The Role of Foreign Direct Investment (FDI) Inflows on Export Performance in Developing Economies: Evidence from Bangladesh

Abstract

Considering the importance of FDI inflows to enhance the export performance in the developing economies, this study aims to investigate the relationship between FDI inflows and export performance in Bangladesh using annual time series data for the period of 1995 to 2020. The empirical analysis is performed employing Johansen cointegration approach and Vector Error Correction Mechanism (VECM) in order to find out the long run as well as the short run relationship between FDI inflows and export receipts. The results of the study indicate that the export receipts have statistically significant positive relationship with FDI inflows in the long run. While other important variables, namely import payments, exchange rate and government development expenditure also have statistically significant influences on the export receipts, moreover the right direction of the all of these variables shows that to some extent there have been an insightful economic relationship between the variables. However, in the short run, such a relationship between FDI inflows and export performance is not statistically well justified, as the inappropriate sign of the coefficient of the error correction term indicates that the dynamic adjustment to the long run equilibrium has not been found in a consistent statistical manner. Lastly, this study also recommends that the government should initiate proper steps for the infrastructure development in the export oriented industrial sector to attract higher FDI inflows in accelerating the export performance that would ensure the faster economic development of the country as a whole.