FOREIGN DIRECT INVESTMENT AND ITS IMAPCT ON

ECONOMIC GROWTH AND INCOME INEQUALITY:
A CASE FOR BANGLADESH

MD AHAD UDDIN ID – 072249020 IN FULFILLMENT OF ECO 495 [SUPERVISED RESEARCH]

RESEARCH PAPER SUBMITTED TO DR. AFM ATAUR RAHMAN ASSOCIATE PROFESSOR, DEPARTMENT OF ECONOMICS NORTH SOUTH UNIVERSITY

19TH SEPTEMBER 2011
Page | 1

ACKNOWLEDGMENT
I would like to take this opportunity to express my gratitude to All Mighty Allah and to my parents whose dedication and sacrifice have allowed me to undertake this research project. They took care of everything else while I concentrated solely on this research. I am highly indebted to my research supervisor, Dr. AFM Ataur Rahman who managed to allocate time despite his busy schedule as core a member of the faculty in the department of economics at NSU. His suggestions and expert advice regarding selection of the research topic and its methodology have been invaluable. I am also grateful to everyone who has helped with this research including my friends at North South University.

Page | 2

Foreign Direct Investment and its Impact on Economic Growth and Income Inequality : A Case for Bangladesh Md Ahad Uddin
ABSTRACT

Foreign Direct Investment is viewed as a major stimulus for economic growth for developing countries like Bangladesh which lacks sufficient domestic financing. This paper is intended to empirically analyze this theoretical perspective and analyze the impact of FDI on Bangladesh’s economic growth and income inequality. Using time series data of FDI, GDP and other relevant variables, it was found that FDI inflow into Bangladesh did not show any direct significant impact on economic growth; however, it had a negative impact on income inequality, though this impact was found to be small.

Key words: FDI , economic growth, income inequality, Bangladesh.

Page | 3

Table of Contents
Acknowledgements…………………………………………………………………………2 Abstract………………………………………………………………………………………3 Introduction….……………………………………………………………………………….5 Rationale and Objective of the study …………………………………………………….7 Structure of the study……………………………………...……………………………….7 History of FDI and its current situation …………………………………………………..7 Literature review …………………………………………………..………………………13 Theoretical framework…………………………………………………………………….20 Methodology and model framework……………………………………………………..21 Empirical model estimation……………………………………………………………….25 Results and Discussion …………………………………………………………………..28 Limitations ………………………………………………………………………………….30 Conclusion …………………………………………………………………………………31 References………………………………………………………………………………….32 Appendix……………………………………................................................................39 A. Time series data for Bangladesh……………………………………………….39 B. Sector wise FDI inflow……………………………………………………………40 C. Regression Output……………………………………………………………..…41 i) ii) Impact of FDI on economic growth………………………………..….41 Impact of FDI on income inequality……………………………..……42

Page | 4

Through FDI. Traditional theories on trade and investment assumed that factors of production. at least initially. in particular the United States where wages are high relative to those in developing countries. 2000). Foreign Direct Investment or FDI in accordance with the United Nations (UN) conference on Trade and Development (UNCTAD) and its World Investment Report 2006 is” an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)”. Although differences in labor costs may sometimes help influence firms‟ decisions to locate abroad. were not internationally traded. this is far from being the whole story. firms may still wish to invest abroad. factors are internationally mobile and at least since the nineteenth century. in reality. The determining factor for a particular firm to establish production facilities abroad is the prospect of earning higher profit which induces firms to invest abroad. According to John Dunning (1977) firms Page | 5 .INTRODUCTION Globalization offers an unprecedented opportunity for developing countries to achieve faster economic growth through trade and foreign investment. However. In this period. As the FDI data showed. the majority of FDI still goes to the advanced countries. for a firm investing in a foreign country where it is not familiar with the local market and the institutions. foreign investors benefit through efficient utilization of their assets and resources while the recipients of FDI benefit from acquiring technology and getting involved in international production and trade network. international labor movement and international investments have been very important in the global economy (Jayasuriya and Weerakoon. such as labor and capital. The interesting point here is that there will normally be extra costs involved. However this situation changed dramatically during the 1980s when the supply of Foreign Direct Investment increased sharply. primarily because of lower labor costs. international trade grew more rapidly than foreign investment and thus it was the most important economic activity. During the 1970s. economic analysis offers various explanatory approaches which attempting to show why. despite these disadvantages. the world FDI has increased its importance by transferring technologies and establishing efficient network for production and sales. At a theoretical level.

1966). FDI provides much needed resources to developing countries such as capital. 1976). These are essential for developing countries to industrialize. Consequently. FDI inflows to developing countries in particular increased by 1546% . technology. and create jobs attacking the poverty situation in their countries. limits on foreign equity and capital.e. were skeptical of the intentions of FDI and perceived it as a tool for promoting foreign interests. As a result. After this period FDI inflows to developing countries picked up sharply and reached its peak in 2008 and again declined in the year 2009. almost 15 times during the same period. many countries including Bangladesh have now lifted such barriers to open their economies and take advantage of the benefits of foreign investment.undertake FDI when three factors are present and the resulting advantages are sufficient to offset the natural disadvantages of having to operate in a foreign country. entrepreneurial ability. 1960). and required royalty payments. In an increasingly globalized world economy. five times from 1990 to 2010 . most developing countries recognize the potential value of FDI and have liberalized their investment regimes and engaged in investment promotion activities to attract various countries. and access to markets.ie. many of the Least Developed Countries. a wide array of restrictions were imposed to control FDI inflows through regulations on profit and dividend repatriations. locational advantages (Vernon. ownership advantages (Hymer. These three advantages are. From the early stage of 1980s. and international advantages (Buckley and Casson. brands. FDI inflow into developing countries started to grow at a steady pace from the 80s and after the year 2000 in declined until 2003. including Bangladesh. develop. Page | 6 . While world FDI inflows increased almost 500% . managerial skills.i.

STRUCTURE OF THE STUDY The structure of the study will constitute a discussion of the history of FDI inflow in Bangladesh followed by theoretical and economic concepts on the impact FDI in an economy. HISTORY OF FDI AND THE CURRENT SITUATION OF FDI INFLOW IN BANGLADESH Bangladesh inherited a small reserve of FDI after its independence. Though there are a number of papers assessing the impact of FDI on economic growth. Net inflows of FDI into Bangladesh have grown from a trickle during the 1980s to above $179 million towards the end of 1990s and reached the highest level of more than $1 billion in 2008. Separate regression models will be presented to examine the impact of FDI on economic growth and income inequality. Figure 1 illustrates the rising trend of FDI inflows into Bangladesh. It however became relatively significant with the start of the privatization process in 1974-75. Finally a conclusion will be given based on the results of regression analysis.RATIONALE AND OBJECTIVE OF THIS STUDY This study is intended to examine the impact of Foreign Direct Investment on the economy of Bangladesh particularly its effect on economic growth and income distribution. Page | 7 . Past relevant literature will be explored before empirically analyzing the effect of FDI inflow for Bangladesh. this paper will be the first of its kind to simultaneously examine the impact of FDI on both economic growth and income inequality for Bangladesh.

