Doing business in…Sri Lanka

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95Thunderbird International Business Review, Vol. 47(1) 95–120 • January–February 2005

© 2005 Wiley Periodicals, Inc. • Published online in Wiley InterScience (www.interscience.wiley.com).

DOI: 10.1002/tie.20042

doing business in...

doing business in...

£P$¥DSri Lanka

Anil Chandrakumara ■ Pawan S. Budhwar

Dr. Anil Chandrakumara is a senior lecturer in organizational behavior and manage-ment and the head of the Business Administration Department in the Faculty of Man-agement Studies and Commerce at the University of Sri Jayewardenapura, Colom-bo, Sri Lanka. His areas of research and teaching interest are human resourcemanagement and cross-cultural management ([email protected]).Pawan S. Budhwar is a reader in organizational behavior and human resource man-agement at Aston Business School, Birmingham, U.K. His main research interestsare in the areas of international human resource management, management in devel-oping countries, and work processes in call centers ([email protected]).

INTRODUCTION

ri Lanka is a teardrop-shapedisland in the Indian Ocean. Itwas known as Ceylon until 1971and is a well-known outlieramong developing nations. Itssize is 65,000 square kilometers,with a coastline of 1,340 kilome-ters. Most of its terrain is low,with flat to rolling plains, andthere are some mountains in thesouth-central interior. Some ofits core natural resources includelimestone, graphite, mineralsands, gems, phosphates, clay,hydropower, and a high percent-age of educated manpower.

Executive Summary

Having a well-developed humanresource base and a relatively well-devel-oped capital market infrastructure, SriLanka offers a liberal and dynamicinvestment environment. Over the years,macrostability has been achieved andconsiderable reforms have been imple-mented, contributing to a healthy eco-nomic growth. This article provides use-ful information on the businessenvironment and is intended to helpforeign businessmen and investors todevelop a good grasp of essential back-ground knowledge for being successful inSri Lanka. It reviews the Sri Lankanpolitical structure, climate, and econo-my. Sri Lanka’s infrastructure, legalframework, and sociocultural set-up, aswell as market structure and potential,are also analyzed. © 2005 Wiley Period-icals, Inc.

Sixty-eight percent of the popu-lation is in the 15–64 age group.It has a labor force of 6.6 mil-lion, out of a total population ofover 19 million. Forty-five per-cent of the labor force is in theservices sector, followed by agri-culture (38%) and industry(17%). Colombo is the capital ofSri Lanka. The country is dividedinto eight provinces. It has atropical climate (for more details,see The World Fact Book, 2003).

In 1977, Sri Lanka liberalized itseconomic policies. For the pastdecade, Sri Lanka has been ableto maintain an average annualgrowth rate of 5.3% (The WorldBank, 2000). In the early 1990s,Sri Lanka, under the SAARC(South Asian Association forRegional Corporation), begantaking measures to reduce tariffs,remove trade barriers, and dis-mantle restrictions on domesticand foreign private investment.As a result, Sri Lanka enteredinto a Free Trade Agreement(FTA) with its neighbors and hasalso been able to attract foreigndirect investment (FDI). SriLanka largely relies on foreigninvestors and adopts an export-led model of economic develop-ment. A combination ofsociocultural and economic fac-tors has created a unique busi-ness environment that attractsforeign investors.

Sri Lankans exhibit many Asiantraits in their family and othersocial interactions, but in busi-


96 Thunderbird International Business Review • January–February 2005

ness management they tend tomix South Asian traits withWestern management philoso-phies and practices. However,South Asian countries are notnecessarily similar despite geo-graphical proximity. They are farfrom being homogeneous in thelevels of development, develop-ment strategies, and cultures. Attimes, multinational companies(MNCs) tend to overlook suchmajor differences within suchgroupings (as in South Asia).This is perhaps one importantreason for the failure of foreignfirms overseas. It is thereforemeaningful and important forcompanies to develop a betterunderstanding of the differencesin managerial practices amongemerging markets. Frost andCyr (1990) note that in thefuture, particularly wherechange is rapid and culturesinteract (or even collide), it willbe companies and countries thatvalue and ensure effective man-agement of human resourcesthat will likely gain a strategicedge over those that do not doso. Sri Lanka is such a country inwhich rapid transformation ofeconomic and business activitieshave been taking place for thelast two decades.

