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28/03/2024
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Islam, M. M. (2024). An empirical analysis of foreign direct investment, ready-made garment exports, and employment in Bangladesh. Journal of International Economics and Management, 24(1), 17-39. https://doi.org/10.38203/jiem.024.1.0078
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An empirical analysis of foreign direct investment, ready-made garment exports, and employment in Bangladesh
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Abstract
This study investigates the relationship between ready-made garment (RMG) exports and foreign direct investment (FDI) inflows, including the relationship between employment and RMG exports in Bangladesh. Using annual time series data from 1991 to 2020, an empirical analysis was performed employing the Johansen cointegration approach and a vector error correction model to determine the long- and short-run relationships between RMG exports and FDI inflows. The results indicate that FDI inflows and RMG exports have a negative relationship in the long run. In the short run, the dynamic adjustment of the equilibrium relationship is justified only for RMG exports. Furthermore, the econometric relationship between RMG employment and exports is examined using an autoregressive distributed lag-bounds test approach. The estimated model reveals a significant statistical relationship between RMG employment and exports in the long run. In the short term, the convergence process is found to be statistically consistent. Additionally, the findings suggest that the government should initiate proper steps in infrastructure development to attract higher FDI inflows and accelerate RMG exports for faster economic growth. Moreover, comprehensive measures are required to produce a skilled workforce or create alternative employment sources to address the huge unemployment problem if full automation occurs in manufacturing industries.
Article Details
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Keywords
RMG exports, FDI inflows, Employment, Vector error correction model, Autoregressive distributed lag
References
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ADB. (2015), Bangladesh consolidating export-led growth, Asian Development Bank, Mandaluyong.
Adhikary, B. (2012), “Impact of foreign direct investment, trade openness, domestic demand, and exchange rate on the export performance of Bangladesh: a VEC approach”, Economics Research International, Vol. 2012, 463856.
Ahamad, M. and Tanin, F. (2010), “Determinants of, and the relationship between FDI and economic growth in Bangladesh”, Bonn Economic Discussion Papers No. 01/2010, Bonn Graduate School of Economics (BGSE), University of Bonn, Bonn.
Anh, D., Song, Y. and Li, M. (2021), “The relationships between foreign direct investment, start-owned investment, private investment, import, export and economic growth in Vietnam”, The Singapore Economic Review, Article in Press.
Arslan, U., Saglam Celikoz, Y. and Guzel, A. (2018), “Causal relationship between foreign direct investment and export: the case of developing economies of Asia”, Asian Economic and Financial Review, Vol. 8 No. 4, pp. 537 - 551.
Artuc, E., Christiaensen, L. and Winkler, H. (2019), “Does automation in rich countries hurt developing ones? Evidence from the US and Mexico”, World Bank Policy Research Working Paper No. 8741, World Bank, Washington D.C.
Baiashvili, T. and Gattini, L. (2020), “Impact of FDI on economic growth: the role of country income levels and institutional strength”, Economics-Working Paper 2020/02, European Investment Bank, Luxemburg.
Bangladesh Bank. (2020), Quarterly review on RMG: January-March FY’20, Bangladesh Bank, Dhaka.
Bazan Navarro, C.E. and Alvarez-Quiroz, V. (2022), “Foreign direct investment and exports stimulate economic growth? evidence of equilibrium relationship in Peru”, Economies, Vol. 10 No. 10, pp. 11 - 16.
BGMEA. (2020), “About garments industry”, Available at https://www.bgmea.com.bd/page/AboutGarmentsIndustry (Accessed 05 June, 2021).
Bhatt, P. (2013), “Causal relationship between exports, FDI and income: the case of Vietnam”, Applied Econometrics and International Development, Vol. 13 No. 1, pp. 161 - 176.
Bouras, H. and Raggad, B. (2015), “Foreign direct investment and exports: complementarity or substitutability an empirical investigation”, International Journal of Economics and Financial Issues, Vol. 5 No. 4, pp. 933 - 941.
