Nexus between foreign direct investment and economic growth in Bangladesh: an augmented autoregressive distributed lag bounds testing approach

Bibhuti Sarker,Farid Khan

doi:10.1186/s40854-019-0164-y

Abstract

The relationship between foreign direct investment (FDI) inflows and economic growth in host countries is a heavily debated issue. Although some studies have found evidence of the positive impact of FDI on economic growth, others have revealed the opposite result. Studies that examined the causality between FDI and gross domestic product (GDP) also have found evidence of unidirectional causality and, in some cases, a bidirectional causality. This study investigated the causal nexus between FDI and GDP in Bangladesh by employing standard time-series econometric tools, namely, augmented Dickey-Fuller, augmented Dickey-Fuller generalized least square, Kwiatkowski-Phillips-Schmidt-Shin, and Lee-Strazicich unit root tests to check stationarity, augmented autoregressive distributed lag (augmented ARDL) bounds testing approach to check cointegration, and Granger causality to explore the direction of causality. The augmented ARDL model found a long-run relationship between FDI and GDP. In addition, the error correction model and Granger causality results indicated the presence of a unidirectional causality running from GDP to FDI.

Highlights

Foreign direct investment (FDI) is one of the most significant factors to influence economic growth in a developing country like Bangladesh, where capital is scarce because of insufficient domestic savings—both private and public
Results of unit root the augmented Autoregressive distributed lag (ARDL) bounds test can be applied to variables that have a different order of integration, it must be ensured that no variable is I(2)
The results showed that the gross domestic product (GDP) series was nonstationary at level but stationary at first difference according to augmented Dickey-Fuller (ADF), Dickey-Fuller generalized least square (DF-generalized least squares (GLS)), and KPSS6 unit root tests

Summary

Introduction

Foreign direct investment (FDI) is one of the most significant factors to influence economic growth in a developing country like Bangladesh, where capital is scarce because of insufficient domestic savings—both private and public. This investment is crucial for the much-needed industrialization in a country (Mujeri and Chowdhury 2013). In the absence of adequate local investment, FDI has been attracted from industrially advanced countries to accelerate the path of industrialization, to foster and maintain sustained economic growth, and to reduce the level of unemployment (Hussain and Haque 2016). Economic and technological factors drive the growth of international production,

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Conclusion