Determinants of Sustainable Foreign Direct Investments in Bangladesh

Foreign Direct Investment (FDI) is widely considered to be a catalyst for economic development. A significant body of literature discusses how FDI contributes to productivity gains, particularly in developing countries, through new investments, improved technology, management expertise, and expansion of export markets (Asiedu, 2002; Dunning, 2009; Meyer, 2003; Sahoo, 2006). These potential benefits of FDI have encouraged developing countries to focus on attracting FDI by creating a conducive environment for foreign investors by providing various tax concessions on import and export materials and on the income they generate.

Since the 1990s, Bangladesh has also implemented various economic policies directed towards attracting FDI into the country. Consequently, during the last two decades, Bangladesh has seen significant changes in the volume and the composition of FDI. In particular, since the year 2000, Bangladesh's FDI inflows experienced a tenfold increase from US$280 million in 2000 to US$2,831 million in 2015. Currently, FDI is about 2% of Gross Domestic Production (GDP) of the country.

In this chapter, using the Autoregressive Distributed Lag framework, we identify the determinants of FDI in Bangladesh using data for the period 1986 to 2017. Our estimation results reveal that per capita GDP, infrastructure, and trade openness positively and significantly determine the level of FDI inflows into Bangladesh. Granger causality test results indicate that in the long run, infrastructure has a bidirectional relationship with FDI, while trade openness and per capita GDP have unidirectional causality with FDI. The estimated error correction coefficient reveals that approximately 81% of the disequilibrium caused by previous period shocks are corrected within one period.