CC BY
16THE EFFECT OF FOREIGN DIRECT INVESTMENT TO ACCELERATE THE ECONOMIC GROWTH OF
BANGLADESH
PhD Student Ataul Karim Rukon Scientific Supervisor: Dr. Ass. Professor Boikova Tatyana
Baltic International Academy Latvia, Riga
Abstract. Foreign Direct Investment (FDI) has great impact on the development of a developing country Bangladesh. The relationship between Foreign Direct Investment (FDI) and economic growth has long been a subject of great interest in the field of international development. The foreign investor seeks for new sources of investment where the developing country seeks for new sources of fund to develop the country.
The FDI has the significant role to develop the garments and weaving, telecommunication, banking and pharmaceuticals industry of Bangladesh. The role of FDI in economic growth (GDP) is analyzed to find out relationship between FDI and GDP in Bangladesh.
Keywords: FDI (foreign direct investment), economic growth, Bangladesh, cointegration, GDP.
Introduction. Foreign Direct Investment (FDI) plays an essential role for accelerating the economic growth [1], developing countries have begun to aggressively compete for FDI opportunities [2]. Globalization is changing the strategies of multinational companies (MNCs) and the way developing countries compete for FDI. Policymakers and multilateral organizations have increasingly emphasized the importance of a sound investment climate and flow of FDI for promoting economic growth in developing countries [4]. FDI encourages the transfer of new business, technology and knowledge [3] and it allows the host economy or country to promote its products more widely in international arena. FDI brings transfer of new business, develop productive capacity, and enhance skills of local labour through technology and knowledge. Host country can promote its products in international arena. This is basically used to decrease the gap between savings and investment. Bangladesh has been maintaining a steady growth of 6% over the past few years. FDI scenario in Bangladesh is not that much promising during the last few years. Political instability, lack of infrastructure development, poor FDI policies are responsible for this lower FDI growth. In the World Bank report on Doing Business 2014 (International Finance Corporation, 2013), Bangladesh ranked 130 among 189 economies all over the world. Among the factors that were considered to rank among economies Bangladesh did well in the 'starting a business' category. FDI is used to be one of the major components for the economic growth of Bangladesh.
Impact of FDI on economic development
Fig. 1.
Foreign Direct Investment in Bangladesh increased by 1700 USD Million in 2015 fiscal year. FDI in Bangladesh averaged 916.07 USD Million from 2002 until 2015, reaching an all time high of 1726 USD Million in 2013 and a record low of 276 USD Million in 2004. Foreign Direct Investment in Bangladesh is reported by the Bangladesh Bank.
The Relationship between FDI and Economic Growth
The ultimate influence of FDI on economic growth depends on the degree of capacity of the host country to use FDI as efficiently as possible. Similarly, trade liberalisation may facilitate economic growth through efficiency in production by utilizing the abundant factors of production more effectively and absorbing better technologies from advanced countries on the one hand, it may harm the growth process on the other through various forms of macroeconomic instability such as terms of trade deterioration and balance of payments crisis. Thus, it is a challenge for developing countries to find out the appropriate direction of the role of FDI and trade liberalisation in economic growth. Foreign Direct Investment (FDI) is often seen as an important catalyst for economic growth in developing countries. Development economists have long argued that countries pursuing outward-oriented development strategies are more likely to achieve higher rates of economic growth than those that are internally focused. A number of studies have examined the relationship between inward foreign direct investment (FDI) and economic growth in the developing host countries. A generally accepted conclusion is that FDI has played a significant role in promoting economic growth in host countries because FDI represents "the transmission to the host country of a package of capital, managerial skills, and technical skills" (Dattaray 2003). A significant finding of previous studies is that the economic and technological conditions of a recipient economy manipulate the extent to which FDI contributes to growth.
Impact of FDI on Economic growth in Bangladesh
Objective of the study is to find out the relationship between FDI and economic growth in Bangladesh. The interest is to show the impact of FDI on economic growth, and GDP growth has taken as a general measure of economic growth of an economy.
