Foreign Direct Investment and Export Growth: Time-series Evidence from Bangladesh's Garment Sector

Abstract

Foreign Direct Investment (FDI) is widely regarded as a critical driver of economic development, particularly in low- and middle-income countries. It provides not only capital but also facilitates technology transfer, creates employment opportunities, and connects local economies to global value chains. This paper examines the impact of Foreign Direct Investment (FDI) on the export performance of Bangladesh's garments industry, the country's most significant export sector. Over the past three decades, Bangladesh has transformed into the world’s second-largest exporter of ready-made garments (RMG), with exports exceeding USD 25 billion annually. Despite various structural and institutional challenges, the sector has managed to attract consistent foreign investment, largely due to low labour costs, strategic trade policies, and government incentives such as tax holidays and the establishment of Export Processing Zones (EPZs). Using annual data from 1996 to 2015, this paper investigates how FDI influences garments export earnings, controlling for other key macroeconomic factors such as labour force size, exchange rate, interest rate, inflation rate, GDP growth, and the number of operating garments firms. Inflation contributes positively (~0.3% increase in export for each 1% inflation increase). Interest rate shows a 0.6% positive impact but remains statistically insignificant, suggesting its role may be indirect or mediated by other variables. Multiple regression models, including Ordinary Least Squares (OLS) and log-linear transformations, are employed to estimate the elasticity and strength of relationships between variables. The results indicate that FDI has a statistically significant and positive effect on garment export earnings. A 1% increase in FDI is associated with an approximate 1% increase in export earnings, suggesting a strong elasticity between the two. Inflation and interest rate also exhibit significant influence, though their effects are comparatively smaller. The model's high adjusted R² value (above 0.93) reflects the robustness of the findings. This paper contributes to the literature on international investment and trade by offering sector-specific evidence from a least-developed economy. The findings highlight the strategic role of FDI in supporting export-led growth and industrialisation. Policy recommendations are made to further enhance FDI inflows and support the sustainability of the garments sector as a driver of inclusive economic development. The findings of this study underscore the pivotal role of Foreign Direct Investment (FDI) in enhancing the export performance of Bangladesh’s garments industry.