Determinants of Foreign Direct Investment in Sri Lanka

Kalaichelvi Ravinthirakumaran · Eliyathamby A. Selvanathan · Saroja Selvanathan · Tarlok Singh

32 citations0/0 files storedSouth Asia Economic Journal

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International Business and FDI Global trade and economics Economic Zones and Regional Development

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.

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