Abstract:
In recent years, there has been an increasing interest in attracting foreign direct investment
(FDI) to stimulate the economies in developing countries like Sri Lanka as they face severe
capital shortage for their development. When considering the economic reforms undertaken
over the past three decades it is clear that FDI inflows into Sri Lanka were not as expected
level by the government. The high volatility of FDI inflows to the country inspired to
examine the factors affecting FDI inflows in Sri Lanka by using ARDL – Bounds testing
approach based on the annual data from year 1985-2018. The results show that FDI
environment improving factors such as trade openness, GDP growth, financial development,
infrastructure, corporate tax rate, labour cost and macroeconomic stability are significant in
explaining FDI inflows to Sri Lanka. Conversely, exchange rate is insignificant in
determining FDI inflow. Accordingly, government should pursue appropriate policies aimed
at providing greater concessions and incentives to investors with the aim of attracting more FDI into the country.
