Page 73 - rohana_journal_No_12-2020-final

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

FDI inflows under open trade policies than in countries where the inward oriented
economic policies were adopted historically. The results depict that the FDI inflows

increased by 1.9 percent points when trade openness increase by 1 percent point. It
is interesting to note that the results show a strong negative relationship with FDI

inflows to the country. The WAGI variable is highly significant as per its P – value
and t – statistics values. The implication is that 1 percent increase in wage rate index

will lead to FDI inflows decreasing by 3.7 percent. It is the general consensus that

FDI inflows to developing countries are mostly to exploit cheap labour. This finding
was justified by the results of a previous study (Albert and Stuart, 2008) as well.

Error correction model

Establishing the cointegration relationship short run dynamic parameters can be

obtained from estimating the error correction model. The ECM model is specified as

follows.

∆ = + ∑ ∆ − + ∑ ∆ − + ∑ ∆ −

1
0
2
3
=1 =1 =1

+ ∑ ∆ − + ∑ ∆ − + ∑ ∆ −
5
6
4
=1 =1 −1

+ ∑ ∆ − + ∑ ∆ −
7
8
=1 =1

+ ∑ ∆ − + ∅ −1 + (03)
9

=1
The −1 was derived from the ARDL bounds test long run terms.

−1 = ∅ −1 + ∅ −1 + ∅ −1 + ∅ −1 + ∅ −1 +
3
4
2
1
2
∅ −1 + ∅ −1 + ∅ −1 + ∅ −1 +
8
7
5
6
∅ −1 (04)
9
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