Fdi essay

1. 0 Introduction FED refers to is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in the country. Foreign Direct Investment which is a passive investment which is passive investment in the securities of another country as stock and bonds. Foreign direct investment occurs when a firm invests directly in facilities to produce and /or market a product in a foreign country.

Fed plays a dominant role in the economics of Bangladesh through accelerating Gross Domestic Product(GAP),export and domestic investment followed by overall economic growth. The Objective Of this term paper is to find Out the major effect of FED on industrial productivity of Bangladesh. Foreign direct investment (FED) enables a capital poor country like Bangladesh to build up capital, avoid threat to unemployment develop productive capacity. Conventional wisdoms have it that firms with foreign equity tend to be more productive.

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This could be due to the firm specific tangible assets such as exclusive technology and product designs, or the intangible know-how embodied in foreign equity such as marketing, networking and sourcing. Such assets may be more readily available in big multinational corporations (NC). As such, being part of Macs allow the local subsidiaries with foreign equity to gain access to these assets, which in turn make them to produce more output given the same level of inputs, and thus a higher level Of total factor productivity (TFTP) than the solely domestic owned firms. . 1 Background Of The Study Foreign Direct Investment is one of the vital force to boost up the economy. Industrial productivity is an pre-requisite for economic growth of a developing entry like Bangladesh Bangladesh is basically a country of agrarian economy for her economic development industrial economy is imperative. So Bangladesh is gradually moving to industrial economy. Researchers have marked FED as an important factor in accelerating industrial productivity.

It helps the country in building up infrastructure, creating employment, enhancing skills of the labor force of the host county through transferring technological knowledge and managerial capability that ultimately help in the increase of domestic productivity. During sass’s , FED to Bangladesh was very little and mostly focused in Nanking and a few other sector. Bangladesh gradually attracting FED in industrial sector in the purpose of I increasing productivity. Since 1 996 Bangladesh started attracting FED in energy and power sector , economic reform as well as unexplored gas and oil resources .

In 1972,annual FED inflow was 0. 09 million USED and in 1996 , it become 231. 61 million USED which rose significantly in 2008 million USED which declined to 913. 32 million USED in 2010(Source: Bangladesh Board of Investment). 1. 2 Objectives of the study: To find out the impact of FED on industrial productivity. 1. 3 Limitation of he study: The study has the following limitations: One of the main limitations of the study was inadequate access to information. The time was insufficient to know the in-dept.

It was very difficult to collect the information from various personnel related to industrial production. Because of the limitations of information, some assumption was made. So there may be some personal mistake in the report 2. 0 Literature Review 2. 1 Key Definition: FED is generally considered as the best way to attract modern technology and management skills. Multinational Enterprises (Ones) are a source of capital, employment, technology, managerial skills and global distribution networks. These benefits, however, as has been argued vary with respect to the characteristics of different sorts of FED.

This probably led to arguments advocating the promotion of FED that is better in some way. This development is important to some extent which implies that some types of FED are more deserving Of incentives than others. 2. 2 The impact of FED on industrial productivity identified by researchers: There is a global race for accelerating FED -But how much it can contribute to host country’s productivity inconsistent and reducing import of product as matter of assessment. Liken and Harrison(1999)have evaluated the contribution of FED on industrial sector. ND found that it has positive effect because in helps to format capital,bring technology and other factors of production.. Rootlet (1984)used his model to explore the impact of foreign investment on the growth of Bangladesh and found that FED has a positive impact on growth. He also found a strong positive effect of the change in the level of domestic investment on growth. Quaked,Seed extreme bounds analysis to the data of the various catalyst variables of FED inflows in Bangladesh. They found FED and domestic investment have a positive effect on productivity increasing and the number of employment.

Impalpably and Savant (1999) states that FED is widely though to bring with it into the host country a bundle of productive assets, including long term foreign capital entrepreneurship capacity and managerial, organizational and export marketing know how. 3. 0 Methodology of the Study This section explains the methodology of research to develop the answer to the research questions. At first the research questions are addressed and then the hypotheses have developed . Next sampling frame and data collection procedure has been discussed. Finally this section tests the validity and reliability analysis of the data.

This study addresses following questions by analyzing literature review: If FED have the positive impact of domestic industrial productivity if have, how much domestic industrial productivity has increased in recent year? In which sector foreign investor are eager to invest more? The most attractive industrial sector of FED and its current productivity statistics? The relation between FED and increased productivity and export possibility of Bangladesh. Research model and hypothesis: A research model has identified to find out the effect of FED on industrial productivity.

