Foreign direct investment-economic growth link: the role of domestic financial sector development in Bangladesh

Rahman, Mohammad Mafizur and Shahbaz, Muhammad (2011) Foreign direct investment-economic growth link: the role of domestic financial sector development in Bangladesh. Academy of Taiwan Business Management Review, 7 (2). pp. 104-112. ISSN 1813-0534

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This paper aims to investigate the links between foreign direct investment (FDI) and economic growth through financial sector’s development (FD) in the case of Bangladesh. Using annual data series of World Bank for the period of 1983-2008, the unrestricted error correction method (UECM) developed by Inder (1993) is employed. FDI alone affects economic growth negatively in the long run. However, FD variable and the interaction term between FD and FDI (FD*FDI) are showing positive impact on GDP growth in the case of Bangladesh. Public investment or public capital stock also stimulates economic growth in the long run. This paper proposes that Bangladesh government should undertake financial reforms to improve the efficiency of the domestic financial sector. Appropriate steps must be taken to further liberalize the capital account to enhance FDI. Care must be taken to ensure efficiency of delivery of services and increase productivity of public investment. This paper convincingly argues that there is a need for case-by- case study on such a project in view of each country’s unique characteristics. To the best of our knowledge, this study seems to be a good and unique contribution in literature with reference to Bangladesh as this is the pioneering attempt that employs UECM for a case study on Bangladesh.

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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Additional Information: Copyright Taiwan Institute of Business Administration.
Faculty/School / Institute/Centre: Historic - Faculty of Business and Law - School of Accounting, Economics and Finance
Date Deposited: 23 Sep 2011 08:03
Last Modified: 14 Sep 2017 05:48
Uncontrolled Keywords: foreign direct investment; growth; financial sector development; Bangladesh
Fields of Research : 14 Economics > 1402 Applied Economics > 140202 Economic Development and Growth
15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150205 Investment and Risk Management
14 Economics > 1403 Econometrics > 140305 Time-Series Analysis
Socio-Economic Objective: B Economic Development > 91 Economic Framework > 9101 Macroeconomics > 910103 Economic Growth

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