An empirical analysis of foreign direct investment, ready-made garment exports, and employment in Bangladesh

Abstract

This study investigates the relationship between ready-made garment (RMG) exports and foreign direct investment (FDI) inflows, including the relationship between employment and RMG exports in Bangladesh. Using annual time series data from 1991 to 2020, an empirical analysis was performed employing the Johansen cointegration approach and a vector error correction model to determine the long- and short-run relationships between RMG exports and FDI inflows. The results indicate that FDI inflows and RMG exports have a negative relationship in the long run. In the short run, the dynamic adjustment of the equilibrium relationship is justified only for RMG exports. Furthermore, the econometric relationship between RMG employment and exports is examined using an autoregressive distributed lag-bounds test approach. The estimated model reveals a significant statistical relationship between RMG employment and exports in the long run. In the short term, the convergence process is found to be statistically consistent. Additionally, the findings suggest that the government should initiate proper steps in infrastructure development to attract higher FDI inflows and accelerate RMG exports for faster economic growth. Moreover, comprehensive measures are required to produce a skilled workforce or create alternative employment sources to address the huge unemployment problem if full automation occurs in manufacturing industries.