Export Potential of Sri Lanka and the Determinants of Exports: A Gravity Model Approach

Abstract

This research attempts to investigate the determinants of exports of Sri Lanka and to estimate the potential exports for the period 2000-2013, using a gravity model augmented with stochastic frontier approach. It uses panel data for 56 major export destinations of Sri Lanka. Results show that importing country’s GDP and colonial relationship have positive impact on Sri Lanka’s exports. In addition, the difference between the factor endowments of Sri Lanka and importing country has a positive impact. However, the distance and trade resistance of the importing country have negative impact on Sri Lanka’s exports. Further, Sri Lanka’s actual exports have achieved only 15 per cent of its potential during the period 2000 to 2013. There is considerable differences in region-wise performance which shows that Sri Lanka has done considerably well in the traditional markets such as the US and EU but has fallen well short of its potential in the other regions.