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Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach

We tested the causality between FDI and its determinants in Bangladesh in the presence of structural break harnessing Vector Autoregression (VAR) model and Granger causality test. Regressors such as GDP growth rate, inflation, interest, corporate tax, exchange and wage rate, and trade openness (TO)...

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Autores principales: Morshed, Niaz, Hossain, Mohammad Razib
Formato: Online Artículo Texto
Lenguaje:English
Publicado: Springer International Publishing 2022
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9191542/
https://www.ncbi.nlm.nih.gov/pubmed/35729877
http://dx.doi.org/10.1007/s43546-022-00247-w
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author Morshed, Niaz
Hossain, Mohammad Razib
author_facet Morshed, Niaz
Hossain, Mohammad Razib
author_sort Morshed, Niaz
collection PubMed
description We tested the causality between FDI and its determinants in Bangladesh in the presence of structural break harnessing Vector Autoregression (VAR) model and Granger causality test. Regressors such as GDP growth rate, inflation, interest, corporate tax, exchange and wage rate, and trade openness (TO) have been used. VAR model finds that interest, tax, wage, and exchange rate do not affect inward FDI. However, the inflation rate and TO significantly impact the inward FDI in Bangladesh. The Granger causality test reveals a bidirectional causality in the FDI–inflation and FDI–TO nexus, whereas other explanatory variables do not cause the FDI granger. Variance decomposition (VDC) and impulse response function (IRF) assessment approve strong, moderate, and poor or no explanatory power of TO, inflation, and other explanatory variables, respectively. Regarding FDI–inflation bidirectional causality, we observed both natural (inflation truly causes FDI) and fake causality (FDI does not necessarily cause inflation). Therefore, when inflation causes FDI, then Bangladeshi Taka (BDT) becomes strong against USD, which increases import and reduces export (import > export). Due to the negative trade balance, this is true for Bangladesh. However, if FDI causes inflation, it will depreciate BDT; consequently, the export will surpass the total import, which is not the case in Bangladesh. Therefore, inflation causes FDI in Bangladesh, and this punch line ends the ongoing debate in the FDI–inflation–exchange rate nexus in Bangladesh. Finally, we recommend decreasing the lending interest rates to encourage further investment, adopting tax holidays, developing a skilled and semi-skilled workforce to harness the advantage of lower wage rates, and being more open to facilitating FDI-led development. SUPPLEMENTARY INFORMATION: The online version contains supplementary material available at 10.1007/s43546-022-00247-w.
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spelling pubmed-91915422022-06-17 Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach Morshed, Niaz Hossain, Mohammad Razib SN Bus Econ Original Article We tested the causality between FDI and its determinants in Bangladesh in the presence of structural break harnessing Vector Autoregression (VAR) model and Granger causality test. Regressors such as GDP growth rate, inflation, interest, corporate tax, exchange and wage rate, and trade openness (TO) have been used. VAR model finds that interest, tax, wage, and exchange rate do not affect inward FDI. However, the inflation rate and TO significantly impact the inward FDI in Bangladesh. The Granger causality test reveals a bidirectional causality in the FDI–inflation and FDI–TO nexus, whereas other explanatory variables do not cause the FDI granger. Variance decomposition (VDC) and impulse response function (IRF) assessment approve strong, moderate, and poor or no explanatory power of TO, inflation, and other explanatory variables, respectively. Regarding FDI–inflation bidirectional causality, we observed both natural (inflation truly causes FDI) and fake causality (FDI does not necessarily cause inflation). Therefore, when inflation causes FDI, then Bangladeshi Taka (BDT) becomes strong against USD, which increases import and reduces export (import > export). Due to the negative trade balance, this is true for Bangladesh. However, if FDI causes inflation, it will depreciate BDT; consequently, the export will surpass the total import, which is not the case in Bangladesh. Therefore, inflation causes FDI in Bangladesh, and this punch line ends the ongoing debate in the FDI–inflation–exchange rate nexus in Bangladesh. Finally, we recommend decreasing the lending interest rates to encourage further investment, adopting tax holidays, developing a skilled and semi-skilled workforce to harness the advantage of lower wage rates, and being more open to facilitating FDI-led development. SUPPLEMENTARY INFORMATION: The online version contains supplementary material available at 10.1007/s43546-022-00247-w. Springer International Publishing 2022-06-13 2022 /pmc/articles/PMC9191542/ /pubmed/35729877 http://dx.doi.org/10.1007/s43546-022-00247-w Text en © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2022 This article is made available via the PMC Open Access Subset for unrestricted research re-use and secondary analysis in any form or by any means with acknowledgement of the original source. These permissions are granted for the duration of the World Health Organization (WHO) declaration of COVID-19 as a global pandemic.
spellingShingle Original Article
Morshed, Niaz
Hossain, Mohammad Razib
Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach
title Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach
title_full Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach
title_fullStr Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach
title_full_unstemmed Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach
title_short Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach
title_sort causality analysis of the determinants of fdi in bangladesh: fresh evidence from var, vecm and granger causality approach
topic Original Article
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9191542/
https://www.ncbi.nlm.nih.gov/pubmed/35729877
http://dx.doi.org/10.1007/s43546-022-00247-w
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