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Investment Climate in Bangladesh

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Introduction: a. Origin of the Report:

Every Business student, as a part of his/her study has to complete some assignments and solve some problems which are very much related to the practical business and economical world. This is a complete study of how the investors are doing business in Bangladesh over years and what will be the course of actions in order to achieve the proper “Investment climate in Bangladesh”. The report is prepared in order to get the knowledge and fulfill the basic requirement to complete the course titled as “Economic Conditions Analysis”.

b. Background of the study:

Economics is a sea of theories. These theories are the stairway to lift us to a stage from where we can get the entire idea of its different sectors. “Economic Conditions Analysis” is basically theory related course in addition to a mixing of practical incidents to compare theories and its applications. Obtaining theoretical knowledge is only a halfway to reach the target because implementation of theories is the ultimate goal of it. Being a very practical course “Economic Conditions Analysis” requires a large extent of implementation of its theories and procedures in the real life. To meet up this requirement I have prepared the report titled “Investment climate in Bangladesh”.

c. Objectives:

1. Broad Objective:

The broad objective is to examine investment climate in Bangladesh over years and what should be done for better performance in the upcoming years.

2. Specific Objectives:

The specific objectives of preparing the report are as follows:

i. To present historical data regarding industrial policy, obstacles to implement and what should be done to create proper investment climate in Bangladesh. ii. To meet up the requirement of “Economic Conditions Analysis” course. iii. To get familiar with the actual situation and future planning regarding strengthening investment climate in Bangladesh.

d. Methodology: Secondary sources are used to prepare this term paper. Mainly, web-sites, national dailies, books and statistical reports collected from various sources are used.

e. Scope of the Study: The study covers the Industrialization aspects and features of Bangladesh which is in a position that can be advanced if properly planned. But every plan has a background and the policy we take today is basically based on the previous efforts and trends. The main consideration facts of this study are: (a) major policy and regulatory measures, (b) Special role of Foreign Direct Investment and (c) Major challenges of domestic and foreign investment and suggested measures to tackle future challenges. f. Limitations:

In preparing the report I have faced some problem which can be termed as limitation of the paper. It could be more resourceful one if the limitation were not created. The major limitations were as follows:

1. Our limited knowledge regarding the Macro economical history and actions taken previously by the existing Governments. 2. Unavailability of specific and structured theories. 3. Unavailability of relevant journals in the internet.

1. Introduction:

Government believes that rapid industrialization is a key to the country’s economic development. A densely populated country with a population of around 150 million living on a land area of 1,47,570 square kilometer (56977 square miles), its economy is dependent mainly on agriculture, which accounts for a fifth of GDP but provides employment to as much as 50 percent of the country’s labor force. Since the country’s population and labor force are growing rapidly every year, it is hardly possible that the growing labor force can ever be absorbed in the agriculture sector, unless the country’s industrial sector is sufficiently developed and expanded to create additional employment opportunities.

The industrial policy presents an integrated strategy for achieving high economic growth in the country through rapid industrialization. It has been prepared taking into consideration the government’s determination to achieve the Millennium Development Goals (MDGs) by 2015, and halve the number of the unemployed and hunger- and poverty-stricken people by 2017.

To alleviate poverty by creating additional employment opportunities, the policy aims to create job for at least one man per family. It envisages rapid industrialization through short-, medium-, and long-term measures, for raising the rate of GDP growth to 8% by 2013, and 10% in 2017 and thereafter to achieve the status of a middle-income country by 2021. The policy puts emphasis on private sector industrialization efforts but at the same time vows to reform the public sector enterprises to make them profitable.

