Do the Inward and Outward Foreign Direct Investments Spur Domestic Investment in Bangladesh? A Counterfactual Analysis

Abstract

The net contribution of the decomposed measures of foreign direct investment (FDIs), e.g., the inward and outward flows of FDIs, to domestic investment is still inconclusive in the case of underdeveloped and developing countries. The current literature bears testimony to this fact. Hence, this research examines the impact of inward and outward foreign direct investments (FDIs) on the domestic investment in Bangladesh. This study considers annual time series data from 1976 to 2019 and estimates this data property under the augmented ARDL approach to cointegration. In addition, this research employs the dynamic ARDL simulation technique in order to forecast the counterfactual shock of the regressors and their effects on the dependent variable. The results from the augmented ARDL method suggest that the inward FDI has a positive impact on domestic investment, while the outward FDI is inconsequential in both the long run and the short run. Besides, our estimated findings also show the economic growth’s long-run and short-run favorable effects on domestic investment. At the same time, there is no significant impact of real interest rates and institutional quality on domestic investment in the long run or the short run in Bangladesh. In addition, the counterfactual shocks (10% positive and negative) to inward FDI positively impact domestic investment, indicating the crowding-in effect of the inward FDI on the domestic investment in Bangladesh. As the inward FDI flow is a significant determinant for sustained domestic investment in Bangladesh, the policy strategy must fuel the local firms by utilizing cross-border investment.