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An Empirical Analysis of the Impact of Economic and Noneconomic Determinants on Foreign Direct Investment of Sri Lanka

S. Vijesandiran|T. Vinayagathasan
지역개발연구소 (The Center for Regional Development)|2020.06|지역개발연구 (The Studies in Regional Development) (The Studies in Regional Development)|제52권 제1호|pp. 1-36|DOI 10.35526/srd.2020.52.1.001

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키워드

ARDL modelForeign direct investmentEconomic and Non-economic variables

초록

Foreign Direct Investment (FDI) has been considered during recent decades as one of the engines that promote economic growth in developing countries. This research seeks to identify the relationship and impact of economic and non-economic variables on FDI net flows in Sri Lanka over the period of 1996-2017. ARDL Bounds test procedure was adopted to achieve above objective. The economic factors Treasury Bill Rate, Consumer Price Index, Real Gross Domestic Product, Exchange Rate, Corporate Tax, Labor Cost and Trade openness and non-economic factors Political Instability/the existence of Violence and Control of Corruption are used as regressors in the ARDL model. AIC criterion selected ARDL (1, 0, 1, 1, 1, 1, 1, 1, 0, 1) model as the best model among the top 20 models. The selected model passes the all relevant tests and confirmed that the selected model and the estimated parameters are stable in the long run. The results detected that long-run co-integrating relationship exists between the variables under considered in this research. The findings also show the real value of GDP, depreciation of domestic currency, rate of interest and wage rate are promoting FDI inflow in the long-run. Whereas inflation rate, corporate tax rate, the level of trade openness, political instability and corruption tend to decrease the FDI inflows in the long-run. Nevertheless, none of the economic and non-economic factors has statistically significant impact on FDI inflow in the short-run. Thus, study confirms that both economic and non-economic determinants influence on FDI inflows in Sri Lankan only in the long run. Further this model confirms that FDI inflows can get back to long run steady state line at the speed of 33.7% in each year one period after the exogenous shocks. Hence the government of Sri Lanka should give priority to both economic and non-economic factors equally in policy making on FDI considering on maintain the price stability, allow certain level of currency depreciation, decrease corporate tax, increase interest rate, fight against corruption in all sectors of the economy and maintain politically stability in order to attract FDI in the long-run.

Abstract

Foreign Direct Investment (FDI) has been considered during recent decades as one of the engines that promote economic growth in developing countries. This research seeks to identify the relationship and impact of economic and non-economic variables on FDI net flows in Sri Lanka over the period of 1996-2017. ARDL Bounds test procedure was adopted to achieve above objective. The economic factors Treasury Bill Rate, Consumer Price Index, Real Gross Domestic Product, Exchange Rate, Corporate Tax, Labor Cost and Trade openness and non-economic factors Political Instability/the existence of Violence and Control of Corruption are used as regressors in the ARDL model. AIC criterion selected ARDL (1, 0, 1, 1, 1, 1, 1, 1, 0, 1) model as the best model among the top 20 models. The selected model passes the all relevant tests and confirmed that the selected model and the estimated parameters are stable in the long run. The results detected that long-run co-integrating relationship exists between the variables under considered in this research. The findings also show the real value of GDP, depreciation of domestic currency, rate of interest and wage rate are promoting FDI inflow in the long-run. Whereas inflation rate, corporate tax rate, the level of trade openness, political instability and corruption tend to decrease the FDI inflows in the long-run. Nevertheless, none of the economic and non-economic factors has statistically significant impact on FDI inflow in the short-run. Thus, study confirms that both economic and non-economic determinants influence on FDI inflows in Sri Lankan only in the long run. Further this model confirms that FDI inflows can get back to long run steady state line at the speed of 33.7% in each year one period after the exogenous shocks. Hence the government of Sri Lanka should give priority to both economic and non-economic factors equally in policy making on FDI considering on maintain the price stability, allow certain level of currency depreciation, decrease corporate tax, increase interest rate, fight against corruption in all sectors of the economy and maintain politically stability in order to attract FDI in the long-run.

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