2. Major Policy & Regulatory Measures

|No |Name of the Policy |Timeline |The Key Focus of the Policy |
|1 |Industrial Investment |January, 1973 |Nationalization of all medium and large scale industrial policies |
| |Policy | | |
|2 |New Industrial Investment |July, 1974 |Encouraging private sector activity in manufacturing, the dominant role of the public sector |
| |Policy | | |
|3 |Revised Investment Policy |Dec, 1975 |Focus on a private sector-led growth. The period witnessed large scale denationalization of |
| | | |industrial enterprises, and private sector investment began to pick up with liberal credit |
| | | |policies and generous lending by commercial hanks and DFIs. Boosting up export sector. |
|4 |New Industrial Policy |June, 1982 |Stimulate industrial development through the private sector which made fundamental changes in the |
| |(NIP) | |industrial policy environment and promotional instruments. Large scale denationalization. |
|5 |Revised Industrial Policy |July, 1986 |Made further relaxation and changes are introduced. More export incentive instruments were made |
| |(RIP) | |available to the exporters, more deregulation proceeded and the number of items on the "negative" |
| | | |list was progressively reduced |
|6 |Industrial Policy |July, 1991 |The whole industrial policy was premised on the philosophy of a market-based competitive economy. |
|7 |Industrial Policy |1999 |The first ever policy that had a true vision of industrial development, and a clear sense of |
| | | |direction. Its major objective was to have, within a decade, a sizable industrial sector where |
| | | |manufacturing would account for at least 25% of GDP and 20% of the employed workforce. |
|8 |Industrial Policy (IP |March, 2005 |The policy envisages that in the next one decade the manufacturing sector will account for about |
| |2005) | |30%-35% of GDP and about 30% of employed workforce. More focus on the SMEs. |

2.1 The Industrial Policy 1999:
The country till now has gone through 8 policies. The Industrial Policy, 1999 was perhaps the most comprehensive policy, which sought to give the private sector a dominant role in industrial development. To enhance the role of the private sector, the industries’ reserved for public sector investment were brought down to four. Its major objective was to have, within a decade, a sizable industrial sector.

2.1.1. Service Sector:
The policy identified some service oriented activities that were declared as "industries". These are:

i. Entertainment (i.e., cinema, amusement parks etc.),

ii. Hospitals and clinics,

iii. IT based industries (i.e., computer software, electronic communication etc.),

iv. Construction, and

v. Hotels.

2.1.2. Thrust Sectors:
For the purpose of targeting special incentives and supportive measures, certain industrial activities (16 in all) were declared as "thrust sectors". They are:

i) Agro-based industries. (ii) Artificial flower-making

(iii) Computer software and ICT (iv) Electronics

(v) Frozen food, (vi) Floriculture,

(vii) Gift items, (viii) Infrastructure,

(ix) Jute goods (x) Leather,

(xi) jewellery and diamond cutting and polishing (xii) Oil and gas.

(xiii) Sericulture and silk industry, (xiv) Stuffed toys,

(xv) Textiles, and (xvi) Tourism.

2.1.3. Reserved Sector (Public Sector) Industries:

The following areas are reserved for public sector investment:
a) Arms & ammunition and other defense equipment & machinery
b) Forest plantation and mechanized extraction within the bounds of reserved forests
c) Production of nuclear energy
d) Security printing (currency notes) and minting

2.1.4. Private Sector Investment:

Except service sectors, private sector both local and foreign of joint venture investment has been kept open without any ceiling.
2.1.5. Foreign Investment:
In order to entice investors, the government has put in place an extensive program of incentives which include:

• No ceiling on investment,

• Tax-holidays, exemption and duty-free importation of capital machinery and spare parts for 100% export-oriented industries,

• Residency permits for foreign nationals,

• Hundred percent foreign equity allowed,

• Exemption of income tax up to three years for expatriate employees,

• Double-taxation avoidance,

• Multiple-entry visas for foreign investors,

• Investors can take advantage of the generalized system of preference.

2.1.6. Facilitative Flow of the Public Institutions:
The following are the investment framework for the development of the private sector:
a) All foreign investments shall be registered in the prescribed manner with the concerned promotional body before setting up an industry.
b) BSCIC and BEPZA will allot plots to respective industrial units. BOI will recommend and pursue allotment of public land wherever available.
2.1.7. Incentives and Facilities for the Investors:
a) Tax Holiday: Tax holiday is allowed to the companies for the following periods according to the location of industries.
|Dhaka and Chittagong division (excluding 3 hill districts of Chittagong Division) 5 years |
|Rajshahi, Khulna, Sylhet Barisal and 3 hill districts of Chittagong Division 7 years |