It was one of the first developingcountries to understand theimportance of investing inhuman resources and promotinggender equality. As a result, SriLanka has achieved humandevelopment outcomes more

South Asiancountries are notnecessarilysimilar despitegeographicalproximity.

consistent with those of high-income countries (The WorldBank, 2000). Despite accelera-tion of the civil conflict in the1990s, the economic growth ratehas been healthy due to goodmacroeconomic managementand progress in trade liberaliza-tion, privatization, and financial-sector reforms. Sri Lanka isperhaps South Asia’s most openeconomy and has a relativelywell-developed capital marketinfrastructure. Its per capitaincome (US$900) remains thehighest in the region, after theMaldives. Unemployment andinflation have fallen to historicallows, the external currentaccount has strengthened,exports have diversified andexpanded, and FDI has risen(The World Bank, 2000). Itstotal external debts in 2002 wereUS$9.8 billion (The World FactBook, 2003).

SOCIOCULTURAL BACKGROUND

Sri Lanka’s population of 19 mil-lion consists of three major eth-nic groups: Singhalese (74%),Tamils (17%), and Muslims (8%).Its main religious groups areBuddhists (69%), Hindus (15%),Christians (8%), and Muslims(8%). It is thus rich in its diversi-ty of culture, race, language, andreligion; it has a recorded historyspanning over 2,500 years. As aresult, it is accepted that SriLanka has a unique cultural her-

Doing Business in Sri Lanka

97Thunderbird International Business Review • January–February 2005

itage. In addition to the influ-ence of a traditional Indian civi-lization and other culturalphenomena, Sri Lankan societyand culture has been influencedby its colonial heritage, as it wasruled by the British for 152 yearsuntil 1948. Also, developmentpolicies and the strategies ofpostindependence governments(Nanayakkara, 1993) have great-ly affected Sri Lanka. The cultur-al patterns of the society are thusintricately made up of a numberof components, which intermeshand influence each other. Thesepatterns are, however, never stat-ic. Although firmly rooted in dis-tant traditions and experiences,culture is continually beingaltered to meet the daily fluctua-tions of life and, with time,become modified to match thevicissitudes of nature and society(Nanayakkara, 1992). This trendhas further been enhanced by thefact that Sri Lanka is a relativelysmall social group in the worldand, in recent times, has beensubjected heavily to the pressuresof a changing world.

With regard to managerial cul-ture, as indicated above, SriLankans tend to mix both Asianand Western managementphilosophies and practices inbusiness management. Forexample, many Sri Lankan man-agers maintain a distance fromtheir subordinates, and there is areward system based on individ-ual performance, reflecting anindividualistic cultural trait

Sri Lankans tendto mix both

Asian and West-ern managementphilosophies and

practices inbusiness

management.

(Nanayakkara, 1984, 1993).They are ardent believers andpractitioners of Western, andespecially American, manage-ment methods in their businessactivities. Several studies con-ducted in Sri Lanka also revealthat many Sri Lankan managersbelieve that employees fall intothe X type category of peopledescribed by McGregor, who seework as a way to live rather thanas a way of life and have negativeattitudes toward sharing respon-sibility, challenging the statusquo, and pioneering innovation(Nanayakkara, 1992).

The decision-making system inthe typical Sri Lankan family ishierarchical, in which majordecisions are made by the father,the mother, or both. As thedesire to be independent is cur-tailed from childhood, the indi-vidual develops a tendency tolook for approval from the hier-archy. Attitudes to work arelargely governed by subsistenceeconomics or semifeudal beliefsthat the individual must work inorder to earn a living. This is incontrast to the value of workitself as an end that seems to bea dominant attitude towardwork in the West (Newman,1972). The attribution of valuesto a particular job as being ofhigh or low status seems tobegin in the family. As a result ofcenturies of colonial dominance,Sri Lankans have developed aparticular preference for white-collar jobs. Parents who are



desirous of determining thefuture of their children directtheir children to jobs that areconsidered of high status.

