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Determinants of Foreign Direct Investment in Sri Lanka

Author

Listed:
  • K. Ravinthirakumaran
  • E.A. Selvanathan
  • S. Selvanathan
  • T. Singh

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.

Suggested Citation

  • K. Ravinthirakumaran & E.A. Selvanathan & S. Selvanathan & T. Singh, 2015. "Determinants of Foreign Direct Investment in Sri Lanka," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 16(2), pages 233-256, September.
    • Handle: RePEc:sae:soueco:v:16:y:2015:i:2:p:233-256
    DOI: 10.1177/1391561415598458
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    References listed on IDEAS

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    2. Jiazhen Ren & Apurbo Sarkar & Hong Li & Xiaojing Li, 2022. "Does the Host Country’s Foreign Direct Investment (FDI) Restrictiveness Inhibit the Export Sophistication of the Home Country? Evidence from China’s Manufacturing Data," Sustainability, MDPI, vol. 14(22), pages 1-20, November.
    3. Biswajit Maitra, 2021. "Relative role of external debt, FDI, and domestic investment in economic growth: evidence from Sri Lanka," International Journal of Economic Policy Studies, Springer, vol. 15(2), pages 329-347, September.
    4. Peter Josef Stauvermann & Ronald Ravinesh Kumar & Syed Jawad Hussain Shahzad & Nikeel N. Kumar, 2018. "Effect of tourism on economic growth of Sri Lanka: accounting for capital per worker, exchange rate and structural breaks," Economic Change and Restructuring, Springer, vol. 51(1), pages 49-68, February.
    5. Abbasi, Kashif Raza & Hussain, Khadim & Radulescu, Magdalena & Ozturk, Ilhan, 2022. "Asymmetric impact of renewable and non-renewable energy on the industrial sector in Pakistan: Fresh evidence from Bayesian and non-linear ARDL," Renewable Energy, Elsevier, vol. 187(C), pages 944-957.

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    More about this item

    Keywords

    cointegration; bounds test; economic growth;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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