000. these reforms Page | 8 .000.000. The First Five Year Plan was undertaken from 1973 through 1978 and focused on a state directed economy. the new government attempted to establish a socialist state and adopted the Nationalization Order of 1972 to foster economic growth.000 800.000.000 600.000. The nationalized industries.000 1. jute.000 FDI inflow 400. were inefficient and the economy experienced slow growth.000 200. Consequently. Bangladesh underwent a series of policy reforms to induce a more capitalistic economy by progressively increasing funding allocations to the private sector. 86% of the industrial sector was brought under government control. however.FDI inflow 1.000. it is necessary to discuss the history of economic policy implemented the Government of Bangladesh since the country‟s independence from Pakistan in 1971. The losses incurred by the public sector and its State Owned Enterprises created a build-up of political pressure and the government initiated more laissezfaire measures to encourage a larger role of the private sector.000 Figure 1 : Inward FDI trend in Bangladesh Source : WDI data World Bank To better understand the factors that have led to this dramatic rise in FDI.000.000 0 198019821984198619881990199219941996199820002002200420062008 -200.000. Immediately after the birth of the sovereign nation. including key industries such as sugar.200. and cotton textiles.

however. During the mid1990s. thus encouraging more joint ventures with international companies. rose very little owing to the upheld trade restrictions and the Investment Act of 1989 soon followed to establish the Board of Investment (UNCTAD 2000). the Bangladesh Board of Investment has taken measures to transform the country into the most liberalized investment regime in the South Asian region. and management within the nascent economy of a new nation. particularly throughout the 1990s. the 1980-1985 Second Five Year Plan. the Bangladesh government opened up the mobile telecommunication industry for private investment. the 1985-1990 Third Five Year Plan. Bangladesh struggled at 0. Geographical Survey. knowledge.include the 1978-1980 Two Year Plan. the Bangladesh Parliament approved the Foreign Private Investment Act.4% per year till 1985. Concurrently.S. This is largely Page | 9 .8% growth of GNP per capita. To accelerate the development of the economy. However with the lack of financial ability. While other low income countries experienced a 3. Considering policy brief. an area which has fostered technology transfers as well as hundreds of millions of dollars in FDI. Given the world‟s scarce resources. external pressure finally urged the Bangladeshi government into liberalizing the energy sector. which have an estimated capacity greater than 10 trillion cubic feet according to the U. FDI. a move which almost immediately attracted increasing levels of FDI. the government could not solely rely on the domestic financial market for economic growth. Figure 1 demonstrates the efforts of the Bangladesh Board of Investment which shows increases in FDI inflows. numerous foreign enterprises led exploratory research campaigns into the nation‟s natural gas reserves. and the 1990-1995 Fourth Five Year Plan. In 1995. It is important to emphasize the years between 1995 and 1998 which saw a sharp and sudden rise in FDI flows. All these reforms and policies combined to shape Bangladesh into the nation that it is today. the primary objective of which is aimed at attracting and facilitating investment from abroad. foreign investment became a priority and in 1980. This period can be attributed to a variety of factors. the government also eased capital controls and reduced its bureaucratic red tape to allow private firms to borrow foreign loans without governmental permission.

The densely populated city centers also provide for an untapped. Thus. the infrastructure of Bangladesh remains underdeveloped and this provides a wide array of markets for incoming foreign investment with little or no domestic competition. Furthermore. Page | 10 . financial services etc. construction. Telecommunication. transportation. Banking. Agriculture and Services (excluding financial service Banking). Publication of FDI survey 2008. The country is also abundant in natural resources such as natural gas and coal. The data for analysis have been collected from Bangladesh Bank website on FDI survey. particularly in areas such as power plants. With a 150 million population. This attribute makes the country ideal for labor-intensive industries. However the only limitation to such a market is that the products offered will only appeal to the upper socioeconomic strata or the products will have to low cost items to cater the needs of the general population. sizeable market. Petroleum. the most abundant factor of production is low-cost labor. the country has adopted a sequence of liberalized industrial policy reform for inward FDI. Figure 2 : Cross sectional distribution of FDI inflows to Bangladesh Source: Bangladesh Bank. Here „Others‟ include Manufacturing (excluding textiles). Power and Others sectors. It is also important to realize that the government has neither the capital nor the resources to expand many areas of its infrastructure and consequently has attempted to open its economy towards foreign capital. The sectors included are Textiles. Hence. foreign enterprises are allowed to reduce associated business risks by undertaking joint ventures with domestic private firms. A number of other advantages make Bangladesh a prime destination for FDI.reflective of the increasingly capitalistic model of the economy where growth is fueled primarily by the private sector. Figure 2 below represents a cross sectional FDI inflow distribution into different sectors of Bangladesh.

Sector wise FDI in 2005 Telecommunication 22% 4% 9% 21% 12% Banking 33% Petroleum Textiles Power Others Sector wise FDI in 2006 4% 9% 10% 24% 17% 36% Telecommunication Banking Petroleum Textiles Power Others Sector wise FDI in 2007 3% 8% Telecommunication Banking 13% 26% 38% Petroleum Textiles 12% Power Others Sector wise FDI in 2008 3% 8% 12% 17% 20% 39% Telecommunication Banking Petroleum Textiles Power Others Page | 11 .

Some of the problems which are hindering FDI include: 1. telecom has emerged as one of the fastest growing sectors in the Bangladesh economy. Bangladesh should have been a notable investment destination for foreign investors by now from whatever opportunities it currently extends to them. agriculture and services has decreased from 22% in 2005 to a mere 8 % in 2008. However the second largest recipient in 2005 „Others‟ which included manufacturing. Certainly. has been stable on a whole over a long period of time. Telecommunication has received the largest share of FDI and its share has increased over the years from 33% in 2005 to 39 % in 2008. At the same time. even with some slumps. Besides. The Banking sector also experienced an increase in share of FDI from 12% in 2005 to 20% in 2008. Grameen Phone‟s efforts to loan out mobile phones to female operators in remote villages have also increased the demand for foreign investment in telecom and satellite communication technologies. The success of the Telecommunication sector is largely due to increased privatization efforts by the government. The success of the Textiles sector in attracting FDI is mainly due to the success of the Ready Made Garments (RMG) industry which exploited the availability of cheap labor. The smallest recipient of FDI is the Power sector with on 4% in 2005 and only 3% in 2008. A strong inducement of FDI is that the macro economy of Bangladesh. The Textiles sector however saw in increase in its share from 9% to 12% in 2008. the ability of the workforce to adapt to the requirements and training of foreign funded enterprises is noted to be relatively good. The petroleum sector‟s increased from 21% in 2005 to 26% in 2007. we find that over the years 2005 to 2008. The pie charts therefore only show us how the dimensions of FDI inflow have changed over the years. the country‟s infrastructure needs to be upgraded. Much of this can be explained by the increased competition between large private corporations that have magnified efforts to attract FDI and attain better technology to optimize profits. Page | 12 .From the above figure. Lack of proper advertisements to attract foreign investors in the vital agricultural sector. however it declined to 17% in 2008. It is important to note that FDI inflows have increased each of these years and the above only represents the share of FDI each sector has received relative to the other sectors. the conditions for FDI in Bangladesh can be further improved or needs to be improved particularly in terms of lowering the costs of starting and doing business. Bangladesh however still has to improve the overall investment climate to remove some of the problems. However.

the possibilities for the country‟s future remain hopeful. because of these problems. Frank (1979). Profits would be exported and the interests of the ruling elite would be allied with those of owners of the foreign capital. enhances productivity through technology transfer and fosters economic growth in developing countries. and fostering a “modern” perspective in the local population. Dependency theorists Amin (1974). LITERATURE REVIEW The relationship between Foreign Direct Investment (FDI) and economic growth has been a hot topic of debate in the field of international development and attracted the interest of economists over the past decades. Bangladesh lags behind its neighboring counterparts such as India and Sri Lanka. Despite the pros. transferring technology. The natural linkages that would evolve from locally controlled capital would not occur.2. the Dependency School in the 1970‟s challenged this pervasive belief. It will take time before Bangladesh achieves better results in attracting FDI but as long as the inflows continue to increase. Bureaucracy and corruption which increases the cost of doing business. Poor law and order condition which results in violence and labor unrests. Chase-Dunn (1975) and Bornschier Page | 13 . Several studies have been conducted among both developed and developing countries to investigate the relationship between FDI and economic growth. However. Income inequality would grow and economy would stagnate. 3. it is still viewed as an FDI underperformer and the country is far from achieving its full potential. In many aspects. The earliest works include the classical modernization perspective of Lewis (1948) who argued that the export of capital to undeveloped countries promoted economic growth by creating industries. argued that an economy controlled by foreign interests would not develop organically but grow in a disarticulated manner. particularly the Least Developed Countries (LDCs) . The Neo-classical models of growth identifies FDI as an important source of capital which compliments private domestic investment and creates new job opportunities. Lack of reliable and sufficient power supply. 4.

