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Research Journal of the University of Ruhuna, Sri Lanka- Rohana 12, 2020
were used to estimate the model. The study found that lending rates along with
openness and money supply have a positive impact on FDI flows while debt, the
unemployment rate and environment pollution have made negative impact on FDI
inflows.
The relationship between FDI inflows and market size measured by gross domestic
product, GDP per capita and GDP growth rate has been widely investigated
(Kinuthia, 2010; Tsen, 2005;). Kinuthia (2010) carried out an investigation of
foreign firms in Kenya to identify the determinants of FDI and showed that market
seeking is one of the crucial determinants of FDI inflows to Kenya. In another
major study, Tsen (2005) found that large market size has positively contributed to
attract FDI into the manufacturing sector in Malaysia.
Khouli and Maktouf (2015) conducted a study based on 14 partners and 39 host
countries on challenges for attracting FDI into the countries that participate in the
international economy using both the static and gravity model in the period of 1990 -
2011. The empirical estimates of the study consider the endogenous nature of the
effects of integration and the existence of the dynamic effect.
Xing and Wang (2006) investigated the Japanese FDI inflows to nine major factories
in China in 1981 – 2002 using panel data. It has been demonstrated that Yuan’s
cumulative devaluation led to increase in wealth and production in the country and
the results confirm that this devaluation positively influenced to the surge in
Japanese FDI inflows in China whereas Baek and Okawa (2001) identified a
negative effect of the exchange rate on FDI inflows from the study on Japanese FDI
oriented to Asian economies.
Some analysts investigated the relationship between FDI inflows and political
stability. Asif et al., (2018) employed the ARDL model to show that government
stability and low external conflict encourage FDI in the long run in Pakistan. A
recent study by Kurecic and Kokotovic (2017) employed the Granger Causality test
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