Empirical Relationship between Foreign Direct Investment and Economic Output in South Asian Countries: A Study on Bangladesh, Pakistan and India

This paper examines co-integration and the causal relationship between Foreign Direct Investment (FDI) and the economic output or Gross Domestic Product (GDP) in the both short and long run of Bangladesh, Pakistan and India over the period of 1972-2008. Three econometric models, viz. Augmented Dickey-Fuller (ADF) test, Engle-Granger two-step co-integration test, Vector error correction mechanism (VECM) have been used. This study also used Granger Causality (GC) to find the directional relationship between FDI and GDP. The results suggest that there is no co-integration between FDI and GDP in the both long and short run in Bangladesh and India. However, we find the co-integration between them in the both short and long run in Pakistan. Conversely, GC results suggest that there is no causality relationship between GDP and FDI for Bangladesh and one way or unidirectional relationship found for Pakistan and India, which means FDI caused economic output in Pakistan.