Carril-Caccia, F. and Pavlova, E. (2018), “Foreign direct investment and its drivers: a global and EU perspective”, ECB Economic Bulletin, No. 4, Available at https://www.ecb.europa.eu/pub/economic-bulletin/articles/2018/html/ecb.ebart201804_01.en.html (Accessed 05 June, 2021).
Dey, S. and Awal, B. (2017), “Impacts of foreign direct investment on economic growth of Bangladesh: an econometric exercise”, Asian Business Review, Vol. 7 No. 2, pp. 71 - 78.
Engert, W. and Hendry, S. (1998), “Forecasting inflation with the M1-VECM: part two”, Bank of Canada Working Paper 98-6, Bank of Canada, Ottawa.
Engle, R. and Granger, C. (1987), “Co-integration and error correction: representation, estimation, and testing”, Econometrica, Vol. 55 No. 2, pp. 251 - 276.
Export Promotion Bureau Bangladesh. (2022), Pocket export statistics FY 2021-2022, Export Promotion Bureau, Bangladesh.
Goswami, C. and Saikia, K. (2012), “FDI and its relation with exports in India, status and prospect in North East region”, Procedia - Social and Behavioral Sciences, Vol. 37, pp. 123 - 132.
Granger, C. (1969), “Investigating causal relations by econometric models and cross-spectral methods”, Econometrica, Vol. 37 No. 3, pp. 424 - 438.
Granger, C. (1980), “Testing for causality: a personal viewpoint”, Journal of Economic Dynamics and Control, Vol. 2, pp. 329 - 352.
Granger, C. (1988), “Some recent development in a concept of causality”, Journal of Econometrics, Vol. 39 No. 1-2, pp. 199 - 211.
Harding, T. and Javorcik, B. (2012), “Foreign direct investment and export upgrading”, Review of Economics and Statistics, Vol. 94 No. 4, pp. 964 - 980.
Hossain, M. (2008), “Impact of foreign direct investment on Bangladesh’s balance of payments: some policy implications”, Policy Note PN 0805, Bangladesh Bank, Dhaka.
Hussain, M. and Haque, M. (2016), “Foreign direct investment, trade, and economic growth: an empirical analysis of Bangladesh”, Economies, Vol. 4 No. 2, pp. 1 - 14.
IMF. (2002), “Bangladesh selected issues”, IMF Country Report No. 22/72, International Monetary Fund, Washington D.C.
Islam, M., Sultana, M. and Kamal, A. (2013), “Economic recession and its impact on the Bangladesh’s economy with a special reference of RMG and remittances of RMG and remittance sectors”, International Journal of Science and Research, Vol. 2 No. 12, pp. 162 - 170.
Islam, T. and Halim, M. (2022), “Impact of ready-made garments (RMG) industries and sustainability: perspective of the pandemic period in a developing country”, Cleaner Engineering and Technology, Vol. 11, 100567.
Jana, S., Sahu, T. and Pandey, K. (2020), “How far is FDI relevant to India’s foreign trade growth? An empirical investigation”, Journal of Economic Structures, Vol. 9 No. 1, pp. 1 - 19.
Johansen, S. (1991), “Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models”, Econometrica, Vol. 59 No. 6, pp. 1551 - 1580.
Kathuria, S., Malouche, M., Kusek, P. and Rizwan, N. (2016), “Attracting foreign direct investment”, in Kathuria, S. and Malouche, M. (Eds.), Strengthening Competitiveness in Bangladesh-Thematic Assessment. A Diagnostic Trade Integration Study, World Bank Group, Washington D.C., pp. 237 - 268.
Lim, E. (2001), “Determinants of, and the relation between, foreign direct investment and growth: a summary of the recent literature”, IMF Working Paper WP/01/175, International Monetary Fund, Washington D.C.
Mahmoodi, M. and Mahmoodi, E. (2016), “Foreign direct investment, exports and economic growth: evidence from two panels of developing countries”, Economic Research-Ekonomska Istraživanja, Vol. 29 No. 1, pp. 938 - 949.
