Does FDI Drive GDP Growth? An Empirical Investigation of Bangladesh's Economy

Abstract

Foreign Direct Investment (FDI) is widely regarded as a key driver of economic growth, particularly in developing economies like Bangladesh. However, existing empirical studies present contradictory findings regarding the magnitude and effectiveness of FDI in fostering economic expansion. Some research suggests that FDI enhances GDP through capital formation, technology transfer, and employment generation, while others indicate weak or even negative short-term effects due to regulatory inefficiencies, infrastructure bottlenecks, and profit repatriation. This study aims to bridge this research gap by employing the Autoregressive Distributed Lag (ARDL) Bounds Testing approach to examine both the short-run and long-run relationships between FDI and GDP growth in Bangladesh from 1990 to 2023.The empirical results indicate that while FDI exhibits a strong long-run association with GDP growth, its short- term impact remains statistically insignificant (p = 0.944), suggesting that FDI-driven economic benefits take time to materialize. The Error Correction Model (ECM) confirms that GDP adjusts toward long-run equilibrium at a rate of 63.87% per period. Despite these findings, the model explains only 34.86% of GDP variations, implying that additional factors—such as infrastructure, institutional quality, and human capital—play a significant role in economic growth. Unlike previous studies, this research explicitly controls for integration orders in time series data and provides a sectoral analysis of FDI concentration, highlighting that manufacturing and services receive the majority of inflows, while agriculture and rural areas remain underdeveloped. The study proposes data-driven policy recommendations, emphasizing the need for targeted FDI diversification into high-value sectors such as technology, pharmaceuticals, and renewable energy. To optimize the long-term benefits of FDI, the government should focus on regulatory reforms, infrastructure enhancement, and policies that strengthen domestic firms’ absorptive capacities. This study contributes to the existing literature by offering a methodologically robust assessment of FDI-GDP dynamics and providing insights for policymakers seeking to leverage FDI for sustainable and inclusive economic growth in Bangladesh.