An Empirical Analysis Of Determinants Of Foreign Direct Investment And Its Impact On Export And Economic Growth In Bangladesh

Bangladesh,being a highly populated country,has shown potential with fast economic growth,and one of many evidence is the recent economic scaling up as developing economy.Before 1990,the primary source of economic growth werefinancial assistance and loans from developed nations while agriculture was the only sector that could contribute to the economy of its own.In the earlier period of 1990,the Government of this country initiated to become liberal towards other nations,especially who have the interest to invest in this potential market.Manufacturing industry played a vital role during this transition period of the economy as this sector could catch the attention of investors because of low labour and production cost.With this,door for Foreign Direct Investment(FDI)unfastened and started to create employment opportunity for millions.Eventually,the economy started to grow with such investment,financially(monetarily),and technologically.Such economic and technological intervention accelerated the GDP growth along with community-centric development.The Government of the People’s Republic of Bangladesh has set a"Vision 2040" where FDI is the key role player for this economic vision.Even though Bangladesh holds a liberal foreign policy,so far the inward FDI is negligible.Such an issue should be scrutinized to enhance and enforce the economic growth of the country.Thus,this study aspires to scrutinize and find the determinants of FDI in Bangladesh.We have considered the eight widely used variables,i.e.GDP,inflation,exchange rate,Infrastructure,market size,the rule of law,political stability,trade openness as a proxy of key determinants of this factual relationship.The study covered an overall period from1995 to 2018.We used an Autoregressive-Distributed Lag(ARDL)model aim to estimate the long and short-run impact of these determinants on FDI in Bangladesh.The analysis further followed two types of unit root test-Augmented Dickey-Fuller(ADF)and Philips-Perron(PP)test with the cointegration test,lag length criteria selection,ARLD long-run,shout run bond test,CUSUM and CUSUMQ stability test.The finding of our study posits that(1)GDP holds a significant positive relationship with market size in both of its long-run and short-run effect while the finding is insignificant for the long-run effect;(2)the rule of law has a positive but insignificant impact in both of its short and long-run effect;(3)we found an insignificant effect of trade openness both in long and short-run(4)also,inflation,exchange rate,political stability were found to have a negative and insignificant effect both in short and long-run impact on FDI inflows.Bangladesh with a vision to achieve economic development and to be classed as a middle-income country;it requires to be developed both socially and economically.As long as only investment from the local market and inward remittance are not sufficient to bring this economic revolution,as an instance,Foreign Direct Investment(FDI)is the maximum level of resolution for a developing country like as Bangladesh.We further analyzed the effect of Foreign Direct Investment on the economic growth of this country.For this empirical analysis,we used the Vector Error Correction Model(VECM).Considering GDP growth,export and trade openness as control variables throughout 1974-2019,we employed augmented dickey-fuller(ADF)unit root test,correlation test,Johansen co-integration test,lag length selection test,VECM long rum estimation,normality test,the inverse root of AR characteristic polynomial test.The empirical analysis reveals that FDI has a positive association with GDP growth of a country in the long-run while trade openness holds a negative association with FDI and GDP growth.The finding of our study thus suggests that the development of a developing economy(Bangladesh)depends more on FDI inflows.So,in order to set a long term vision and achieve higher economic growth,the FDI policy should be strengthened with greater importance.Also,the authority should emphasis more on the development of the mentioned determinants in this study to attract more investors for this market.