FDI as an Opportunity for Economic growth of Bangladesh: A VECM Analysis.

Asaduzzaman, Md (2019): FDI as an Opportunity for Economic growth of Bangladesh: A VECM Analysis. Published in: ERN: Other Development Economics: Macroeconomic Issues in Developing Economies (Topic) No. https://ssrn.com/abstract=3498742 (26 December 2019): pp. 1-28.

Abstract

This study investigates the empirical relationship between economic growth (GDP) and Foreign Direct Investment (FDI) as well as the Real Effective Exchange Rate (REER) and Trade Openness (TOP) of Bangladesh over the period from 1973 to 2017 by using Johansen cointegration test and VECM analysis. The empirical findings exhibit that there are a distinctive short-run and long-run relationship that exists between economic growth and foreign direct investment in Bangladesh. While the Error Correction Term (ECT) result exhibits that real effective exchange rate and trade openness are causing economic growth in the long-run. This study highly suggests that fully utilizing foreign direct investment and trade openness is one of the best chances of Bangladesh to develop its economy. Therefore, the policymaker should have more foresight to influence foreign direct investment and trade openness on the long term basis, especially to facilitate investment in the special economic zone (such as EPZ) and export more manufacturing goods and services and importing capital goods through maintaining the trade balance.

• Item Type: MPRA Paper
• Language: English
• Keywords: Gross Domestic Product (GDP) growth; Foreign Direct Investment (FDI), Real Effective Exchange Rate (REER); Trade Openness (TOP); Vector Error Correction Model (VECM) Model; Bangladesh Economy
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C49 - Other; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; F - International Economics > F1 - Trade; F - International Economics > F3 - International Finance

References

Acemoglu, D., & Zilibotti, F. (1997). Was Prometheus unbound by chance? Risk,diversification and growth. Journal of Political Economy, 105(4), 709–51.

Adams, S. (2009). Foreign direct investment, domestic investment, and economic growth in Sub-Saharan Africa. Journal of Policy Modeling, 31, 939-949.

Adhikary, B. K. (2011). FDI, Trade Openness, Capital Formation, and Economic Growth in Bangladesh: A Linkage Analysis. International Journal of Business and Management; Vol. 6, No. 1; January 2011. www.ccsenet.org/ijbm

Adhikary, B.K., & Mengistu, A.A. (2008). Factors influencing foreign direct investment(FDI) in “South” and“Southeast” economies. The Journal of World Investment and Trade, 9(5): 427-437.

Agosin, M.R., & Mayer, R. (2000). Foreign investment in developing countries: does it crowd in domestic investment? UNCTAD Discussion Paper 146, Geneva, Switzerland.

Ahmed, S. (1975). Foreign capital inflow and economic growth: A two gap model for the Bangladesh economy, The Bangladesh Development Studies, Vol. iii, No. 2. P.115-123.

Alfaro, Laura (2003). Foreign Direct Investment and Growth: Does the sector matter?Harvard Business School, Boston, MA

Alguacil, M.A. et al. (2002). Foreign Direct Investment, Exports and Domestic Performance in Mexico: a causality analysis, Economic Letters, 77, 371-376.

Ali, N. & Mingque, Y. (2018). Does Foreign Direct Investment Lead to Economic Growth? Evidences from Asian Developing Countries. International Journal of Economics and Finance; Vol. 10, No. 3; 2018; ISSN 1916-971X E-ISSN 1916-9728; doi:10.5539/ijef.v10n3p109.

Balasubramanyam, V.N., Salisu, M., & Sapsford, D. (1996). Foreign Direct Investment and Growth in EP and IS ountries. The Economic Journal, 106 (434), 92-105.

Balasubramanyam, V.N., Salisu, M., & Sapsford, D. (1996). Foreign Direct Investment and Growth in EP and IS Countries. The Economic Journal, 106 (434), 92-105.

