FDI, Trade Openness, Capital Formation, and Economic Growth in Bangladesh: A Linkage Analysis

Abstract

This paper examines the linkage between FDI, trade openness, capital formation, and economic growth rates inBangladesh over a period 1986 to 2008 using time series analysis. All variables are found stationary at firstdifferencing both at constant and constant plus trend level under the ADF and PP stationary tests. TheJohansen-Juselius procedure is applied to test the cointegrating relation between variables followed by a vectorerror correction model. The empirical results trace a strong long-run equilibrium relationship between GDPgrowth rates and the explanatory variables with unidirectional casual flows. The volume of FDI and level ofcapital formation are found to have significant positive effect on changes in real GDP. The degree of tradeopenness unleashes negative but diminishing influence on GDP growth rates. We conclude that Bangladeshshould formulate FDI-led polices and ensure higher degree of capital formation to enhance her economic growthrates at large.