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Impact of Foreign Direct Investment on Economic Growth: Empirical Evidence from Bangladesh

Afzalur Rahman
Corresponding author’s
School of Business and Economics, Thompson Rivers University, Kamloops, BC, V2C 0C8, Canada

Abstract/ Executive Summary:

The core objective of this study is to evaluate the impact of Foreign Direct Investment (FDI) on the economic development of Bangladesh. To attain the objective, this paper has conducted statistical analyses of the relationships between FDI and its impact on selected macroeconomic indicators such as Gross Domestic Product, Inflation Rate, and Balance of Trade. The study has examined time series data over a period of fifteen years, from 1999 to 2013. Multiple Regression Analyses were utilized to measure the relationship between independent (FDI) and dependent variables (macroeconomic indicators). The results obtained in this research signify a negative correlation between FDI and economic growth and may be a concern for the government of Bangladesh. The government might focus on required reforms and policy implications to make foreign investment more beneficial.

Keywords: FDI, Bangladesh economy, Economic growth, Developing countries

Location: In Bangladesh

Start Date: 00-00-1999

End Date: 00-00-2013

Program Area: Socio-economic and Policy

Non-commodity: Income generation

Objectives:

To determine whether FDI has a significant impact on economic growth by examining empirical evidence from Bangladesh.

Methodology:

This research examines time series data over a period of fifteen years from 1999 to 2013 (see data set in the Appendix). To test the three hypotheses, multiple regression analysis was conducted using FDI inflow as the independent variable, and GDP, CPI inflation, and BOT as the three dependent variables. The historical data (from 1999 to 2013) of FDI inflow, GDP growth, CPI inflation, and BOT, were collected from publications issued by the Bangladesh Bank (BB), the country’s central bank responsible for reporting FDI and macroeconomic data. BB uses a survey reporting system and book valuation system to collect and present its primary data (Methodological, 2010). Since BB is the source of both FDI inflow data and macroeconomic data, any inconsistencies in generating data will be minimized. Statistical Interpretation: The relationships between FDI and GDP growth rate, FDI and Inflation rate, and FDI and Balance of Trade were analyzed based on the time-series data from 1999 to 2013. FDI in Bangladesh is encouraged in areas such as energy and power infrastructure, as well as industries such as telecommunications, computers, aircraft and motor parts, textiles, agriculture, and pharmaceuticals (Foreign Investment, 2009). While these are preferred sectors, foreign investors are welcome to invest any sector of their choice except the “reserved industries” such as arms and ammunition, forest plantation, nuclear energy, and printing currency notes. In all sectors except for the reserved industries, Bangladesh provides non-discriminatory treatment between foreign and local investors. FDI and GDP Growth: A Pearson correlation was used to describe the strength and direction of the linear relationship between the independent (FDI) and dependent (GDP growth) variable. The Pearson correlation was .38, indicating a moderate positive correlation between FDI and GDP growth, but the significance level was .08 , suggesting that the relationship between FDI and GDP growth is not statistically significant. FDI and Inflation Rate: The correlation coefficient is .573, suggesting a strong positive relationship between FDI and Inflation rate (p=.013). The R square is .328, indicating that 32.8% of the variance in the Inflation rate is explained by the variance in the amount of FDI inflow. FDI and Balance of Trade (BOT): There is a strong negative relationship between FDI and BOT which is supported by large and significant correlation coefficient of .697 The R square is .486, thus, 48.6% of the variance in the BOT is explained by the variance in the amount of FDI inflow.

Source of Information: International Journal of Economics and Finance; Vol. 7, No. 2; 2015; ISSN 1916-971X E-ISSN 1916-9728

Article Link (Online Journal): https://www.researchgate.net/publication/269399741

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The statistical findings exhibited an insignificant positive correlation between FDI and GDP growth, a strong positive correlation between FDI and inflation rate, and a strong negative correlation between FDI and BOT. Therefore, the results obtained in this research suggest that growth in FDI has not been associated with positive economic growth in Bangladesh. FDI was linked with increases in the inflation rate and a negative trade balance. As discussed before, higher inflation rate reduces the purchasing power of people and has been blamed for economic stagnation. Additionally, a negative trade balance occurs when a country’s imports are higher than exports and this creates a resource gap for developing nations. In contrast, FDI appears to have a small positive, but not statistically significant, impact on GDP growth.

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