Determinants of Foreign Direct Investment in Bangladesh: Evidence from ARDL Bounds Approach

Abstract

 Foreign Direct Investment (FDI) plays a crucial role in the economic growth of developing nations like Bangladesh, enhancing capital, technology transfer, infrastructure development, and job creation. The study examines the influence of significant macroeconomic factors—exchange rate, interest rate, and trade openness—on foreign direct investment inflows in Bangladesh across a 50-year timeframe (1974–2023). This study utilizes the Autoregressive Distributed Lag (ARDL) bounds testing approach to examine these dynamics, drawing on annual time series data sourced from the World Development Indicators. The results from the Unit Root Tests ADF indicate that the variables are integrated at I(0) and I(1), thereby supporting the application of ARDL methodology. The ARDL Bounds Test validates the presence of long-term co-integration among the variables. The results indicate that a decline in the exchange rate has a notable positive impact on foreign direct investment, suggesting that a weaker currency may entice international investors by lowering relative production expenses. The analysis reveals that interest rates exert a considerable negative influence, indicating that elevated borrowing costs discourage investment activities. The relationship between trade openness and FDI is notably positive, highlighting the significance of global economic integration.The short-run dynamics further validate rapid adjustments moving towards long-run equilibrium. The findings emphasise the importance of ensuring macroeconomic stability and encouraging trade liberalisation to secure ongoing FDI inflows. These insights provide essential direction for policymakers in crafting investment-oriented economic strategies that can foster sustainable development in Bangladesh.