Determinants 0f Foreign Direct Investments in Sri Lanka

Abstract

Foreign Direct Investment (FDI) has become an engine of growth and vital for economic development. Sri Lanka has also been entertaining FDI seeking acceleration of economic growth through various channels such as employment generation, poverty alleviation and creating foreign exchange. However, the factors that are likely influence on the FDI inflow has been varied country to country in terms of their Institutional and socio-economic characteristics. In that line, this study investigates the determinants of FDI in Sri Lanka during the time period from 1990 to 2017, using annual time series data extracted from the World Bank, and Central Bank database. As determinants, the study incorporates six variables such as gross domestic product, inflation, trade openness, labor force and tourism income. The study employs ADF unit root test, Johansen’s Cointegration analysis and Error correction model based on the Vector error correction model (VECM) to ascertain the significance of macroeconomic and country specific factors on FDI inflow in Sri Lanka. The results derived from this study suggest that all variables are significantly influencing on the FDI in the long run. Gross domestic product and labor force have positive impact, whereas inflation, trade openness, and tourism income are found to have a negative impact on FDI.