Tax holiday facility can be availed by industries set up within June 30,2000.
b) Concessionary Duty on Imported Capital Machinery: Import duty at the rate of 5% ad-valorem is payable on capital machinery and spares imported for initial installation. c) Incentives to Non-Resident Bangladeshis (NRBs): NRB investors will enjoy facilities similar to those of foreign investors.
d) Incentives to Export Oriented and Export-Lineage Industries: i. Duty free import of capital machineries and spare parts up to 10 percent. ii. Existing facilities for Bonded warehouse and back-to back LC will continue. iii. Duty drawback will be fixed at a flat rate on exportable and potentially exportable goods. iv. The arrangement for providing loans up to 90 percent against irrevocable and confirmed LC /Sales Agreement will continue. v. To ensure backward linkage, incentives will be extended to the "deemed exporters" supplying indigenous raw materials to export-oriented industries.
Apart from the above mentioned facilities, other facilities were announced and provided in the export policy will be applicable to export-oriented and export-linkage industries.
2.1.8. Export Processing Zones (EPZs)
Industries in the EPZs enjoy i) tax holiday for 10 years, (ii) exemption of income tax on interest on borrowed capital, (iii) relief from double taxation subject to bilateral agreement, (iv) duty free import of machinery, equipment, raw materials, and materials for construction of factory building.

2.2 The Industrial Policy 2005:

The latest industrial policy was announced in March 2005. The major objectives and strategies are more or less similar to those of the 1999 policy, for example, it reiterates the dominant role of the private sector in industrial development in which the government will act only as a facilitator.

Again IP 2005 incorporates certain new provisions as well. For example, it has proposed for the establishment of cottage industries and SMEs in different regions of the country by giving special incentives and support measures for establishing a specialized women's bank to assist women entrepreneurs for promoting agro-based and food processing industries.

The IP 2005 has also expanded the list of the thrust sectors. There are now 33 thrust sector industries instead of' the 16 in the previous policy. The new policy designates RMG as a thrust sector industry, which will henceforth be open for foreign investment as well. Again IP 2005 policy provides a list of 19 service industries as against 5 in the 1999 policy.

The industrial policy of 2005 has also changed the definition of the different sizes of industry. It divides industrial enterprises into manufacturing and non-manufacturing industries which are defined in terms of the size of capital Investment and employment of workers respectively.

2.3. The Industrial Policy 2010

Government announced a draft Industrial Policy on 5 September 2010. The Cabinet Committee has already agreed the draft policy, which is now awaiting parliamentary approval.

2.3.1 Reclassification of Industry and Industry Size

The 2010 Policy has also brought an improvement over the 2005 policy by changing the classification of Industry and giving a new definition of industry size. Thus,

a) The 2010 policy classifies industry into five categories – large, medium, small, micro, and high-tech industries.

b) The policy has redefined all types of industry sizes – whether manufacturing or non-manufacturing (service) – in terms of both fixed capital and the employment of labor.

2.3.2. Thrust Sector Industries

The thrust sector has been reduced to 30 from 33.

2.3.3. Regulated Industries

a) The proposed industrial policy includes a large number of industries (17 in all) in the list of Regulated Industries.

b) The highly restrictive provision that the registering authorities – BOI, BSCIC, BEPZA etc. – shall not register the regulated industries without the express approval of the concerned Ministry/Organization.

2.3.4 Public Private Partnership (PPP)

a) The emphasis on PPP in the proposed industrial policy is laudable but the concept is still in a rudimentary stage.

b) Government will need to act expeditiously to devise a transparent mechanism and frame well-defined rules for participating in and mobilizing funds for the PPP projects.
The Regulatory Measures:

a) FDI Policy Reforms: In the late 1980s and 1990s, foreign investors are provided with some incentives like tax exemptions for power generation and tax holidays for different industries. b) Trade Policy Reforms: In the early 1990s, the facility of duty-free import of machinery was introduced for 100% export oriented industries. An incentive to exporters is also provided in terms of duty drawbacks equal to custom duties and VAT paid on imported materials used in the manufacture of exports. c) Exchange Rate Policy Reforms: On a daily basis the buying and selling rates of the US$ on the basis of the Real Effective Exchange Rate were introduced in 1991. d) Fiscal Policy Reforms: Domestic resources mobilization was strengthened through improvement in tax policies, better tax collection and introducing of Value Added Tax (VAT) in 1991. e) Industrial Policy Reforms: No limitation pertaining to equity participation except four reserve sectors. f) Reforms in Public Sector Enterprises and Privatization: No govt. permission is necessary to set up new industries except reserved sectors. g) Financial and Banking Reforms: The permission had given for setting up of all kinds of financial institutions in private sector since the early 1980s. The commercial banks were allowed to set their own bank rates freely. In 1990, an act to expedite NCB loan recovery was enacted.
3. Special Role of FDI