and Chase-Dunn (1985) supported the above theoretical argument. 1965–75. they found that their measure of foreign capital penetration (PEN: a ratio of foreign investments to total capital stocks) in 1967 had a negative effect on GNP per capita growth. panel data and Page | 14 . This suggests that FDI is more preferable to foreign borrowing in order to achieve a higher growth. Lensink and Marrissey (2001) also found a positive relationship by estimating the standard model using cross-section. they utilized data on FDI flows from developed countries (DCs) to 69 less developed countries (LDCs) for the two decades. Firebaugh (1992) in his paper “Growth Effects of Foreign and Domestic Investment” found a positive relationship between FDI and economic growth. They also observed that FDI has the effect of increasing domestic investment suggesting a complementary relationship. Firebaugh concluded from his reanalysis of Bornschier and Chase-Dunn‟s data that penetration of foreign capital has a positive effect on economic growth but one that is smaller than the positive effect that domestic capital investment has. he challenged the validity of Bornschier and Chase-Dunn‟s (1985) findings and argued that their findings of the negative effects were spurious. Borensztein et al (1998) studied the effect of FDI on economic growth in a cross-country regression framework and found a positive relationship. In this paper. FDI inflows contributed more to GDP growth in South Asia than did an equal amount of foreign borrowing. Their findings suggest that FDI is an important vehicle for the transfer of technology. the 1970s and 1980s. With their pooled data of both developed and developing countries. Agrawal ( 2000) presented empirical evidence on the impact of foreign direct investment (FDI) inflows on domestic investment by national investors and on GDP growth for South Asian countries . suggesting that there exist complementarity and linkage effects between foreign and national investment. contributing relatively more to growth than domestic investment. He found that increases in the FDI inflows in South Asia were associated with a many-fold increase in the investment by national investors. He also found that since 1980. Studies from the 1990‟s produced an ambiguous picture of the relationship between FDI and economic growth as some studies found positive relationship while others found a negative relationship and some of them shows no relationship between the two. The impact of FDI on economic growth is found to be positive for South Asian countries with more open economy.

and found that FDI does compliment private investment in Latin America and thus helps to achieve a faster rate of economic growth. Samsu et al (2008) tested the long run relationship between FDI and Malaysian exports. Though many researches showed a positive relationship between FDI and economic growth. They found these two time series variables to be cointegrated implying a long term relationship between foreign investment and exports. A similar work was done by Kentor (1998) in his paper “The Long‐Term Effects of Foreign Investment Dependence on Economic Growth. which suggests that increases in FDI raise the marginal productivity of private capital via the transfer of more advanced technology and managerial knowhow. 1940–1990” examined the long-term effects of foreign capital penetration Page | 15 .e. thereby inducing higher rates of private investment spending.instrumental variable techniques whereas volatility of FDI has a negative effect. Dixon and Boswell (1996) followed up on Firebaugh‟s (1992) work and found a negative relationship where Firebaugh found a positive one. Amin and Eskander (2006) examined the long run relationship between FDI and economic growth in Bangladesh. Though they did not find any short term relationship. They constructed two new measures of foreign capital penetration: the ratios of (1) foreign stocks to total capital stocks and (2) foreign stocks to gross domestic product (GDP) and their reanalysis of the data with these new measures of foreign investment dependence supported Bornschier and Chase-Dunn‟s (1985) earlier findings of the negative effect of foreign investment dependence. there are also papers which show a negative relationship. Their pooled model using data from Latin American countries tested the complementarity hypothesis. Using three different cointegration techniques. foreign investment into Malaysia leads to higher exports in the long run.2000 and found a positive relationship. Ramirez (2006) analyzed the theoretical and empirical links between FDI and private investment spending in Latin America for the period 1981. they found that there exists a long run positive relationship between FDI and economic growth even though short run error correction models showed negative relationship between the two. they found a positive relation in long run. i. They also found that the evidence for a positive effect of FDI was not sensitive to other explanatory variables which were included.

Maria Carkovic and Ross Levine (2002) using pooled data. This implies that a developing country experiencing an influx of foreign investment will experience higher level of corruption. over-urbanization.and found that peripheral countries with relatively high dependence on foreign capital had a slower economic growth than those less dependent peripheral countries. income inequality. they showed that the more rapid the rate of change in FDI.47 of a percentage point in Thailand and 0. independent influence on growth. Using Corruption Perceptions Index (CPI) scores computed by Transparency International for a panel of 99 countries. This shows that imports contributed more to economic growth than foreign investment. concluded in their econometric study on FDI and GDP growth that the exogenous component of FDI does not exert a robust. His works further showed that a structure of dependency is created that perpetuates these effects.05 percentage point in each country whereas imports contribute about 0. They found the impact of FDI on GDP growth rate to be insignificant. They found that FDI contribution to every one percentage growth point in GDP is about only 0. and social unrest. These studies show that FDI has very little or no significant impact on economic growth rendering it unable to change the fate of developing countries. Bekeke and Mekonnen (2004) examined the impact of FDI on economic growth of Sub-Saharan African countries through its impact on savings and found that the impact of FDI on economic growth was unsatisfactory holding the assumption of efficient market and perfect mobility of Page | 16 .31 of a percentage point in the Philippines. His econometric results showed that FDI inflows do not exert an independent influence on economic growth and also the direction of causation is not towards from FDI to GDP growth but GDP growth to FDI. The consequences of these effects are unemployment. the higher the level of corruption. A similar conclusion was reached by Athukorala (2003) who examined the relationship between FDI and GDP using time series data from Srilankan economy. Damooei and Tavakoli (2006) estimated the output elasticity of FDI and imports in Thailand and in the Philippines during the period 1970-1998. Robertson and Watson (2004) examined the impact of changes in the level of FDI on corruption. Recent studies on the relationship of FDI and economic growth reveals a new dimension in the literature.

openness and FDI-dependence. Their findings conclude that economic growth of Bangladesh is actually a determinant of FDI. Analysis using data from only LDCs shows no relation between FDI and growth. however. however.2006. Sarkar (2007) casts doubt on examined the growth-promoting effect of foreign direct investment. In the case of Bangladesh. Ahamad and Tanin (2010) reviewed the long-run trend of FDI and economic growth in Bangladesh over the period 1975. there is no impact. There has been plenty of research on the relationship between trade and income inequality within countries. for a panel of 51 less developed countries. Region specific analysis shows that in Latin America and South Asia. the time-series analysis observes meaningful positive relationships between FDI and growth only for 3 countries belonging to this group and some other countries. They concluded that it was difficult to generalize that FDI has positive contribution to economic growth of other developing countries like Sub-Saharan African. which is widely supported by the proponents of financial globalization. it is seen that one study shows a long run positive relationship but another more recent study reveals no relation between FDI and economic growth. But by and large no long-term positive relationship exists between the two irrespective of income levels. Page | 17 . The study for only the Srilankan economy shows no relationship between the two.factors of production. For Bangladesh. FDI has a positive impact nn economic growth but for Sub-Saharan countries. The effect of globalization on income inequality has been one of the hottest research interests as globalization has deepened in the 1990s. it can be concluded that analysis using pooled panel data of both developed and developing countries yields an ambiguous result where some shows a positive relation between FDI and economic growth and some shows negative relation. Their econometric analysis of FDI and economic growth shows a positive relationship. As foreign direct investment has increased recently. His analysis shows a rising relationship between growth and FDI (relative to gross capital formation) only for the group of 11 relatively rich and open-economy countries. From the above literatures. this result is misleading as further analysis revealed that it is actually the other way around. concern about the effect of FDI on income inequality has heightened.

