Page 67 - rohana_journal_No_12-2020-final

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

Exchange rate

Exchange rate depreciation in the host country is expected to increase the wealth of
foreign firms leading to increase in FDI inflows. An appreciation of the rupee

increases the cost of investing in Sri Lanka, and thus falling FDI inflows to the
country. MNEs are willing to invest more in a country with weaker domestic

currency (Koojaroenprasit, 2013). Therefore, a negative relationship between
exchange rate and FDI is expected.

Corporate tax rate

It is expected that higher taxes would lead to deter investors investing in the host
country. Thus, corporate tax rate is also considered a critical factor to determine

flows of foreign capital. This study expects to find a negative impact of corporate
tax rate on FDI inflows.

Trade openness

A strong positive relationship between FDI and trade openness has been reported in
several empirical studies (Chawla and Rohra (2015); Liargovas and Skandalis

(2012); Jayasekara (2014); Sahoo (2006). This factor is important for foreign
investors who are inspired by the market seeking FDI. On general, openness is

hypothesized as having a positive relationship with FDl.

Inflation

Inflation rate is the key indicator of the economic stability of the host country.

Investors prefer to invest in a country with a lower inflation rate as a high inflation
rate could reduce the returns on investment. Investors generally have to spend more

money in a host country with a high inflation rate. Thus, it is expected that there is a

negative association between FDI and inflation rate.

58