Abstract
This paper investigates the impact of foreign direct investment (FDI), trade openness, domestic demand, and exchange rate on the export performance of Bangladesh over the period of 1980–2009 using the vector error correction (VEC) model under the time series framework. The stationarity of the variables is checked both at the intercept and intercept plus trend regression forms under the ADF and PP stationarity tests. The Johansen-Juselius procedure is applied to test the cointegration relationship between variables followed by the VEC regression model. The empirical results trace a long-run equilibrium relationship in the variables. FDI is found to be an important factor in explaining the changes in exports both in the short run and long-run. However, the study does not trace any significant causal relationship for the cases of trade openness, domestic demand, and exchange rate. The study concludes that Bangladesh should formulate FDI-led polices to enhance its exports.
Highlights
The Jarque-Bera test statistics fails to reject the null hypothesis of normal distribution of each variable, which confirms that the series are normally distributed
To run the vector error correction (VEC) model, the appropriate lag-length of the variables has been selected through the final prediction error (FPE) criterion
This study investigated the influence of foreign direct investment (FDI), trade openness, domestic demand, and exchange rate on the export performance of Bangladesh over the period of 1980–2009 by applying a vector error correction model
Summary
The global financial meltdown curtailed the share of world’s foreign direct investment (FDI) into the developed economies to 50.79% in 2009 from its peak at 86.13% in 1980, the share of developing economies increased substantially during the same time, from 13.83% in 1980 to 48.93% in 2009 (Figure 1). The government gradually lifted restrictions on repatriation of capital and profits and unleashed almost all industrial sectors for foreigners investing independently or jointly with local partners [1] These incentives and facilities together with a low labor cost structure and reasonable GDP growth rate (5% on average since 1990) made Bangladesh a resilient and attractive investment destination for foreign investment since the late 1980s. The remainder of the paper proceeds as follows: Section 2 provides a brief survey of the empirical literature on the link between FDI, trade openness, exchange rate, domestic consumption, and exports.
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