A glance at these results would suggest that we have the multicollinearity problems, all variables are statistically insignificant, a classical symptom of multicollinearity. To shed more light on this, we show in figure 2 the inter-correlations among the repressors.
Table 1. Correlation Matrix (Bangladesh)
Variables GDPG FDI XM GE HC GFCF DI SR DCR
GDPG 1 0.3 0.39 -0.02 0.3 0.33 0.35 0.29 0.38
FDI 0.3 1 0.74 0.11 0.57 0.61 0.61 0.61 0.66
XM 0.39 0.74 1 0.31 0.77 0.8 0.85 0.77 0.84
GE -0.02 0.11 0.31 1 0.37 0.57 0.53 0.39 0.35
HC 0.3 0.57 0.77 0.37 1 0.88 0.9 0.92 0.87
GFCF 0.33 0.61 0.82 0.57 0.88 1 0.97 0.94 0.92
DI 0.35 0.61 0.85 0.53 0.9 0.97 1 0.93 0.9
SR 0.29 0.61 0.77 0.39 0.92 0.94 0.93 1 0.93
DCR 0.38 0.66 0.84 0.35 0.87 0.92 0.9 0.939 1
Note:- The matrix of pairewise correlation coefficients is presented in above table. We observe multicollinearity among the variables which will affect our regression results. The correlation matrix indicates that we can use only GDPG, FDI, GFCF as our key variables because others share multi-colinerity. As we want to see the rate of change of these variables we used log linear function.
The empirical model is estimated by OLS method. However, before estimation it is imperative to check the time series properties of the underlying data. We have used time series data for the study. All macroeconomic time series data show some trend. When working with the time series data, the first issue is whether the series are stationary or not. A stochastic process is said to be stationary if its mean and variance are constant over time and the covariance between the two time periods depends only on the distance between the two time periods and not the actual time at which the covariance is
computed. If the variables are not integrated to the same order, then the regression may be spurious one and the resulting outcome will be of no practical use. To avoid this problem, before estimating the model, unit root test is carried out.
Unit root test is a pre-requisite of testing long run relationship between two or more time series data. Augmented Dickey-Fuller (DF) and Phillips-Perron (PP) tests are widely used in empirical research. To test the stationarity of the variables we conducted the Augmented Dickey-Fuller test for all variables. The criterion is if the absolute value of the test statistics of the Augmented Dickey-Fuller test is higher than the critical absolute value, the null hypothesis is rejected. It means that there is no unit root in the series and the variables are stationary. Conversely if the absolute value of the test statistic is less than the critical absolute value, the null hypothesis is not rejected. Using Eviews software package the results of the Augmented Dickey-Fuller test are presented in figure 3.
From the figure 3 it is showed that all variables contain unit root. To make the variables stationary the first difference of all variables were taken and found that the variables were integrated of order one i.e. I (1). The results show that LnGDPG, LnFDI, Loggfcf are level non-stationary at 1%, 5%, and 10% levels, but first difference stationary. However, LnFDI is also trend stationary at its level.
Table 2. ADF Unit Root Test Results (Bangladesh)
Variables Level First difference
Without Trend With Trend Without Trend With Trend
LnGDPG 1.512 -1.173 -8.374* -11.62*
LnFDI -0.094 -4.033* -7.011* -7.390*
LnGFGC -0.758 -2.786 -6.760* -7.507*
Dm -0.969 -2.00 -5.656* -5.561*
Note:
1. Critical values for 1%, 5% and 10% significance levels are -2.6369, -1.9513 and -1.6107 respectively.
2. Critical values for 1%, 5% and 10% significance levels are -3.7700, -3.1900 and -2.8900 respectively.*, **, and *** indicate significance at 1%, 5% and 10% levels respectively.
