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

significant role by increasing and augmenting the supply of capital for investment in
the host country. Besides the capital brought in by FDI inflows can increase the host

country’s export capacity leading to increase foreign exchange earnings of the
country. The UN (2005) viewed FDI as a potential catalyst to increase productivity

in developing countries mainly through the transfer of technology and management
skills, and facilitating channels for marketing products internationally. It should be

noted that compared to other more volatile private capital flows, such as portfolio

flows and bank lending, FDI flows have been identified as more stable foreign
capital source (Spratt, 2009).

Considering the vast range of benefits of FDI, all countries make every attempt to

provide a welcoming climate for foreign investment. During the past few decades
Sri Lanka also implemented a number of policies to attract FDI into the country and

provided attractive investment opportunities. When we analyse the trends of FDI

inflows into the country it becomes evident that, to some extent, that they are linked
with the changes in macroeconomic policies of the country. The development

strategy is very important to attract FDI. The macroeconomic factors can highly
influence foreign investors mainly MNEs to direct their investment. It is argued that

investors prefer to invest their funds in countries where there is a political stability, a

large market and a high growth rate. Like many developing countries, Sri Lanka put
in place an inward–looking import-substituting industrialization (ISI) with public

11
10
sector planning and regulation of the public sector . One of the major
consequences of the ISI was that it created a highly distorted incentive structure
resulting in severe allocative and productive inefficiency which not only inhibited
the growth prospects but also caused an anti-export bias, thus undermining the

employment intensive growth.

10 In 1959, the government produced a ten year plan (National Planning council). Apart from this
there were many planning attempts, e.g. 1963 3year plan, 1972 5 year plan, over the period. See
Radhakrishna (1979), Fernando (1997).
11 Development strategy in the 1960s increasingly turned to maximization of growth through capital
accumulation and industrialization based on import substitution and increased government
intervention. See Weerakoon ( 2004 ).
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