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Inward foreign direct investment in Bangladesh: Do we need to rethink about some of the macro-level quantitative determinants?

Mohammad Razib Hossain ()
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Mohammad Razib Hossain: University of Leeds

SN Business & Economics, 2021, vol. 1, issue 3, 1-23

Abstract: Abstract FDI has become a desired form of incoming investment for capital-poor nations like Bangladesh. Therefore, a critical analysis of macroeconomic constituent’s influences that determine the inflow of this “Investment-Blood” is undoubtedly rational. The study is conducted to shed empirical light on the relationship between FDI and other macroeconomic variables in Bangladesh, which is believed to assist modifications at the policy level. Resorting on annual time-series data and harnessing ARDL bounds testing and Error Correction Model, this study detects a long-run relationship between inward FDI and a set of regressors. The study finds no impact of interest rate and foreign reserve on FDI. Export is inversely related to FDI. This study reveals a substitutionary effect of export on FDI, which suggests applying the Heckscher-Ohlin model to reduce redundant exports by producing goods only in which the nation has a comparative advantage to create more room for FDI. In other words, to attract more FDI, Bangladesh has to make a trade-off in export. This paper recommends adopting FDI-led development as an intermediary solution until export can surpass the total import. The effects of import, current account balance (CAB), and per capita GDP are all positive. The findings further disclose that the CAB gap due to reduced export can be mitigated with more FDI. Electricity production has an inverse effect on FDI for high energy production costs. Thus, to attract more FDI in Bangladesh, this paper's robust findings suggest increasing the interest rate, decreasing unnecessary export, and relying more on renewable energy sources.

Keywords: Inward FDI; Import; Current account balance; Export reduction; ARDL cointegration; Bangladesh’s FDI-led development (search for similar items in EconPapers)
JEL-codes: C22 F13 F32 F43 O40 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s43546-021-00050-z

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