An insight into foreign direct investment in Bangladesh

Abstract

Foreign Direct Investment (FDI) plays a crucial role in accelerating the development and economic growth of a country. Most of the developing countries rely on FDI to promote their economy as they face capital shortage for their development process. FDI can enable a country to build up capital, developed productive capacity, reduce unemployment and ensure overall economic development. With this background in mind this study was undertaken to give an insight into the determinants and role of FDI for the economic development process of Bangladesh. The present study examines the factors that potentially affect the Foreign Direct Investment (FDI) of a country and identifies the key determinants of the FDI in Bangladesh. This study also explores the FDI theories and how they explain FDI decisions of a developing country like Bangladesh. Based on the data 1999–2013 of FDI factors, this study uses the statistical estimation method to identify the determinants of FDI. In this study we have identified the potential determinants of FDI in Bangladesh. For the empirical analysis, eleven independent variables have been taken. Which are market size, gross national income, inflation, openness, corporate tax rate, domestic investment, external debt, labor force, average exchange rate, average wage in manufacturing and urbanization. As for the estimates out of eleven variables nine variables were significant and having the expected positive sign. On the basis of the correlation and regression analysis it is observed that market size, gross national income, inflation, openness, external debt, labor force, average exchange rate, average wage in manufacturing and urbanization have positive relation and relevant factors of FDI. The other factors corporate tax rate and domestic investment have negative sign and irrelevant factors in determining FDI inflow in Bangladesh. It is observed that there are some administrative loopholes and policy issues that hinder the inflow of FDI in Bangladesh. It may be argued that addressing those issues and making favorable environment, rules and regulation are to be enacted to overcome those problem and to build up confidence for existing and new investors. We are optimistic that Bangladesh will undertake positive move to reduce these barriers and take appropriate measures to attract sizable FDI in Bangladesh to maintain the development wheel of the economy in the years to come.