The Effect Of Fdi Inflow On Exports

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This paper uses time series data on Bangladesh from the WDI databank to find the impact of FDI inflow on exports. We’ve considered the time period from 1976. Bangladesh became independent in 1971. Just after birth, the nation adopted an import substitution trade policy. And consequently, discouraged export oriented industrialization. And FDI was forbidden till 1976. In 1976, Bangladesh took newer policies and thereby trade openness began. FDI also started to arrive. That’s why, we’ve excluded the years before 1976.
Dependent Variable: Export, measured in US dollar.
Independent Variable: Foreign Direct Investment, FDI inflow measured in US dollar.

Before explaining the methodology of data analysis it is important to
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Granger-casualty tests the hypothesis if one variable is useful in forecasting the change in another variable. Here, the time series variable ‘FDIBD’ would Granger–cause time series ‘X’ (exports) if it could be statistically established.
Results of the study suggests causality in both directions (i.e. ‘XBD’ depends on ‘FDIBD’ and ‘FDIBD’ depends on ‘XBD’). It may be mentioned that the main objective of this analysis is related to first one only. However, second causation also provides worthwhile information for further studies. Results of the analysis are given in Table-1. The results reject the null hypothesis (of no causality) and statistically prove causality between FDI and exports in both directions.

Cointegration Relationship Test

In spite of statistically significant Granger-causality between FDI and Exports, this test alone is not that strong to fully establish dependence of one variable on other. It, in fact, only establishes that explanatory variable leads the dependent variables- a necessary (but not sufficient) condition for an explanatory variable. For unbiased estimation of regression parameters another necessary condition is that the explanatory and dependent variables should have mutual cointegration. Granger-causality and cointegration together are thought to be
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