The Relationship Between Fdi & Economic Growth in Bangladesh- Theoretical Concepts, Empirical Evidence and Analysis.

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Table of Content

SerialTopicPage No.
1Introduction1
2Literature Review3
3Theoretical Background10
4Overview of FDI in Bangladesh12
5Econometric Results and Interpretation19

6Conclusion and Policy Recommendations23
7References26

1. INTRODUCTION

FDI occurs when a firm invests directly in the facilities to produce and/or market a product in a foreign country. World Investment Report 2006 defines, “FDI 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).” Over the year FDI accelerated faster than world trade and world output. It is a potent weapon for developing countries to improve their GDP growth as well as the overall economy. Foreign direct investment (FDI) in developing countries especially in Bangladesh takes a vibrant part of GDP acceleration and rapid economic growth (Motaleb 2007). FDI can emerge as a significant vehicle to build up economic development in a capital poor country like Bangladesh since, it develops output growth, capital formation, productive capacity, technological progress, exports and employment opportunity which in turn contribute to the country’s GDP. The inflow of foreign investment can expand a country’s economic production and growth. Indeed, FDI inflow in Bangladesh affects important determinants like GDP per capita, average growth rate of GDP, gross capital formation, human capital, foreign reserve, terms of trade and others essential infrastructure. Although the magnitude of FDI played a minor role in the economy of Bangladesh until 1980 (a crucial year of policy change); FDI inflows to Bangladesh have increased dramatically in recent years and have had positive influence on development (BOI 2008). The major challenges for the host country are to ensure an eye-catching and conducive investment climate to foreign investors for FDI inflow. In recent years, Bangladesh has been devoting efforts for attracting FDI offering a lot of lucrative incentives and benefits. The Government of Bangladesh enacted the ‘Foreign Investment Promotion and Protection Act, 1980’ in an attempt to attract FDI. FDI is allowed in every sector of the economy except five industries, which are reserved for the public sector: defense equipment and machinery, nuclear energy, forestry in the reserved forest area, security printing and minting, and railways. Bangladesh now depends on 36 countries across the globe for FDI. Empirically, FDI inflow emerges export-oriented sectors that enhanced the sectoral economic growth (Alam 1999 and Hossain 2008) and infrastructure development as well as employment generating activities. In the current global context, the foreign investors are looking at sectors like telecom, banks, power and energy, where profit growth is likely to be high, which may alter the sectoral composition. Through developing and enhancing output growth, physical capital, skills of local labor, access to technology, marketing and managerial know-how, integration of the domestic country with the global economy; FDI can be an effective weapon in developing Bangladesh’s economy. The inflows of FDI can expand economic production and GDP growth of our country. This paper carefully studies the dynamic relationship between FDI and GDP growth in Bangladesh in a time-series framework.

2. Literature Review

There is conflicting evidence in the literature regarding the question as to how, and to what extent, FDI affects economic growth. FDI may affect economic growth directly because it contributes to capital accumulation, and the transfer of new technologies to the recipient country. In addition, FDI enhances economic growth indirectly where the direct transfer of technology augments the stock of knowledge...
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