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

Where FDI is value of net FDI inflows measured in US $; the financial development
(FD) is the total sum of private credit to GDP; the economic growth, which is

measured by real GDP per capita is noted by GRO; EXR is the nominal exchange
rate; CTR is measured as corporate tax rate; trade openness (OPEN) is the total sum

of exports and imports divided by GDP; INF is inflation rate; infrastructure
(INFRA) is measured by public expenditure on transport and communication, and

electricity and water supply; labour cost is measured by wage rate index (WAGI);

is the error term. L refers to the logarithm of variables. The log-log specification is
employed to facilitate the interpretation of estimated coefficients as elasticities. The

short-run dynamic effects of the variables will be measured by the coefficients of ,

( = 1, 2, . . 9), while the long-run effects the variables will be measured by the
∅ ( = 1, 2, . . 9). It is necessary to clarify exactly the reasons for the inclusion of

the right hand side variables in equation (1) and their possible directions for
changing FDI are discussed below.

Economic growth

It is the general consensus that MNCs are willing to invest their capital in a country
with recording high economic growth as they can generate more profit. This study

uses GDP growth as a proxy for market size. The size of the market is considered as
a good indicator of the potential domestic demand and the host country's economic

condition (Koojaroenprasit, 2013). It is found that increase in market size is linked
with increasing of FDI inflows (Tuluce and Yapark, 2015; Karim and Othman,

2005; Jayasekara, 2014; Albert and Stuart, 2008).

Financial development

FDI inflows increase substantially in countries with well-developed banking systems

(Claessens et al., 2001; Agarwal and Mohtadi, 2004).

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