The direct impact of FDI on poverty can be seen through the increase in employment and the reduction of people living below the poverty line resulting from the increase in the demand for labor. Tsai (1995) also concluded a similar result that FDI helps to reduce income inequality when capital. (Girling. domestic or foreign. 1985. the level of income inequality also decreases. Choi (2006) using pooled Gini coefficient from 1993 to 2002 data for 119 countries from World Development Indicators 2004. Page | 18 . as well as the economic environment. Taylor and Driffield (2004) also found that inward flows of FDI contributed to increasing wage inequality based on an empirical analysis with the three-digit industry level for UK manufacturing sectors over the period 1983 to 1992. Feenstra and Hanson (1997) using Mexican data from 1975 to 1988. World Bank. Deardorff and Stern (1994) in their paper “The Stolper–Samuelson Theorem: A Golden Jubilee” found that FDI helps to reduce income inequality when implemented to utilize abundant lowincome unskilled labor. As poverty goes down in an economy. other researchers have found that higher FDI leads to increase in income inequality. However.Foreign direct investment can have direct and indirect impacts on poverty reduction in the host country. 1973. found that income inequality increases as FDI stocks as a percentage of GDP increase. found that the rising wage inequality in Mexico is caused by higher foreign capital inflows. 1995) have reached the same conclusion that inward FDI deteriorates income distribution by raising wages in the corresponding sectors in comparison with traditional sectors. Mah (2002) investigated the impact of changes in trade values and FDI inflows on the Gini coefficients in Korea and concluded that globalization tends to deteriorate the income distribution there. 1976.Tsai. The indirect impact of FDI on the reduction of poverty is through economic growth which results in the improvement of living standards due to the increase in GDP. improvement of technology and productivity. stimulates economic growth and its benefits eventually spread throughout the whole economy.Rubinson. Jensen and Rosas (2007) explored the relationship between FDI and income inequality in Mexico and they also found that increased FDI inflows are associated with decrease in income in inequality in Mexico‟s states. Bornschier and Chase-Dunn.

b. Lindert and Williamson (2001) and Milanovic (2002) did not find any significant relationship between FDI and income inequality.Though income inequality has a negative impact on economic growth as concluded by Persson and Tabellini ( 1994). Foreign Aid. From the literature. In the case of Bangladesh. THEORETICAL FRAMEWORK Neo classical theory of growth maintains that economic growth is caused by improvements in the quality if labor (through training and education).e. it can be concluded that the overall impact of FDI on income inequality is ambiguous and mainly depends on the type of FDI. Perfectly competitive market. i. there are also researches which shows that though FDI has an impact on economic development but it doesn‟t affect the profile of income inequality.e. Quazi (2005) finds that aid in the form of loans significantly increases GDP growth rate. improvement in technology ( through research and development) . and others. there is no study which specifically tests the impact of FDI on income inequality. Tsai (1995) after comparing models with and without geographical dummies –such as Asia and Latin America – over the period from 1967 to 1981. the investment is capital intensive or labor intensive. Page | 19 . Voitchovsky(2005) . also concluded that the statistically significant correlation between FDI and income inequality might capture more of the geographical difference in inequality than the negative influence of FDI. i. However it is clear that FDI does gives rise to wage inequality whether it be sectoral wage or regional wage. increase in capital (through higher savings and investment). however. and increase in labor quantity ( population growth) . Neo-classical economists advocate the following strategies should be encouraged: a. the next alternative of foreign funds. Privatization of state owned enterprises.

These policies will stimulate investment. Moreover. For example. FDI-related technological spillovers offset the effects of diminishing returns to capital and keep the economy on a long-term growth path. in contrast. Opening up the domestic economy through encouraging free trade and FDI. higher output and a faster rate of economic growth. 1998). and providing training for the local workforce and upgrading technical and management skills. 1994) or when the benefits of economic growth caused by capital both domestic and foreign spread throughout the economy (Tsai. FDI may play an important role for economic growth. All of these benefits are expected to contribute to higher economic and employment growth which is an effective tool for achieving improvement in the redistribution of income and reduction of poverty. on the one hand. In endogenous growth models. 1995). facilitating access to new and large foreign markets. and through the introduction of alternative management practices and organizational arrangements. In this view. Accordingly. Page | 20 . through capital accumulation and knowledge spillovers. FDI can reduce income inequality when implemented to utilize abundant low-income unskilled labor (Deardorff and Stern. FDI is often assumed to be more productive than domestic investment. 1970).c. The logic behind this is that FDI encourages the incorporation of new technologies in the production function of the host economy (Borensztein et al. A move from closed to an open economy. on the other (de Mello. 1997). FDI can possibly stimulate economic growth through the international trade channel by augmenting domestic capital for exports. Theoretically. d. there are several potential ways in which FDI can cause economic growth.. In neoclassical growth models with diminishing returns to capital. helping transfer of technology and new products for exports. FDI has only a short-run growth effect as countries move towards a new steady state. the impact of FDI on growth is identical to that of domestic investment. Solow-type standard neoclassical growth models suggest that FDI increases the capital stock and thus growth in the host economy by financing capital formation (Brems. endogenous growth models imply that FDI can promote long-run growth by augmenting the existing stock of knowledge in the host economy through labor training and skill acquisition. Hence. Furthermore.

Y = β0 . In this study. Lβ1 . Amin (1974). Therefore an empirical analysis of this issue is needed in order to better understand the role of FDI in a country. enhances productivity through technology transfer and fosters economic growth in developing countries. Agrawal ( 2000). and many others. However. Borensztein et al (1998). FDI may not stimulate host economy because it may lower or replace domestic savings and investment. a Cobb-Douglas production function is used. Moreover. annual GDP has been selected as the measure of economic growth. Neo. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. To test the impact of FDI on growth. Theoretically. or it will not help developing the host country‟s dynamic comparative advantages by focusing solely on local cheap labor and raw materials. (i) Page | 21 . It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources.However. K β2 ……………………………………………. Chase-Dunn (1975) and Bornschier and Chase-Dunn (1985).classical models of growth identifies FDI as an important source of capital which compliments private domestic investment and create new job opportunities. there are also literature against this view where it is said that FDI actually has a negative effect on economic growth. METHODOLOGY AND MODEL FRAMEWORK The purpose of this study is to empirically analyze the impact foreign direct investment has on Bangladesh‟s economic growth and income inequality. FDI may target primarily the host country‟s domestic market and thus not increase exports. It might even adversely deteriorate income distribution by raising wages in the corresponding sector compared to the traditional sector which does not receive FDI. If the size of the traditional sector is relatively large then income inequality may increase. Frank (1979). This view has been supported by Firebaugh (1992).

The marginal productivity of capital is proportional to the amount of production per unit of capital. the assumptions made by Cobb and Douglas can be stated as follows : 1. K = capital and capital respectively. Morrissey(2001) points a number of mechanisms through which aid can contribute to economic growth. (2003). 2. certain modifications have been made. Burnside and Dollar (2000). Hansen and Tarp (2000). Dalgaard et al. Burnside and Dollar (2000) and Brautigam and Knack (2004) find evidence for negative impact of foreign aid and growth. the main role of foreign aid in stimulating economic growth is to supplement domestic source of finance such as savings. The variable K is broken down into three components.K). The marginal productivity of labor is proportional to the amount of production per unit of labor. β β 1 2 are the output elasticities of labor and If the production function is denoted by P = P(L. then so will production. Mosley.Where. Gupta and Islam (1983). while Mosley (1980). In addition. b) aid increases the capacity to import capital goods or technology . et al. Y= GDP . this conclusion applies only to Page | 22 . the partial derivative dP/dK is the rate of change of production with respect to capital and is called the marginal productivity of capital. and Karras (2006). although Burnside and Dollar (2000) concluded that foreign aid has positive effects. Papanek (1973). Gomanee. Dowling and Hiemenz (1982). official development aid also known as foreign aid has also been included. (2004). c) aid does not have indirect effect that reduce investment or savings rate. Boone (1996). It should be noted that. If either labor or capital vanishes. Foreign capital is used as an additional variable. and Jensen and Paldam (2003) find evidence to suggest that aid has no impact on growth. For example. (1987). find evidence for positive impact of foreign aid on growth. In these terms. et al. then the partial derivative dP/dL is the rate at which production changes with respect to the amount of labor. Previous empirical studies on foreign aid and economic growth generate mixed results. 3. thus increasing the amount of investment and capital stock. From a theoretical perspective. Likewise. For the purpose of this study. a) aid increases investment in both physical and human capital. L = labor inputs . Economists call it the marginal production with respect to labor or the marginal productivity of labor. Total labor force has been used as a proxy for labor inputs.

L = labor . Ln Y = β0 + β1 ln L + β2 ln FDInf + β3 ln ODA + β4 GCF ……. formerly gross domestic investment. L β1 . FDInf = FDI inflow . the following function will be used. Hence the model becomes. FDInf β2 .economies in which it is combined with good fiscal. To examine the impact of FDI on income inequality. Thus the new model is Y = β0 . a “ln” transformation is made to make the model linear. Since this is a non-linear model. higher the productive capacity of the economy increases hence higher the economic growth. Khan and Reinhart (1990) using data from developing countries found that private investment has a large direct effect on economic growth. consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. GCF ) Page | 23 . and trade policies. ODA . Tang. ODA β3 . GCF = Gross capital formation net of FDI inflow and ODA received. This result was also obtained by Anderson (1990) in his paper “Investment and Economic growth” where he found that capital accumulation greatly benefits growth in both developing and industrial countries. (iii) The coefficients of the independent variables now give the partial elasticity of output of the respective variable. Economic theory suggests that higher the investment. ODA = official development aid . GINI = F ( FDInf . (ii) Where . Domestic capital is represented by „Gross capital formation‟. This notion was empirically tested. GCF β4 ………………. Selvanathan and Selvanathan (2008) investigated the causal link domestic investment and economic growth in China and found that there exists a bi-directional causality between domestic investment and economic growth. Gross capital formation. monetary.

