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The dynamics of Foreign Direct Investment (FDI) inflows in developing economies: Evidence from Bangladesh

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  • Islam, Mohammad Mohidul

Abstract

Considering the importance of economic development in attracting Foreign Direct Investment (FDI) inflows to the developing economies, this study aims to investigate the relationship between FDI inflows and economic development in Bangladesh using annual time series data for the period of 1991 to 2020. The empirical analysis is performed employing the Autoregressive Distributed Lag (ARDL) bound test method in order to find out the long-run as well as the short-run relationship between FDI inflows and economic development. The empirical evidence from the study indicates that the economic development indicator does not have any statistically significant positive relationship with FDI inflows in the long-run. Other variables, namely the interest rate and export receipts, have a significant statistical relationship with FDI inflows, and the right direction of these two variables in terms of the expected sign of the coefficients shows that to some extent there has been an insightful economic relationship. However, in the short-run, such a relationship between FDI inflows and economic development is statistically justified, where the negative coefficient of the error correction term indicates the dynamic adjustment to the long-run equilibrium has been found to be made in a consistent manner, which is supported by the statistical theory. Finally, this study also suggests that the government should take proper measures to attract higher FDI inflows in order to ensure the faster socio-economic development of the country as a whole.

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  • Islam, Mohammad Mohidul, 2022. "The dynamics of Foreign Direct Investment (FDI) inflows in developing economies: Evidence from Bangladesh," OSF Preprints tehuf, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:tehuf
    DOI: 10.31219/osf.io/tehuf
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    1. Nunnenkamp, Peter & Spatz, Julius, 2003. "Foreign direct investment and economic growth in developing countries: how relevant are host-country and industry characteristics?," Kiel Working Papers 1176, Kiel Institute for the World Economy (IfW Kiel).
    2. Mohammad Razib Hossain, 2021. "Inward foreign direct investment in Bangladesh: Do we need to rethink about some of the macro-level quantitative determinants?," SN Business & Economics, Springer, vol. 1(3), pages 1-23, March.
    3. Eldin Mehic & Sabina Silajdzic & Vesna Babic-Hodovic, 2013. "The Impact of FDI on Economic Growth: Some Evidence from Southeast Europe," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S1), pages 5-20, January.
    4. Mohammed Ershad Hussain & Mahfuzul Haque, 2016. "Foreign Direct Investment, Trade, and Economic Growth: An Empirical Analysis of Bangladesh," Economies, MDPI, vol. 4(2), pages 1-14, April.
    5. Li, Xiaoying & Liu, Xiaming, 2005. "Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship," World Development, Elsevier, vol. 33(3), pages 393-407, March.
    6. Ahamed, Mazbahul Golam & Tanin, Fahian, 2010. "Determinants of, and the relationship between FDI and economic growth in Bangladesh," Bonn Econ Discussion Papers 01/2010, University of Bonn, Bonn Graduate School of Economics (BGSE).
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