On the Causal Links between Foreign Direct Investment and Economic Growth in Bangladesh, 1975-2010: An Application of Granger Causality and Co-integration Techniques

Purpose: Foreign direct investment is an imperative to overcome deficiencies in capital formation and to gain market access in the present context of liberalization of the world economy. So, the point of the paper is to unveil the relationship between foreign direct investment and economic growth in Bangladesh.
Design/methodology/approach: The paper examines the long-run relationship between per capita income (GDP), and foreign direct investment in Bangladesh during the period 1975-2009. Here, the Granger causality and Johansen co-integration techniques are employed to analyze the relationship and direction of causality between the variables. The Johansen co-integration statistic indicates that the variables are co-integrated, and the granger causality statistic reveals a unidirectional causality running from foreign direct investment to economic growth.
Findings: It is found that income and foreign direct investment are co-integrated in the long run. There are strong evidence for unilateral causality running between income and foreign direct investment in the long-run. Hence, the findings of this study have policy implications for Bangladesh where measures for increasing foreign direct investment can be relevant in policymaking.