Abstract:
Foreign direct investment is considered as one of key factor in determining factors
for its economic growth. However, the macroeconomic environment in the host
country must be favorable to attract foreign investment. Exchange rates of its
currency against other foreign currencies are one of the main factors that affect the
foreign direct investment of a country. The main objective of this study is to
investigate the relationship between exchange rate volatility on foreign direct
investments in Sri Lanka during the period of 2000 to 2017. Real exchange rate, Real
exchange rate volatility, Openness of the economy, GDP per capita, stock of foreign
direct investment and political situation were selected as independent variables while
foreign direct investment was selected as a dependent variable. Data were collected
through annual reports of Central Bank of Sri Lanka and World Bank. Data was
analyzed using Vector Error Correction model. The results indicate a negative longrun
relationship between exchange rate volatility and foreign direct investment for
Sri Lanka. The existence of a short-run association was not Significant in Sri Lanka