Barro, R.J., & Sala-I-Martin, X. (1995). Capital mobility in neoclassical models of growth. American Economic Review, 85,103-115.Electronic copy available at: https://ssrn.com/abstract=3498742 Electronic copy available at: https://ssrn.com/abstract=349874223

Bhattacharya, D. (2005). Bangladesh's Experience with Foreign Direct Investment, in Foreign Direct Investment: High Risk, Low Reward for Development, Bonn: Church Development Service (EED), pp. 51-66,.

Bianca Maria LUDOȘEAN (STOICIU). (2012). A VAR analysis of the connection between FDI and economic growth in Romania. Theoretical and Applied Economics. Volume XIX, No. 10(575), pp. 115-130.

Blomstrom, M., Robert, E., Lipsey, R., & Mario, Z. (1994). What explains the growth of developing countries? In Baumol, J.William, R. R. Nelson, & W. N. Edward (Eds.), International Convergence of Productivity. London: Oxford University Press. 243-259.

Blomstrom, M., Robert, E., Lipsey, R., & Mario, Z. (1996). Is fixed investment the key to economic growth? Quarterly Journal of Economics, 111(1), 269-276.

Borensztein, E., J. De Gregorio and J.-W. Lee. (1998). How does FDI affect economic growth. Journal of International Economics, 45(1): 115-135.

Borensztein, E. J., Gregorio, & Lee, J. W. (1995). How does foreign direct investment affect economic growth? NBER Working Paper 5057.

Borensztein, E., De Gregorio, J., and Lee, J. W. (1998). How Does Foreign Direct Investment Affect Growth? Journal of International Economics, vol. 45, pp. 115-35

Breusch, T.S. (1978). Testing for autocorrelation in dynamic linear models. Australian Economic Papers, Vol. 17 No. 31, pp. 334-355.197.

Brown, R.L., Durbin, J., and Evans, J.M. (1975). Techniques for testing the constancy of regression relationship over time, Journal of the Royal Statistical Society, Vol. 37, pp. 14963

Chakraborty, C. and P. Basu. (2002). Foreign Direct Investment and Growth in India: A Cointegration Approach. Applied Economics 34: 1061-1073.

Choong, C., & Lam, S. (2010). The determinants of foreign direct investment in Malaysia: A revisit. Global Economic Review, 39(2), 175–195.

Chowdhury, A, Mavrotas, G (2003). Foreign Direct Investment and Growth: What Causes What?. Department of Economics, Marquette University,USA, World Institute Electronic copy available at: https://ssrn.com/abstract=3498742 Electronic copy available at: https://ssrn.com/abstract=349874224

Development Economic Research/United Nations University (UNU/WIDER). (2006),"FDI and Growth: What Causes What", The World Economy, 29 (1), 42-58.

Crespo, N., & Fontoura, M. P. (2007). Determinant factors of FDI spillovers – what do we really know? World Development, 35, 410–425.

Dritsaki, M., Dritsaki, C.,& Adamopoulos, A. (2004). A Causal Relationship between Trade,Foreign Direct Investment and Economic Growth for Greece, American Journal of Applied Sciences l, 3, 230-235

Flexner. N. (2000). Foreign Direct Investment and Economic Growth in Bolivia,1990-1998, Economic Policy Division, Central Bank of Bolivia

Grossman, G., & Helpman, E. (1991). Innovation and Growth in the Global Economy.Cambridge: MIT Press.

Godfrey, L.G. (1978). Testing for higher order serial correlation in regression equations when the regressors include lagged dependent variables, Econometrica, Vol. 46 No. 6,pp. 13031310.