LnGDPG=f(LnFDIt, LnGFCFt, Dm) (1)
LNGDPt = 6.320637569 + 0.0035278944*LNFDI + 0.4517688375*LNGFCF + 0.1512406994*DM
t-statistics (23.694) (0.897262) (13.26619) (2.980506)
Table 3. Regression Results (Bangladesh)
Dependent Variable: LNGDP
Variable Coefficient Std. Error t-Statistic Prob.
C 6.320 0.266 23.69 0.00
LNFDI 0.003 0.003 0.897 0.37
LNGFCF 0.451 0.034 13.26 0.00
DM 0.151 0.050 2.980 0.00
R-squared-0.962, Adjusted R-squared-0.958, S.E. of regression-0.084, F-statistic-257.4, Prob(F-statistic)- 0.00
Durbin-Watson stat-0.670, Akaike info criterion--2.00, Schwarz criterion- (-1.82)
From the above figure 4 it is seen that, except LNFDI, all other variables have statistically significant impact, with expected signs, on GDP growth. The highest impact comes from GFCF, which is quite obvious. The sign of LNFDI coefficient is positive but it is statistically insignificant. The result indicates that FDI is positively correlated to the economic growth of Bangladesh but it has not yet been established as a significant determining factor for the economic growth of Bangladesh.
The coefficient of capital formation (GFCF) is significant at the 1% level and the sign is positive indicating that 1% increase in gross fixed capital will increase the growth rate of GDP by 13.266%. This
means that capital formation has more positive influence on economic growth in Bangladesh.
The coefficient of dummy variable is positive and statistically significant. This implies that democratic governments have been contributing to the economic growth of Bangladesh. The reason may be democratic governments make effective policies and biuld good institutions which ultimately lead to economic growth.
r2 , and adjusted r2 indicate that the behavior of foreign direct investment in Bangladesh is almost completely explained by the independent variables included in the model. F statistics shows that the independent variables are jointly highly significant. The coefficient of determination (R2 = 0.96) is quite high and reveals almost a perfect fit of the model. This indicates the proportion of total variation in GDP growth explained by the explanatory variables.
REFERENCES
1. Chow, P. 1987. Causality between Export and Industrial Development. Journal of development Economics 26: 55-63.
2. Oman, C. (2000), Policy Competition for Foreign Direct Investment: A Study of Competition among Governments to Attract FDI, OECD Development Centre, Paris.
3. De Mello, L. (1997), "Foreign Direct Investment in Developing Countries and Growth: A Selective Survey," Journal of Development Studies, 34 (1): 1-34.
4. Athukorala P. A W., 2003, 'The Impact of Foreign Direct Investment for Economic Growth: A Case Study in Sri Lanka', 9th International Conference on Sri Lanka Studies, 28th- 30th November 2003, Matara, Sri Lanka, Full Paper Number 092.
5. Athukorala, P. and Menon, J (1995) Developing Countries with Foreign Investment: Malaysia. Australian Economic Review 1: pp. 9-22.
6. Carkovic, M and Levine, R (2002) Does Foreign Direct Investment Accelerate Economic Growth?. University of Minnesota Working Paper, May, 2002.
7. Shimul, S.N., S. M. Abdullah, and S. Siddiqua. 2009. An examination of FDI and growth nexus in Bangladesh: Engle Granger and bound testing cointegration approach. BRAC University Journal, 1: 69-76.
8. Chakraborty, P. & A. K. Mottalab (1998) Foreign Direct Investment: The Bangladesh Scenario. Development Review, Planning & Development Academy, Dhaka. Vol.9/10, 1997 & 1998.
9. Dutt, K. A (1997) The Pattern of Direct Foreign Investment and Economic Growth. World Development, Vol. 25, No. 11, pp. 1925-1936.
10. Iqbal, Alam. B (2006) FDI: A Tool for Economic Development. Foreign Trade Review, Vol. XLI, No. 2, pp. 62-79.
11. Borensztein, E., J. de Gregorio, and J.-W. Lee (1998), "How Does Foreign Investment Affect Economic Growth?," Journal of International Economics, 45: 115-135.
