Impact of FDI on Bangladesh’s Economic Growth

Business Statistics II (BUS 204) Term Paper

Supervised By
Jillur Rahim
Lecturer, ULAB School of Business (USB)

Prepared By

Name: Md. Sahibullah Saad

Student ID: 181011078

Submission Date (September 15, 2019)

Chapter One: Introduction

1.1Background

Foreign Direct Investment (FDI) is regarded to be one of the key ingredients in a

developing country like Bangladesh is playing a role in overall development process.
Bangladesh’s government is attempting to construct a favorable investment environment
by implementing financial policies, investor incentives, privatization, etc. Therefore,
FDI’s contribution is needed to enhance the economic growth of a country.

FDI plays a major role in accelerating GDP and economic growth in Bangladesh (Mottaleb
2007). FDI has played a notable part in the Bangladesh economy’s modernization over
the past two decades. It allows the nation to build infrastructure, create more jobs, build
ability, enhance the host country’s labor force abilities by transferring technological
expertise and build managerial abilities, and helping to integrate national economy and
global economy. Bangladesh’s various beneficial characteristics are now attracting the
attention of both developed and developing countries’ investors. In Bangladesh, skilled
labor at comparatively low salaries is accessible. In addition, the macroeconomic
environment is fairly stable. These two key variables can make Bangladesh an attractive
destination for foreign investors. Wage rate is very low among Asian countries, tolerable
inflation, fairly stable exchange rates, investment friendly custom laws and appealing
incentive packages make Bangladesh a favorable investment destination. Over the past
decades, Bangladesh has become more responsive to FDI policies, which will certainly
maintain the current development in FDI investment by the foreign investors in
Bangladesh. (Rahman, 2012)

1.2 Objectives of the Study

The main objectives of the study are as follow:

 To investigate the association between FDI and economic growth

 To investigate the impact of FDI on economic growth in Bangladesh
 To find out the current status of FDI and economic growth in Bangladesh
Chapter Two: D ata & Methodology

2.1 Data

The purpose of this research paper is to examine the relation of Bangladesh’s GDP
with FDI and inflation (CPI). Study covers the time period from 1996-2018. This paper is fully based
on secondary data. The relevant secondary data are collected from World Bank and Statistics
Department and Research Department of Bangladesh Bank (Central Bank of Bangladesh), Board of
Investment, Bangladesh.

2.2 Methodology

The core intention of the paper is to study the effect of FDI on GDP of Bangladesh.
The trend of foreign Direct Investment inflows is also observed with relevance to GDP
Growth and inflation of Bangladesh. To examine the relation of Bangladesh's GDP with FDI and
inflation (CPI), the following multiple regression model is used,

GDP = βo + β1FDI + β2CPI + e

Where:

βo = Population Y intercept, e = Random Error term

β1…β2 = Regression Coefficients
GDP=Gross Domestic Product (Dependent Variable)
FDI=Foreign Direct Investment
CPI=Consumer Price Index (Inflation Rates)
Level of Significant: 5 to 10 percent

In this multiple regression model, GDP is used as dependent variable whereas FDI and CPI are
measured as independent variables. To estimate the effect of FDI on GDP of Bangladesh, Multiple
Regression Model is applied over the period of 1996 to 2018. Two inputs are used; foreign direct
investment and inflation. Descriptive statistics of GDP, FDI and CPI are as follows,
Chapter Three: Analysis and Findings

3.1 Descriptive Statistics

The below findings in Table1 indicate the descriptive statistics of studied variables throughout
1996-2018. The minimum value of GDP is USD 46438.48 million in 1996 while the maximum value
of GDP is calculated as USD 274024.96 million. Moreover, the mean of GDP and standard deviation
are USD 110376.73 million and USD 69338.97 million, respectively. On the other hand, the mean of
FDI is USD 977.85 million, the standard deviation is USD 640.21 million, the minimum value is
231.61, and the maximum value is 2332.72. The mean value of CPI is 6.24. The standard value of
CPI is 2.29; the minimum value is 2.01 and 11.40 is the maximum value.

Table 1: Descriptive Statistics

GDP (in millions FDI (in million) CPI %

Mean 110376.73 977.85 6.24

Standard 14458.17 133.49 0.48

Error

Median 79611.89 792.48 6.19

Mode #N/A #N/A #N/A

Standard 69338.97 640.21 2.29

Deviation

Sample 4807892412 409870.2 5.26

Variance

Kurtosis 0.21 -0.18 -0.31

Skewness 1.13 0.91 -0.095

Range 227586.47 2101.11 9.39

Minimum 46438.48 231.61 2.01

Maximum 274024.96 2332.72 11.40

Sum 2538664.90 22490.63 143.46

 Count 23 23 23

3.2 Correlation Matrix

Table 2: Correlation Matrix

Variables GDP FDI CPI

GDP 1.00 0.89 0.15

FDI 0.89 1.00 0.24

CPI 0.15 0.24 1.00

The correlation matrix in Table 2 above shows that there is a significant positive linear relationship
between the FDI and GDP. On the other hand, there is a weak positive linear relationship between
CPI (inflation rate) and GDP.
3.3 Multiple Regression Analysis

