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Empirical Research on Economic Policy Uncertainty and FDI of Bangladesh

1. Introduction

The most reliable form of international capital flow is the foreign direct investment (FDI). Based on the accessibility of beneficial resources and competencies, enterprises can now disperse their manufacturing operations across the globe thanks to the global value chain (GVC) (Adams, 2009). In most locations with competitive production variables, proximity to the regional or international production network, and potential regional markets, FDI followed the GVC pattern. In the past, FDI has been recognized as a catalyst for economic development by promoting the adoption of cutting-edge management techniques, technologies, and ideas in developing nations (Nistor, 2015). Foreign innovation and the possibility of beneficial spillover can be provided via GVC and FDI.

Additionally, they have provided production processes and quality control methods, creating job chances and opening up access to financing that is only sometimes simple to come by locally (Osei & Kim, 2020). However, during the past 20 years, nations worldwide have cracked their doors to entice FDI using a variety of incentives, including preferential tax treatment and open economic policies (Paul & Feliciano-Cestero, 2021). Three effects of FDI on the recipient economies’ supply sides of the economies include the size effect, compositional effect, and technological effect. The scale of the FDI’s impact on economic activity depends on the input and output of the home country. The effect of the composition of FDI is demonstrated by a structural movement from traditional to modern production methods, such as the transition from the pre-stage to the take-off stage, which modifies the manufacturing mix of recipient countries.

In contrast, the technical influence of FDI is focused on disseminating innovative concepts, knowledge, and cutting-edge technology. FDI impacts income inequality and the welfare systems of FDI-recipient countries on the consuming side of the economy. This research aims to investigate the relationship between economic policy uncertainty and foreign direct investment (FDI) in Bangladesh. Bangladesh is a developing country that has experienced significant economic growth in recent years, but its FDI needs to be more consistent. Economic policy uncertainty is a potential factor that may affect FDI inflows into Bangladesh.

2. Objectives

The objectives of this research are to:

  1. Explore the current state of economic policy uncertainty in Bangladesh
  2. Examine the trend and pattern of FDI inflows in Bangladesh
  3. Analyze the relationship between economic policy uncertainty and FDI inflows in Bangladesh
  4. Evaluate the impact of economic policy uncertainty on FDI inflows in Bangladesh

3. Research Questions

The research questions that will guide this study are:

  1. What is the current state of economic policy uncertainty in Bangladesh?
  2. What is the trend and pattern of FDI inflows in Bangladesh?
  3. Is there a relationship between economic policy uncertainty and FDI inflows in Bangladesh?
  4. What is the impact of economic policy uncertainty on FDI inflows in Bangladesh?

4. Literature Review

The literature review will provide an overview of the existing literature on economic policy uncertainty and FDI inflows. The review will include theories and empirical studies related to the case studies topic. It will also identify gaps in the literature and highlight the need for further research. Traditional economics holds that foreign direct investment (FDI) has three significant effects on a country’s economy, society, and government. Micro and macro effects on the economy are distinguished. Capital provision, output growth, level of employment, the balance of payments, wages, and trade flows are the significant macroeconomic implications of FDI.

Nevertheless, FDI’s microeconomic effects are linked to changes in business and organizational structure, productivity, residents’ training, transfer of knowledge, and market structure (Paul & Benito, 2018). Many economic theories describe the dynamics of international capital flows notwithstanding the importance of FDI in economic growth and development. The product life cycle theory, institutional theory, and resource-based view (RBV) are all well-known in the literature on foreign investment and trade, as is the ownership, location, and internationalization (OLI) advantage theory. The internationalization theory explains why and how a company engages in foreign direct investment. When the cost of internalization exceeds the cost of the external transaction, the theory states that multinational corporations will invest abroad (Carrizosa et al., 2020). As a result, companies that participate in foreign direct investment (FDI) look to the host country’s unique factor advantages rather than their own (Verbeke & Kano,2016). In addition, new empirical research has elaborated on the internationalization paradigm [44] by describing FDI in the context of regionalization and global value chain integration (Nedosekin et al., 2019)

How organizations compete in foreign markets by leveraging existing resources like ownership advantage (O), location advantage (L), and internalization is the topic of the eclectic ownership, location, and internalization (OLI) paradigm. The benefits of ownership are tied to the company’s intangible and tangible assets, which can be transferred more cheaply among subsidiaries of the same multinational corporation. Some businesses can increase earnings or decrease marginal costs by expanding into international markets. Regarding transnational cooperation activities, such as transportation costs, manufacturing costs, telecommunication costs, market size, etc., different nations with distinct features and resources have comparative advantages compared to host countries. Locational benefits also include social and political aspects, including favorable government policies, travel time, cultural variety, trade liberalization, and investment reforms.

After WWII, Vernon (1992) proposed the product cycle theory, which centers on industrial FDI flows from the United States to Western Europe through multinational corporations. This idea clarifies the product cycle’s four phases: introduction, expansion, maturity, and decline. The concept proposes that in the initial manufacturing phase, the firm sells the product within the company, making the technology widely known. The second phase involves the company taking advantage of the standardized opportunity by beginning to export to international countries. In the third phase, the company identifies the LCCs with the lowest manufacturing costs and moves production there. The most cutting-edge innovations and technologies are developed with the domestic market in mind and refined over time. Because of this, many factories have moved to other, less developed nations that are rapidly industrializing. The institutional theory and the dynamic capability view (DCV) are two more FDI theories that describe the organizational structure, business behavior, and underlying causes of FDI flows, respectively. Institutional elements, such as business costs, macroeconomic environment, political stability, institutional quality, transparency, and property protection, are said companies driving forces behind foreign investment and FDIpanies (Contractor et al., 2020). Institutional restrictions, such as state involvement, poor institutional support, the unpredictability of public policy, and political risk, are, on the other hand, significant barriers to foreign direct investment (FDI) flows.