The model is as follows: The Productivity Spillover Model: which analyzing if domestic firms gets benefits from FED firms. Primary data: Primary data are collected in the course of conducting oral discussion with the officers and production manager of different industry. Secondary data: These are collected from books, Annul Report FED, different magazine on industrial productivity. 4. 0 An overview of FED in Bangladesh 4. 1 Investment Registration Statistics in Bangladesh: The industrial investment mainly consist of private versus public, local versus foreign investment.

The analysis of industrial investment status will provide good information as to how FED is used. The economy of Bangladesh has been gradually drawing the attention of private sector investors since its opening up in early sass’s. Manufacturing is becoming increasingly vibrant claiming a significant share in the total investment. Year Proposed Local Investment Proposed Foreign Investment Total Proposed Investment Growth Project CSS$ (M lions) US (Million) 2005-2006 1754 2662. 31 135 3621. 15 1889 6283 25% 2006-2007 1930 2848. 98 191 1728. 6 2121 4577 -27% 2008-2009 1336 2480. 72 132 2137. 53 1468 4618 -21% 2009-2010* 876 1831. 44 92 617. 68 968 2449 27% Total 751 1 12657 693 8892 8204 21549 Source: Bangladesh Economic Review (February 201 0) During FYI 2005- 2006 to FYI 2009 -2010 , cumulative private investment registered with Board of Investment(Boll), the apex private investment promoting and facilitating body, total IS$$ 21,549 million. The registered investments consists of 58. 74 percent as local and 41. 26 percent as local and 41. 26 percent as foreign (100 percent and Joint Venture).

In the above table presents the time series data during FYI 2005-2006 to FYI 2009 – 2010. In PAYOFF-2 006,total private investment registered amounted 0$$6283. 46 million, whereas in 2009-2010 it reached IS$$ 2449. 12 million 2008-2009 experienced a 27 percent in the overall investment comprising of -12. 45% growths in local and 171. 51 % growth in foreign investment. See the table in above for more information. 4. 2 Foreign Private investment projects register with Bangladesh: Textile and service are the two most growing sectors in BY 2009-2010.

Agro based industry also growth in FYI 2009-2010 compared to F”‘ 008-2009. Simultaneously ,total share of Agro based industry grew 59 units in 2009-2010. S. L No Sector No. Of unit Investment In US$(Million) Employment Opportune ties(person) Agro Based 59 154. 29 24434 2 Chemical 65 1985. 94 6147 3 Engineering 57 38. 96 4388 4 Food and Allied 13 19. 11 1662 5 Glass and Ceramic 8. 19 328 6 Painting and Packaging 7 2. 27 325 Tannery and Rubber product 4. 01 602 8 Textile 115 221 . 26 84578 9 Service 91 4575. 90 18758 10 Miscellaneous 2. 3 735 421 701 2. 77 14957 Source: Investment Implementation Monitoring Cell (MIMIC), Board of Investment. Table 2: sector-Wise Distribution of foreign Private investment projects register With BOG from FYI 2009-2010 4. 3 Export Performance of Garment Sector The past few years have witnessed an expansion Of Bangladesh garment export to the world market. In 1998, the total value of garment export from Bangladesh was about CSS$3. 8 billion, it increased to IIS$4. 2 billion in 2001 and settled at US$3. 6 billion in 2003.

This Information is obtained from the United Nations Comrade Database according to the reporting of the Bangladesh government. Figure 1 presents the breakdown of the aggregate export of the Bangladesh garment sector by destinations, in 1 998, 2001 and 2003. In both 1998 and 2001 , the share of EX. in Bangladesh garment export was about 50 percent, closely followed by the US at 45 percent, while other countries, noticeably Canada, made up the remaining 5 percent of aggregate garment export. In 2003, the importance of E further increased to 58 percent, while the share Of the LIST dropped to 37 percent.

Figure 1: Breakdown of Garment Export The surprising fall in the garment export to the US could be due to transshipment or misclassification of goods. Based on US custom data from he US International Trade Commission (SUITS), garment export to US from Bangladesh in fact has been steadily climbing from USES . 5 billion in 1998 to LOS$I . 8 billion in 2003. In 2004, the value of garment export from Bangladesh further increased to IIS$I . 9 billion, which makes Bangladesh the 10th largest garment supplier for the US market. Figure 2 presents the values of garment imports of IIS from 1998 to 2004 by major exporting countries.

