Technical Report Foreign Direct Investment in the Ready-Made Garments Sector of Bangladesh: Macro and Distributional Implications

HOSSAIN, Sharif M.  ,  HOSOE, Nobuhiro

17-102017-10 , GRIPS Policy Research Center
Bangladesh, being a labor-abundant country, benefits from foreign direct investment (FDI) as it is considered as a supplement to domestic investment for this capital-scarce economy. We examine how the benefits of increased FDI in the ready-made garments (RMG) sector are transmitted and shared among households with different characteristics, and the appropriate government policies to mitigate adverse distributional problems, if any, created from the increased FDI. To address these issues, we develop a computable general equilibrium model for Bangladesh that describes competition between local firms and multinational enterprises (MNEs) in the RMG sector and the distributional impacts of FDI among households. Our simulation results demonstrate that an increase in FDI promotes both output and exports in the RMG sector. However, because of the competition between MNEs and domestic firms, the output of domestic firms would fall slightly. Scrutinizing the welfare effects among household groups, we find that the benefits of FDI-induced growth would affect all household groups unevenly. We also demonstrate that the benefits could be shared equitably among household groups with skill development programs targeted at the adversely affected household groups.
JEL Classification Codes: C68, F21, F23, O15It is gratefully acknowledged that this study was supported by JSPS KAKENHI Grant (16K03613).

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