and Ramzan (2013) found this as the main reason of why the developing countries are trying
to attract more FDI. Zafar, Imran and Ramzan (2013) observed that increased number of new
jobs, improved income level, high growth of GDP and ultimately high quality living
standards are the outcome of proper utilization of FDI in respect to developing countries.
Therefore, all policymakers agreed on one point that FDI imposes positive impact on
productivity of host countries. Moreover, FDI can reform a national economy and promote
economic development. Blomstrom (1994) observed that effectiveness increases among local
firms in Mexico and Indonesia. On the other hand, Smarzynska (2002) concluded that FDI
spillovers through backward linkages resulted higher impact on local firms compare to
multinational firms in Lithuania. Borensztein (1998) and Findlay (1978) concentrated on
economic development, technological improvements of less-developed countries which are
the results of FDI investments. Hanson (2001) explained a few positive sides of FDI whereas
Greenwood (2002) came up with negative effects of FDI that it may crowd out local firms
that hampers the developments of economy. Lipsey (2002) came up with a very good
conclusion that there is no consistent relationship between FDI stock and economic growth
though there are positive effects that depend on the nature of the investment sector where the
FDI invested. Finally, FDI channels much needed capital for investment and provides support
to capital formation; trade openness facilitates the flows of international capital and redirects
factor endowments to more productive sectors; a high level of capital formation ensures
needed finance for the industries growth and development; and all of them jointly promote
economic growth at large. From this perspective, the linkage between FDI, trade openness,
and economic growth ought to be positive. Not only this, this nexus should be co-integrated
in the long-run. However, a question arises whether this nexus works equally for all
developing countries, particularly in Bangladesh

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4.0 METHODOLOGY

21
4.0 METHODOLOGY

Economic growth is the increase in the inflation adjusted market value of the goods and
services produced by an economy over time. It is conventionally measured as the percent rate
of increase in real gross domestic product, or real GDP. Of more importance is the growth of
the ratio of GDP to population (GDP per capita, which is also called per capita income). An
increase in growth caused by more efficient use of inputs (such as labor, physical capital,
energy or materials) is referred to as intensive growth. GDP growth caused only by increases
in the amount of inputs available for use (increased population, new territory) is called
extensive growth.
In economics, "economic growth" or "economic growth theory" typically refers to growth of
potential output, i.e., production at "full employment". As an area of study, economic growth
is generally distinguished from development economics. The former is primarily the study of
how countries can advance their economies. The latter is the study of the economic
development process particularly in low income countries.
Growth is usually calculated in real terms – i.e., inflation adjusted terms – to eliminate the
distorting effect of inflation on the price of goods produced. Measurement of economic
growth uses national income accounting. Since economic growth is measured as the annual
percent change of gross domestic product (GDP), it has all the advantages and drawbacks of
that measure.
Gross Domestic Product (GDP) is a type of economic tool that is utilized by governments and
economists as a means of measuring or attributing a value to the final goods and related
services within a defined economy in a stated period. Usually, the measurement of GDP is
used to calculate the living standards in a country due to its importance in the calculation of
how well the economy is performing. As such, the relationship between GDP and economic
growth is the fact that GDP serves as a means for analyzing how an economy is behaving.
This link between GDP and economic growth is drawn from the fact that the GDP seeks to
measure the total consumption of goods and services within the economy, a factor that helps
shed light on the state of the economy under consideration. During the calculation of the GDP
as part of the process of establishing the link between GDP and economic growth, the
analysis is divided into time periods, which may be based on quarterly assessments.
Whatever the case, when the consumption within that period as high, it shows that the
economy is performing according to expectations. When the consumption is low, this may be
the basis of concern due to the negative macroeconomists effects. Even though consumption

22
is necessary to maintain the economic balance, an excessive rate of consumption can have the
opposite effect as it may result in inflation.
The purpose of this research paper is to examine the relation of Bangladesh's GDP with
FDIand inflation (CPI). Study covers the time period from 1981-2010.As World Bank is
considered as an authentic source of data collection therefore, secondary data of the
mentioned variables is collected from this reliable source. To examine the relation of
Pakistan's GDP with FDI and inflation (CPI), the following theoretical model is used.

