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

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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.

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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 Bangladeshs 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.

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Table of Contents
Acknowledgements2 Abstract3 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 inflow40 C. Regression Output..41 i) ii) Impact of FDI on economic growth...41 Impact of FDI on income inequality..42

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INTRODUCTION
Globalization offers an unprecedented opportunity for developing countries to achieve faster economic growth through trade and foreign investment. During the 1970s, international trade grew more rapidly than foreign investment and thus it was the most important economic activity. However this situation changed dramatically during the 1980s when the supply of Foreign Direct Investment increased sharply. 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). In this period, the world FDI has increased its importance by transferring technologies and establishing efficient network for production and sales. Through FDI, 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.

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, primarily because of lower labor costs. Traditional theories on trade and investment assumed that factors of production, such as labor and capital, were not internationally traded. However, in reality, factors are internationally mobile and at least since the nineteenth century, international labor movement and international investments have been very important in the global economy (Jayasuriya and Weerakoon, 2000). Although differences in labor costs may sometimes help influence firms decisions to locate abroad, this is far from being the whole story. As the FDI data showed, the majority of FDI still goes to the advanced countries, in particular the United States where wages are high relative to those in developing countries. The interesting point here is that there will normally be extra costs involved, at least initially, for a firm investing in a foreign country where it is not familiar with the local market and the institutions. At a theoretical level, economic analysis offers various explanatory approaches which attempting to show why, despite these disadvantages, firms may still wish to invest abroad. According to John Dunning (1977) firms
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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. These three advantages are; ownership advantages (Hymer, 1960), locational advantages (Vernon, 1966), and international advantages (Buckley and Casson, 1976).

FDI provides much needed resources to developing countries such as capital, technology, managerial skills, entrepreneurial ability, brands, and access to markets. These are essential for developing countries to industrialize, develop, and create jobs attacking the poverty situation in their countries. As a result, 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. While world FDI inflows increased almost 500% ,i.e. five times from 1990 to 2010 , FDI inflows to developing countries in particular increased by 1546% .ie. almost 15 times during the same period. FDI inflow into developing countries started to grow at a steady pace from the 80s and after the year 2000 in declined until 2003. After this period FDI inflows to developing countries picked up sharply and reached its peak in 2008 and again declined in the year 2009.

From the early stage of 1980s, many of the Least Developed Countries, including Bangladesh, were skeptical of the intentions of FDI and perceived it as a tool for promoting foreign interests. Consequently, a wide array of restrictions were imposed to control FDI inflows through regulations on profit and dividend repatriations, limits on foreign equity and capital, and required royalty payments. In an increasingly globalized world economy, many countries including Bangladesh have now lifted such barriers to open their economies and take advantage of the benefits of foreign investment.

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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. Though there are a number of papers assessing the impact of FDI on economic growth, 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.

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. Past relevant literature will be explored before empirically analyzing the effect of FDI inflow for Bangladesh. Separate regression models will be presented to examine the impact of FDI on economic growth and income inequality. Finally a conclusion will be given based on the results of regression analysis.

HISTORY OF FDI AND THE CURRENT SITUATION OF FDI INFLOW IN BANGLADESH

Bangladesh inherited a small reserve of FDI after its independence. It however became relatively significant with the start of the privatization process in 1974-75. 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. Figure 1 illustrates the rising trend of FDI inflows into Bangladesh.

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FDI inflow
1,200,000,000 1,000,000,000 800,000,000 600,000,000 FDI inflow 400,000,000 200,000,000 0 198019821984198619881990199219941996199820002002200420062008 -200,000,000

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, it is necessary to discuss the history of economic policy implemented the Government of Bangladesh since the countrys independence from Pakistan in 1971. Immediately after the birth of the sovereign nation, the new government attempted to establish a socialist state and adopted the Nationalization Order of 1972 to foster economic growth. 86% of the industrial sector was brought under government control, including key industries such as sugar, jute, and cotton textiles. The First Five Year Plan was undertaken from 1973 through 1978 and focused on a state directed economy. The nationalized industries, however, were inefficient and the economy experienced slow growth. 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.

Consequently, Bangladesh underwent a series of policy reforms to induce a more capitalistic economy by progressively increasing funding allocations to the private sector; these reforms
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include the 1978-1980 Two Year Plan, the 1980-1985 Second Five Year Plan, the 1985-1990 Third Five Year Plan, and the 1990-1995 Fourth Five Year Plan.

However with the lack of financial ability, knowledge, and management within the nascent economy of a new nation, the government could not solely rely on the domestic financial market for economic growth. While other low income countries experienced a 3.8% growth of GNP per capita, Bangladesh struggled at 0.4% per year till 1985. To accelerate the development of the economy, foreign investment became a priority and in 1980, the Bangladesh Parliament approved the Foreign Private Investment Act. FDI, however, 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 primary objective of which is aimed at attracting and facilitating investment from abroad.

