FDI Versus Economic Growth: An Empirical Investigation for Causality

Abstract

This paper attempts at finding the long run relationship and causality between foreign direct investment and economic growth for Bangladesh using time series data over the 1974-2009 period. For empirical testing, we execute three standard econometric tools: Augmented Dickey Fulller (ADF) test for unit root detection, Granger causality test and Testing for Akaike Information Criteria (AIC) and Bayesian-Schwartz Information Criteria (BIC). This study finds that FDI and GDP was not cointegrated. Moreover, using Granger Causality test it is shown that the FDI and openness are not significantly causing the GDP per capital both in the short and long run. The regression result indicates that FDI is positively correlated to the economic growth of Bangladesh but it has not yet been established as a significant determining factor for the growth. The study suggests adopting appropriate steps so that FDI can be used as a contributing factor to the economic development.