Foreign Direct Investment

FDI is regarded as one of the most important factors for the development process of developing countries. Initially, it is regarded important in providing additional capital to these countries where capital resources are scarce and labour plentiful. Such inflow of foreign capital brings about an increase in labour productivity and helps increase real wages. The theoretical approach explaining this kind of phenomenon was suggested by MacDougall (1960). The basic idea of this theory is similar to a few other economists' who try to explain why foreign direct investment is taking place, using theory of capital movement, resulting from the difference in inter-country interest rates. Among those pioneer economists are, for example, Ohlin (1967) and Nurkse (1972). These theories are based on competitive markets assumptions. On the other hand, new theories of international investment try to explain the phenomenon in the context of the theory of the firm, mostly in the terms of oligopolistic advantage of overseas investors or firms from investing countries.

Hymer's (1960) "specific advantage hypothesis" can be regarded as a starting point. In this theory, Hymer believes that the primary objective for firms to have overseas investment is to control foreign operations due to imperfect market power in the home market. This imperfect market power arises because of the firm's ownership-specific advantages such as better or superior technology, better entrepreneurship, etc.

Caves (1971) explains FDI in a similar way. Using his industrial economic approach, he argues that FDI in industries is characterised by certain market structures in both home and host countries. He divides FDI into horizontal and vertical. Horizontal FDI usually occurs in industries where product differentiation and oligopolistic power exist while vertical FDI occurs mainly because the firm wants to secure its raw materials or intermediate products for its own operation in the home market. Veroon's (1966) product life cycle is also popularly used to explain such phenomenon. Veroon's theory is basically technology oriented, and a dynamic model of FDI. Veroon believes that technological development usually starts in developed countries where there are large domestic markets and high-income elasticity. When a firm or a country starts developing its own technology, it will use such technology in the production process and later export the products to other countries. As the technology becomes standardised, the originator of technology will become less and less profitable. Thus, it forces the country that develops the technology to shift its resources into the development of new technologies.

Dunning's electric model (1982) could be regarded as the most comprehensive theory explaining FDI phenomenon. The theory explained that a firm will engage in FDI if three conditions, namely, the ownership specific advantage, the internationalisation-incentive advantage, and the location-specific advantage are simultaneously satisfied.

Early in twentieth century, a large part of the world's infrastructure was developed through FDI, including electric power in Brazil and telecommunication in Spain, Persian Gulf's oil fields, India's tea plantation, and Malaysian rubber plantation. British firms invested in consumer goods manufacturing abroad from an early date. German Chemical Companies were expanding outside before World War-I as were US auto manufacturers. The UK domination on FDI was apparent up to World War-II as USA became the engine of capitalist development. Escalating of commodity prices in the 1970s had two effects on FDI. First, high prices encouraged increased FDI in extractive sectors, particularly in oil and gas. This benefited countries such as Congo, Equador, Indonesia, and Nigeria, which saw sharp increases in FDI in the early 1970s. Second, the balance payment surpluses of commodity exporting countries provided an abundant source of ingestible capital. This money was recycled to developing countries through a large scale sovereign lending by commercial banks. Added to this many developing countries in this period encouraged inward oriented approaches, often expressly aimed at de-linking from global economy and FDI fell sharply and continued to stagnate into the first part of 1980s.

The IFC survey (1997) rated FDI flows of 12 countries dividing the period into 1970-79, 1980-89 which and 1990-96 revealed interesting findings. Resulting from government policy and international environment Brazil was ranked number one during 1970-79 and second in 1980-89 period. Nigeria was the third highest recipient of FDI during 1970-79 and during 1980-89 it was rated 10th. However, in 1990-96 it had no place among the top 12 countries. Malaysia was the 4th largest FDI recipient during 1970-79 and retained the position during 1980-89 and graduated to 3rd position in the 1990-96 periods. Indonesia was the 5th largest FDI recipient during 1970-9 and 11th in 1980-89 and graduated to 5th in 1990-96. Greece was the 6th largest FDI recipient in 1970-9 and 7th in 1980-9 and had position in 1990-96 among top 12 countries. South Africa ranked 7th during 1970-9 but relegated from the list of top 12 countries in 1980-9 and 1990-6 periods. Similarly Iran and Algeria scored 8th and 12th position in 1970-9 but no position during 1980-96s. Egypt scored 9th position in 1970-9 and graduated to 5th in 1980-9 and had position in 1990-96 while Equador scored 10th position in 1970-9 but no position among top 12 FDI recipients in 1980-96. Thailand graduated from 11th position in 1970-9 to 8th position in 1980-9 and 6th position in 1990-96. China scored no position in 1970-9 but gained 3rd position in 1980-9 and finally took first position in 1990-96. This was possible for the change in economic policy since 1979. Surprisingly, China's FDI rapidly caught up with its size and rate of economic growth. By contrast, the next largest developing country, India, remains way down in the list, with FDI of only 0.6 per cent of GNP, against China's 4.8 per cent. This reflects India's, relatively slow progress like its nearest neighbour Bangladesh, in restructuring growth and orienting its policies to encourage FDI.

For attracting FDI developing countries should keep in mind that with the opening of central and eastern European communist countries FDI is getting diverted from other developing countries. Incoming of FDI also depends on the system of running a government. For example, Algeria and Iran occupied position among top 12 FDI recipient countries but the wave of Islamic revolution changed the situation after 1980s. Similarly, rise of radical Islamic fundamentalism in some countries like Afghanistan and Pakistan and Turkey have witnessed the decrease in FDI flow. Foreign Investment Advisory Services (FIAS) of USAID study (1990) identified Mediterranean basin as a vulnerable investment area where hundreds of West European, North American and Japanese companies having knowledge of those countries with rise of radical Islamic fundamentalism, do not consider the countries there as prospective investment sites and exclude them as too risky to include in their corporate business strategy.

In Bangladesh, the present unfavourable law and order situation, spread of rampant corruption within the government, bureaucratic tangles towards deregulation and liberalisation, all combined, have damaged the FDI friendly environment. Examples are easily available from the daily newspapers and electronic media. Over and above, deteriorating law and order situation, Islamic Fundamentalists sharing power with the current government, widespread interference of Special House in every government decision where lion consideration is bribe, are considered to be vital contributory reasons for reduced inflow of foreign investment in Bangladesh now.

Blaming Bangladesh Bank or any other organisation including opposition parties cannot be an excuse for the reduced inflow of FDI. This lies elsewhere; to my mind, within government itself including BoI and other relevant GoB agencies connected with processing of FDI inflow into Bangladesh. Time has come for the professionals and experts involved in the FDI to open their mouth, boldly exposing the pitiable and foreign-loan-syndrome-economy of Bangladesh. If BoI, reporting to Prime Minister's Office and Bangladesh Bank reporting to Finance Ministry can not agree to FDI calculation methodology then the question remains unresolved on how the International credit rating agencies shall rate Bangladesh in terms of reliability of FDI figures. The way things are going we should wait for worse days in terms GDI. The Chairman of BoI is not the recognised authority to dictate the methodologies to figure out FDI inflow rather it should follow accepted international practices.

Dr Jamaluddin Ahmed FCA is a partner of Hoda Vasi Chowdhury & Co, an affiliated firm of Deloitte Touche Tohmatsu.