(An) empirical study on the contribution of foreign direct investment and its barriers to economic growth in Sri Lanka

Abstract

The primary object of this paper is to examine the contribution of FDI on the economic growth of Sri Lanka using annual time series data from 1977 to 2014. This study adopts the Vector Error Correction Model (VECM). Empirical results revealed that in the long-run, FDI, exchange rate and employment exert a positive impact on the economic growth of Sri Lanka, however, human capital and trade adversely affect growth outcomes for the period under the study. The negative impact of human capital on economic growth is caused by excessive brain drain experienced by the country, the less ability to absorb high technology due to the conventional educational system, and the low demand for educated labour which is comparatively expensive than uneducated labour. In the short run, FDI

human capital, and trade contribute positively on economic growth, while a depreciation of the exchange rate impact negatively on economic growth. As a secondary objective of this study, several barriers that impede the flow of FDI to Sri Lanka were identified

these include political instability, tedious laws and regulations, bureaucratic procurement process, limited diversification of FDI. In view of the challenges mentioned, the study recommends strategies that will boost FDI in Sri Lanka which include: - 1) introduction of an integrated system that acts like a one-stop center for FDI approval processes, 2) enhance access through online FDI Information services and 3) lessening of the red tape of regulations, 4) boost the domestic market capacity for active involvement in international trade.