Though there are other measures of income inequality. and d. Their finding is consistent with recent empirical research on aid ineffectiveness in achieving economic growth. However. Deardorff and Stern (1994) . Ln FDInf + β2 Ln ODA + β3 Ln GCF …. Bornschier and Chase-Dunn.GINI coefficient has been selected as the measure of income inequality. b. Official development aid (ODA) helps to alleviate the problem of low savings and availability of fund and acts as an alternate source of investment creating both employment opportunities and increasing economic growth. For simplicity of the model and interpretation. Therefore the model stands as . therefore higher the value of the coefficient. higher the inequality in income distribution. the anonymity. scale independence. 1985. Theoretically. Chong et al (2009) find aid to be conducive to improvement of income distribution only when the quality of institution is taken into account otherwise the result is not robust. FDI reduces income inequality through increase in employment and demand for labor. This will improve the income distribution in the economy. Later.. Jensen and Rosas (2007) and other researchers found inward FDI reduces income inequality whereas other found that inward FDI deteriorates income inequality (Girling.. It is an aggregate numerical measure ranging from 0 (perfect equality) to 1 (perfect inequality). 1973. theoretically. 1995).Rubinson. 1976. transfer principles. Tsai (1995). higher the level of GCF . (1989) becomes impetus for providing aid to developing countries to assist them in taking-off to a steady state. the variables are taken in „ln‟ form. higher will be the demand for labor and more job opportunities will be created. Ln GINI = β1. The impact of Gross Capital formation on income inequality is theoretically more prominent than other variables. GINI coefficient has been selected because it satisfies four highly desirable properties: a. the “big push” theory by Murphy et al. Since this represents domestic investment. As mentioned in the literature review. c. a majority of literature shows that aid tends to deteriorate income inequality. Solow's growth model provides grounds for the need of ODA to supplement domestic savings in augmenting growth (Dornbusch et al.Tsai. population independence. Chase-Dunn and Rubinson (1978) find that stocks of foreign aid and investment had negative effects on income inequality in both rich and poorer countries.2004). … (iv) Page | 24 .

A positive sign of the coefficient means that the variable has a positive impact on GDP and a negative sign will indicate a negative impact. official development aid and Gross capital formation.477) (0.270 ln ODA + 0.723 + 0. In order to estimate equation (iii) . β2 will be equal to β4 if FDI inflow is equally productive as domestic gross capital formation. The coefficient β1 has a value of Page | 25 . we see that all the coefficients have positive sign which means that they all have a positive impact on GDP.460 ln L + 0.Taking a partial derivative of any of the independent variable with respect to the dependent variable gives us the coefficient β1.22 (0. Ln Y = β0 + β1 ln L + β2 ln FDInf + β3 ln ODA + β4 GCF …….10 (0. Statistical software package EVIEWS 7.00 Adjusted R2 = 98% d= 1. (iii) In the above equation.772 0. FDInf which represents FDI inflow into Bangladesh is the main variable of interest . β2. on Bangladesh‟s GDP.0 has been used to estimate the equation. Similarly. β3 and β4 which are the partial elasticities of output of the respected variable.011 ln FDInf + 0.EMPIRICAL MODEL ESTIMATION Based on the model framework in previous section. equation (iii) will be used to examine the effect of FDI inflow and other independent variables such as Labor force. The data point ranges from 1980 to 2009.09 From the estimation output of equation (iii).009) 0. Ln Y = 0.274) 0.091) 0.060) 0.424 GCF + ut S.E P value R2 = 99% (2. β2 will be equal to β3 if FDI inflow is just as efficient as Official development aid. data for all the variables in the equation have been collected from World Development Indicators from World Bank website.00 (0.

However. ODA has a coefficient of 0.0. Page | 26 . If the coefficients have a positive value. … (iv) In the above equation. FDI inflow (FDInf) has a coefficient of 0. this variable is significant only above 22% level of significance. the coefficients β1.46 % . then a rise in the value of the variables decreases the value of GINI coefficient which indicates that income inequality decreases. this means that if ODA received by Bangladesh increases by 1% then GDP is expected to increase by 0.011%.27% . This means that 99 % of the variation in GDP is explained by the regressors. Our main variable of interest. then GDP is expected to increase by 0. The coefficient of GCF is 0. at 10% level of significance.723 however this value is insignificant due to its high standard error and high p value. This variable is significant at 0% level. β2 and β3 give us the effect each of the variables has on GINI coefficient. The Adjusted R2 = 98% which means that 98% of the variation in GDP is explained by the regressors after adjusting for degrees of freedom. Therefore we can consider its effect to be insignificant. Ho : β1= 0 .424 %. Ln GINI = β1. equation (iv) from modeling framework in the previous section is used. This means that if we set up a hypothesis Ho : β1= 0 H1 : β1≠ 0 We can reject the null hypothesis. then an increase in the value of the variables increases GINI coefficient which indicates that income inequality increases.270 .10.011 which means that if FDI inflow increases by 1% then GDP is expected to increase by 0. GCF is also significant at 0% level of significance. If the coefficients have a negative value. This can be restated as the variable is statistically significant at 10 % level of significance. This means that if the quantity if the Labor force increases by 1% .424 which indicates that if GCF increases by 1%. Like ODA . The equation has a R2 = 99% . then GDP is expected to increase by 0. The intercept has a value of 0. This coefficient has a low standard error and has a p value of 0. Ln FDInf + β2 Ln ODA + β3 Ln GCF …. To examine the impact of FDI and other variables on inequality.460.

0389) 0.29 % .76% From the estimation output. Official development aid and Gross Capital Formation have been collected from World Development Indicators.0000 d= 1. The equation has a R 2 = 25.067 % . we see that the impact of FDI inflow on economic growth is insignificant. data for GINI coefficient has been collected from “The Standardized World Income Inequality Database”.067 % with every 1% increase in FDI inflow. This is the only variable which has an insignificant impact. by Fredrick Solt. This variable is significant at 0% level of significance.0164) 0. This finding corresponds to the findings of Karkovic and Levin (2003) that came to the same conclusion using pooled data. (SWIID v.Saharan African countries. Athukorala Page | 27 . This means income inequality is expected to increase by 0. This variable has a low standard error and is significant even at 0% level of significance.405 Adjusted R2 = 19.0000 ( 0.0004 ( 0.067 Ln FDInf + 0. which means that 25. then income inequality is expected to decrease by 0.231 .3). Data for FDI inflow. RESULTS AND DISCUSSION From the above regression estimation. Bekeke and Mekonnen (2004) for Sub. This is also a significant variable at even 0% level of significance.29 % (0. The coefficient of ODA is 0.231 Ln GCF + ut S.067. we see that if FDInf has a coefficient of 0. Ln GINI = 0.To estimate the equation.E P value R 2 = 25. The data points used ranges from 1973 to 2005.359 indicating that with every 1% increase in ODA received. then GINI coefficient is expected to increase by 0.29% of the variability of GINI is explained by the regressors.0313) 0.359 Ln ODA – 0.359 % . Domestic Gross capital formation (GCF) on the other hand has a coefficient of -0. This means that if GCF increases by 1 % .231% . World Bank website. This means that if FDI inflow increases by 1 % . income inequality is expected to increase by 0.

