The impact of foreign direct investment in the economic growth of Bangladesh

The effect of FDI on economic growth of Bangladesh is examined in combination of selected policy variables (trade openness, institutional quality and inflation) and non-policy variables (foreign exchange reserve and gross fixed capital formation) using time series data covering the period of 1980-2011. All the variables are made stationary after first differencing and then ordinary least squares (OLS) method is applied to explore the relationship. OLS results revealed a significant positive relation of FDI and foreign exchange reserve with growth rate. These significant variables are then analyzed further using Error Correction Model (ECM), which can explore a long-run relationship even in presence of non-stationarity and autocorrelation in data. The empirical results of ECM revealed that FDI have a significant and unidirectional long-run equilibrium relationship on growth rate. Both theoretical and empirical findings suggest that Bangladesh should formulate FDI-led growth policies that will secure human capital development as well so that growth is sustained in the long-run.  Keywords: GDP, FDI, GFCF, Foreign exchange reserve, ECM and Bangladesh.