Table 3: Summary (Regression Statistics)

Model Multiple R R Square Adjusted R Standard Observations

Square Error

0.892892137 0.797256369 0.776982006 32745.17557 23

The R-Sqaure of this model is 0.7973. We conclude that the independent variables (FDI and CPI)
explain, or account for, 79.73% of the variation in GDP. To put it another way, 20.27% of the
variation is due to other sources, such as random error or variables not included in the analysis.

Table 4: ANOVA

Model Df SS MS F Significance F

Regression 2 84328702593 42164351296 39.32337 0.00

Residual 20 21444930467 1072246523

Total 22 105773633059.24

The findings show that the significance value is less than 0.05, so the model is statistically
considered to predict how FDI and Inflation rate affect the GDP of Bangladesh. The F calculated
value is greater than the F critical value which shows that the overall model was significant.
 Table 5: Regression Analysis

Coefficients Standard Error t Stat P-value

Constant 26529.95123 21150.08202 1.254366352 0.224171

FDI 98.10744894 11.22090492 8.743274244 0.00

CPI -1938.04449 3130.859339 -0.61901359 0.542895

From the regression findings in table 5 above, we substitute the values in the regression equation;

GDP = βo + β1FDI + β2CPI + e becomes:

GDP (ŷ) = 26529.95 + 98.11FDI - 1938.04CPI + e

From the regression findings in Table 5 below, According to the equation, by taking all the factors
i.e. FDI, inflation rate constant at zero, GDP will be USD 26529.95 million. The results revealed that
a unit increase in FDI would lead to USD 98.11 million rises in GDP holding the inflation rate
variable constant; a percentage increase in inflation rate (CPI) will lead to USD -1938.01 million
decrease in GDP holding the FDI variable constant . At 5% level of significance and 95% level of
confidence, FDI had a 0.000 level of significance which means FDI (independent variable) allows us
to make a better estimate of the GDP (dependent variable) and to put it another way, a significant
relationship exists between the two variables. On the other hand, CPI had a 0.54 level of significance
which means there is no relationship between CPI (independent variable) and GDP (dependent
variable) showed insignificance to GDP. In other words, CPI (independent variable) does not offer
us any help in estimating the value of the GDP (dependent variable).
Chapter Four: Conclusions

FDI plays a very significant role in attaining anticipated economic growth in Bangladesh.
Increasing GDP, FDI flows were effective. At the same time, FDI also contributed to enhancing
Bangladesh’s revenue rate. FDI can guarantee greater development in Bangladesh by having the
ability to make full use of all resources. (Rahman, 2012)

If efforts can be drawn to solidify the proposed reforms, the mere possibility of the Bangladesh
economy would be positive in the future. In order to encourage enhanced FDI, Bangladesh has
recently taken measures to simply 25 different procedures. The state, the economic industry as a
whole and foreign investors must work together to attain the objectives of making Bangladesh a
progressive economy by the end of this decade. (Rahman, 2012)
Chapter Five: References and Appendices

5.1 References

1. Mottaleb, K.A., 2007, Determinants of Foreign Direct Investment and Its Impact on
Economic Growth in Developing Countries, MPRA Paper 9457, University Library
of Munich.

2. Rahman, A. (2012). Foreign Direct Investment in Bangladesh, prospects and challenges, and its
impact on economy. Retrieved from
http://www.bankingandfinance.ait.ac.th/sites/default/files/report/report_afsanarahman.pdf
5.2 Appendices

Year GDP (USD in million) FDI (USD CPI (%)

in million)
1996 46438.48411 231.61 2.37712
1997 48244.30913 575.29 5.30560
1998 49984.55947 576.46 8.40223
1999 51270.56988 309.12 6.10669
2000 53369.78732 578.64 2.20825
2001 53991.28984 354.5 2.00717
2002 54724.08149 335.4 3.33256
2003 60158.92919 350.3 5.66870
2004 65108.54425 460.4 7.58753
2005 69442.94309 845.26 7.04661
2006 71819.08368 792.48 6.76526
2007 79611.88821 666.36 9.10698
2008 91631.27824 1086.31 8.90194
2009 102477.7915 700.16 5.42347
2010 115279.0775 913.32 8.12667
2011 128637.9387 1136.38 11.3951
2012 133355.7495 1292.56 6.21750
2013 149990.451 1599.16 7.53040
2014 172885.4549 1551.28 6.99163
2015 195078.6787 2235.39 6.19428
2016 221415.188 2332.72 5.51352
2017 249723.8625 2151.56 5.70207
2018 274024.959 1415.97 5.54362