The effects of foreign direct investment on export processing zones in Bangladesh using Generalized Method of Moments Approach

Abstract

Studies about the effects of foreign direct investment (FDI) on export processing zones (EPZs) in Bangladesh are very scarce. Most of the researchers have done research on the effects of FDI on economic growth in Bangladesh. Some of the researchers have also examined the effects of FDI on domestic investment, trade, and other sectors of the economy. But as far as we know, the effects of FDI on EPZs in Bangladesh have not been examined. The objective of this study is to analyze the effects of FDI inflows on EPZs in terms of exports and employment in EPZs using secondary data from 1997 to 2018 in Bangladesh. The study has applied the Generalized Method of Moments (GMM) model for the export of EPZ and the Auto Regressive Distributed Lag (ARDL) bound test approach for employment generation, respectively. Inward FDI is the key explanatory variable. There are also some control variables to overcome the problem of omitting variables. According to the GMM estimation, FDI and GDP growth both have a positive relationship in accelerating EPZ export. The coefficient of FDI inflows is 0.74%, which means that if the FDI inflows increase by 1%, the export of EPZ production will increase by 0.74%. The ARDL results show that, in the long-run and short-run, there is a positive association between FDI inflows and EPZ employment. The government and policymakers of the country should emphasize the real operation of the one-stop service to encourage foreign investors as well as local investors. If the government really starts a one-stop service for foreign investors, then most of the investors will be encouraged to invest in the country.

Keywords

• EPZ
• FDI
• Export
• Employment
• GMM
• ARDL