Foreign Direct investment: impact on sectoral growth in BanglaDesh iftekhar ahmed robin introDUction Untilthe1980s,mostdevelopingcountriesviewedForeignDirectInvestment (FDI)1withgreatsuspicion.Inrecentyears,however,FDIrestrictionshavebeen significantly reduced. Most countries offer incentives to attract FDI, such as tax concessions, tax holidays, accelerated depreciation on plants and machinery, export subsidies, import entitlements, etc. Many theoretical and empirical studies have attempted to account for the reasons of FDI movement across the globe. As a developing country, Bangladesh needs FDI for its ongoing development process.Sinceindependence,Bangladeshhasbeentryingtobeasuitablelocation for FDI. Special zones have been set up and lucrative incentive packages have been provided to attract FDI. Total FDI inflow has been increasing gradually over the years. In 1972, annual FDI inflow was 0.090 million USD (UNCTAD 2005), but after 33 years, in 2005 annual FDI rose to 845.30 million USD. The time has come, then, to investigate the benefit of FDI inflow in different sectors of the economy. Until recently, there has hardly been any empirical study undertaken to examine the impact of FDI on sectoral growth. What has been done so far mostly addresses the barriers and prospects of FDI (Rahman and Hossain 2001): one study investigated whether optimum utilization of natural gas was directly or inversely correlated to the FDI in that sector (Anu Muhammad 2004). The objective of this paper is to address the impact of FDI on sectoral (agriculture, industry and service) growth patterns. It analyses data from secondary sources and estimates the relationship between inflow of FDI and annual output growth achieved in different sectors between 1995-2005, by computing correlation co-efficient and corresponding p-values. The analyses reveal that FDI inflow in the industrial sector does not appear to correlate much with industrial growth; however, it relates better to service sector growth. FDI inflow in the service sector is fairly well correlated with the growth in that sector. FDI in agricultural sector doesnothaveanycloserelationshipwiththesectoralgrowthpattern.Thepaper is organized as follows: Firstly, it shows the trend of FDI inflow at both sectoral and aggregate levels. Secondly, it explains the relationship between FDI inflow and sectoral output growth based on Pearson Correlation Co-efficient. Thirdly, it provides an account of country-wise FDI inflow. Fourthly, it reports componentwise FDI inflow. Fifthly, it reviews FDI related outward remittances. Sixthly, it discusses net effects of FDI and policy recommendations in guiding FDI decisions. Finally, it offers some concluding remarks. 1. Foreign Direct Investment (FDI) is capital provided by a foreign direct investor, either directly or through other related enterprises, where the foreign investor is directly involved in the management of the enterprise.
Foreign Direct Investment: Impact on Sectoral Growth in Bangladesh
the magnitUDe oF FDi FDI played a minor role in the economy of Bangladesh until 1980, a crucial year of policy change. This is because the Government of Bangladesh (GOB) thenenactedthe‘ForeignInvestmentPromotionandProtectionAct,1980’in an attempt to attract FDI. Except five industries, which were reserved for the public sector, (defence equipment and machinery, nuclear energy, forestry in the reserved forest area, security printing and minting, and railways), FDI was allowed in every sector of the economy. Table 1 shows total FDI inflow (including that in Export Processing Zones or EPZs) over the last 11 years (1995-2005). Data reveals that in 1999, there was a sudden fall in FDI, and again in 2001, mainly because of continued political unrest, which discouraged foreign investment. Subsequently, it took several years to regain the confidence of foreign investors. FDI stabilized...