Investment Climate Factors with Reference to Firm Performance in Bangladesh: A Prospective Cohort Study

Investment Climate Factors with Reference to Firm Performance in Bangladesh: A Prospective Cohort Study

Farhana Ferdousi (East West University, Bangladesh) and Arun Kumar Sangaiah (VIT University, India)
DOI: 10.4018/978-1-5225-8356-1.ch021
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A productive investment climate is key to the growth of any developing country. Given the limited literature and importance of economic zone in attracting FDI, this paper conducts a study on the Export Processing Zone to provide an insight into the investment climate factors and its association with firms' performance. A total of 30 firms were chosen from the garment industry, in particular from the EPZ of Bangladesh. Findings reveal that all six factors were considered as important indicators affecting investment climate of EPZ firms. Moreover, five factors were found to be significantly associated with the firm performance. An important implication of the findings is that government and garment associations can get an important insights into the factors that are critical to the investment climate and accordingly take necessary steps to arrange better utilities provide sound governance, improve credit facilities, ensure a favorable trade union together with other infrastructural facilities that require for creating better investment climate for both the EPZ and non-EPZ firms.
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While developing countries as a group have certain similarities in terms of living standards, level of labour productivity, rate of population growth, and the degree of market failure and economic power, they vary in terms of political conditions, infrastructural development, and other development indicators such as imports and export growth (Mersha, 1997).Due to these differences, the investment climate1 also differs between the developing countries. While a suitable investment environment is especially important to attract investors, the EPZs’2 in developing country like Bangladesh have been successful in attracting Foreign Direct Investment (FDI)3 primarily in ready-made garments. EPZs are essential part of Bangladesh economy (Bhuiya et al., 2014). A review of literature indicates that the companies operating in the EPZs’in Bangladesh are achieving several benefits over the companies out of the EPZ (Ferdousi, 2009) because of its internationally competitive duty-free environment for export production at low cost. The especial support from the government in terms of modern infrastructure, utilities, tax facilities enable them to perform better and attract more investors than the non-EPZ firms However, while EPZs of Bangladesh are performing well compared to some developing countries, they are lagging behind in respect to the investment growth and other performance indicators of the EPZ’s of some other developing countries (Abdin, 2014).

This situation therefore, raises a fundamental question as to what factors influencing the investment climate of EPZ firms in Bangladesh. In line with this, previous studies have focused on the investment climate factors from both country level and firm level perspectives (Kinda et al., 2011; Aterido et al., 2010; Kee, 2005; World Bank and BEI, 2003; Dollar et al., 2003). There is only a limited study that have focused on this issue in respect to firms operating in EPZ, particularly in garment industry (Aggarwal, 2005). While some case studies (Watson 2001; Subramanian & Roy 2001; Madani 1999; Hinkle et al. 2003; Ferrerosa 2003; OTA 2003) conducted in EPZ in respect to the success and failure of this zone, there are only a limited empirical study (Aggarwal, 2005) focused on EPZ in respect to investment climate. Given the limited study, this study therefore, aims to empirically examine the factors that influence the investment climate and its association with performance in respect to the garment firms operating in eight EPZs of Bangladesh.

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