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Foreign Direct Investment, Trade Openness, Financial Development, and Economic Growth Dynamics: Empirical Evidence from Bangladesh

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  • Faisal Ahmed Mashrur

    (Department of Economics, Vanderbilt University, United States)

Abstract

This study investigates the relationships between Foreign Direct Investment (FDI), trade openness, financial development, and economic growth within the context of Bangladesh, a rapidly developing economy in South Asia. By analyzing annual data from 1999 to 2023, the Vector Error Correction Model (VECM) has been used to assess both the short-term dynamics and long-term interactions among these variables. The analysis demonstrates how financial development can enhance the effects of FDI and trade openness, promoting economic growth. The results indicate that while FDI and trade openness directly contribute to economic growth through increased productivity and improved market access, their impacts are significantly bolstered by a well-developed financial sector that supports effective resource allocation and investment. Granger causality tests confirm that financial development causally influences economic growth, highlighting its critical role as a driver of economic performance. The results highlight the need for strategic financial policies that promote financial development to maximize the economic benefits of increased FDI and trade openness.

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Handle: RePEc:epw:develo:v:5:y:2025:i:1:id:15409
DOI: 10.24018/ejdevelop.2025.5.1.409
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