JBS Vol 11. Num 1. 2009 - Foreign Direct Investment and Investment Climate: Comparing Bangladesh with Selected Countries in South Asia

Since the early 1980s, developing countries have eagerly sought to increase the influx of foreign capital. This paper
analyses recent trends in capital inflows as measured by Foreign Direct Investment (FDI) for selected economies in
South Asia - Bangladesh, India, Pakistan and Sri Lanka. Amongst the four, the average ratio of FDI to GDP is the
lowest for Bangladesh, suggesting that the country may have a locational disadvantage in attracting FDI vis-à-vis the
other three countries. Using a panel regression model, this study finds that inward FDI in these sample economies is
significantly enhanced by foreign investors’ familiarity with the host economy and better infrastructure, and the
inflow is significantly depressed by the lack of economic freedom and increased political risk. Furthermore, this
study finds that FDI inflows are negatively correlated with policies that diminish a country’s economic freedom (as
measured by the Economic Freedom Index published by the Heritage Foundation). Finally, this study identifies
several barriers – poor infrastructure, pervasive corruption, crime and disorder, underdeveloped financial markets,
excessive regulations, and inadequate human capital, which seem to have created a location based disadvantage for
Bangladesh in attracting FDI.