Figure 1 demonstrates the efforts of the Bangladesh Board of Investment which shows increases in FDI inflows, particularly throughout the 1990s. It is important to emphasize the years between 1995 and 1998 which saw a sharp and sudden rise in FDI flows. This period can be attributed to a variety of factors. During the mid1990s, numerous foreign enterprises led exploratory research campaigns into the nations natural gas reserves, which have an estimated capacity greater than 10 trillion cubic feet according to the U.S. Geographical Survey. Given the worlds scarce resources, external pressure finally urged the Bangladeshi government into liberalizing the energy sector, a move which almost immediately attracted increasing levels of FDI.

Concurrently, the government also eased capital controls and reduced its bureaucratic red tape to allow private firms to borrow foreign loans without governmental permission, thus encouraging more joint ventures with international companies. In 1995, the Bangladesh government opened up the mobile telecommunication industry for private investment, an area which has fostered technology transfers as well as hundreds of millions of dollars in FDI. All these reforms and policies combined to shape Bangladesh into the nation that it is today.

Considering policy brief, the Bangladesh Board of Investment has taken measures to transform the country into the most liberalized investment regime in the South Asian region. This is largely
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reflective of the increasingly capitalistic model of the economy where growth is fueled primarily by the private sector. Thus, 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. With a 150 million population, the most abundant factor of production is low-cost labor. This attribute makes the country ideal for labor-intensive industries. The densely populated city centers also provide for an untapped, sizeable market. 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. The country is also abundant in natural resources such as natural gas and coal.

Furthermore, the infrastructure of Bangladesh remains underdeveloped and this provides a wide array of markets for incoming foreign investment with little or no domestic competition. 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, particularly in areas such as power plants, construction, transportation, financial services etc. Hence, the country has adopted a sequence of liberalized industrial policy reform for inward FDI.

Figure 2 below represents a cross sectional FDI inflow distribution into different sectors of Bangladesh. The sectors included are Textiles, Telecommunication, Banking, Petroleum, Power and Others sectors. Here Others include Manufacturing (excluding textiles), Agriculture and Services (excluding financial service Banking). The data for analysis have been collected from Bangladesh Bank website on FDI survey.

Figure 2 : Cross sectional distribution of FDI inflows to Bangladesh Source: Bangladesh Bank, Publication of FDI survey 2008.

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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

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From the above figure, we find that over the years 2005 to 2008, Telecommunication has received the largest share of FDI and its share has increased over the years from 33% in 2005 to 39 % in 2008. However the second largest recipient in 2005 Others which included manufacturing, agriculture and services has decreased from 22% in 2005 to a mere 8 % in 2008. The Textiles sector however saw in increase in its share from 9% to 12% in 2008. The petroleum sectors increased from 21% in 2005 to 26% in 2007, however it declined to 17% in 2008. The Banking sector also experienced an increase in share of FDI from 12% in 2005 to 20% in 2008. The smallest recipient of FDI is the Power sector with on 4% in 2005 and only 3% 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 pie charts therefore only show us how the dimensions of FDI inflow have changed over the years. The success of the Telecommunication sector is largely due to increased privatization efforts by the government, telecom has emerged as one of the fastest growing sectors in the Bangladesh economy. 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. At the same time, Grameen Phones 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 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. A strong inducement of FDI is that the macro economy of Bangladesh, even with some slumps, has been stable on a whole over a long period of time. Besides, the ability of the workforce to adapt to the requirements and training of foreign funded enterprises is noted to be relatively good. However, the countrys infrastructure needs to be upgraded. Certainly, 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 should have been a notable investment destination for foreign investors by now from whatever opportunities it currently extends to them. Bangladesh however still has to improve the overall investment climate to remove some of the problems. Some of the problems which are hindering FDI include: 1. Lack of proper advertisements to attract foreign investors in the vital agricultural sector.
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2. Poor law and order condition which results in violence and labor unrests. 3. Bureaucracy and corruption which increases the cost of doing business. 4. Lack of reliable and sufficient power supply.

Despite the pros, because of these problems, Bangladesh lags behind its neighboring counterparts such as India and Sri Lanka. In many aspects, it is still viewed as an FDI underperformer and the country is far from achieving its full potential. It will take time before Bangladesh achieves better results in attracting FDI but as long as the inflows continue to increase, the possibilities for the countrys future remain hopeful.

