Abstract. This paper aims to discover the relationship between FDI and GDP in the context of Bangladesh. Using annual data of FDI, GDP, and export for the period of thirty-three years from 1986 to 2018, the paper finds that above three variables are non-stationary at level but stationary at first difference. No cointegration among three variables is found through the application of the cointegration test. The Granger-causality test reveals that there are no causalities among the variables except a causality running from FDI to GDP. The variance decomposition exhibits that the forecast error variance of GDP is mainly explained by itself and FDI. A negative relationship between FDI and GDP in the short-run is observed by the impulse response function. This finding indicates that the absorptive capacity of Bangladesh is not sufficient enough to avail the FDI for promoting economic growth. The paper renders some policy recommendations to ameliorate the absorptive capacity of Bangladesh to exploit the FDI.

Keywords: gross domestic product, foreign direct investment, vector autoregressive, grangercausality test, variance decomposition, impulse response function.