Majeed, M. and Ahmad, E. (2007), “FDI and exports in developing countries: theory and evidence”, The Pakistan Development Review, Vol. 46 No. 4, pp. 735 - 750.
Majumder, S., Rahman, M. and Martial, A. (2022), “The effects of foreign direct investment on export processing zones in Bangladesh using generalized method of moments approach”, Social Sciences & Humanities Open, Vol. 6 No. 1, 100277.
Maloney, W. and Molina, C. (2019), Is automation labor-displacing in the developing countries, too? Robots, polarization, and jobs, World Bank, Washington D.C.
Mitic, B. and Ivic, M. (2016), “The impact of foreign direct investment on export performance: case of European transition economies”, Independent Journal of Management & Production, Vol. 7 No. 3, pp. 771 - 785.
Mukhtarov, S., Alalawneh, M., Ibadov, E. and Huseynli, A. (2019), “The impact of foreign direct investment on exports in Jordan: an empirical analysis”, Journal of International Studies, Vol. 12 No. 3, pp. 38 - 47.
Nguyen, C. (2020), “The impact of foreign direct investment, aid and exports on economic growth in Vietnam”, Journal of Asian Finance, Economics and Business, Vol. 7 No. 10, pp. 581 - 589.
Nguyen, D., Tran, L., Bui, T., Ngo, T. and Nguyen, T. (2021), “The relationships between foreign direct investment, export, and economic growth”, Accounting, Vol. 7, pp. 1371 - 1378.
Osmani, S. (2008), “Achievements and challenges of the Bangladesh economy: an overview”, in Emerging Issues in Bangladesh Economy, University Press Limited, Dhaka, pp. 1 - 23.
Pesaran, M., Shin, Y. and Smith, R. (2001), “Bounds testing approaches to the analysis of level relationships”, Journal of Applied Econometrics, Vol. 16 No. 3, pp. 289 - 326.
Rahman, K. and Chowdhury, E. (2020), “Growth trajectory and developmental impact of ready-made garments industry in Bangladesh”, in Barai, M.K. (Ed.), Bangladesh’s Economic and Social Progress, Palgrave Macmillan Singapore, Singapore, pp. 267 - 297.
Raihan, S. and Bourguignon, F. (2020), “Bangladesh’s development: achievements and challenges”, in Raihan, S. and Bourguignon, F. (Eds.), Bangladesh Institutional Diagnostic, Economic & Development Institutions, Oxford Policy Management, Oxford, pp. 1 - 43.
Raihan, S., Khondker, B., Ferdous F. and Uddin, S. (2015), “Bangladesh country paper: employment effects of different development policy institutions”, Swiss Program for Research on Global Issues for Development, R4D Working Paper 2015/5, World Trade Institute, Bern.
Rayhan, M. (2014), Contribution of foreign direct investment to economic growth in Bangladesh, Master Thesis, Eastern Illinois University, Charleston.
Sarker, M. (2018), “Garments exports in Bangladesh”, Social Scientist, Vol. 46 No. 9-10, pp. 61 - 70.
Schlogl, L. and Sumner, A. (2020), “Automation and structural transformation in developing countries”, in Schlogl, L. and Sumner, A. (Eds.), Disputed Development and the Future of Inequality in the Age of Automation, Palgrave Macmillan, London, pp. 51 - 78.
Shourave, M. (2022), “Ready-made garments, FDI and total exports of Bangladesh: a time series analysis”, South Asian Journal of Social Studies and Economics, Vol. 13 No. 1, pp. 57 - 66.
Sultan, Z. (2013), “A causal relationship between FDI inflows and export: the case of India”, Journal of Economics and Sustainable Development, Vol. 4 No. 2, pp. 1 - 9.
Sultanuzzaman, M., Fan, H., Akash, M., Wang, B. and Sarker, M. (2018), “The role of FDI inflows and export on economic growth in Sri Lanka: an ARDL approach”, Cogent Economics & Finance, Vol. 6 No. 1, 1518116.