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. The Neo-classical models of growth identifies FDI as an important source of capital which compliments private domestic investment and creates new job opportunities, enhances productivity through technology transfer and fosters economic growth in developing countries, particularly the Least Developed Countries (LDCs) . Several studies have been conducted among both developed and developing countries to investigate the relationship between FDI and economic growth. 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, transferring technology, and fostering a modern perspective in the local population. However, the Dependency School in the 1970s challenged this pervasive belief. Dependency theorists Amin (1974); Frank (1979), argued that an economy controlled by foreign interests would not develop organically but grow in a disarticulated manner. The natural linkages that would evolve from locally controlled capital would not occur. Profits would be exported and the interests of the ruling elite would be allied with those of owners of the foreign capital. Income inequality would grow and economy would stagnate. Chase-Dunn (1975) and Bornschier
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and Chase-Dunn (1985) supported the above theoretical argument. With their pooled data of both developed and developing countries, 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, 196575. Studies from the 1990s 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. Firebaugh (1992) in his paper Growth Effects of Foreign and Domestic Investment found a positive relationship between FDI and economic growth. In this paper, he challenged the validity of Bornschier and Chase-Dunns (1985) findings and argued that their findings of the negative effects were spurious. Firebaugh concluded from his reanalysis of Bornschier and Chase-Dunns 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. Borensztein et al (1998) studied the effect of FDI on economic growth in a cross-country regression framework and found a positive relationship; they utilized data on FDI flows from developed countries (DCs) to 69 less developed countries (LDCs) for the two decades, the 1970s and 1980s. Their findings suggest that FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment. They also observed that FDI has the effect of increasing domestic investment suggesting a complementary relationship. 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 . He found that increases in the FDI inflows in South Asia were associated with a many-fold increase in the investment by national investors, suggesting that there exist complementarity and linkage effects between foreign and national investment. The impact of FDI on economic growth is found to be positive for South Asian countries with more open economy. He also found that since 1980, FDI inflows contributed more to GDP growth in South Asia than did an equal amount of foreign borrowing. 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, panel data and
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instrumental variable techniques whereas volatility of FDI has a negative effect. They also found that the evidence for a positive effect of FDI was not sensitive to other explanatory variables which were included. Ramirez (2006) analyzed the theoretical and empirical links between FDI and private investment spending in Latin America for the period 1981- 2000 and found a positive relationship. Their pooled model using data from Latin American countries tested the complementarity hypothesis, which suggests that increases in FDI raise the marginal productivity of private capital via the transfer of more advanced technology and managerial knowhow, thereby inducing higher rates of private investment spending; 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. They found these two time series variables to be cointegrated implying a long term relationship between foreign investment and exports. Though they did not find any short term relationship, they found a positive relation in long run, i.e. foreign investment into Malaysia leads to higher exports in the long run. Amin and Eskander (2006) examined the long run relationship between FDI and economic growth in Bangladesh. Using three different cointegration techniques, 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. Though many researches showed a positive relationship between FDI and economic growth, there are also papers which show a negative relationship. Dixon and Boswell (1996) followed up on Firebaughs (1992) work and found a negative relationship where Firebaugh found a positive one. 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-Dunns (1985) earlier findings of the negative effect of foreign investment dependence. A similar work was done by Kentor (1998) in his paper The LongTerm Effects of Foreign Investment Dependence on Economic Growth, 19401990 examined the long-term effects of foreign capital penetration
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and found that peripheral countries with relatively high dependence on foreign capital had a slower economic growth than those less dependent peripheral countries. His works further showed that a structure of dependency is created that perpetuates these effects. The consequences of these effects are unemployment, over-urbanization, income inequality, and social unrest.

Robertson and Watson (2004) examined the impact of changes in the level of FDI on corruption. Using Corruption Perceptions Index (CPI) scores computed by Transparency International for a panel of 99 countries, they showed that the more rapid the rate of change in FDI, the higher the level of corruption. This implies that a developing country experiencing an influx of foreign investment will experience higher level of corruption. Damooei and Tavakoli (2006) estimated the output elasticity of FDI and imports in Thailand and in the Philippines during the period 1970-1998. They found that FDI contribution to every one percentage growth point in GDP is about only 0.05 percentage point in each country whereas imports contribute about 0.47 of a percentage point in Thailand and 0.31 of a percentage point in the Philippines. This shows that imports contributed more to economic growth than foreign investment. Recent studies on the relationship of FDI and economic growth reveals a new dimension in the literature. 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. Maria Carkovic and Ross Levine (2002) using pooled data, concluded in their econometric study on FDI and GDP growth that the exogenous component of FDI does not exert a robust, independent influence on growth. They found the impact of FDI on GDP growth rate to be insignificant. A similar conclusion was reached by Athukorala (2003) who examined the relationship between FDI and GDP using time series data from Srilankan economy. 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. 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
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factors of production. They concluded that it was difficult to generalize that FDI has positive contribution to economic growth of other developing countries like Sub-Saharan African. Sarkar (2007) casts doubt on examined the growth-promoting effect of foreign direct investment, which is widely supported by the proponents of financial globalization, for a panel of 51 less developed countries. 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, however, the time-series analysis observes meaningful positive relationships between FDI and growth only for 3 countries belonging to this group and some other countries. But by and large no long-term positive relationship exists between the two irrespective of income levels, openness and FDI-dependence. 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- 2006. Their econometric analysis of FDI and economic growth shows a positive relationship, however, this result is misleading as further analysis revealed that it is actually the other way around. Their findings conclude that economic growth of Bangladesh is actually a determinant of FDI.

From the above literatures, 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. Analysis using data from only LDCs shows no relation between FDI and growth. Region specific analysis shows that in Latin America and South Asia, FDI has a positive impact nn economic growth but for Sub-Saharan countries, there is no impact. The study for only the Srilankan economy shows no relationship between the two. For Bangladesh, 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.

The effect of globalization on income inequality has been one of the hottest research interests as globalization has deepened in the 1990s. There has been plenty of research on the relationship between trade and income inequality within countries. As foreign direct investment has increased recently, concern about the effect of FDI on income inequality has heightened.