For every 1% increase in aid GDP is expected to increase by 0. its mainly based on agriculture with labor intensive production process. Dalgaard et al. (2003). et al. Gomanee. For an economy to grow organically. (2004). This result is compatible with economic theory as higher the investment. Since only the direct contribution of FDI inflow to GDP shows an insignificant result. Page | 28 .424 % on GDP for every one percent increase in GCF. In our estimation model. Hansen and Tarp (2000). domestic investment must have a significant contribution to economic growth. it would be incorrect to completely discard the importance of FDI inflow to economic growth. Tang. The second largest impact can be seen from domestic gross capital formation. we find that of all the independent variables in the model. higher the productive capacity of the economy increases hence higher the economic growth. there is a very high possibility that FDI inflow has a lagged beneficial effect on GDP and it compliments domestic capital formation.27%. Labor has the largest output elasticity of 0. Selvanathan and Selvanathan (2008). Both of these effects have not been tested and there is a strong possibility of their occurrence. it has been found that Official development aid also has a significant positive impact for Bangladesh‟s economic growth. Dowling and Hiemenz (1982). This view is supported by Agrawal (2000) who found evidence that FDI inflow in South Asia led to many fold increase in investment by domestic investors suggesting that there exists complementarity and linkage effects between foreign investment and national investment. Moving on to the effects of the other variables. Burnside and Dollar (2000).(2003) for the Srilankan economy and Ahmad and Tanin (2010) for Bangladesh. Gupta and Islam (1983). However.46% of expected GDP increase with 1% increase in labor force. Similar empirical conclusions have been reached by Anderson (1990). Since Bangladesh is a developing country. A similar outcome is also predicted by Papanek (1973). GCF has an expected impact of 0. This result is also predicted from a theoretical perspective as it supplements domestic source of savings. and Karras (2006). Therefore this result is expected as higher number of labor means more available inputs for the agricultural sector and labor intensive production sector. all these researchers have found a positive impact of foreign aid on economic growth.

et al. For every percent increase in FDI inflow.The value of the intercept is found to statistically insignificant. The estimation result shows that with every percent increase in Official development aid received. Hansen and Tarp (2000). Since this investment is made by domestic investors. these sectors are mainly located in the urban areas and demand skilled to semi-skilled labors. Unlike FDI. there is more chance of using labor intensive technology and hence employment of semi-skilled and low-skilled workers. (2004). Dowling and Hiemenz (1982). we see that even though the impact of FDI inflow to economic growth was found to be insignificant. This means that in the absence of Labor and other variables. (2003). Burnside and Dollar (2000). This result is consistent with the findings of Chase-Dunn and Rubinson (1978). As a result. They also found FDI inflow to negatively affect income inequality. Our estimation model shows that If GCF increases by 1 % . Dalgaard et al. When we look at the estimation of equation (iv). Chong et al (2009). This finding is perfectly compliant with economic theory as higher level of capital formation will lead to higher level of demand for labor and creation for more job opportunities. instead of the abundant cheap unskilled labor. and Karras (2006). income inequality is expected to increase by 0. ODA is perceived as an alternative source of funds for investment leading to employment opportunities and economic growth which ultimately leads poverty reduction . Gomanee. a wage inequality is created between labors employed in the manufacturing and agricultural sector. Official development aid. domestic gross capital formation shows to have a positive impact on income inequality. GDP would be zero. income inequality is reduced by 0. However the majority of the labor force is located in the rural sector and thus cannot access any formal training program offered by these sectors.35 % . a lot of studies have found foreign aid to cause income inequality.06% . Even though the FDI in the textile sector leads to employment generation. Gupta and Islam (1983). This view is also shared by Papanek (1973). Since the basis of the model is Cobb-Douglas production function.23% . though a significant contributor to GDP. One possible explanation maybe that most of the FDI inflow in Bangladesh leads to the use of trained skilled labors such as in the telecom industry and other manufacturing industries. income inequality is expected to increase by 0. is a source of income inequality. this finding is compliant with the first assumption of the model. it has a negative impact on income inequality. One possible reason is the level of Page | 29 . Even though theoretically.

it is useless for the donor country to transfer resources in the form of aid. LIMITATIONS Since Bangladesh gained its independence not so in the distant past.corruption in Bangladesh where the ruling elites tend to realize maximum benefits from the aid. without institutional reform. Overall. Examining the lagged effect of FDI using advanced econometric model would also have given a more detailed picture of the FDI scenario. Hence low number of observation points is one the limitations of this study especially since data for labor force has only been formally recorded since 1980. the number of postindependence data is very limited. Foreign aid can help income redistribution only when the quality of institution is taken into account ( Chong et al . 2009 ). from the analysis. According to Auer (2007). even though the impact is very small. Page | 30 . we find that foreign direct investment into Bangladesh does not have a significant contribution in Bangladesh‟s economic growth but instead it does lead to income inequality. it is still found to be statistically significant.

Currently Bangladesh provides an attractive investment regime but the response from the investor has not been very encouraging. major policy reforms regarding favorable FDI conditions was made during the 80s and during the mid-90s. then an appropriate policy mix is necessary to achieve these. poor law and order condition. Even though FDI inflow did not show any significant impact on economic growth. The importance of FDI cannot be ignored hence the investment climate in the country must be improved through appropriate measures such as de-regulation in economic activity. we found it to a negative impact in income distribution. In our econometric result. If the ultimate objective of the government is to attract FDI for development. In Bangladesh. empirical studies have found mixed results. Page | 31 . road network. However the investment climate has not improved in Bangladesh as a result of political instability and disturbance. Though theoretically. Other variables such as Official development aid. domestic gross capital formation and the number of people in the labor force all were found to have a statistically significant positive impact on economic growth. railways and telecommunication facilities etc. poverty reduction and growth. however this impact was found to be small.CONCLUSIONS This paper has examined the impact of FDI on economic growth and income inequality using time series data from Bangladesh economy. Even though development aid was found to be a significant contributor to growth we found it to have a significant negative impact on income inequality. it was shown that FDI inflow into Bangladesh does not exert any independent influence on its economic growth. FDI is supposed to have a positive impact on economic growth and income inequality. poorly developed infrastructure. lack of power and low level of human capital. developing the port network. creating more transparency in the trade policy and more flexible labor markets and setting a suitable regulatory framework and tariff structure. The attitude of the government of Bangladesh towards FDI is positive. there was an influx of FDI and it has grown ever since.

Lee. Mekonnen (2004). 092. 1974. Borensztein. Bornschier. Bekeke. How Does Foreign Direct Investment Affect Economic Growth? Journal of International Economics 45:115-135. J. Ahamad and Tanin (2010) . Journal of the institute of Bankers Bangladesh. Determinants of.uni-muenchen. Contribution of foreign direct investment to the economic growth of Sub-Saharan African countries. "Politics and the effectiveness of foreign aid. The Ethiopian Economic association. 1998. New York: Monthly Review Press.. P. The Dynamic Relationship between Foreign Direct Investment and Economic Growth in Bangladesh : A Cointegration Approach .40. and the Relationship between FDI and Economic Growth in Bangladesh . De Gregorio.289–329. 1985. pp 51. Samir. 2 vols. Issue 8. Boone. World Development. and Christopher Chase-Dunn. (1996). E. No.REFERENCES Agrawal (2000) .ub. 9th International Conference on Srilankan Studies. Dennis (1990) . New York: Praeger. Volume 18 . Shahid Uddin (2006) . Investment and economic growth. p. ECONOMIC IMPACT OF FOREIGN DIRECT INVESTMENT IN SOUTH ASIA. Sakib and Eskander. J. Transnational Corporations and Underdevelopment. Volker. Full Paper no. vol. Amin. Authokorala (2003) . Page | 32 ." European Economic Review. Online at http://mpra. Anderson. Accumulation on a World Scale: A Critique of the Theory of Under-Development. 1 .73 . The impact of foreign direct investment for economic growth : A case in Srikanka.de/20236/ Amin. Vol 53 .W.

and S.pdf Page | 33 . and D. institutions.13.bangladeshbank. No. Stanford University. Applied Economics Letters.Gradstein Mark.D. p. 2006. Changkyu Choi (2006) .org/pub/halfyearly/fdisurvey/fdisurveyjanjun2008. “International Economic Dependence in the World-System. dissertation. C. American Journal of Sociology. The American Economic Review (AER). 13. 1975b. (1978) . Cross section sector wise FDI inflow http://www. “A Growth Model of International Direct Investment”.3 Chong.847–868. C. Hans (1997).” Ph. and growth. Vol 140 . D.Burnside. R. Public Choice .Alberto. 1975a. Knack (2004). Christopher. A. vol. ." American Economic Review. p. Brems. Vol 84.” Economic Development and Cultural Change.” American Sociological Review 40:720–38. 320 . "Aid. Chase-Dunn. “The Effects of International Economic Dependence on Development and Inequality: A Cross-National Study. Rubinson.” Does foreign direct investment affect domestic income inequality?” . No. Cross-national evidence of the effects of Investment and Aid on Economic Growth and Inequality : A survey of findings and a reanalysis . vol. policies.255-285. Brautigam. and governance in Sub-Saharan Africa. Department of Sociology.90.31. Foreign aid. Chase-Dunn. Dollar (2000). Can foreign aid reduce income inequality and poverty ? . 811–814. 1/2 . 60(3). Calderon Cecilia (2009) .

