Does trade liberalization policy accelerate foreign direct investment in Bangladesh?: An empirical investigation

Abstract

Foreign Direct Investment is one of the major sources of external funding and has a significant impact on economic progress in developing countries. This paper investigates the influence of the Trade Liberalization policy on Foreign Direct Investment (FDI) inflow in Bangladesh using annual time series data 1997-2020. ARDL model is used to examine the long-run relationship, and the ADF unit root test is applied to observe the level of integration. The study also employed the Error correction model to estimate long run as well as the short-run relationship between foreign direct Investment and Trade openness, along with remaining explanatory variables used in the model. The results reveal that Trade Openness has positive effect on foreign direct Investment in the short-run, and there is no impact exists in the long-run. The study also used CUSUM and CUSUM square tests to determine stability, and plots of those tests demonstrated that the parameters of the error correction model are stable over the period.