“Foreign Direct Investment (FDI)” is defined as an investment involving a long term relationship and reflecting a lasting interest and controlled by a resident entity in one economy (foreign direct investor and parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transactions between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated.

FDI is dramatically increasing in this age of globalization. It has played important role for economic growth in this global process. But, the distribution of FDI is uneven in all over the world. Some countries are ahead and some are lag behind to attract FDI.

The magnitude of FDI played a minor role in the economy of Bangladesh until 1980, a crucial year of policy change. At first The Government of Bangladesh (GOB) enacted the ‘Foreign Investment Promotion and Protection Act, 1980’ in an attempt to attract FDI. Except some industries, which are reserved for the public sector FDI is allowed in every sector of the economy.


Table 1: The Aggregate and Sector-Wise FDI Inflow, 1995-2005:

• Roles of FDI:

1. The effects of FDI for economic growth: The most obvious effect of FDI on the growth potential of host countries may be the provision of additional capital. The inflow of foreign funds can help overcome the pervasive investment-saving gap. By attracting foreign venture capital, the growth potential could be raised without incurring the vulnerabilities typically associated with external debt burdens. In addition, the investment by one MNE[1] in a foreign firm can induce other MNEs to invest in the same host country as well in order to retain a role as a supplier of intermediate products. Moreover, MNEs usually enjoy better access to international financial markets than firms based only in the host economy.

2. Liquidity Increase in the Host Country Stock Market: FDI has a positive influence on the development of the local stock market if foreign firms were to recover part of the investment by selling equities in the host country. Additionally, the liquidity of stock markets is increased if foreign investors choose to purchase existing equities of the local firm as part of the investment.

3. Enriching Technical & Management Technique: Another dimension in which FDI can bear positively on growth in MNEs is through endowing host firms with more efficient technology as well as management techniques.

4. Infrastructure Development: Industries which have FDI can improve in infrastructures regarding technology, office and plant facility and communication advantages easily than other sectors.

5. Employment Creation: FDI creates employment in different sectors. RMG sector in Bangladesh is an example of this. At present, in Bangladesh, a huge number of people serve in this particular field and women are working in most numbers.

6. Export Rising: Export rises as FDI inflows in an economy, particularly in Bangladesh where Government encourages FDI in the field of export products. EPZ has a great deal of FDI every year which is, basically, emphasizes on export of RMG products.

7. Liquidity, Money Flow & Money Creation: As FDI inflows in an economy, liquidity increases which results in money supply and smoothens money creation process. It can have an adverse effect of inflation though but by a timely policy by the Government it can be controlled.

8. Manufacturing & Service Industry: FDI can make a significant change in technical know-how use in the field of Manufacturing and Service Industry. Enterprise Resource Planning (ERP) software is being used in many organizations to make it as a paperless organization.

9. GDP Growth: As the earnings of a country increases through the investment of a Foreign Company/Investor, the GDP increases proportionately.

10. Perfect Competition in Industry: Due to FDI no industry becomes monopoly market. FDI creates competition with the local investors with quality products or services. Mobile Telephone industry in Bangladesh is a perfect example of this.

11. Digital Bangladesh: Due to many foreign companies we are used to use ERP software, internet in mobile phones, computers to make Bangladesh a digital one very soon.

12. Foreign Currency Reserve: Through export oriented business, initial investment by foreign investors our economy can get a healthy amount of foreign currency which rises the foreign currency reserve in Bangladesh Bank. It will reflect the strong economy of Bangladesh.

These are the basic role and impact of FDI in an economy.