. Glenn. Hansen. Firebaugh.” American Journal of Sociology 102 (2): 543–62. Asian Development Bank: Manila.handle. 371–93. Frederick Solt. pp. 1992. S. M. NI. Damooei and Tavakoli (2006) ." Economic Office Report Series 3. (1994) The Stolper–Samuelson Theorem: A Golden Jubilee. and Hanson.. William J. H. 1996. H. and U. The Journal of Developing Areas. "On the empirics of foreign aid and growth. Frank. 39.Dalgaard. Dowling. Vol. and Stern. 2 . “Growth Effects of Foreign and Domestic Investment. 79-100 Deardorff. C. No. 5-44. http://hdl. p. (1997) Foreign direct investment and relative wages: evidence from Mexico‟s maquiladoras. R. 2008-09. and Terry Boswell. (1996) "Why are Latin America's Saving Rates so low? An International Comparative Analysis". 42. Dependent Accumulation and Underdevelopment. Journal of International Economics. The Effects of Foreign Direct Investment and Imports on Economic Growth: A ComparativeAnalysis of Thailand and the Philippines (1970-1998) .net/1902. Hiemenz (1982). and F. 1979.1/11992 V3 [Version] Page | 34 .191–216. Edwards. J. R. 51. Ann Arbor. G. and Denominator Effects: Another Look at Foreign Capital Penetration.” American Journal of Sociology 98 (1): 105–30. vol. New York: Monthly Review Press. C. Journal of Development Economics.114. Feenstra. Andre Gunder. "Aid. Dixon. "The Standardized World Income Inequality Database". Disarticulation. Savings and Growth in the Asian Region. Tarp (2004). A." Economic Journal. University of Michigan Press. “Dependency.

vol. 130. in Structures of Dependency (Eds) F. Why Do Foreign-Owned Firms Pay More? The Role of On-theJob Training. pp. 83–101. Hansen. Görg.. 3. R. 1. Paldam (2003). Reidel Publishing Company: Dordrecht. and F. D. and Sapsford. 34. Gomanee. and M. "Aid effectiveness disputed. (2006). Page | 35 . Weltwirtschaftliches Archiv. 3. “ What does Liberalisation Do for Exports and Growth?”. "Can the New Aid-Growth Models Be Replicated?. 143. no. S.18.1055–1075. (1973) Dependency and persistent income inequality. Gupta. M." Journal of International Development. P. Review of World Economics / Weltwirtschaftliches Archiv. Vol. Islam (1983). 152-73. Karras. S. vol. pp. Girling. L. Hejazi and Pauly (2003). CA. Savings and Growth—An International Cross-Section Study. pp. vol. K. K. p. Girma. Morrisey (2005).7. Jensen. Motivations for FDI and Domestic Capital Formation. Institute of Political Studies. Greenway. Tarp (2000). Strobl & Walsh (2007) ..17. No. D. Bonilla and R.2003–17. and O. "Aid and growth in Sub-Saharan Africa: accounting for transmission mechanisms. p. Institute for Economics: Aarhus. 282-289. Foreign Capital. Stanford.12. (1994).375–398." Journal of International Development. Journal of International Business Studies.8. A. "Foreign aid and long-run economic growth: empirical evidence for a panel of developing countries. G. pp." Journal of International Development. vol. H.15–28. p. Vol.Girling. no. no." Working Paper No. 464-482. No.

1 (Autumn. 2006). vol.Jeffery (1998) . (2001).: Brookings Institution. (2002). D. World Bank Policy Research Working Paper 876. No.1. 81-97 Milanovic. and Williamson. J. Horrell (1987). (1980). Vol. vol. NBER Working Paper 8228. Morrissey. H.616–641. J.Kentor. 1948." Progress in Development Studies. p. 4 (January 1998). (2001). S.1. Mah. Volume 18 .387. "Does aid increase growth?. no. Source: The Journal of Developing Areas.42. and S.2. Mosley. vol. Does globalization make the world more unequal?. no. 103. B.79–95. Lindert. Economic Journal. G. 40. P. O. 1940–1990. pp. no. Hudson. Cleona. p. P. savings and growth revisited. (2002) The impact of globalization on income distribution: the Korean experience. Page | 36 .D Ramirez. pp. Khan and Carmen M. Washington. World Development.37-50. Aid. Applied Economics Letters. Private investment and economic growth in developing countries . 1944. Debtor and Creditor Countries: 1938. Mohsin S. The American Journal of Sociology. Issue 1. Can we discern the effect of globalization on income distribution? Evidence from household budget surveys." Oxford Bulletin of Economics and Statistics. p. J. Does Foreign Direct Investment Enhance Private Capital Formation in Latin America? A Pooled Analysis for the 1981-2000 Period. Reinhart (1990) . 9. "Aid. Lewis. The Long‐Term Effects of Foreign Investment Dependence on Economic Growth. P. the public sector and the market in less developed countries. Miguel.C. No. 1024-1046 . Mosley. 1007–9. Vol.97.

(1976) The world economy and the distribution of income within states: a crossnational study. 7-25. 27. "The effect of aid and other resource transfers on savings and growth in less developed countries. Vol. Online at http://mpra. pp. Journal of Political Economy. 2007). Romer. Rahim M. R. vol. Robertson and Watson (2004) . Vol. no. 415-25. Vol: 38.unimuenchen.82. (1985) “Exports and Economic Growth. Journal of Development Studies.ub. Prabirjit Sarker (2007) . 41. “Endogenous technological change”. P. “Effects of foreign aid on GDP growth and fiscal behavior: An econometric case study of Bangladesh” . 4 (Apr. Corruption and Change: The Impact of Foreign Direct Investment. 3 (Summer. (1972). 1990-2000” .” Foreign Direct Investment and Income Inequality in Mexico. (1990). Jensen and Guillermo Rosas(2007).. International Organization. and Hatcher.935–950. F. R. No. 61. 1970-2002 . (1991) “Inward Oriented and Outward Oriented Trade Strategies”. No. G. 467-487 Papanek. pp. pp. 638–59. D." Economic Journal. 2004).Nathan M. Ram.de/5176/ Quazi. vol. The Journal of Developing Areas. p. EconomicDevelopment and Cultural Change. T. Page | 37 . American Economic Review. Some Additional Evidence”. 98: s71– s103. 385-396 Rubinson. (2005).2 . 25. Does Foreign Direct Investment Promote Growth? Panel Data and Time Series Evidence from Less Developed Countries.327. No. Strategic Management Journal. pp. Salvatore. vol. 33.

1994). 3 . 70: 65-94. (2008) . World Development. No. Tsai. Vol. “Does the Profile of Income Inequality Matter for Economic Growth?: Distinguishing betweenthe Effects of Inequality in Different Parts of the Income Distribution” .Samsu.12 Sarah Voitchovsky (2005). 3 No. P. (1995) Foreign direct investment and income inequality: further evidence. Foreign Direct Investment. (1956). Ooi & Ghazali (2008) Causal Links between Foreign Direct Investment and Exports: Evidence from Malaysia .-L. APPENDIX Time series data for Bangladesh Source: WDI World Bank website for GDP. pp. “Is Inequality Harmful for Growth?” .3 for Income Inequality Page | 38 . No. and Economic Growth in China . 2008/19. Paper No. FDI.A and Selvanathan. 10. Tang. ODA and GCF SWIDD v. 23. S. pp.. Vol.Sumei. E. World Institute for Development Economics Research . The American Economic Review. 469–83. Journal of Economic Growth. Journal of Economics. 600-621. Vol. International Journal of Business Management. Selvanathan. 3 (Jun. Domestic Investment. Torsten Persson and Guido Tabellini (1994). R. 84. 273-296. “A Contribution to the theory of economic growth”. Solow. Derus.

