Analysis of Foreign Direct Investment Inflows into Sri Lanka

Abstract

In recent years, there has been an increasing interest in attracting foreign direct investment (FDI) to stimulate the economies in developing countries like Sri Lanka as they face severe capital shortage for their development. When considering the economic reforms undertaken over the past three decades it is clear that FDI inflows into Sri Lanka were not as expected level by the government. The high volatility of FDI inflows to the country inspired to examine the factors affecting FDI inflows in Sri Lanka by using ARDL – Bounds testing approach based on the annual data from year 1985-2018. The results show that FDI environment improving factors such as trade openness, GDP growth, financial development, infrastructure, corporate tax rate, labour cost and macroeconomic stability are significant in explaining FDI inflows to Sri Lanka. Conversely, exchange rate is insignificant in determining FDI inflow. Accordingly, government should pursue appropriate policies aimed at providing greater concessions and incentives to investors with the aim of attracting more FDI into the country.

Keywords: foreign direct investment, Openness, GDP growth, Infrastructure. BoundTest, Sri Lanka.