Swazan, I. and Das, D. (2022), “Bangladesh’s emergence as a ready-made garment export leader: an examination of the competitive advantages of the garment industry”, International Journal of Global Business and Competitiveness, Vol. 17, pp. 162 - 174.
World Bank. (2017), How dialogue is shifting Bangladesh’s textile industry from pollution problem to pollution solution, World Bank, Washington D.C.
WTO. (2022), World trade statistical review 2022, World Trade Organization, Geneva.
Yunus, M. and Yamagata, T. (2012), “The garment industry in Bangladesh”, in Fukunushi, T. (Ed.), Dynamics of the Garment Industry in Low-Income Countries: Experience of Asia and Africa (Interim Report), IDE-JETRO, Japan.
ADB. (2015), Bangladesh consolidating export-led growth, Asian Development Bank, Mandaluyong.
Adhikary, B. (2012), “Impact of foreign direct investment, trade openness, domestic demand, and exchange rate on the export performance of Bangladesh: a VEC approach”, Economics Research International, Vol. 2012, 463856.
Ahamad, M. and Tanin, F. (2010), “Determinants of, and the relationship between FDI and economic growth in Bangladesh”, Bonn Economic Discussion Papers No. 01/2010, Bonn Graduate School of Economics (BGSE), University of Bonn, Bonn.
Anh, D., Song, Y. and Li, M. (2021), “The relationships between foreign direct investment, start-owned investment, private investment, import, export and economic growth in Vietnam”, The Singapore Economic Review, Article in Press.
Arslan, U., Saglam Celikoz, Y. and Guzel, A. (2018), “Causal relationship between foreign direct investment and export: the case of developing economies of Asia”, Asian Economic and Financial Review, Vol. 8 No. 4, pp. 537 - 551.
Artuc, E., Christiaensen, L. and Winkler, H. (2019), “Does automation in rich countries hurt developing ones? Evidence from the US and Mexico”, World Bank Policy Research Working Paper No. 8741, World Bank, Washington D.C.
Baiashvili, T. and Gattini, L. (2020), “Impact of FDI on economic growth: the role of country income levels and institutional strength”, Economics-Working Paper 2020/02, European Investment Bank, Luxemburg.
Bangladesh Bank. (2020), Quarterly review on RMG: January-March FY’20, Bangladesh Bank, Dhaka.
Bazan Navarro, C.E. and Alvarez-Quiroz, V. (2022), “Foreign direct investment and exports stimulate economic growth? evidence of equilibrium relationship in Peru”, Economies, Vol. 10 No. 10, pp. 11 - 16.
BGMEA. (2020), “About garments industry”, Available at https://www.bgmea.com.bd/page/AboutGarmentsIndustry (Accessed 05 June, 2021).
Bhatt, P. (2013), “Causal relationship between exports, FDI and income: the case of Vietnam”, Applied Econometrics and International Development, Vol. 13 No. 1, pp. 161 - 176.
Bouras, H. and Raggad, B. (2015), “Foreign direct investment and exports: complementarity or substitutability an empirical investigation”, International Journal of Economics and Financial Issues, Vol. 5 No. 4, pp. 933 - 941.
Carril-Caccia, F. and Pavlova, E. (2018), “Foreign direct investment and its drivers: a global and EU perspective”, ECB Economic Bulletin, No. 4, Available at https://www.ecb.europa.eu/pub/economic-bulletin/articles/2018/html/ecb.ebart201804_01.en.html (Accessed 05 June, 2021).
Dey, S. and Awal, B. (2017), “Impacts of foreign direct investment on economic growth of Bangladesh: an econometric exercise”, Asian Business Review, Vol. 7 No. 2, pp. 71 - 78.
Engert, W. and Hendry, S. (1998), “Forecasting inflation with the M1-VECM: part two”, Bank of Canada Working Paper 98-6, Bank of Canada, Ottawa.