GDP=F (FDI & CPI)

The core intention of the paper is to study the effect of FDI on GDP of Bangladesh. The trend
of foreign Direct Investment inflows is also observed with relevance to GDP growth and
inflation of Bangladesh. To examine the relation of Bangladesh's GDP with FDI and inflation
(CPI), the following multiple regression model is used,

GDP = a + b1 FDI + b2CPI+μ

Where,
FDI = Foreign Direct Investment
GDP = Gross Domestic Product
CPI = Inflation Rate
Level of Significant: 5 to 10 percent

The aforementioned Multiple Regression Model was run on E-Views to find out the Impact
of FDI and CPI on the Gross Domestic Product of Bangladesh. In this multiple regression
model, GDP is used as dependent variable whereas FDI and CPI are measured as independent
variables. To estimate the effect of FDI on GDP of Pakistan, Multiple Regression Model is
applied over the period of 1981 to 2010. Two inputs are used; foreign direct investment and
inflation.

23
4.1 Data Collection Technique

The research is based on regression analysis and graphical representation with the help of
economic data to show the impact of FDI on economic growth. The data was collected from a
range of different journals and articles and some data taken from different publications.
Dynamic annual time series data from 1980 to 2014 has been used for this study from the
website of World Bank. Annual Report of Central Bank of Bangladesh, monthly bulletin and
Economics and Socio Statistics publications of the Central Bank of Bangladesh.

4.2 Result Analysis

We used the following multiple regression model for the study.

GDP = a + b1 FDI + b2CPI+μ

The proposed model empirical results are depicted by the above table. The slope coefficients
of the inputs (FDI) in the multiple regression analyses have positive impact on GDP whereas
the slope coefficients of the inputs (CPI) have negative impact on GDP.

24
If one percent change in FDI occurs, it will bring about 4.8869% change in GDP while 1
percent change in CPI will bring 1.33% change in GDP by holding other variables constant.
Estimates (FDI and CPI) are highly significant. As the value of F is too high i.e., 96.48156
and the value of P is so small i.e., 0.000 we can deduce that model is overall very much
significant and the results are not by chance. The r-square of this model is 0.87that means
13% variation in the model is unexplained by FDI and CPI whereas remaining variation
(87%) is explained by FDI and GDP.

25
5.0 FINDINGS AND DISCUSSIONS

26
5.0 FINDINGS AND DISCUSSIONS
There are plenty of reasons why FDI does not or might not flow easily into Bangladesh.
Following are the reasons:

Limited capacity to supply adequate electricity and gas to industries. Bangladesh

naturally lacks resources of such category. This could be an impediment in
Bangladesh’s progress.
Absence of efficient physical infrastructure. Not too many relevant investment has
been made in this regard already. A business need relevant infrastructure for its
build up but unfortunately Bangladesh lacks it big time.
Bureaucratic complexity to get registered or permission. Being a third world
country this is a very common phenomenon. Too many stakeholders from
different agencies create a menace and cause a delay.
Absence of investment promoting agency. Since foreign investment in new to this
country not too many agencies are there to promote it.
Lack of professionals and sector specific trained man power. Despite having a
huge population Bangladesh lacks enough number of efficient people in all
sectors.
Poor imposition of IP (Intellectual Property) law. It is pretty easy for someone to
imitate someone’s business and create one for own. Bangladesh lacks strict laws in
this regard.
Lack of project specific proposals in hand to attract international investment.
Despite having tons of promises Bangladesh lacks specific plans for which there
has been lesser development than expected.
Non-cooperation from relevant government agencies like, the Board of
Investment, Police, National Board of Revenue, Environment Authority etc.
Bangladesh is yet to become a business friendly country.
Political unrest and blockades. Political turmoil hampers the confidence of the
foreign investors. They look for an environment where the business is not at all
hampered.
Absence of standardization / quality infrastructure in home.
Absence of technology infrastructure. Technologically Bangladesh is yet to

27
 become sound since not too many investment has been made in this regard.
Corruption. Being a developing country is quite an obvious that we have
corruption existing in our country. Though it is on the decrease but we are still not
up to the mark in this regard.
Lack of administrative coordination among different government bodies.
Delay to get services from support organizations. Support organizations aren’t
good enough to support business with arms wide spread.

Declaring a long range of fiscal / nonmonetary incentive or having competitive advantage

in factors of production is not enough to get FDI into a country. Government has to be
proactive for creating and maintaining an FDI friendly business environment in
Bangladesh. To get satisfactory amount of FDI, Bangladesh has to complete its home
work like identifying potential sectors, preparing specific project proposal, approaching
potential FD Investor companies etc. Dedicated agency is needed to promote investment
instead of regulator of investment. Ensuring hassle free power and utilities supply,
smooth registration and certification mechanism has a direct linkage to get foreign or
inspire local investment. Maintaining peaceful political and reliable legal environment is
equally important to get foreign investment in a country. Bangladesh has to increase the
amount of FDI attraction at any cost. Otherwise it would be tough to achieve and
maintain a double digit GDP growth. Without achieving double digit growth rate we
cannot meet vision 2021 in time. Currently the figure of FDI investment is manipulated
with reinvestment of locally earned profit. If we drop the locally earned profit amount as
FDI then the figure during last few years is very dissatisfactory. So this is the pick time to
concentrate upon it and start new drives for increasing FDI inflow into Bangladesh.

