The role of Foreign Direct Investment (FDI) and Economic Growth in Bangladesh: A Focus On the RMG Sector.

Shawkat Osman

Master's thesis

Abstract:

This chapter provides the overall conclusion of the paper and its recommendations, serving as the final statement of the research titled "The Role of Foreign Direct Investment (FDI) and Economic Growth in Bangladesh: A Focus on the RMG Sector." It not only combines the theoretical, empirical, and econometric backgrounds from the previous chapters but also assesses the total contribution of Foreign Direct Investment to Bangladesh’s economic growth through the Ready-Made Garments (RMG) sector. The conclusions are based on descriptive findings from practical analysis and the econometric validation of regression results. The chapter also includes policy implications, acknowledges the research limitations, and notes directions for future research throughout the ongoing analysis. The paper establishes that FDI plays a significant and positive role in Bangladesh's economic growth, particularly in relation to the RMG industry. Empirical evidence shows that, since 2000, FDI inflows have grown substantially, albeit with some volatility influenced by global and domestic economic factors. Nevertheless, foreign investment remains a vital source of financing industrial growth, technological modernization, and export expansion. Descriptive analysis indicates that RMG exports in Bangladesh surged between 2000 and 2022, with exports increasing from US$4.82 billion to US$45.70 billion, becoming the country’s main foreign exchange earner. The sector’s transformation into the primary export industry demonstrates a robust relationship between rising FDI inflows, expanding RMG exports, and sustained GDP growth—a clear indication of a high export-FDI-growth transmission mechanism operating in the Bangladeshi economy. Econometric regression results strongly confirm this relationship, showing positive and statistically significant coefficients for both FDI and RMG exports, which directly impact GDP growth. The RMG industry is central to FDI’s growth transmission in Bangladesh, as it forms the core of the country’s export-based development strategy. The relationship between these variables is negative when inflation rises, which hampers growth, while the exchange rate plays a role in maintaining export competitiveness, underscoring the importance of macroeconomic stability for sustained long-term economic performance. However, the research also concludes that Bangladesh’s economy remains heavily reliant on a single export sector, making it vulnerable to external risks such as international demand fluctuations, supply chain disruptions, and high compliance costs. Based on the theoretical framework, empirical data, and econometric analysis, the study finds that FDI has been a catalyst and enabler of economic growth in Bangladesh. While not a direct growth engine, FDI influences growth indirectly through effects on industrial expansion, export competitiveness, job creation, technological transfer, and productivity improvements, particularly within the RMG sector. Foreign capital, multinational buyer networks, and global value chain integration have significantly benefited Bangladesh’s RMG industry, making it the second-largest garment producer globally, responsible for over 80 percent of total export earnings and employing more than four million workers. This sector’s performance has bolstered Bangladesh’s balance of payments, foreign exchange reserves, and fiscal capacity, promoting macroeconomic stability and poverty reduction. The study further indicates that long-term support for export-led growth driven by FDI requires diversification, industrial upgrading, institutional reforms, and environmental sustainability. The current growth model yields impressive economic outcomes but risks limiting Bangladesh’s development prospects if it continues to rely on low-value-added manufacturing. Accordingly, policy efforts should focus on attracting higher-quality, technologically advanced, and value-added FDI rather than overly depending on

Abstract:

the labor-intensive garment industry. While RMG will remain vital, diversification of exports and strengthening the industrial base are essential to mitigate global shocks. Investment in infrastructure—ports, power, transportation, logistics, and digital facilities—is critical to reducing production costs and boosting investor confidence. Reforms to improve transparency, contract enforcement, land administration, and tax governance are necessary to create a favorable investment climate. FDI policies should also align with human capital development through enhanced vocational training, skills development, and industry-academia collaboration to improve productivity and technology transfer. Environmental sustainability must remain a key aspect of industrial policy through strict enforcement of environmental laws, promotion of green financing, and adoption of energy-saving technologies. Strengthening labor governance and social compliance is crucial to protect workers’ rights, improve workplace safety, and secure continued access to international markets and investor confidence. Despite its comprehensive scope, this research faces constraints that should be considered. It relies solely on secondary, time-series data, which limits insights into firm-level investment behaviors, productivity differences, and micro-level spillover effects. As an annual econometric model, it cannot fully capture short-term fluctuations or seasonal variations. Data limitations also mean that governance quality, political stability, corruption, and investor perceptions are not directly included. Additionally, external shocks such as the 2008 financial crisis and COVID-19 pandemic could affect the stability of the results. Nonetheless, these limitations do not diminish the core findings but highlight areas for future improvement. Future research could explore productivity spillovers, wage effects, and innovation impacts of FDI at the firm or industry level using microdata. Comparative analyses across countries—such as Vietnam, India, and Cambodia—could provide valuable insights. Employing advanced econometric methods like vector error correction models, autoregressive distributed lag models, and structural break tests can better represent short- and long-term dynamics. Qualitative research through interviews with investors, factory owners, policymakers, and workers could yield deeper understanding of institutional barriers, compliance issues, and technology transfer mechanisms. As Bangladesh approaches graduation from the Least Developed Country (LDC) status, future studies should evaluate how losing preferential trade access might affect FDI inflows, export competitiveness, and long-term growth prospects. In conclusion, this study provides empirical and econometric evidence that FDI has been a key driver of Bangladesh’s growth through export-led development, with the RMG sector serving as the primary transmission channel. The findings support the concepts of FDI-led development and export-oriented growth in Bangladesh’s industrial transformation. While current growth models have yielded substantial economic benefits, their sustainability depends on diversification, industrial modernization, institutional strengthening, and environmental and social sustainability. Through strategic policy reforms, targeted investments, and human capital development, Bangladesh can leverage FDI’s long-term benefits to achieve inclusive, sustainable, and resilient economic growth in the decades ahead.

Keywords

Economic Growth, Bangladesh Economy, RMG Sector, Ready-Made Garments., Foreign Direct Investment (FDI)

Language used: English

Date on which the thesis was submitted / produced: 1. 12. 2025

Thesis defence

• Date of defence: 4. 2. 2026
• Supervisor: prof. Ing. Mansoor Maitah, Ph.D. Ph.D.
• Reader: Jiří Čermák, externi

Czech University of Life Sciences Prague

Faculty of Economics and Management

Master programme:
International Trade and Business