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

of 5% confidential interval indicating the stability of parameters. According to the
results of the Lagrange Multiplier (LM) the null hypothesis of no serial correlation is

accepted as F-statistics (3.5285) is not significant at 5% level (P-value is 0.13).

8
6

4
2
0

-2
-4

-6
-8
2013 2014 2015 2016 2017 2018

CUSUM 5% Significance

Figure 05: Plot of CUSUM test

Conclusion

This paper set out to determine the factors which can influence FDI inflows to Sri

Lanka for the period of 1985 – 2018. Based on the ARDL bounds test approach, the
research investigated the long – run relationship between FDI inflows and specified

explanatory variables in the model. The findings of this study demonstrate that GDP

growth, trade openness, macroeconomic stability through mitigating inflation rates,
financial development, reducing the tax burden on private sector and low labour cost

are the factors which determine FDI inflows, while the exchange rate is found to be
insignificant in determining FDI inflows to the country.

The most obvious finding to emerge from this study is the positive effect of trade
openness attracting FDI inflows. Thus, far-reaching trade liberalization and

strengthening links with the external world is considered crucial for Sri Lanka. It
was also shown that reducing the role of the government, mainly through dwindling

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