4. Major Challenges of Domestic and Foreign Investment and Suggested Measures to Tackle Future Challenges:

Bangladesh is a country of immense potential for investment. It has all the natural endowments which are considered essential elements for a particular region to thrive up as a very covetous trade and investment center. But owing to lack of prudence, myopic vision, lack of timely initiatives and policy interventions and slow implementation process of the schemes on part of the Government(s) are attributed to the under exploitation of its immense potentials.

• Challenges Regarding Bangladesh:

1. Quality of Bureaucracy and Governance: It has been identified that in Bangladesh there is reform inertia, inefficiency, and red-tapism in the government officials due to systemic distortions.

2. Improvement in Law and Order Situation: Overall law and order situation in Bangladesh is far from satisfactory. The use of ‘Cadres’ by political parties gives rise to terrorist activities directly and indirectly. This increases cost of doing business and lowers business competitiveness. New investment in productive activities is heavily discouraged.

3. Development of Infrastructure and Human Resources: A poor infrastructure facility is one of the prominent hurdles for investment in Bangladesh. There has been a modest improvement in the road infrastructure in the recent years but overall infrastructure facilities are still inadequate. Transport and telecommunication services are insufficient and severely under-developed. Inadequate power supply is another major problem. Many industrial units look for alternative sources of power resulting in higher operational costs. Bangladesh is a labor surplus country but there is a shortage of high-skilled manpower as demanded by modern investors.

4. Improving the Port Services: Chittagong Port, the major seaport of the country, is one of the most cost ineffective seaports in the world. Low quality service, delay and uncertainty in loading/unloading of goods, lengthy custom clearance process, frequent strikes, inadequate facilities for container shipment, these add cost of transaction.

5. Privatizations and Further Reform: There is not enough constitutional recognition of the role of the private sector. The slow pace of privatization and the half-hearted implementation of reforms have resulted in an erosion of investor confidence.

6. Modernization of Business Law: There is inadequacy in business laws in Bangladesh for handling business disputes in the modern world. Also, there is a severe shortage of lawyers capable of handling business disputes.

7. Setting up of Industrial Parks: It is very problematic for an investor to procure land and arrange for all the infrastructure and utility services.

8. Export-Oriented FDI: We have to encourage FDI in export-oriented industries. Most foreign investors have a tendency to send foreign currency abroad in form of profit repatriation and repayment of capital. Foreign exchange earnings through exports are quite helpful to balance off any such effects. Export oriented FDI may help in this regard.

9. Importance of the local market: A bulk of the FDI comes to explore natural resources, i.e., gas and oil rather than exploiting the domestic market. Some of the foreign investment in Bangladesh seems to be guided by the domestic market in sectors like Banking and other Financial Services.

10. Pooling Available Funds of NRB: There is some potential for the non-resident Bangladeshis (NRBs) to invest in our country. Theoretically NRBs are treated in the same standard as foreign investors, but in reality it is not so.

11. Economic and Commercial Diplomacy: Globally, competition for attracting FDI has been intensified. FDI started to show a tremendous decline due to a global slow-down and post 9/11developments. Hence, it has now become more difficult to attract FDI even with good policies.

12. Enforcement of Regulations on the Environment, Product Quality and Copyrights: Lack of compliance with environmental and other regulations relating to product quality and safety may have a negative impact on the society and for sustainable development of the country. There are allegations of mimicking production processes and of copying brand names through unfair means by these firms.

13. Improving the Image of the Country: Unfortunately, Bangladesh suffers due to a poor image in the international arena. Because of poor governance, distorted market, half-hearted reforms campaign, inadequate private sector development, poor infrastructure, political instability and natural disasters, etc.

14. Regional and Sub-regional Co-operation: Free trade arrangement under regional co-operation may relax the problem of limited market size by ensuring a unified regional market. South Asian countries share many common cultures and hence there is a similarity in the nature of consumers’ demand. Effective regional co-operation (e.g. SAARC) may improve the country's image to the foreign investors and may be useful for tapping investment complementary as well.

• Specific Recommendations to Attract and Sustain Investment:

1. Political Consensus: Political consensus should be reached for the greater interest of trade, commerce and investment of the country.

2. Setting up a Separate Counter Intelligence Department: To monitor the corruption, nepotism and any other irregularities by any Government department including police, port, custom etc., a counter intelligence department has to be formed immediately.

