Abstract

Abstract

Foreign Direct Investment (FDI) is considered to be a vital source of external finance for lower-middle-income countries, such as Bangladesh. Although the existing literature predominantly focuses on the causal relationship between FDI and economic growth, this study advances a discourse by examining the dynamic interdependencies among FDI, financial sector development, and trade openness within a cointegration and error-correction framework. Applying a Vector Error Correction Model (VECM) on data from 1972 to 2017, the analysis reveals a long-horizon relationship between the variables observed under the error correction mechanism, although no short run causality is observed. The results show a positive association between the exchange rate and financial development, but a negative relationship between trade openness and FDI. These findings suggest that while a developed financial sector can enhance the benefits of FDI, trade openness alone may not be sufficient to attract FDI. The study offers valuable guidance for policymakers and investors by highlighting the strategic importance of macroeconomic factors in attracting FDI.