Some thoughts on FDI

Bangladesh is a labour surplus country and has enjoyed high economic growth that has allowed it to achieve a per capita income of $923. It can achieve faster economic growth by successfully attracting more FDI and deploying the foreign investment in sectors that can employ the abundant labour supply in the country, writes Salman Sakir

WHEN an investor from a foreign country invests in a particular country, it leads to employment generation and industrialisation in the recipient country. Foreign direct investment is considered a lucrative form of investment for any country. FDI is often suggested as a way for developing countries to industrialise and increase their gross national product. There are several instances of countries that have benefited from FDI inflow.
The total FDI inflow in the whole world has increased substantially in the last two decades. In 1990 total FDI inflow in the whole world was $207.4 billion which has phenomenally increased to $1.35 trillion in 2012. The substantial increase in world FDI inflow has been mostly due to trade liberalisation, investment liberalisation and globalisation. The integration of some economies like China, India and Brazil into the world economy, led to significant inflow of FDI in these countries. These large and populous countries have introduced a significant number of workers and consumers in the world economy. Usually, FDI tries to take advantage of low labour costs and ultimately, low production costs and investment generally flows to the developing countries that have an abundant supply of low-wage labour. As Figure 1 shows, world FDI inflow even reached $2 trillion in 2007. However, the financial crisis had an impact on the investment scenario as overall consumer demand slumped.  Since then, world FDI inflow has recovered but it is still below its 2007 level.
The richest countries in the world, which have substantial GNP, are the main FDI investors. As Figure 2 illustrates, the largest economy in the world was the largest FDI investor in 2012. The United States invested almost $329 billion in 2012 that was 23.6 per cent of world FDI outflow in 2012. It was followed by the third-largest economy in the world, Japan, and the second-largest economy in the world, China, that contributed 8.8 per cent and 6.1 per cent respectively to world FDI outflow. In total, the top ten FDI investors accounted for 68.3 per cent of world FDI outflow in 2012.
The United States was also the largest FDI recipient in 2012, proving it to be the most attractive investment destination in the world. It received more than $167 billion of FDI as shown in Figure 3. This was 12.4 per cent of world FDI inflow in 2012. The United States was followed by China that accounted for 9 per cent of world FDI inflow. The top 10 recipients accounted for 56.7 per cent of world FDI inflow in 2012. An analysis of Figure 2 and Figure 3 reveal that while the United States and China were both top FDI investors and recipients, Japan was only a major FDI investor but not a major FDI recipient. It goes on to show that most of the investment in the Japanese economy is probably a domestic investment.
FDI inflow to Bangladesh for the period 1990 to 2012 is shown in Figure 4. It has increased substantially during this period as the graph reveals. FDI has hovered to close to a billion dollars annually for the last several years and financed major projects in the telecommunication and the power sector. The inflow of FDI has increased the value of Bangladesh exports and has employed many workers. At the same time, it has made valuable contribution to the industrialisation of the country. Bangladesh has also benefited from technology transfer and improvement in human capital due to inflow of FDI. Currently, the country has a massive skilled garment workforce that has been made possible by enthusiastic initiatives from domestic investors as well as foreign investors. The improvement of human capital has been beneficial for the country as well as foreign investors.
 FDI can be an important source of investment for a country. It can expedite economic growth and poverty reduction, as has been seen from the experience of the Asian Tigers and, recently, China. Whether it is Singapore or China, the countries have significantly benefited from FDI inflow. In the past few decades, China continuously experienced significant FDI inflow that led to double digit growth rates and improvement in poverty reduction. The country was able to pull out 680 million people out of poverty between 1981 and 2010 and achieve a per capita income of $6,629. However, FDI is beneficial for the recipient country only when certain circumstances exist in the recipient country. First of all, the recipient country has to have sufficient ‘absorptive’ capacity. It essentially means that there should be sufficient land and labour in the country so that the FDI can fully utilise them. Therefore, a labour-surplus country will have sufficient absorptive capacity, while a shortage of land may be an impediment to efficient utilisation of FDI inflow.
It is widely stated that FDI inflow leads to economic growth. However, this is dependent on the level of human capital in the recipient country. A high level of education, which is a proxy for human capital, leads to strong interaction with FDI. This strong interaction may lead to higher economic growth in the FDI recipient country. Again, a high level of education will attract more FDI as the foreign investment will be able to use a highly skilled workforce. The development of infrastructure like roads, highways, power generation, wide availability of internet, etc are also important determinants of FDI inflow. Political stability and, law and order condition are also necessary conditions for FDI inflow as the foreign investors want to feel secure about their investments. However, corruption can act as an impediment to the inflow of FDI that may decrease economic growth and poverty reduction.
Bangladesh is a labour surplus country and has enjoyed high economic growth that has allowed it to achieve a per capita income of $923. It can achieve faster economic growth by successfully attracting more FDI and deploying the foreign investment in sectors that can employ the abundant labour supply in the country. A strong inflow of FDI will help Bangladesh in its battle against poverty and help the country achieve its goal of becoming a middle-income country.

http://www.newagebd.com/detail.php?date=2013-08-29&nid=62940#.Uh9WTn_TRi0

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