Macroeconomic determinants of foreign direct investment: evidence of Bangladesh

Abstract

This study has examined the short-run, long-run, and granger causal relationship between total foreign direct investment (TFDI) and few selected macro variables, e.g., the nominal exchange rate (NER), trade openness (TRDOPN), wage rate index (WRI), gross fixed capital formation (GFCF), and industrial value added (IVA). This study has used 23 year’s annual data (1996 2018) and the ARDL test has been applied for a short-run relationship, the Bound Cointegration test for a long-run relationship, and the Granger Causality test a causal relationship. In addition, short-run dynamics correction to converge towards a long-run equilibrium relationship has also been measured. This investigation reveals that TRDOPN, WRI, and GFCF have statistically significant short-run and long-run relationships with TFDI in Bangladesh during the sample period. A short run disequilibrium has been found to be corrected by 31.92 percent each year. On the other hand, except NER and GFCF, the other three macro variables, i.e., TRDOPN, WRI, and IVA, have a causal relationship with TFDI in a different form.