590.130.000 175.415.000 $ 1.160.099.566.000 $ 3.561 $ 19.768.090.300 394.700 71.042.000 $ 1.000 $ 1.970.668.145.040.468.000 6.752.071.830.613.850.690.115.700.000 $ 1.099.015.246.543.010.000 4.030.550.760.784 40.956 49.40309 36.390.560 $ 5.95514 40.902.519.000 $ 309.736 $ 68.000 $ 10.000 $ 1.760.780 1.000 $ 1.854.000) 8.945.678 $ 89.580.300.238.422 66.870.000) 2.414.000 11.530.YEAR 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GDP $ 6.000 $ 914.976 $ 61.481.587.000 $ 1.000 $ 9.150 $ 5.163.470.320.150.631 43.944 $ 21.126.000 250.000 8.486.113.226.42129 42.049.420.916 $ 10.000 539.694.556.000 2.16842 34.073.482.59409 35.404.400.639.000 13.000 $ 1.000 2.000 1.000 10.486.297.027.000 7.420.610.952.245.813 39.54761 35.560.200.987.284.798.889.787.847 $ 47.000 $ 988.407.200.799.000 $ 1.061.730.069.48898 38.24467 45.460.410.030.359.166.000 $ 1.708.162.000 $ 17.000 ODA $ 223.000 $ 1.315.660.785.000 9.19409 47.042 78.644.800 92.721.000 $ 12.115.000 $ 3.281.866 $ 8.540.000 $ 1.109.641 60.Jun 2008 Unit: Million US dollar Page | 39 .000.107.042.344 $ 30.69909 33.000 $ 10.010.147.130.259.554.300.538.957.000 2.781.784.000 $ 2.550.478.508.818.980.830 64.138.043 42.54983 45.510.288.765.000 $ 1.000 $ 497.945.570.450.000 $ 3.072.350.613.879 51.408.255 75.76556 37.932 $ 25.199.06805 46.140.500.638.91192 34.282.000 $ 1.220 $ 5.400.378.878.421.728.951 54.680.223.000 3.000 $ 11.000 1.469.000 2.659 38.000 2.925.547 $ 9.414.300 $ 1.670.848.200.744.175 70.000 $ 4.413.513.350.825.665.000) (6.710 $ 18.000 $ 231.318.214.424.632.200 $ 7.641 $ 42.863.252.379 $ 47.000.067.400.651 52.379.440.000 9.64561 43.000 $ 5.186.161 53.22378 31.000 2.769.61521 47.227 47.219.000 $ 1.553 $ 15.114.939.787.970.754.799.000 $ 8.006 37.230.960 $ 40.22976 33.93376 34.1244 36.989.072 62.520.800 496.430.07084 33.430.370.670.230.000 $ 1.828.000 5.150.000 6.460.333 5.850.541 44.000 $ 1.277.960.140.395.162 58.162.442 FDI net inflow $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 90.444.903.047.04115 30.900 $ 918.510.000 $ 1.600.878.340.767 $ 31.000 $ 3.680.885.000 $ 1.929 57.961.000 $ 3.500.317.000 $ 13.228.216.69335 50.000 400.083.400.000 19.000 $ 421.730 $ 33.000 $ 328.000 $ 3.707 76.842.000 6.000 $ 1.798.258.000 7.655.940.000 591.000 GCF GCF net of FDI and ODA $ 295.183.901.585.060 $ 33.000 $ 16.89144 47.000 3.621.219.498.746.515.484.087.079 SECTOR WISE FDI INFLOW Source: Bangladesh Bank FDI survey Jan.560.534.769 $ 21.581.870.360.900 278.368.599.000 $ 1.091.459.62727 36.182.000 1.230.487.449.116.000 $ 1.46442 33.000 $ 15.569.312 46.100 $ 6.910.110.000 $ 1.650.128.240.478 56.814.254.000 $ 21.913.700 $ 702.000 $ 522.686.535.552.000 $ 1.880.650.911.000 $ 354.000 (8.462.171.645.000 $ 716.100.659 $ 13.000 $ 4.012 $ 60.861 68.000 (550.749.410 $ 18.667 $ 999.526.000 12.757.776.742.700.19065 33.459 61.000 9.000 1.460.000 $ 1.530.780.15752 35.799.600.018.124.661.000 5.071 $ 51.442.713.550.000 $ 19.462 $ 46.104 $ 12.337.762.000 $ 1.000 $ 2.850 14.378.086.809.737.030.639 73.240.300.89352 28.560.778.192.7459 29.000 $ 1.000 $ 1.373 $ 79.660.000 319.000 $ 576.75301 34.000 $ 1.000 $ 8.060.200.861.000 $ 792.402.015.000 4.131.784.000 3.720.440 3.650.750.439.043.220.650.767.390.421.000 2.339.790.310.483.000 $ 1.900 11.320.300.538 $ 44.000 $ 460.661.148 $ 45.231.092.869 $ 19.000 14.234.286.530.619.615.514.002.010.000 $ 783.000 3.000 1.160.000 7.299.720.347 $ 30.000 $ 845.840.485 $ 56.000 2.18878 33.612.155.447.126.666.000 $ 1.373 $ 26.000 $ 578.630.000 $ 2.800 $ 1.758.571.000 $ 575.015.000 $ 666.000 3.868.836.000 16.162.161 $ 19.000 1.288.808.000 $ 10.820.768.011.044 71.392.470.000 $ 2.050.384 $ 23.300.560.210.274.280.000 Labor GINI NET 42.000 $ 1.000 $ 350.629.473.427 $ 37.270.90644 36.460.000 $ 14.047.358.

82 93.77 2006 267.63 768.85 744.42 25.64 803.96 181.96 60.62 2007 304.53 27.74 74.88 168.99 105.83 204.71 91.89 94.1 60.91 156.98 29.83 792.86 73.Sector Telecommunication Banking Petroleum Textiles Power Others Total 2005 261.97 129.45 24.68 Sector wise FDI inflow in percentage Sector Telecommunication Banking Petroleum Textiles Power Others Total 2005 33% 12% 21% 9% 4% 22% 100% 2006 36% 17% 24% 10% 4% 9% 100% 2007 38% 12% 26% 13% 3% 8% 100% 2008 39% 20% 17% 12% 3% 8% 100% Page | 40 .77 2008 299.45 63.64 173.8 132.

723507 0.Regression Output Impact of FDI on economic growth Dependent Variable: LOG(GDP) Method: Least Squares Date: 09/19/11 Time: 17:33 Sample (adjusted): 1980 2009 Included observations: 28 after adjustments Variable Coefficient Std.0002 0.000000 Mean dependent var S. C LOG(LABOR) LOG(FDINF) LOG(ODA) LOG(GCF) 0.424082 2.021433 -2.011619 0.0001 R-squared Adjusted R-squared S.783540 -2. Durbin-Watson stat 24.459069 -3.273669 0.E.1062 0.681337 1.990176 0.476696 0.270806 0.33942 0. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.5804 0.7728 0.292126 1.988468 0.049298 0.2257 0.009334 0.244911 4.448434 4.D.460130 0.091300 0. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter.30007 579.055897 47.060877 0.644918 0.948707 1.097778 Page | 41 . Error t-Statistic Prob.

D.951939 Page | 42 .95147 1. 3.197652 0. LOG(FDINF) LOG(ODA) LOG(GCF) 0.Regression output Impact of FDI on income inequality Dependent Variable: LOG(GINI) Method: Least Squares Date: 09/19/11 Time: 17:37 Sample (adjusted): 1973 2005 Included observations: 30 after adjustments Variable Coefficient Std.031364 0.075287 11.016419 0.230644 0.0004 0.252986 0.0000 0.140206 0. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter.45565 -5. Error t-Statistic Prob.530760 17.038923 4.359290 -0.996765 -0.405427 Mean dependent var S.614882 0.156526 -0.0000 R-squared Adjusted R-squared S.066913 0.856645 -0.925656 0. of regression Sum squared resid Log likelihood Durbin-Watson stat 0.E.

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.