The Role of Export and Foreign Direct Investment in the Economic Growth of Bangladesh: A Time Series Analysis
Abstract:
Purpose - This study examines the long-run and short-run relationships among foreign direct investment (FDI), exports, and economic growth in Bangladesh. It also considers the role of structural changes and external shocks—such as the COVID-19 pandemic and the Russia–Ukraine conflict—in shaping these relationships, with the aim of providing policy-relevant insights for sustainable economic development.
Design/methodology/approach - The analysis employs annual time-series data from 1986 to 2022. The Autoregressive Distributed Lag (ARDL) bounds testing approach is applied to investigate cointegration among the variables, allowing for mixed orders of integration. To capture potential regime shifts, the study incorporates a structural break identified through the Gregory–Hansen cointegration test. The error correction model (ECM) is used to estimate both short-run dynamics and long-run equilibrium relationships, supported by standard diagnostic and stability tests.
Findings - The results confirm the existence of a stable long-run cointegrating relationship among FDI, exports, and economic growth. Exports are found to have a positive and statistically significant effect on economic growth in both the short and long run, supporting the export-led growth hypothesis in Bangladesh. In contrast, FDI exhibits a positive but statistically insignificant impact, suggesting that its growth-enhancing effects may depend on complementary factors such as institutional quality and infrastructure. The analysis also identifies a structural break around 2015, coinciding with Bangladesh’s transition to lower-middle-income status and improved macroeconomic performance. Furthermore, global disruptions, including the COVID-19 pandemic and geopolitical tensions, are shown to have indirectly influenced FDI inflows and export performance.
Research limitations - This study is limited by its focus on a small set of variables and the use of aggregate data, which may overlook sector-specific dynamics. Additionally, while the analysis establishes long-run associations, it does not fully explore causal relationships. Future research could incorporate additional variables—such as remittances, human capital, and financial development—and apply advanced econometric techniques to provide deeper insights.
Originality/value - This study contributes to the existing literature by jointly examining FDI, exports, and economic growth in Bangladesh within an ARDL framework that incorporates structural breaks. By integrating recent global shocks into the analysis, it offers a timely and context-specific understanding of growth dynamics in a developing economy. The findings provide practical insights for policymakers seeking to promote export-led growth while enhancing FDI's effectiveness in supporting long-term economic development.
Keywords: Export, FDI, Economic Growth, ARDL, Bangladesh
Purpose - This study examines the long-run and short-run relationships among foreign direct investment (FDI), exports, and economic growth in Bangladesh. It also considers the role of structural changes and external shocks—such as the COVID-19 pandemic and the Russia–Ukraine conflict—in shaping these relationships, with the aim of providing policy-relevant insights for sustainable economic development.
Design/methodology/approach - The analysis employs annual time-series data from 1986 to 2022. The Autoregressive Distributed Lag (ARDL) bounds testing approach is applied to investigate cointegration among the variables, allowing for mixed orders of integration. To capture potential regime shifts, the study incorporates a structural break identified through the Gregory–Hansen cointegration test. The error correction model (ECM) is used to estimate both short-run dynamics and long-run equilibrium relationships, supported by standard diagnostic and stability tests.
Findings - The results confirm the existence of a stable long-run cointegrating relationship among FDI, exports, and economic growth. Exports are found to have a positive and statistically significant effect on economic growth in both the short and long run, supporting the export-led growth hypothesis in Bangladesh. In contrast, FDI exhibits a positive but statistically insignificant impact, suggesting that its growth-enhancing effects may depend on complementary factors such as institutional quality and infrastructure. The analysis also identifies a structural break around 2015, coinciding with Bangladesh’s transition to lower-middle-income status and improved macroeconomic performance. Furthermore, global disruptions, including the COVID-19 pandemic and geopolitical tensions, are shown to have indirectly influenced FDI inflows and export performance.
Research limitations - This study is limited by its focus on a small set of variables and the use of aggregate data, which may overlook sector-specific dynamics. Additionally, while the analysis establishes long-run associations, it does not fully explore causal relationships. Future research could incorporate additional variables—such as remittances, human capital, and financial development—and apply advanced econometric techniques to provide deeper insights.
Originality/value - This study contributes to the existing literature by jointly examining FDI, exports, and economic growth in Bangladesh within an ARDL framework that incorporates structural breaks. By integrating recent global shocks into the analysis, it offers a timely and context-specific understanding of growth dynamics in a developing economy. The findings provide practical insights for policymakers seeking to promote export-led growth while enhancing FDI's effectiveness in supporting long-term economic development.
Keywords: Export, FDI, Economic Growth, ARDL, Bangladesh