28
6.0 RECOMMENDATIONS

29
6.0 RECOMMENDATIONS

The following policies should be followed.

6.1 ENSURING BUSINESS FRIENDLY ENVIRONMENT

Business friendly environment must be created on priority to attract large FDI. To maximize
the benefits of FDI persistently Bangladesh should also focus on developing human capital
and technology Jobs for unskilled population when compared with service sector.

6.2. ENSURING QUALITY EDUCATION

Bangladesh's educational sector is highly negligible and its quality is on its last legs. Short of
financial resources causes a poor quality of education which further causes a massive talent
deficiency and this forced harmful impact on the domestic as well as foreign business.
Bangladesh is highly populated country but its working population is uneducated and
untrained. This sector requires a grand amount of foreign direct investment so, encouraging
opportunities should be originated to attract the domestic and foreign investors.

6.3 ENSURING POLITICAL STABILITY

A dynamic market economy requires political stability for its best possible outcomes.
Political instability generates economic uncertainty because of turn down in investment. A
strong financial sector generates higher saving efficiency and it leads to elevated economic
growth however, this strong financial sector can only be flourished under the politically
stable environment. Political instability is reducing the confidence of investors in our country.
In business sector decisions are mainly based on the political stability not on the type of the
government. In the recent years a democratic government is present in our country but FDI is

30
rapidly diminishing it means to attract huge amount of FDI political condition of the country
must be sound and stable.

6.4 IMPROVED QUALITY OF INFRASTRUCTURE

Infrastructure plays an essential role for the growth of any economy. The countries which
have good physical infrastructure are considered as the best attractive hosts for the FDI. The
law of diminishing returns is applicable in infrastructure especially in a particular type of
infrastructure for example the first road or the bridge or any other physical infrastructure is
more essential than the second one and the second one is more important than the third one
and it continues further in the same way. For that reason, those countries which are poor in
infrastructure may be considered as a central source for attracting FDI because their primary
requirement is to improve infrastructure through the massive investment.

6.5 PROVIDE ENOUGH GASOLINE

Enough gasoline is very much needed in case of attracting FDI. Perhaps, the efforts may be
gone in vain. This would surely be one of the major concerns for the investors.

6.6 ECONOMIC REFORMATION

Economic reformation means the transfer of resources from less productive to more
productive sectors of the economy. Real growth of production is directly correlated with the
effective process of economy restructuring from the less productive to the more productive
sectors of the economy. FDI may be involved in the transfer of resources from less
productive to more productive sectors of the economy.

31
7.0 CONCLUSION

32
7.0 CONCLUSION
Investments play a significant role in the economic growth, increment in assets and infrastructure
in any developing country. In an economy, direct investment is indicative of a positive trend of
investment with eventually translates in increase in GDP and economic growth of the country.
This can also be proved from the aforementioned studies in the literature review. All efforts
made in this regard must keep into consideration the economic, political and social situation of
the country. There must be present for the investor's concrete benefits and opportunities in order
for the FDI to have an impact on the economy. Without these, any investment made would be
unable to yield the results that were desired. Here we must understand that it is the responsibility
of the local government to devise policies and strategies in such a manner that would support the
efforts and investments being made. For a country like Bangladesh, the need of the hour is to
concentrate on infrastructure development, human resource training, encouraging local
entrepreneurs, creation of a stable macroeconomic environment and ensuring opportunities that
would be conducive for investors and provide momentum to the developmental process.

FDI and REM could be views as a major stimulus to the economic growth in the Bangladesh.
FDI brings prosperity to the Bangladesh through technology transfer, increasing volume of
exports, enhancing job opportunities and increasing the government revenue. Similarly
remittance also contribute to the economic growth throw injecting foreign currency consequently
stagnating the foreign exchange reserve in the country and contributing to the capital formation
in Bangladesh.

Bangladesh should reinforce its infrastructure facilities, and improve the quality of services.
Furthermore, a consistent incentive package should be implemented which may include fiscal
measures (such as rationalization of Para tariffs, elimination of non-tariff barriers), financial
measures (such as reducing interest rates, access to financing), and institutional measures (such
as enhancement of competitiveness through capacity building) to attract the FDI.

33
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