Do Foreign Direct Investment and Foreign Remittances Drive Economic Growth in Bangladesh? New Evidence from an Augmented ARDL Approach, 1990–2025

Abstract Foreign direct investment and remittances are widely credited with sustaining Bangladesh’s growth, yet the time-series evidence is mixed and often rests on bivariate models, short samples and incomplete cointegration testing. This study re-examines their growth effects using World Development Indicators data for 1990–2025, measured in constant 2015 US dollars, within an augmented production function that controls for gross fixed capital formation and labor. Long- and short-run effects are estimated with the autoregressive distributed lag bounds-testing approach, using both the F and t statistics with asymptotic and simulated small-sample critical values. A model containing only output, foreign direct investment and remittances shows no valid long-run relationship. In the augmented model, a stable long-run relationship exists (F = 8.25; t = − 4.22), with about 17% of any disequilibrium corrected each year, but it is anchored by domestic fixed investment (elasticity 0.97). The long-run elasticities of foreign direct investment (− 0.003, p = 0.78) and remittances (− 0.039, p = 0.25) are statistically insignificant, as are their short-run effects. Three alternative cointegrating estimators, a pandemic dummy, alternative control variables and Toda–Yamamoto causality tests reveal no positive effect of either inflow. Recursive estimates show that the positive remittance elasticity visible in samples ending before 2016 has since disappeared. Policy should therefore aim at converting external inflows into productive domestic investment rather than at maximizing inflow volumes.