"The Impact of Chinese Foreign Direct Investment (FDI) on Economic Growth in Bangladesh: An Empirical Analysis"

Abstract

There is widespread consensus that foreign direct investment (FDI), which helps in building up capital, transferring technology, and increasing productivity, is one of the main sources of growth in developing countries. In this context, this paper aims to empirically explore the influence of Chinese FDI on the economic growth of Bangladesh using annual time series data between 1980 and 2023. This study explores the long-run and short-run relationship between Chinese FDI flows and GDP of Bangladesh, keeping other determinants such as domestic investment, openness to trade, inflation, and exchange rates constant using the Johansen cointegration test and Vector Error Correction Model (VECM). The empirical findings suggest that, in the long run, Chinese FDI positively influences the economic growth of Bangladesh, and an increase of 1% in Chinese FDI causes an increase in GDP by about 0.28%. But, the short-run effect is quite minimal due to the time involved in industrial and infrastructural developments. There is heterogeneity in the results due to the use of sectors, whereby the energy and infrastructural industries contribute significantly to the economic growth followed by the manufacturing sector. The presence of a large negative error correction term shows the confirmation of stable long-run equilibrium. The validity of the model is proven by the absence of any heteroskedasticity, serial correlation, and misspecification found during the diagnostic test. The findings of this study are that although Chinese FDI has been instrumental in the economic transition of Bangladesh, policy strategies are required to address the diversification of industries, debt sustainability, and technology spillovers to maximize the benefits from Chinese FDI. Recent data suggests that Chinese foreign direct investment (FDI) has a significant positive effect on green GDP compared to the traditional GDP.