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ABSTRACT
This study examines the various economic factors effects on foreign direct investment (FDI) inflows into Bangladesh during the study period ranging from 1972 to 2010. Log linear regression model has been used and the method of least squares (OLS) has been applied to estimate the various determinants effects on FDI inflows. In the models, dependent variable is Natural Log of real foreign direct investment. Independent variables are market size proxied by natural log of real GDP, Trade Balance, Labor productivity expressed by natural log of productivity indices of industrial labor in selected industries (Jute, Cotton, Paper, Steel, Cement, and Fertilizer). According to the econometric results, market size has positive sign and is statistically significant. Trade balance is found positive sign and statistically significant. Labor productivity has positive sign but not significant.
Keyword: Foreign Direct Investment, Determinants of FDI, Unit Root Test, OLS
INTRODUCTION
Economic growth in every country depends upon the sustain growth of captive capacity, supported by savings and investment. Low levels of savings and investment particularly in developing countries and least developed countries results in a low level of capital stock and economic growth. Bangladesh which was known as a third world country during the era of cold war, is now either called a “developing country” or in world bank vocabulary “a low mid-income country”. With a population of more than 130 million and per capita GDP below US$750, we need to attract Foreign Direct Investment (FDI) to create employment, generate income. FDI is considered as a crucial ingredient for economic development of a developing country and can play an important role in achieving the countries socio-economic objectives including poverty reduction goals. Countries that are lagging behind to attract FDI are now formulating and implementing new policies for attracting more investment. Industrial development is one of the pre-requisites for economic growth, particularly in a developing country. Moving from the agrarian economy to industrial economy is imperative for economic development. Bangladesh is an example in this regard. In a capital poor country like Bangladesh FDI can emerge as a significant vehicle to build up physical capital, create employment opportunities, developed productive capacity, enhance skills of local labor through transfer of technology and managerial know-how and help integrate the domestic economy with the global economy.
1.1 BACKGROUND OF THE STUDY
Foreign Direct Investment (FDI) is considered as one of the vital ingredients for overall development process of a developing country like Bangladesh. As we stated earlier, Industrial development is an important pre-requisite for economic growth of a developing country. Bangladesh is basically a country of agrarian economy. For her economic development, industrial economy is imperative. So Bangladesh is gradually moving from agrarian economy to industrial economy. In the age of globalization, it has become a burning issue to exchange views, ideas, capital and human resources. Government of Bangladesh is trying to create a favorable investment environment through introducing economic policies, incentives for investors, promoting privatization and so on. Therefore, the contribution of FDI is necessary in the enhancement of a country’s economic growth. Researchers have marked FDI as an important factor in accelerating economic success and wealth of a country as well as a door in creating jobs, facilitating economy, and creating more competitive environment and contributing productivity to the host country.
In Bangladesh, FDI plays a significant role in GDP acceleration and economic growth (Mottaleb 2007). FDI has a mentionable role in the modernization of the Bangladesh economy for last two decades. It helps the country in building up infrastructure, creating more employment, developing capacity, enhancing skills of the labor force of the host country through transferring technological knowledge and managerial capability, and helping in integrating domestic economy and the global economy. Various positive attributes of Bangladesh is now drawing the attention of the investors from both developed and developing countries. In Bangladesh, it is available to get skilled labor at relatively low wages. Moreover, there is reasonably stable macroeconomic environment. These two important factors can make Bangladesh an alluring destination for foreign investors. Lowest wage rates among the Asian countries, tolerable inflation rate, reasonably stable (except previous year) exchange rate, investment friendly custom regulations and attractive incentive packages make Bangladesh a favorable investment destination. Bangladesh became more open toward FDI policies over the last decades. These above features will certainly maintain the recent advancement in FDI investment in Bangladesh by the foreign investors.
During 1980s, FDI to Bangladesh was very little and mostly focused in banking and a few other sectors. Bangladesh started attracting FDI since 1996 in energy and power sector because of favorable and supportive policies for foreign investment, economic reform as well as unexplored gas and oil resources. In 1972, annual FDI inflow was 0.09 million USD and in 1996, it became 231.61 million USD which rose significantly in 2008 to 1086 million USD which declined to 913.32 million USD in 2010 (source: Bangladesh Board of Investment).
1.2 OBJECTIVES OF THE STUDY
The objectives of the research are as follows:
1.3 LITERATURE REVIEW
FDI is considered as an important tool for economic development in a developing country. If the investing country is wealthier than the host country then capital will flow to the host country (Zhao, 2003). It contributes to growth of GDP; create employment generation, technology transfer, human resource development, etc. It is also perceived that FDI can play a significant role to reduce poverty of a developing country.
