The Impact of Foreign Capital on Domestic Investment in Bangladesh: A Co-integration and Vector Error Correction Analysis

Abstract

This study explores the influence of foreign capital flows on Bangladesh's domestic investment from 1990 to 2021. Using time series econometric methods, such as the unit root test, Johansen co integration, vector error correction, and Granger causality, the data were evaluated. Between the domestic investment and foreign capital flow variables, a long-term co integration relationship has been identified. A unidirectional causal connection has been established between foreign loan stock, remittances, and domestic savings and domestic investment. Investment and the payment of external debt are both causally connected. In addition, there is evidence of a bidirectional correlation between foreign direct investment and domestic investment, although neither direction of causality between investment and inflation is confirmed. The results are statistically significant, and the derived model is robust. The paper closes with policy recommendations.