The preliminary literature assessment shows that many economic theories can explain the reasons for international capital mobility. The overarching purpose of these concepts is to explain why a corporation could choose to set up a shop in a different country. All of these ideas, notwithstanding their differences, agree that a company expands internationally to reap the benefits of internationalization in terms of geography, the firm itself, or the target market. Theories like this stress the importance of home and host government policies in luring foreign direct investment (FDI).

5. Methodology

The study will use a quantitative research design. The data will be collected from secondary sources such as the World Bank, the Bangladesh Bank, and other relevant government and non-government organizations. The study will use regression analysis to examine the relationship between economic policy uncertainty and FDI inflows. The study will also use descriptive statistics to analyze the trend and pattern of FDI inflows in Bangladesh. In order to better understand the impact of economic policy uncertainty on FDI inflows to Bangladesh, the study described above has been designed. To begin, this study employs a quantitative approach, which necessitates collecting and analyzing numerical data for hypothesis testing and drawing definitive conclusions. Research of this sort is frequently employed in the social sciences for quantifying concepts, identifying trends, and extrapolating future outcomes.

This research will use the World Bank, the Bangladesh Bank, and other applicable governmental and non-governmental organizations as secondary sources. This means the researchers will not collect their own data but instead use information that has already been gathered and made public. Using secondary data for analysis can help save time, and the mound may provide a more complete and trustworthy data set. Regression analysis will be used to look at how economic policy uncertainty affects foreign direct investment. Using regression analysis, statisticians can assess the nature and direction of any relationship between multiple variables. In this case, regression will determine if economic policy uncertainty correlates with a rise in foreign direct investment (FDI) in Bangladesh. Finally, descriptive statistics will examine the pattern and trend of FDI inflows into Bangladesh. You can summarise and characterize the critical aspects of a data set with descriptive statistics. Researchers in this study will use descriptive statistics to summarise FDI flows into Bangladesh over a specified time period (say, the past decade) and highlight any discernible patterns or trends.

6. Expected Outcomes

The study is expected to provide insights into the current state of economic policy uncertainty in Bangladesh and its impact on FDI inflows. This study aims to shed light on the factors that influence FDI in Bangladesh and the role that economic policy uncertainty plays in luring or driving away foreign investors. Uncertainty in economic policy may have a chilling effect on Bangladesh’s foreign direct investment (FDI). Foreign investors may be wary of investing in a country with an unclear economic policy because of the inherent risks associated with doing so. In the case of Bangladesh, where the political and economic climate is notoriously unstable, this may be especially true. However, the study’s findings could show that economic policy uncertainty has little to no bearing on FDI in Bangladesh. This result may result from less essential factors that discourage foreign investment, such as the need for more natural resources, infrastructure, or a skilled workforce. Uncertainty in economic policy may also benefit Bangladesh’s foreign direct investment (FDI). If the instability opens the door for foreign investors to enter the market, they may reap the benefits of future growth. The study will also provide recommendations for policymakers to reduce economic policy uncertainty and attract more FDI inflows to Bangladesh.

7. Conclusion

The study will contribute to the literature on economic policy uncertainty and FDI inflows, particularly in the context of Bangladesh. The findings of this study will have important implications for policymakers, investors, and academics interested in understanding the factors that influence FDI inflows in developing countries.

8. References

Adams, S. (2009). Foreign direct investment, domestic investment, and economic growth in Sub-Saharan Africa. Journal of policy modeling31(6), 939–949.

Carrizosa, M. J., Stankovic, N., Vannier, J. C., Shklyarskiy, Y. E., & Bardanov, A. I. (2020). Multi-terminal dc grid overall control with modular multilevel converters. Записки Горного института243, 357-370.

Contractor, F. J., Dangol, R., Nuruzzaman, N., & Raghunath, S. (2020). How do country regulations and business environment impact foreign direct investment (FDI) inflows? International Business Review29(2), 101640.

Nedosekin, A. O., Rejshahrit, E. I., & Kozlovskiy, A. N. (2019). A strategic approach to assessing economic sustainability objects of mineral resources sector of Russia. Записки Горного института237, 354-360.

Nistor, P. (2015). FDI implications on BRICS economy growth. Procedia Economics and Financepp. 32, 981–985.

Osei, M. J., & Kim, J. (2020). Foreign direct investment and economic growth: Is more financial development better? Economic Modelling93, 154-161.

Paul, J., & Feliciano-Cestero, M. M. (2021). Five decades of research on foreign direct investment by MNEs: An overview and research agenda. Journal of business research124, 800-812.

Paul, J., & Benito, G. R. (2018). A review of research on outward foreign direct investment from emerging countries, including China: What do we know, how do we know and where should we be heading? Asia Pacific Business Review24(1), 90-115.

Verbeke, A., & Kano, L. (2016). An internalization theory perspective on the global and regional strategies of multinational enterprises. Journal of World Business51(1), 83-92.

Vernon, R. (1992). International investment and international trade in the product cycle. In International economic policies and their theoretical foundations (pp. 415–435). Academic Press.


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