Determinants of Foreign Direct Investment Inflows in Sri Lanka

Abstract

Foreign direct investment (FDI) has grown strongly as a major form of international capital transfer over the past decades. It is considered a key element for a country’s economic integration and represents a key source to finance capital investment. This paper investigates the determinants of FDI inflows in Sri Lanka for the period from 1977 to 2016 by expanding the literature focusing on the behavior of investors in pre and post-civil ethnic war. Gross domestic production (GDP) growth rate, exchange rate, trade openness, military expensess and inflation are considered as major determinants to the foreign direct investments and regression is used to find out the relationship between selected variables. According to the results of correlation analysis, two regression models are developed and first model suggests that the growth rate of GDP, inflation, exchange rate and military expenses have significant impact on FDI inflows. The second model shows that trade openness also has a significance impact on FDI inflows. Though a considerable increase in FDI inflows is expected after the victory of war from 2009, it has not taken place. Sri Lankan government has to take necessary actions to attract more investment from foreigners by maintaining favorable economic conditions inside the country.