Fdi and Its Impact on Gdp and Income Inequality in Bangladesh

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FOREIGN DIRECT INVESTMENT AND ITS IMAPCT ON ECONOMIC GROWTH AND INCOME INEQUALITY: A CASE FOR BANGLADESH

MD AHAD UDDIN
ID – 072249020
IN FULFILLMENT OF ECO 495 [SUPERVISED RESEARCH]

RESEARCH PAPER SUBMITTED TO
DR. AFM ATAUR RAHMAN
ASSOCIATE PROFESSOR, DEPARTMENT OF ECONOMICS
NORTH SOUTH UNIVERSITY

19TH SEPTEMBER 2011

ACKNOWLEDGMENT
I would like to take this opportunity to express my gratitude to All Mighty Allah and to my parents whose dedication and sacrifice have allowed me to undertake this research project. They took care of everything else while I concentrated solely on this research. I am highly indebted to my research supervisor, Dr. AFM Ataur Rahman who managed to allocate time despite his busy schedule as core a member of the faculty in the department of economics at NSU. His suggestions and expert advice regarding selection of the research topic and its methodology have been invaluable. I am also grateful to everyone who has helped with this research including my friends at North South University.

Foreign Direct Investment and its Impact on Economic Growth and Income Inequality : A Case for Bangladesh Md Ahad Uddin

ABSTRACT

Foreign Direct Investment is viewed as a major stimulus for economic growth for developing countries like Bangladesh which lacks sufficient domestic financing. This paper is intended to empirically analyze this theoretical perspective and analyze the impact of FDI on Bangladesh’s economic growth and income inequality. Using time series data of FDI, GDP and other relevant variables, it was found that FDI inflow into Bangladesh did not show any direct significant impact on economic growth; however, it had a negative impact on income inequality, though this impact was found to be small.

Key words: FDI , economic growth, income inequality, Bangladesh.

Table of Contents

Acknowledgements…………………………………………………………………………2 Abstract………………………………………………………………………………………3 Introduction….……………………………………………………………………………….5 Rationale and Objective of the study …………………………………………………….7 Structure of the study……………………………………...……………………………….7 History of FDI and its current situation …………………………………………………..7 Literature review …………………………………………………..………………………13 Theoretical framework…………………………………………………………………….20 Methodology and model framework……………………………………………………..21 Empirical model estimation……………………………………………………………….25 Results and Discussion …………………………………………………………………..28 Limitations ………………………………………………………………………………….30 Conclusion …………………………………………………………………………………31 References………………………………………………………………………………….32 Appendix……………………………………................................................................39 A. Time series data for Bangladesh……………………………………………….39 B. Sector wise FDI inflow……………………………………………………………40 C. Regression Output……………………………………………………………..…41 i) Impact of FDI on economic growth………………………………..….41 ii) Impact of FDI on income inequality……………………………..……42

INTRODUCTION

Globalization offers an unprecedented opportunity for developing countries to achieve faster economic growth through trade and foreign investment. During the 1970s, international trade grew more rapidly than foreign investment and thus it was the most important economic activity. However this situation changed dramatically during the 1980s when the supply of Foreign Direct Investment increased sharply. Foreign Direct Investment or FDI in accordance with the United Nations (UN) conference on Trade and Development (UNCTAD) and its World Investment Report 2006 is” an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)”. In this period, the world FDI has increased its importance by transferring technologies and establishing efficient network for...
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