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Foreign direct investment can have direct and indirect impacts on poverty reduction in the host country. 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. 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, as well as the economic environment. As poverty goes down in an economy, the level of income inequality also decreases. Deardorff and Stern (1994) in their paper The StolperSamuelson Theorem: A Golden Jubilee found that FDI helps to reduce income inequality when implemented to utilize abundant lowincome unskilled labor. Tsai (1995) also concluded a similar result that FDI helps to reduce income inequality when capital, domestic or foreign, stimulates economic growth and its benefits eventually spread throughout the whole economy. 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 Mexicos states.

However, other researchers have found that higher FDI leads to increase in income inequality. (Girling, 1973;Rubinson, 1976; Bornschier and Chase-Dunn, 1985;Tsai, 1995) have reached the same conclusion that inward FDI deteriorates income distribution by raising wages in the corresponding sectors in comparison with traditional sectors. Feenstra and Hanson (1997) using Mexican data from 1975 to 1988, found that the rising wage inequality in Mexico is caused by higher foreign capital inflows. 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. 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. Choi (2006) using pooled Gini coefficient from 1993 to 2002 data for 119 countries from World Development Indicators 2004, World Bank, found that income inequality increases as FDI stocks as a percentage of GDP increase.

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Though income inequality has a negative impact on economic growth as concluded by Persson and Tabellini ( 1994); Voitchovsky(2005) ; and others, there are also researches which shows that though FDI has an impact on economic development but it doesnt affect the profile of income inequality.

Lindert and Williamson (2001) and Milanovic (2002) did not find any significant relationship between FDI and 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, 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. In the case of Bangladesh, there is no study which specifically tests the impact of FDI on income inequality, however, the next alternative of foreign funds, i.e. Foreign Aid, Quazi (2005) finds that aid in the form of loans significantly increases GDP growth rate.

From the literature, it can be concluded that the overall impact of FDI on income inequality is ambiguous and mainly depends on the type of FDI, i.e. the investment is capital intensive or labor intensive. However it is clear that FDI does gives rise to wage inequality whether it be sectoral wage or regional wage.

THEORETICAL FRAMEWORK
Neo classical theory of growth maintains that economic growth is caused by improvements in the quality if labor (through training and education), increase in capital (through higher savings and investment), improvement in technology ( through research and development) , and increase in labor quantity ( population growth) . Neo-classical economists advocate the following strategies should be encouraged: a. Perfectly competitive market. b. Privatization of state owned enterprises.
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c. A move from closed to an open economy. d. Opening up the domestic economy through encouraging free trade and FDI.

These policies will stimulate investment, higher output and a faster rate of economic growth.

Theoretically, there are several potential ways in which FDI can cause economic growth. For example, 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, 1970). In neoclassical growth models with diminishing returns to capital, FDI has only a short-run growth effect as countries move towards a new steady state. Accordingly, the impact of FDI on growth is identical to that of domestic investment. In endogenous growth models, in contrast, FDI is often assumed to be more productive than domestic investment. The logic behind this is that FDI encourages the incorporation of new technologies in the production function of the host economy (Borensztein et al., 1998). In this view, FDI-related technological spillovers offset the effects of diminishing returns to capital and keep the economy on a long-term growth path. Moreover, 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, on the one hand, and through the introduction of alternative management practices and organizational arrangements, on the other (de Mello, 1997). Hence, through capital accumulation and knowledge spillovers, FDI may play an important role for economic growth. Furthermore, FDI can possibly stimulate economic growth through the international trade channel by augmenting domestic capital for exports, helping transfer of technology and new products for exports, facilitating access to new and large foreign markets, and providing training for the local workforce and upgrading technical and management skills. 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. FDI can reduce income inequality when implemented to utilize abundant low-income unskilled labor (Deardorff and Stern, 1994) or when the benefits of economic growth caused by capital both domestic and foreign spread throughout the economy (Tsai, 1995).

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However, FDI may not stimulate host economy because it may lower or replace domestic savings and investment. Moreover, FDI may target primarily the host countrys domestic market and thus not increase exports, or it will not help developing the host countrys dynamic comparative advantages by focusing solely on local cheap labor and raw materials. 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. Therefore an empirical analysis of this issue is needed in order to better understand the role of FDI in a country.

METHODOLOGY AND MODEL FRAMEWORK

The purpose of this study is to empirically analyze the impact foreign direct investment has on Bangladeshs economic growth and income inequality. In this study, annual GDP has been selected as the measure of economic growth. 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. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources.

Theoretically, Neo- classical models of growth identifies FDI as an important source of capital which compliments private domestic investment and create new job opportunities, enhances productivity through technology transfer and fosters economic growth in developing countries. This view has been supported by Firebaugh (1992), Borensztein et al (1998), Agrawal ( 2000), and many others. However, there are also literature against this view where it is said that FDI actually has a negative effect on economic growth, Amin (1974); Frank (1979), Chase-Dunn (1975) and Bornschier and Chase-Dunn (1985). To test the impact of FDI on growth, a Cobb-Douglas production function is used. Y = 0 . L1 . K 2
. (i)

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Where, Y= GDP ; L = labor inputs ; K = capital and capital respectively.

