Abstract:
Foreign Direct Investment (FDI) is an investment in the form of controlling
ownership in a business in a country by an entity based in another country. It
contributes to transfer tangible and intangible assets such as technology,
capital, knowledge and managerial skills, etc. FDI is the main driver of
economic growth and sustainable development especially regarding Least
Developed Countries (LDC). Sustainable Development Goals (SDG) for 2030
include Decent Work and Economic Growth as the 8th goal which can be
accelerated by attracting FDI. In 1977 the open economic reforms invited
Foreign Direct Investors to Sri Lanka. Thus the Board of Investment and
island-wide free trade zones started regulating and monitoring FDI activities
in Sri Lanka. Later, welfare economic reforms resulted in a dual gap issue of
the savings-investment gap and export-import gap which in return caused the
continuous budget deficit. Consequently, FDI is used to fill the dual gap
problem and also for investment purposes. But the impact of FDI on economic
growth in developing countries changes due to country specific factors.
Therefore, this study attempts to identify the impact of FDI on economic
growth measured by Gross Domestic Production (GDP) and identifying the
impact of domestic investment, trade liberalization, inflation, human capital
and population on GDP for the period of 1978-2018 in Sri Lanka. The analysis
is based on the time series data collected from secondary resources like reports
of central bank and the Census and Statistics Department. The multiple
regression analysis indicates that FDI has a positive and statistical impact on
economic growth in Sri Lanka. But the previous studies revealed that the
causation is from the GDP to FDI.
