Relationship Between FDI Inflows and Export Performance: An Empirical Investigation by Considering Structural Breaks

Abstract

The present study examines the relationship between FDI inflows and export performance in Bangladesh by considering the issue of structural breaks utilizing annual time-series data from 1972 to 2019. In the study, unit root tests were conducted without (ADF test and PP test) and with (ZA test and LP test) the presence of probable structural breaks in the dataset. A Johansen test of co-integration was employed to determine whether the variables were co-integrated. The VECM was used for determining the sources of causation and the directions of the causal relationships between the variables. Since all the variables were integrated of order one, I(1), with breaks (confirmed by ZA and LP unit root tests), a Johansen test of co-integration was applied to identify whether the variables were co-integrated. The results of the Johansen co-integration test confirmed that three variables (LRGDPGR, LRFDI, and LREX) have a long-run equilibrium relationship or cointegrating relation. Finally, the VECM suggests the evidence of a positive and unidirectional causal relation from REX to RFDI in Bangladesh. An important uniqueness of this study lies in its application of the methodological issues of incorporating structural breaks, which could have significant implications for investigating the said relationship.