1 2

are the output elasticities of labor and

If the production function is denoted by P = P(L,K), then the partial derivative dP/dL is the rate at which production changes with respect to the amount of labor. Economists call it the marginal production with respect to labor or the marginal productivity of labor. Likewise, the partial derivative dP/dK is the rate of change of production with respect to capital and is called the marginal productivity of capital. In these terms, the assumptions made by Cobb and Douglas can be stated as follows : 1. If either labor or capital vanishes, then so will production. 2. The marginal productivity of labor is proportional to the amount of production per unit of labor. 3. The marginal productivity of capital is proportional to the amount of production per unit of capital.

For the purpose of this study, certain modifications have been made. Total labor force has been used as a proxy for labor inputs. The variable K is broken down into three components. Foreign capital is used as an additional variable. In addition, official development aid also known as foreign aid has also been included. From a theoretical perspective, the main role of foreign aid in stimulating economic growth is to supplement domestic source of finance such as savings, thus increasing the amount of investment and capital stock. Morrissey(2001) points a number of mechanisms through which aid can contribute to economic growth, a) aid increases investment in both physical and human capital, b) aid increases the capacity to import capital goods or technology , c) aid does not have indirect effect that reduce investment or savings rate. Previous empirical studies on foreign aid and economic growth generate mixed results. For example, Papanek (1973), Dowling and Hiemenz (1982), Gupta and Islam (1983), Hansen and Tarp (2000), Burnside and Dollar (2000), Gomanee, et al. (2003), Dalgaard et al. (2004), and Karras (2006), find evidence for positive impact of foreign aid on growth; Burnside and Dollar (2000) and Brautigam and Knack (2004) find evidence for negative impact of foreign aid and growth, while Mosley (1980), Mosley, et al. (1987), Boone (1996), and Jensen and Paldam (2003) find evidence to suggest that aid has no impact on growth. It should be noted that, although Burnside and Dollar (2000) concluded that foreign aid has positive effects, this conclusion applies only to
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economies in which it is combined with good fiscal, monetary, and trade policies. Domestic capital is represented by Gross capital formation. Gross capital formation, formerly gross domestic investment, consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Economic theory suggests that higher the investment, higher the productive capacity of the economy increases hence higher the economic growth. This notion was empirically tested. Khan and Reinhart (1990) using data from developing countries found that private investment has a large direct effect on economic growth. 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. Tang; 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. Thus the new model is Y = 0 . L 1 . FDInf 2 . ODA 3 . GCF 4 . (ii)

Where , L = labor ; FDInf = FDI inflow ; ODA = official development aid ; GCF = Gross capital formation net of FDI inflow and ODA received. Since this is a non-linear model, a ln transformation is made to make the model linear. Hence the model becomes, Ln Y = 0 + 1 ln L + 2 ln FDInf + 3 ln ODA + 4 GCF . (iii)

The coefficients of the independent variables now give the partial elasticity of output of the respective variable.

To examine the impact of FDI on income inequality, the following function will be used,

GINI = F ( FDInf , ODA , GCF )

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GINI coefficient has been selected as the measure of income inequality. It is an aggregate numerical measure ranging from 0 (perfect equality) to 1 (perfect inequality), therefore higher the value of the coefficient, higher the inequality in income distribution. Though there are other measures of income inequality, GINI coefficient has been selected because it satisfies four highly desirable properties: a. the anonymity, b. scale independence, c. population independence, and d. transfer principles. As mentioned in the literature review, theoretically, FDI reduces income inequality through increase in employment and demand for labor. Deardorff and Stern (1994) , Tsai (1995), Jensen and Rosas (2007) and other researchers found inward FDI reduces income inequality whereas other found that inward FDI deteriorates income inequality (Girling, 1973;Rubinson, 1976; Bornschier and Chase-Dunn, 1985;Tsai, 1995). Theoretically, 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. Solow's growth model provides grounds for the need of ODA to supplement domestic savings in augmenting growth (Dornbusch et al.,2004). Later, the big push theory by Murphy et al., (1989) becomes impetus for providing aid to developing countries to assist them in taking-off to a steady state. However, a majority of literature shows that aid tends to deteriorate income inequality. 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. 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. Their finding is consistent with recent empirical research on aid ineffectiveness in achieving economic growth. The impact of Gross Capital formation on income inequality is theoretically more prominent than other variables. Since this represents domestic investment, higher the level of GCF , higher will be the demand for labor and more job opportunities will be created. This will improve the income distribution in the economy. For simplicity of the model and interpretation, the variables are taken in ln form. Therefore the model stands as , Ln GINI = 1. Ln FDInf + 2 Ln ODA + 3 Ln GCF . (iv)
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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, official development aid and Gross capital formation, on Bangladeshs GDP. Ln Y = 0 + 1 ln L + 2 ln FDInf + 3 ln ODA + 4 GCF . (iii)

In the above equation, FDInf which represents FDI inflow into Bangladesh is the main variable of interest .Taking a partial derivative of any of the independent variable with respect to the dependent variable gives us the coefficient 1, 2, 3 and 4 which are the partial elasticities of output of the respected variable. 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. 2 will be equal to 4 if FDI inflow is equally productive as domestic gross capital formation. Similarly, 2 will be equal to 3 if FDI inflow is just as efficient as Official development aid.

