Bangladesh Bank Training Academy Journal

Abstract

This paper investigates the impacts of inflation, trade openness and exchange rate on foreign direct investment (FDI) in Bangladesh, Colombia, India, Indonesia, Mexico, Philippines, and Turkey. Johansen-Juselius (1988) procedure is applied to test the cointegration relationship among the variables followed by the Vector Error Correctionmodel. The empirical results trace a long-run equilibrium relationship in the variables. Among the three independent variables, inflation and exchange rate are found as important factors in explaining the changes in FDI inflows in both short-run and long-run.Therefore, the challenge before the central banks of these emerging countries including Bangladesh is to maintain a stable exchange rate that will boost domesticproduction, increase FDI and maintain internal and external balance. In order to protectexternal competitiveness, one of the possible ways is to intervene in the domestic foreignexchange market by the concerned central banks. As trade opennes is a means of the market-related economic determinant regarding attracting FDI inflow in the host country, so trade policy vis-a-vis monetary and fiscal policies should be made proactiveconsidering the global perspectives.