Hammed Oluwaseyi Musibau et al. (2017). The Impact of Foreign Capital Inflows,Infrastructure and Role of Institutions on Economic Growth: An Error Correction Model,Academic Journal of Economic Studies Vol. 3, No. 4, December 2017, pp. 35–49. ISSN 2393-4913, ISSN On-line 2457-5836

Hansen, H. and J. Rand. (2006). On the Causal Links between FDI and Growth in Developing Countries, The World Economy, 29 (1), pp. 21-41

Hossain, A. et al. (2012). Empirical Relationship between Foreign Direct Investment and Economic Output in South Asian Countries: A Study on Bangladesh, Pakistan and India. Journal of International Business Research.Vol. 5, No. 1; January 2012. (URL:http://dx.doi.org/10.5539/ibr.v5n1p9

Hendry, D.F., and Juselius, K. (2001). Explaining cointegration analysis: part II, The Energy Journal, Volume: 22 Issue: 1 Pages: 75-120

Hossain, A. et al. (2012). Empirical Relationship between Foreign Direct Investment and Economic Output in South Asian Countries: A Study on Bangladesh, Pakistan and India. International Business Research; Vol. 5, No. 1; January 2012; www.ccsenet.org/ibr Electronic copy available at: https://ssrn.com/abstract=3498742 Electronic copy available at: https://ssrn.com/abstract=349874225

Hussain, M. E et al. (2016). Foreign Direct Investment, Trade, and Economic Growth: An Empirical Analysis of Bangladesh. Economies, 4, 7; doi:10.3390/economies4020007; www.mdpi.com/journal/economies

Khawar, M. (2007). Foreign Direct Investment and Economic Growth: A Cross-Country Analysis, Global Economy Journal, Vol. 5, Issue 1, pp.1-10

Kohpaiboon, A. (2003). Foreign Trade Regimes and the FDI growth nexus: A case of Thailand, The Journal of Development Studies, Vol. 40, No. 2, PP. 55-69

Kumar, N., & Pradhan, J. P. (2002). Foreign direct investment, externalities and economic growth in developing countries: some empirical explorations and implications for WTO negotiations on investment. RIS Discussion Papers 27/2002, New Delhi.

Lensink, R., and O. Morrissey. (2001 ). Foreign Direct Investment: Flows,Volatility and Growth in Developing Countries, SOM research report 01E16, Groningen: SOM research School, University of Groningen.

Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country regressions. The American Economic Review, 82(4), 942-963

Love, j., and chandra, r. (2004). Ratesting export-led growth in india, pakistan and srilanka using multivariate framework, the manchester school, vol: 72, no. 4.

Mankiw, N.G., David, R., & David, N.W. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, CVII, 407-438.

Maria, B. L. (2012). A VAR analysis of the connection between FDI and economic growth in Romania; Journal of Theoretical and Applied Economics, Volume XIX (2012), No. 10(575), pp. 115-130

Marksun, J.R., & Venables, A.J. (1997). Foreign direct investment as a catalyst for industrial development. NBER Working Paper 624, Cambridge.

McLean, B., & Shrestha, S. (2002). International financial liberalization and economic growth. Research Discussion Paper 03, Reserve Bank of Australia. Electronic copy available at: https://ssrn.com/abstract=3498742 Electronic copy available at: https://ssrn.com/abstract=349874226

Mian, E.U. and Alam, Q. (2006). FDI and development:Bangladesh scenario, Monash Business Review, Vol. 2, Issue 1

Moosa, I. A. (2002). Foreign Direct Investment: Theory, Evidence and Practice. Palgrave: London.

Mohsen, Bahmani-Oskooee and R. W. Ng. (2002). Long run demand for money in HongKong: An application of the ARDL model. International Journal of Business and Economics, 1(2): 147-155.

Moosa, I. A., & Cardak, B.A. (2006). The determinants of foreign direct investment: An extreme bound analysis. Journal of Multinational Financial Management, 16, 199-211.

Najaf A. et al. (2018). Does Foreign Direct Investment Lead to Economic Growth? Evidences from Asian Developing Countries. International Journal of Economics and Finance; Vol. 10, No. 3; 2018

Nath, H. K. (2009). Trade, foreign direct invest, and growth: evidence from transition economies. Comparative Economic Studies, 51, 20-50.