In order to estimate equation (iii) , data for all the variables in the equation have been collected from World Development Indicators from World Bank website. Statistical software package EVIEWS 7.0 has been used to estimate the equation. The data point ranges from 1980 to 2009.

Ln Y = 0.723 + 0.460 ln L + 0.011 ln FDInf + 0.270 ln ODA + 0.424 GCF + ut S.E P value R2 = 99% (2.477) (0.274) 0.772 0.10 (0.009) 0.22 (0.060) 0.00 (0.091) 0.00

Adjusted R2 = 98%

d= 1.09

From the estimation output of equation (iii), we see that all the coefficients have positive sign which means that they all have a positive impact on GDP. The coefficient 1 has a value of
Page | 25

0.460. This means that if the quantity if the Labor force increases by 1% , then GDP is expected to increase by 0.46 % . This coefficient has a low standard error and has a p value of 0.10. This means that if we set up a hypothesis Ho : 1= 0 H1 : 1 0 We can reject the null hypothesis, Ho : 1= 0 , at 10% level of significance. This can be restated as the variable is statistically significant at 10 % level of significance. Our main variable of interest, FDI inflow (FDInf) has a coefficient of 0.011 which means that if FDI inflow increases by 1% then GDP is expected to increase by 0.011%. However, this variable is significant only above 22% level of significance. Therefore we can consider its effect to be insignificant. ODA has a coefficient of 0.270 , this means that if ODA received by Bangladesh increases by 1% then GDP is expected to increase by 0.27% . This variable is significant at 0% level. The coefficient of GCF is 0.424 which indicates that if GCF increases by 1%, then GDP is expected to increase by 0.424 %. Like ODA , GCF is also significant at 0% level of significance. The intercept has a value of 0.723 however this value is insignificant due to its high standard error and high p value. The equation has a R2 = 99% . This means that 99 % of the variation in GDP is explained by the regressors. The Adjusted R2 = 98% which means that 98% of the variation in GDP is explained by the regressors after adjusting for degrees of freedom.

To examine the impact of FDI and other variables on inequality, equation (iv) from modeling framework in the previous section is used. Ln GINI = 1. Ln FDInf + 2 Ln ODA + 3 Ln GCF . (iv)

In the above equation, the coefficients 1, 2 and 3 give us the effect each of the variables has on GINI coefficient. If the coefficients have a positive value, then an increase in the value of the variables increases GINI coefficient which indicates that income inequality increases. If the coefficients have a negative value, then a rise in the value of the variables decreases the value of GINI coefficient which indicates that income inequality decreases.

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To estimate the equation, data for GINI coefficient has been collected from The Standardized World Income Inequality Database, (SWIID v.3), by Fredrick Solt. Data for FDI inflow, Official development aid and Gross Capital Formation have been collected from World Development Indicators, World Bank website. The data points used ranges from 1973 to 2005.

Ln GINI = 0.067 Ln FDInf + 0.359 Ln ODA 0.231 Ln GCF + ut S.E P value R 2 = 25.29 % (0.0164) 0.0004 ( 0.0313) 0.0000 ( 0.0389) 0.0000 d= 1.405

Adjusted R2 = 19.76%

From the estimation output, we see that if FDInf has a coefficient of 0.067. This means that if FDI inflow increases by 1 % , then GINI coefficient is expected to increase by 0.067 % . This means income inequality is expected to increase by 0.067 % with every 1% increase in FDI inflow. This variable is significant at 0% level of significance. The coefficient of ODA is 0.359 indicating that with every 1% increase in ODA received, income inequality is expected to increase by 0.359 % . This is also a significant variable at even 0% level of significance. Domestic Gross capital formation (GCF) on the other hand has a coefficient of -0.231 . This means that if GCF increases by 1 % , then income inequality is expected to decrease by 0.231% . This variable has a low standard error and is significant even at 0% level of significance. The equation has a R 2 = 25.29 % , which means that 25.29% of the variability of GINI is explained by the regressors.

RESULTS AND DISCUSSION

From the above regression estimation, we see that the impact of FDI inflow on economic growth is insignificant. This is the only variable which has an insignificant impact. This finding corresponds to the findings of Karkovic and Levin (2003) that came to the same conclusion using pooled data, Bekeke and Mekonnen (2004) for Sub- Saharan African countries, Athukorala
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(2003) for the Srilankan economy and Ahmad and Tanin (2010) for Bangladesh. However, it would be incorrect to completely discard the importance of FDI inflow to economic growth. Since only the direct contribution of FDI inflow to GDP shows an insignificant result, there is a very high possibility that FDI inflow has a lagged beneficial effect on GDP and it compliments domestic capital formation. Both of these effects have not been tested and there is a strong possibility of their occurrence. 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, we find that of all the independent variables in the model, Labor has the largest output elasticity of 0.46% of expected GDP increase with 1% increase in labor force. Since Bangladesh is a developing country, its mainly based on agriculture with labor intensive production process. Therefore this result is expected as higher number of labor means more available inputs for the agricultural sector and labor intensive production sector. The second largest impact can be seen from domestic gross capital formation. GCF has an expected impact of 0.424 % on GDP for every one percent increase in GCF. This result is compatible with economic theory as higher the investment, higher the productive capacity of the economy increases hence higher the economic growth. Similar empirical conclusions have been reached by Anderson (1990), Tang; Selvanathan and Selvanathan (2008). For an economy to grow organically, domestic investment must have a significant contribution to economic growth. In our estimation model, it has been found that Official development aid also has a significant positive impact for Bangladeshs economic growth. For every 1% increase in aid GDP is expected to increase by 0.27%. This result is also predicted from a theoretical perspective as it supplements domestic source of savings. A similar outcome is also predicted by Papanek (1973), Dowling and Hiemenz (1982), Gupta and Islam (1983), Hansen and Tarp (2000), Burnside and Dollar (2000), Gomanee, et al. (2003), Dalgaard et al. (2004), and Karras (2006), all these researchers have found a positive impact of foreign aid on economic growth.

