Determinants of foreign direct investment in Sri Lanka

Abstract

Sri Lanka is moving towards achieving a per capita income of US$ 4,000 by 2016 and it has to maintain a growth rate around 8 per cent per year to realise the expected target. However, internal investment capability of the country is limited due to low domestic savings. Therefore, Sri Lanka has to rely on external finance such as foreign Direct Investment to achieve expected prosperity. This paper investigates the determinants of Foreign Direct Investment in Sri Lanka and evaluates the attractiveness of India, Sri Lanka, Bangladesh and Pakistan for foreign direct investment during the period of 1975-2012. Fully modified least squares (FM-OLS) regression model was fitted to estimate the determinants of foreign direct investment. Attractiveness of the selected countries for foreign direct investment was evaluated using an index. Empirical results revealed that GDP growth rate, inflation, infrastructure quality, lending interest rate, labour force, exchange rate, and corporate income tax were significant determinants of FDI in Sri Lanka during the period of 1975-2012. Main feature of the variables which are determinants of FDI is that they are directly associated with the cost of production of the investors. Therefore, it can be interpreted that the main motive of the foreign investors in Sri Lanka is to reduce the cost of production by improving the efficiency of operations. FDI index suggests that India and Bangladesh were more attractive for FDI inflows over Sri Lanka and Pakistan. Market seeking investors are keen on the potential large market size of India and Bangladesh over Sri Lanka. Therefore, the motive of the investors is important in evaluating determinants of foreign direct investments in a country.

Exchange rate, exchange rate volatility and foreign direct investment in Sri Lanka

“…FDI does not hold a statistically significant relationship with real exchange rate, exchange rate volatility, and expected exchange rate as hypothesized. However, some previous studies have confirmed statistically significant relationship of FDI with real exchange rate (Froot & Stein, 1991;Jayasekara. 2011).…”

“…Most of the existing literature supports the hypothesis that a depreciation of host country currency promotes FDI inflows (Harris & Ravenscraft, 1991;Klein & Rosengren, 1994;& Dewenter, 1995). Studies, which looked at the impact of exchange rate on FDI flows in Sri Lanka, have also come to a similar conclusion (Jayasekara, 2011). However, there are contrary evidences (Stevens, 1998;Healy & Palepu, 1993).…”

Faktor Faktor Yang Mempengaruhi Investasi Asing Langsung di Indonesia

“…Menurut Soo Lee & S.Min, (2011), perusahaan multinational selalu memperhatikan perubahan nilai tukar mata uang sebagai penentu keputusan investasi asing langsung. Tingkat inflasi, kualitas infrastruktur, tingkat suku bunga pinjaman, ketersediaan tenaga kerja, nilai tukar berpengaruh positif dan signifikan terhadap investasi asing langsung, penelitian dilakukan di Sri Lanka (Jayasekara, 2014) Penelitian yang dilakukan di lima negara Asia Tenggara yang meliputi: Indonesia, Malaysia, Thailand, Philipina, dan Vietnam dengan pengambilan data dari tahun 2005 sampai dengan tahun 2012 dengan hasil penelitian, bahwa pertumbuhan ekonomi berpengaruh positif dan signifikan terhadap investasi asing langsung sedangkan tingkat suku bunga, tingkat inflasi, dan keterbukaan perdagangan berpengaruh negatif terhadap investasi asing langsung (Anwar, Kuswantoro, & Dewi 2017).…”

“…Angkatan kerja tidak berpengaruh terhadap investasi asing langsung di Indonedsia. Hasil penelitian ini tidak sejalan dengan hasil penelitian yang dilakukan oleh: (Jayasekara (2014); (Nistor (2015); (Salike (2016); (Siraroj (2016); (Gharaibah (2015).…”

“…Hasil penelitian ini tidak sejalan dengan hasil penelitian yang dilakukan oleh: (Ali & Gua (2005) (Jayasekara (2014); (Lily et al, 2014); (Hui et al, (2015); (Ramadhani et al, (2015); (Deseatnico & Akiba, 2016); (Bakar & Razak (2016); (Majidi et al, , 2017). 6.…”