In 2004, the top ten garment exporting countries to the US market and their market shares are China (16%), Mexico (10%), Hong Kong (5. %), Honduras (4. 1%), Vietnam (3. 7%), Indonesia (3. 6%), India (3. 4%), Dominican Republic (3. 1 %), Guatemala (2. 9%) and Bangladesh (2. 8%). Figure 2: Breakdown of Major Garment Exporters in the US Market We further use a firm level export data set obtained from the Textile Unit of the Export Promotion Board (PEP) of Bangladesh to analyze the export performance of the Bangladesh garment sector.

This information is compiled from those firms that applied for Country of Origin Certificates in 2004. This certificate is often requested by the importing countries to verify the origins f the imported goods in order to grant trade preferences. In this firm level data set there are 2387 garment firms exporting in 2004. The total value of garment export is IIS$5. 7 billion, with more than 400 million dozens of garment exported. Overall 57 percent of garment export headed to the ELI, 20 percent for the US and the remaining 23 percent went to the other countries such as Canada and Australia.

Table 1 presents the breakdown of garment export volume by destinations. Description Quantity (dozen) value (LIST$) E under SSP 31 Others USA with quota USA without quota 1 59,1 50,271 41 ,686,090,000 Table 1: Garment Export by Destination, 2004 In terms of the distribution of firms across different markets in 2004, there are 1967 firms exporting under SSP, mainly to the European market, 1 039 firms exporting to the US, of which 709 export under quota allocations, and 1231 firms exporting to other countries.

Figure 3 presents the distribution Of firms by export destinations. Among these firms, 46 percent only us apply to one market, 34 percent supply to two markets, 14 percent to three markets, and 5 percent to all four markets. This is clearly presented in Figure 4. Figure : Number of Firms in Different Markets Figure 4: Number of Firms vs.. Number of Markets Figure 5 presents the choice of export markets of Bangladesh garment exporters according to the number of export market the firms supply.

It is very clear that EX. is the most popular destination, especially among firms that have only one export market. Among the 1109 firms that only supply one market, nearly 850 firms concentrate on ELI which is about 76 percent. The US market appears to be toughest to break in among this group of firms, less than 8 percent only export to the US with and without quota. For firms hat supply two markets, both the EX. and the others are the favorites. Together, they account for 80 percent of the markets among the 1 640 firms that export to two markets.

The US in quota market is popular for firms that export to more than 2 markets. Figure 5: Market Choice by Firms with Different Markets In addition, according to Eaton, Quorum and Grammar (ARE, 2004) who study the export performance of French firms, the number of markets a firm supplies reflects the productivity and competitiveness of the firm in the world market. The above distribution of firms implies that more than 35 percent of Bangladesh garment exporters participate in world markets widely with at least 3 export destinations, and are thus very competitive.

This is quite evidence in Figure 6, when we plot the unit value of garment export (left axis) and total export value (right axis) against the number of export destinations. Firms that export to more destinations tend to have higher average unit values and larger in size, with the former reflects better quality and the latter indicates greater scale economies, both signal higher productivity of the firms. The differences in unit values and total size among firms with different umber of markets are statistically significant. Figure 6: Exporting and Productivity 4. Preliminary Findings Based on Firm Survey Firm level survey was conducted from the period of November 2004 to April 2005, which covers a stratified random sample of 350 firms, which is about 10% of the total population of the garment firms currently operating in Bangladesh. After cleaning up the data to exclude outliers and firms with incomplete information, there are a total Of 231 firms in the unbalanced final panel data set of 1026, from 1999 to 2003. In this unbalanced panel data set, he composition of sub-industries of knitwear, sweaters and woven is 24%, 8% and 68% respectively.

Among the sampled firms, 13% have positive foreign equity, while the remaining 87% are purely domestic owned. Moreover, 15% of the sampled firms are in the Dacha and Chitchatting Peps, 63% in Dacha and 15% in Chitchatting. Tables 2-4 and Figures 7-9 present the sample means of the key variables of the sub-industries of knitwear, sweaters and woven, by foreign versus domestic firms. It is clear that FED firms are in general larger in sales, in exports, they purchase more material inputs, including imported materials, they hire more employees, including production workers.

FED firms also have larger capital stock and investment. All these suggest that FED firms are larger in scale and presumably more profitable and productive. To formally study the productivity superiority of FED firms, and the possible productivity spillover to domestic firms, we will need to first estimate firm level productivity for the firm sample. The estimated firm productivity is then relate to the ownership of the firms, and the relationship between productivity of domestic and FED firms in the same pub-industries will be statistically examined.

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