Engle, R. and Granger, C. (1987), “Co-integration and error correction: representation, estimation, and testing”, Econometrica, Vol. 55 No. 2, pp. 251 - 276.
Export Promotion Bureau Bangladesh. (2022), Pocket export statistics FY 2021-2022, Export Promotion Bureau, Bangladesh.
Goswami, C. and Saikia, K. (2012), “FDI and its relation with exports in India, status and prospect in North East region”, Procedia - Social and Behavioral Sciences, Vol. 37, pp. 123 - 132.
Granger, C. (1969), “Investigating causal relations by econometric models and cross-spectral methods”, Econometrica, Vol. 37 No. 3, pp. 424 - 438.
Granger, C. (1980), “Testing for causality: a personal viewpoint”, Journal of Economic Dynamics and Control, Vol. 2, pp. 329 - 352.
Granger, C. (1988), “Some recent development in a concept of causality”, Journal of Econometrics, Vol. 39 No. 1-2, pp. 199 - 211.
Harding, T. and Javorcik, B. (2012), “Foreign direct investment and export upgrading”, Review of Economics and Statistics, Vol. 94 No. 4, pp. 964 - 980.
Hossain, M. (2008), “Impact of foreign direct investment on Bangladesh’s balance of payments: some policy implications”, Policy Note PN 0805, Bangladesh Bank, Dhaka.
Hussain, M. and Haque, M. (2016), “Foreign direct investment, trade, and economic growth: an empirical analysis of Bangladesh”, Economies, Vol. 4 No. 2, pp. 1 - 14.
IMF. (2002), “Bangladesh selected issues”, IMF Country Report No. 22/72, International Monetary Fund, Washington D.C.
Islam, M., Sultana, M. and Kamal, A. (2013), “Economic recession and its impact on the Bangladesh’s economy with a special reference of RMG and remittances of RMG and remittance sectors”, International Journal of Science and Research, Vol. 2 No. 12, pp. 162 - 170.
Islam, T. and Halim, M. (2022), “Impact of ready-made garments (RMG) industries and sustainability: perspective of the pandemic period in a developing country”, Cleaner Engineering and Technology, Vol. 11, 100567.
Jana, S., Sahu, T. and Pandey, K. (2020), “How far is FDI relevant to India’s foreign trade growth? An empirical investigation”, Journal of Economic Structures, Vol. 9 No. 1, pp. 1 - 19.
Johansen, S. (1991), “Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models”, Econometrica, Vol. 59 No. 6, pp. 1551 - 1580.
Kathuria, S., Malouche, M., Kusek, P. and Rizwan, N. (2016), “Attracting foreign direct investment”, in Kathuria, S. and Malouche, M. (Eds.), Strengthening Competitiveness in Bangladesh-Thematic Assessment. A Diagnostic Trade Integration Study, World Bank Group, Washington D.C., pp. 237 - 268.
Lim, E. (2001), “Determinants of, and the relation between, foreign direct investment and growth: a summary of the recent literature”, IMF Working Paper WP/01/175, International Monetary Fund, Washington D.C.
Mahmoodi, M. and Mahmoodi, E. (2016), “Foreign direct investment, exports and economic growth: evidence from two panels of developing countries”, Economic Research-Ekonomska Istraživanja, Vol. 29 No. 1, pp. 938 - 949.
Majeed, M. and Ahmad, E. (2007), “FDI and exports in developing countries: theory and evidence”, The Pakistan Development Review, Vol. 46 No. 4, pp. 735 - 750.
Majumder, S., Rahman, M. and Martial, A. (2022), “The effects of foreign direct investment on export processing zones in Bangladesh using generalized method of moments approach”, Social Sciences & Humanities Open, Vol. 6 No. 1, 100277.
Maloney, W. and Molina, C. (2019), Is automation labor-displacing in the developing countries, too? Robots, polarization, and jobs, World Bank, Washington D.C.
Mitic, B. and Ivic, M. (2016), “The impact of foreign direct investment on export performance: case of European transition economies”, Independent Journal of Management & Production, Vol. 7 No. 3, pp. 771 - 785.