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The value of the intercept is found to statistically insignificant. This means that in the absence of Labor and other variables, GDP would be zero. Since the basis of the model is Cobb-Douglas production function, this finding is compliant with the first assumption of the model. When we look at the estimation of equation (iv), we see that even though the impact of FDI inflow to economic growth was found to be insignificant, it has a negative impact on income inequality. For every percent increase in FDI inflow, income inequality is expected to increase by 0.06% . This view is also shared by Papanek (1973), Dowling and Hiemenz (1982), Gupta and Islam (1983), Hansen and Tarp (2000), Burnside and Dollar (2000), Gomanee, et al. (2003), Dalgaard et al. (2004), and Karras (2006). They also found FDI inflow to negatively affect income inequality. 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, instead of the abundant cheap unskilled labor. Even though the FDI in the textile sector leads to employment generation, these sectors are mainly located in the urban areas and demand skilled to semi-skilled labors. 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. As a result, a wage inequality is created between labors employed in the manufacturing and agricultural sector. Unlike FDI, domestic gross capital formation shows to have a positive impact on income inequality. Our estimation model shows that If GCF increases by 1 % , income inequality is reduced by 0.23% . 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. Since this investment is made by domestic investors, there is more chance of using labor intensive technology and hence employment of semi-skilled and low-skilled workers. Official development aid, though a significant contributor to GDP, is a source of income inequality. The estimation result shows that with every percent increase in Official development aid received, income inequality is expected to increase by 0.35 % . Even though theoretically, ODA is perceived as an alternative source of funds for investment leading to employment opportunities and economic growth which ultimately leads poverty reduction , a lot of studies have found foreign aid to cause income inequality. This result is consistent with the findings of Chase-Dunn and Rubinson (1978), Chong et al (2009). One possible reason is the level of
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corruption in Bangladesh where the ruling elites tend to realize maximum benefits from the aid. Foreign aid can help income redistribution only when the quality of institution is taken into account ( Chong et al , 2009 ). According to Auer (2007), without institutional reform, it is useless for the donor country to transfer resources in the form of aid. Overall, from the analysis, we find that foreign direct investment into Bangladesh does not have a significant contribution in Bangladeshs economic growth but instead it does lead to income inequality; even though the impact is very small, it is still found to be statistically significant.

LIMITATIONS
Since Bangladesh gained its independence not so in the distant past, the number of postindependence data is very limited. 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. Examining the lagged effect of FDI using advanced econometric model would also have given a more detailed picture of the FDI scenario.

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

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APPENDIX

Time series data for Bangladesh Source: WDI World Bank website for GDP, FDI, ODA and GCF SWIDD v.3 for Income Inequality

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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 $ 6,288,245,866 $ 8,067,027,104 $ 12,459,282,561 $ 19,395,903,916 $ 10,083,163,547 $ 9,632,469,659 $ 13,299,358,553 $ 15,585,961,410 $ 18,114,645,161 $ 19,762,945,710 $ 18,087,000,000 $ 17,155,798,869 $ 19,670,160,944 $ 21,613,230,769 $ 21,160,234,384 $ 23,781,404,932 $ 25,638,749,373 $ 26,825,240,347 $ 30,128,776,344 $ 30,957,444,767 $ 31,708,863,730 $ 33,166,530,060 $ 33,768,661,427 $ 37,939,752,960 $ 40,666,015,641 $ 42,318,798,538 $ 44,091,754,148 $ 45,694,072,379 $ 47,124,925,462 $ 46,987,842,847 $ 47,571,130,071 $ 51,913,661,485 $ 56,560,744,012 $ 60,277,560,976 $ 61,901,116,736 $ 68,415,421,373 $ 79,554,350,678 $ 89,359,767,442

FDI net inflow

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 90,000 2,340,000 2,200,000 1,543,333 5,420,000 6,980,000 7,700,000 (8,010,000) 8,510,000 5,360,000 6,960,000 400,000 (550,000) (6,660,000) 2,440,000 3,210,000 1,840,000 250,000 3,238,780 1,390,440 3,721,850 14,049,900 11,147,800 92,300,000

$ 231,600,000 $ 575,310,000 $ 576,460,000 $ 309,100,000 $ 578,700,000 $ 354,500,000 $ 328,300,000 $ 350,200,000 $ 460,400,000 $ 845,300,000 $ 792,500,000 $ 666,400,000 $ 1,086,300,000 $ 716,000,000