Okamoto, Y., & Sjoholm, F. (2005). FDI and the dynamics of productivity in Indonesian manufacturing. Journal of Development Studies, 41, 160–182.

Omar Faruk, M. (2013). The Effect of FDI to Accelerate the Economic Growth of Bangladesh and Some Problems & Prospects of FDI. Asian Business Review, Volume 2, Number 2/2013 (Issue 4) ISSN 2304-2613 (Print); ISSN 2305-8730 (Online)

Paugel, A. T. (2007). International Economics. McGraw-Hill Irwin: New York, USA. Quarder, S. M. (2009). Foreign Direct Investment in Bangladesh: An Empirical Analysis on its Determinants and Impacts. Online at http://mpra.ub.unimuenchen.de/26134/ MPRA Paper No. 26134, posted 25. October 2010.

Ramirez, M.D. (2006). Is Foreign Direct Investment beneficial for Mexico? An empirical analysis 1960-2001, World Development 34(5): 802-817.

Rayhan, M. A. (2014). Contribution of Foreign Direct Investment to Economic Growth in Bangladesh. Masters Theses 1339. http://thekeep.eiu.edu/theses/1339. Electronic copy available at: https://ssrn.com/abstract=3498742 Electronic copy available at: https://ssrn.com/abstract=349874227

Rodrik, D. (1992). The limits of trade policy reforms in developing countries. The Journal of Economic Perspectives, 6(1), 87-105.

Romer, P. (1993). Idea gaps and object gaps in economic development. Journal of Monetary Economics, 32(3), 543–573.

Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 95(5), 1002-1037.

Romer, P. M. (1989).What determines the rate of growth and technological change. World Bank Working Paper, 279.

Romer, P. M. (1994). The origin of endogenous growth. Journal of Economic Perspectives, 8(1):3-22.

Shawa, M. J & Shen, Y. (2013). Causality Relationship between Foreign Direct Investment, GDP Growth and Export for Tanzania. International Journal of Economics and Finance; Vol. 5, No. 9; 2013; ISSN 1916-971X E-ISSN 1916-9728; doi:10.5539/ijef.v5n9p13.

Sultanuzzaman, M. R et al. (2018). Trade (Exports) as an Opportunity for Bangladesh: A VECM Analysis. 22nd Annual Western Hemispheric Trade Conference, April 11-13 2018, Laredo, TX, USA; pp.249-260. ( www.freetrade.tamiu.edu )

Temiz, D., & Gokmen, A. (2014). FDI inflow as an international business operation by MNCs and economic growth: An empirical study on Turkey. International Business Review, 23, 145–154. UNCTAD. (1992). Transnational corporations as engines of growth. World Investment Report, New York: United Nations.

Vadlamannati, K. C., Tamazian, A., & Irala, L. R. (2009). Determinants of foreign direct investment and volatility in South East Asian economies. Journal of the Asia Pacific Economy, 14, 246–261.

Visansack KHAMPHENGVONG; XIA Enjun & Khaysy SRITHILAT. (2017). The Relationship among FDI, Trade Openness and Economic Growth: Empirical Evidence from Lao PDR, Conference Paper · July 2017, DOI: 10.1109/IEIS.2017.8078623 Electronic copy available at: https://ssrn.com/abstract=3498742 Electronic copy available at: https://ssrn.com/abstract=349874228

World Bank. (1999). Foreign direct investment in Bangladesh: Issues of long-run sustainability. Dhaka, Bangladesh: Bangladesh Country Office.

Zhang, K. (2001). Does Foreign Direct Investment Promote Economic Growth? Evidence from East Asia and Latin America, Contemporary Economic Policy, Vol. 19, No. 2, pp. 175-185

Zhang, Zhaoyong. (2002). Productivity and Economic Growth: An Empirical Assessment of the Contribution of FDI to the Chinese Economy, Journal of Economic Development, vol. 27, pp.81-94