Impacts of Inflation and Exchange Rate on Foreign Direct Investment in Bangladesh

Muhammad Mahmud Mostafa
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Muhammad Mahmud Mostafa: Assistant Professor (Economics), Officer on Special Duty, Directorate of Secondary and Higher Education, Bangladesh, Dhaka, and Ph.D. Fellow, Institute of Bangladesh Studies, University of Rajshahi.

International Journal of Science and Business, 2020, vol. 4, issue 11, 53-69

Abstract: The objective of this study is to investigate the impacts inflation and exchange rate on foreign direct investment (FDI) in Bangladesh. To meet the purpose of the study, time series data on dependent and independent variables are collected from various secondary sources covering the period 1980 to 2017. For estimation purpose the study employs different econometric techniques such as Augmented Dickey-Fuller (ADF) test, Johansen Co-integration Test, and Vector Error Correction Model (VECM). Apart from these, various diagnostic tests have been applied to evaluate the goodness-of-fit of the model. Results of the study reveal that there exists a long-run relationship between dependent and independent variables. Inflation rate is found to have a significant negative impact on FDI in the long-run but it is insignificant in the short-run. The results also show that exchange rate has a significant positive relationship with FDI both in the long-run and short-run. That is, depreciation of Bangladeshi taka against US dollar induces FDI flows in Bangladesh. Therefore, in order to increase the flow of FDI in Bangladesh, it is essential to take necessary steps to curb high inflation and to prevent the devaluation of oreign currencies against Bangladeshi taka.

Keywords: FDI; Inflation Rate; Exchange Rate; Co-integration; ADF; VECM (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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