Contribution of Foreign Direct Investment to Economic Growth in Bangladesh

Rapid industrialization is essential in Bangladesh to keep pace with its development needs. But the low rate of gross domestic savings and investment as well as low level of technology base hamper the expected industrialization process. Foreign aid and grant had been serving to bridge the gap earlier. As many developing countries are in the process of graduating from being aid-dependent economy into a trading economy, FDI has come to be viewed as a major stimulus to economic growth for these emerging economies. This paper examines the contribution of FDI to economic growth in Bangladesh over the period from 1975 to 2012. Data are compiled from World Development Indicators (WDI), International Financial Statistics (IFS), and Penn World Table (version 8.0). This paper takes the conventional neoclassical production function-type synthesis that considers FDI (foreign capital) as a factor input that depends on a set of relevant factors available in the host economy. Statistical models - OLS, 2SLS, VAR - are used for empirical analysis in this paper. The study reveals that if FDI increases 1%pt, per capita growth could rise by 1.65 to 6.05 %pts in the IV model. This is a manifestation from available dataset, although not a statement as our further tweak has failed to uncover lower values. These large numbers can be understood only in the context of a major push to growth given by FDI in the textile and garment industries. The study also finds bi-directional relationship in the Granger causality sense between FDI and GDP per capita