Determinants of Foreign Direct Investment (FDI) in Developing Countries:The Case of Sri Lanka

Abstract

This study aims at identifying the key determinants of FDI inflows to Sri Lanka during the period from 1970 to 2014. In the context of Sri Lanka, this period was coincided with economic policy shifts, civil wars and changing global economic climate. This study uses a supply demand approach to identify how Sri Lanka responded to global demand for investment sites using domestic supply factors to attract FDIs. An ARDL method is employed to analyse the long run relationships of the determinants. It is revealed that Sri Lanka has failed to benefit from the surge in international demand for investment sites in developing countries in last few decades. However, continuous liberalisation efforts have been successful compared to meager FDI flows in the closed economy era. It is also found that prevalence of peaceful environment after the last civil war has helped Sri Lanka to attract more FDIs.