ODA $ 223,760,000 $ 421,470,000 $ 522,370,000 $ 1,015,390,000 $ 497,460,000 $ 783,570,000 $ 988,430,000 $ 1,162,660,000 $ 1,286,720,000 $ 1,099,040,000 $ 1,337,400,000 $ 1,042,430,000 $ 1,186,820,000 $ 1,126,530,000 $ 1,424,560,000 $ 1,787,610,000 $ 1,613,870,000 $ 1,799,240,000 $ 2,092,760,000 $ 1,878,790,000 $ 1,818,030,000 $ 1,368,850,000 $ 1,742,550,000 $ 1,281,540,000 $ 1,228,060,000 $ 1,010,630,000 $ 1,162,140,000 $ 1,219,300,000 $ 1,171,730,000 $ 1,043,720,000 $ 914,580,000 $ 1,392,150,000 $ 1,413,780,000 $ 1,317,650,000 $ 1,219,830,000 $ 1,514,590,000 $ 2,061,400,000 $ 1,226,940,000

GCF GCF net of FDI and ODA $ 295,402,700 71,552,700 $ 702,799,900 278,989,900 $ 918,854,300 394,284,300 $ 1,192,442,000 175,508,667 $ 999,378,800 496,498,800 $ 1,109,970,000 319,420,000 $ 1,535,650,000 539,520,000 $ 1,746,231,000 591,581,000 $ 2,615,644,000 1,320,414,000 $ 3,482,515,000 2,378,115,000 $ 3,223,050,000 1,878,690,000 $ 2,911,639,000 1,868,809,000 $ 3,131,486,000 1,945,216,000 $ 3,526,885,000 2,407,015,000 $ 3,534,047,000 2,107,047,000 $ 3,808,889,000 2,018,069,000 $ 4,182,468,000 2,566,758,000 $ 4,486,145,000 2,686,655,000 $ 5,138,199,000 3,042,200,220 $ 5,230,560,000 3,350,379,560 $ 5,487,230,000 3,665,478,150 $ 5,952,339,000 4,569,439,100 $ 6,214,297,000 4,460,599,200 $ 7,254,002,000 5,880,162,000 $ 8,130,447,000 6,670,787,000 $ 8,769,668,000 7,183,728,000 $ 9,538,113,000 7,799,513,000 $ 10,140,910,000 8,612,510,000 $ 10,850,030,000 9,099,600,000 $ 10,848,090,000 9,449,870,000 $ 11,011,530,000 9,768,650,000 $ 12,150,550,000 10,408,200,000 $ 13,587,650,000 11,713,470,000 $ 14,784,410,000 12,621,460,000 $ 15,259,010,000 13,246,680,000 $ 16,737,270,000 14,556,280,000 $ 19,258,450,000 16,110,750,000 $ 21,778,970,000 19,836,030,000

Labor

GINI NET 42.64561 43.54983 45.19409 47.69335 50.61521 47.89144 47.06805 46.24467 45.42129 42.95514 40.48898 38.62727 36.76556 37.90644 36.54761 35.18878 33.04115 30.89352 28.7459 29.22378 31.19065 33.15752 35.1244 36.59409 35.75301 34.91192 34.07084 33.22976 33.46442 33.69909 33.93376 34.16842 34.40309

36,252,006 37,288,659 38,421,813 39,550,784 40,784,043 42,071,631 43,414,541 44,814,312 46,274,227 47,861,956 49,519,879 51,315,651 52,484,161 53,680,951 54,902,478 56,220,929 57,483,162 58,757,641 60,115,459 61,462,072 62,785,830 64,629,422 66,473,861 68,320,175 70,073,044 71,828,639 73,481,255 75,126,707 76,765,042 78,619,079

SECTOR WISE FDI INFLOW Source: Bangladesh Bank FDI survey Jan- Jun 2008 Unit: Million US dollar

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Sector Telecommunication Banking Petroleum Textiles Power Others Total

2005 261.89 94.88 168.74 74.98 29.64 173.64 803.77

2006 267.97 129.96 181.86 73.53 27.45 63.85 744.62

2007 304.71 91.83 204.99 105.45 24.96 60.83 792.77

2008 299.91 156.8 132.82 93.42 25.1 60.63 768.68

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%

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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. Error

t-Statistic

Prob.

C LOG(LABOR) LOG(FDINF) LOG(ODA) LOG(GCF)

0.723507 0.460130 0.011619 0.270806 0.424082

2.476696 0.273669 0.009334 0.060877 0.091300

0.292126 1.681337 1.244911 4.448434 4.644918

0.7728 0.1062 0.2257 0.0002 0.0001

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic)

0.990176 0.988468 0.049298 0.055897 47.30007 579.5804 0.000000

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

24.33942 0.459069 -3.021433 -2.783540 -2.948707 1.097778

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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. Error

t-Statistic

Prob.

LOG(FDINF) LOG(ODA) LOG(GCF)

0.066913 0.359290 -0.230644

0.016419 0.031364 0.038923

4.075287 11.45565 -5.925656

0.0004 0.0000 0.0000

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

0.252986 0.197652 0.140206 0.530760 17.95147 1.405427

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter.

3.614882 0.156526 -0.996765 -0.856645 -0.951939

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