Determinants of Foreign Direct Investment in Sri Lanka

Abstract

Foreign direct investment (FDI) can play a significant role in achieving rapid economic growth in developing countries such as Sri Lanka. Even after the 30-year-long war that ended in 2009, the economy is still struggling to convince domestic and foreign investors that Sri Lanka is ‘ready for business’. In the light of this situation, identifying the factors that could influence FDI inflows into Sri Lanka is crucial to design policies aimed at attracting more FDI. This article empirically investigates the determinants of FDI inflows into Sri Lanka using annual data for the period 1978–2013 and applying the latest econometric techniques in time series analysis. As expected, market size, trade openness and infrastructure level have a positive impact, while wage and political instability have a negative impact on FDI. From a policy point of view, the results suggest that, to attract FDI inflows, Sri Lanka should develop and introduce policies that would improve the level of market size, trade openness, infrastructure and political stability but reduce the cost of labour.

Causal Links between Trade Openness and Foreign Direct Investment in Romania

“…Trade openness also shows positive and statistically significant impact on inward FDI long-run. Finally, the study suggested giving more consideration on GDP, exchange rates, interest rates, and the level of external trade to attract FDI inflows in Sri Lanka, in line with Ravinthirakumaran et al (2015). Uduak et al (2014) examined the determinants of foreign direct investment in Brazil, Russia, India, China, and South Africa (BRICS) and Mexico, Indonesia, Nigeria, and Turkey (MINT) using pooled time-series cross sectional analysis and random effect model over the period 2001-2011.…”

The linear and non-linear relationship between of tourism demand and output per worker: A study of Sri Lanka

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