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Research Journal of the University of Ruhuna, Sri Lanka- Rohana 12, 2020

Analysis of Foreign Direct Investment Inflows into Sri Lanka

Sumanaratne. B.M

Senior Lecturer, Department of Economics, University of Ruhuna

Email: bmsumana@econ.ruh.ac.lk

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. Bound-
Test, Sri Lanka.
Introduction

Foreign direct investment (FDI) inflows into the developing countries are considered

as a significant force to increase economic growth, enhance productivity while

bringing additional benefits to the recipient country. FDI inflows can play a

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