3. Strengthening Parliamentary Standing Committee: Parliamentary Standing Committees on various ministries should be strengthened and given more power to consolidate its role in investigating and monitoring performance of respective fields under jurisdiction.

4. Speedy Judicial System: Judicial system of the country is very lengthy and inefficient. Still we exercise many 100 years old laws which were obtained from the British regime.

5. Effective Inland Water & Railway Transport: An efficient Inland Water Transport System across the country has to be developed with adequate dredging to maintain its navigability.

6. 4 Lane Dhaka-Chittagong Highway: The Dhaka-Chittagong Highway along with other key national highways has to be made 4 lane on priority basis.

7. Dedicated New Dhaka-Chittagong Express Highway: A dedicated and toll based new Dhaka-Chittagong Express Highway has to be constructed on priority basis.

8. Double Tracked Dhaka-Chittagong Railway with a Chord Line: The Dhaka-Chittagong railway line has to be made dual with construction of a chord line from Laksam to Narayangonj.

9. More Bridges on Karnaphuli: On very urgent basis 4th and 5thKarnaphuli bridge have to be constructed keeping in mind our future road communication need with Southeast Asian countries and full exploitation of potentials of greater Chittagong for needed boost to our economy.

10. Improve Port Service: Port facility and service quality has to be improved. Private Cargo Facility Service should also be allowed to handle import cargo. All the labor unions should be brought under control.

11. Deep Seaport: As, due to strategically advantageous geographic location, Chittagong is poised to emerge as a lucrative trade and investment hub linking entire South and Southeast Asia, construction of a deep seaport at Moheshkhali or any other near suitable place will be badly needed in near future. This port will also help to provide transit facility to landlocked neighboring countries.

12. New Telephone Exchange: Some new telephone exchanges of 5 million capacities across the country have to be established.

13. New Power Generation Plant: A plan has to be made to setup some more power generation plant(s) of 7000-10000 MW capacity in next 5-7 years. More private sectors can be encouraged in this regard. The existing distribution and transmission line has to be refurbished.

14. Online Linkage and Coordination between Organizations: An online communication should be established between port and customs to avoid problems. Other related agencies/bodies like Shipping Agent, C&F etc. should also be brought under this network to accelerate delivery process and ensure transparency and accountability.

15. Modern Tourist Spots and Amusement Parks: A good number of private tourist spots and amusement and theme parks have to be established with necessary amenities for the tourists.

16. Simple and Easy Approval Procedure: Approval procedure related to trade and business by any Government/Semi Government/Private body should be simplified and online.

17. Devolution of Adequate Power to All Local Government Offices: All the local government offices have to be delegated adequate power and authority, so that they can take any decision locally and independently without sending the file to Dhaka for higher authority’s approval.

18. Availability of information: Information related to trade and investment facilitation should be made readily available to business.

5. Conclusion:

The FDI can undoubtedly play an important role in the economic development of Bangladesh in terms of capital formation, output growth, technological progress, exports and employment. The relatively small share of FDI in GDP, however, indicates that the potentials are far from being realized in Bangladesh. Nevertheless, concerns remain about the possible negative effects of FDI, including the question of market power, technological dependence, capital flight and profit outflow. On a positive note, service sector growth appears well correlated with FDI flow to this sector. Further, this has a linkage effect to the rest of the economy.


1. Rahman, K.M.A., (2008), “Globalization and the Climate of Foreign Direct Investment: A Case for Bangladesh”,Journal of Money, Investment and Banking, (Pages98-99), Retrieved on 13thNovember, 2011 from

2. “Investment Policy in Bangladesh-An Agenda for Action” by “CUTS Centre for Competition, Investment & Economic Regulation (India)” in association with “Bangladesh Enterprise Institute (Bangladesh)”, Retrieved on20thNovember, 2011from

3. Chowdhury, Saifuzzaman. (2011), “Investment Prospects in Bangladesh vis-à-vis imperatives for exploitation”, (Pages, 1-5), Retrieved on 17th November, 2011 from

4. “Foreign Direct Investment in Bangladesh”, Retrieved on 17th November, 2011 from

[1] Multi National Enterprise

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Investment Climate in Bangladesh

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