Cointegration and VAR Causality Testing of the Infrastructure - FDI Relationship: A Case of Bangladesh

Abstract

This study explores the role of infrastructure availability, particularly with respect to transportation, information and communication technology and energy consumption in determining the attractiveness of foreign direct investment (FDI) inflows in Bangladesh. The infrastructure of a country not only encourages its local investment to develop its socio-economic condition but also attracts the foreign direct investment. For the empirical analysis this paper uses data for the period 1975-2011 from the World Development Indicators (WDI) (on FDI, per capita energy consumption and GDP) (WDI 2014). The long term relationships between infrastructure and FDI are explored by using cointegration analysis for Bangladesh. The data sets are found to be integrated of the same order. It is also found that they move together in the long run by Johansen Cointegration Test. Using VAR Granger causality/Block exogeneity Wald causality test the study has revealed some interesting causal relationships between foreign direct investment and different infrastructure indicators in Bangladesh. Bi-directional causality is observed only from LNICT to LNFDI in Bangladesh.