Mukhtarov, S., Alalawneh, M., Ibadov, E. and Huseynli, A. (2019), “The impact of foreign direct investment on exports in Jordan: an empirical analysis”, Journal of International Studies, Vol. 12 No. 3, pp. 38 - 47.
Nguyen, C. (2020), “The impact of foreign direct investment, aid and exports on economic growth in Vietnam”, Journal of Asian Finance, Economics and Business, Vol. 7 No. 10, pp. 581 - 589.
Nguyen, D., Tran, L., Bui, T., Ngo, T. and Nguyen, T. (2021), “The relationships between foreign direct investment, export, and economic growth”, Accounting, Vol. 7, pp. 1371 - 1378.
Osmani, S. (2008), “Achievements and challenges of the Bangladesh economy: an overview”, in Emerging Issues in Bangladesh Economy, University Press Limited, Dhaka, pp. 1 - 23.
Pesaran, M., Shin, Y. and Smith, R. (2001), “Bounds testing approaches to the analysis of level relationships”, Journal of Applied Econometrics, Vol. 16 No. 3, pp. 289 - 326.
Rahman, K. and Chowdhury, E. (2020), “Growth trajectory and developmental impact of ready-made garments industry in Bangladesh”, in Barai, M.K. (Ed.), Bangladesh’s Economic and Social Progress, Palgrave Macmillan Singapore, Singapore, pp. 267 - 297.
Raihan, S. and Bourguignon, F. (2020), “Bangladesh’s development: achievements and challenges”, in Raihan, S. and Bourguignon, F. (Eds.), Bangladesh Institutional Diagnostic, Economic & Development Institutions, Oxford Policy Management, Oxford, pp. 1 - 43.
Raihan, S., Khondker, B., Ferdous F. and Uddin, S. (2015), “Bangladesh country paper: employment effects of different development policy institutions”, Swiss Program for Research on Global Issues for Development, R4D Working Paper 2015/5, World Trade Institute, Bern.
Rayhan, M. (2014), Contribution of foreign direct investment to economic growth in Bangladesh, Master Thesis, Eastern Illinois University, Charleston.
Sarker, M. (2018), “Garments exports in Bangladesh”, Social Scientist, Vol. 46 No. 9-10, pp. 61 - 70.
Schlogl, L. and Sumner, A. (2020), “Automation and structural transformation in developing countries”, in Schlogl, L. and Sumner, A. (Eds.), Disputed Development and the Future of Inequality in the Age of Automation, Palgrave Macmillan, London, pp. 51 - 78.
Shourave, M. (2022), “Ready-made garments, FDI and total exports of Bangladesh: a time series analysis”, South Asian Journal of Social Studies and Economics, Vol. 13 No. 1, pp. 57 - 66.
Sultan, Z. (2013), “A causal relationship between FDI inflows and export: the case of India”, Journal of Economics and Sustainable Development, Vol. 4 No. 2, pp. 1 - 9.
Sultanuzzaman, M., Fan, H., Akash, M., Wang, B. and Sarker, M. (2018), “The role of FDI inflows and export on economic growth in Sri Lanka: an ARDL approach”, Cogent Economics & Finance, Vol. 6 No. 1, 1518116.
Swazan, I. and Das, D. (2022), “Bangladesh’s emergence as a ready-made garment export leader: an examination of the competitive advantages of the garment industry”, International Journal of Global Business and Competitiveness, Vol. 17, pp. 162 - 174.
World Bank. (2017), How dialogue is shifting Bangladesh’s textile industry from pollution problem to pollution solution, World Bank, Washington D.C.
WTO. (2022), World trade statistical review 2022, World Trade Organization, Geneva.
Yunus, M. and Yamagata, T. (2012), “The garment industry in Bangladesh”, in Fukunushi, T. (Ed.), Dynamics of the Garment Industry in Low-Income Countries: Experience of Asia and Africa (Interim Report), IDE-JETRO, Japan.