Foreign Direct Investment can be defined as investment in which a firm acquires a substantial controlling interest in a foreign firm or set up a subsidiary in a foreign country (Chen, 2000). IMF (1993, 2003) and OECD (1996) defined FDI as a long term investment by a foreign investor in an enterprise resident in an economy other than foreign direct investor is based. According to the Balance of Payment Manual (1977 and 1993) FDI refers to investment made to acquire lasting interest in enterprises operating outside of the economy of the investor.
In the developing world, the East Asian countries - South Korea, Hong Kong, Taiwanand Singapore were the first to use effectively the FDI from TNCs to achieve economic development (Sinha, 2007). After opening up their economy towards FDI, these countries emerged as ‘Asian Tigers’ and witnessed rapid economic developed within a relatively short period of time. In recent years, many countries have introduced open door policy to attract FDI with a view to increase investment, employment, productivity and economic development (Agiomirgianakis et al., 2003). A number of empirical studies have shown that developed and developing countries both desire to attract FDI. Developing countries always are in disadvantage in terms of technology, capital, and human resources at the early stage of development.
In FDI literature it is already recognized that FDI not only brings capital for productive development to the host economy, it also transfers a considerable amount of technical and managerial knowledge and skills, which is likely to spill over to domestic enterprise in that economy (Balasubramanyam et al 1996; Kumar and Podhan,2002). It is recognized that FDI can contribute to the growth of GDP, Gross Fixed Capital Formation (GFCF) (total investment in a host economy) and balance of payments (Baskaran and Muchie, 2008).
Most Developing countries are always at a disadvantaged position in terms of technology and in this regard FDI contribute to transfer technology and can contribute towards income, production, prices, employment, economic growth, development and general welfare of the host country (Kok and Ersoy, 2009).
Key Definitions
Foreign Direct Investment (FDI)
FDI is an important category of international investment that shows a long-term relationship between the direct investor and the enterprise. It indicates the influence of the investor on the management of the enterprise. Direct investment relates the initial transaction between the investor and the enterprise. It also shows the transactions between them and among affiliated enterprises, both incorporated and unincorporated. The components of FDI are: a) Equity capital, b) Reinvested earnings and c) Intra-company loans.
Equity Capital states the ownership as well as the share purchasing of an enterprise by a foreign investor. Reinvested earnings demonstrate that portion of earning of an investor which is not distributed back to him. This means the profits that are not given out as dividends. It is kept within the firm. Intra-company loans include debt transactions and these transactions are regarding lending by the foreign parent company to its affiliates in the form of both short and long-term.
OLS
OLS stands for Ordinary Least Square method which is a statistical method for estimating the unknown parameters in a linear regression model, with the goal of minimizing the differences between the observed responses in some arbitrary dataset and the responses predicted by the linear approximation of the data. Visually this is seen as the sum of the vertical distances between each data point in the set and the corresponding point in the regression line- the smaller the differences, the better the model fits the data. The resulting estimator can be expressed by a simple formula, especially in the case of a single regressor on the right-hand side.
Unit Root Test
The term Unit Root means a given time series is non-stationary. More technically, the term refers to the root of the polynomial in the lag operation. The name Unit Root is due to the fact that P=1 in the following equation:
Yt = PYt-1+Ut -1< P <1
In statistics, a Unit Root test tests whether a time series variable is non-stationary using an autoregressive model. A well-known test that is valid for large samples is the Dickey-Fuller test.
CONTENTS
Preface
Acknowledgement
Letter of Transmittal
Acceptance Letter
Abstract
Contents
List of Tables
List of Figures
CHAPTER 1: INTRODUCTION
1.1 Background of the Study
1.2 Objectives of the Study
1.3 Literature Review
CHAPTER 2: METHODOLOGY
2.1 Time Reference
2.2 Sources and Nature of Data
2.3 Data Analysis Tools
2.4 Model Formation
2.5 Variable Definitions and Labeling
CHAPTER 3: AN OVERVIEW OF FDI IN BANGLADESH
3.1 Present FDI Status
3.2 FDI Inflows by Components
3.3 Investment Registration Statistics in Bangladesh
3.4 Foreign Private Investment Projects Registrar with Bangladesh
CHAPTER 4: EMPIRICAL ANALYSIS
4.1 OLS Estimation
4.2 F-Test
4.3 Descriptive statistics of major variables
4.4 Tests for Heteroskedasticity
4.5 Autocorrelation Test
4.6 Normality Test
4.7 Multicollinearity Test
4.8 The Unit Root Test
4.9 Co-Integration Test
CHAPTER 5: CONCLUSIONS &POLICY IMPLICATIONS
Reference
Appendices
REFERENCES
Research, Report, Determinants, Foreign, Direct, Investment, Bangladesh, Econometric, Estimation, FDI, Unit, Root, Test, OLS, Autocorrelation, Empirical, Analysis, Developing, Country, GDP, Jute, Cotton, Paper, Steel, Cement, Fertilizer, Industries
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