Family hierarchy demands obedi-ence and respect for authority.Parents expect the child to takepermission to do things, evenminor things like leaving hometo go to the town or nearby shopor to play with friends. A mental-ity is thus developed to make onebelieve that authority is position-al; one only gains wisdom andexperience with age. Thus,authority is seen as related to theperson; therefore, to questionthe merit of an idea is to chal-lenge the person or authority.Such a perception of authorityand its meaning has encouragedthe rejection by elders of alterna-tive suggestions by youngermembers. Chandrakumara andSparrow (2003) highlight theunique work and value orienta-tions of Sri Lankan employees.These are:

1. Individual growth-orientedwork normsThis represents the beliefabout the right to work in,and duties toward, society.Employees tend to be moreoriented toward the beliefthat individual growth anddevelopment in a job is moreimportant than output.

2. Organization- and position-oriented work ethicsThis is the tendency tobelieve that work is good in

Family hierarchydemands obedi-ence andrespect forauthority.

itself but meaningful only ifit relates to an organizationand a job position. It revealsthat people hold positivework ethics but in puttingthem into practice theybelieve and depend moreon organizations and theirpositions than on entrepre-neurship.

3. Status- and security-orientedupward strivingThis indicates peoples’ orien-tation toward advancementand social status in work withsecurity orientation. Thesecurity orientation meansthat they are oriented towardpredictive results and avert-ing risks.

4. Extrinsic value orientationThis represents the orienta-tion toward monetaryrewards and earnings. In par-ticular, employees are orient-ed toward choosing aparticular job over anotherbecause of high salaries andretirement benefits, believ-ing that a good job is a well-paid job.

THE ECONOMY

As indicated above, Sri Lankawas the first country in SouthAsia to adopt an open marketeconomy. It is today known as“the Gateway to South Asia” bymany investors. A large numberof investors have invested in SriLanka within the last ten years. Ithas enjoyed healthy economic



growth since the early 1990s. In1999, Sri Lanka was ranked thehighest in South Asia in econom-ic governance by the HumanDevelopment Center (NewYork). Macrostability was main-tained and considerable reformshave been implemented, mostprominently in trade, taxation,privatization, and enhancing theflexibility of the labor market. Itseconomy has been very resilientto both internal and externalshocks over the last two decades.

The economy has three majorsectors: agriculture, industry,and service. Marketed under thebrand name Ceylon Tea, SriLankan teas have achieved areputation as the best in theworld. Tea estates originallyplanted by British settlers weretaken over by the governmentafter independence and they arenow being privatized. Otheragricultural exports include rice,sugar cane, grains, pulses,oilseed, spices, rubber,coconuts, foliage plants, milk,hides, beef, and flowers. SriLanka is rich in mineral depositssuch as graphite, apatite, andgems (precious stones). Majorindustrial exports are textilesand apparel, tea, diamonds,petroleum products, computersoftware, ceramic products, andwooden and coir products. In2002, the total exports amount-ed to US$4.6 billion. The mainexport partners are: the UnitedStates (38.7%), the UnitedKingdom (10.6%), Germany

Sri Lanka wasthe first countryin South Asia to

adopt an openmarket economy.

(4.3%), and Japan (4.1%). Totalimports of Sri Lanka in 2002added up to US$5.4 billion.Key commodities importedinclude textiles, mineral prod-ucts, petroleum, foodstuffs,machinery, and equipment. Themain import partners are India(11%), Hong Kong (7.6%), Sin-gapore (7.1%), China (6.3%),Taiwan (5.9%), South Korea(5.7%), Japan (5.3%), and Iran(4.2%). It has 26 commercialbanks, 18 of which are foreign(for more details, see The WorldFact Book, 2003).

REGULATORY ENVIRONMENT

The economy of Sri Lanka wasunder a regulatory environmentuntil 1977. The government andthe legislature that came intopower in 1977 introduced openeconomic policies by implement-ing a package of deregulation.This enables the private sector(both local and foreign) to maketheir investments in all the sec-tors of the economy: agriculture,industry, trade, bank, insurance,education, and so on. Today, allthe political parties have accept-ed the market-oriented econom-ic principles, and the donorcommunity has placed its trust inthis stance of the political parties.

The currency of the country isthe Sri Lanka Rupee (SLRe),which consists of 100 cents. Theexchange rate is according to thedaily fluctuation of demand and



supply in the money market.However, the Central Bank ofSri Lanka closely monitors thefluctuations and it is allowed tofloat within two boundary levels:an upper and lower limit. Theexperience is that the US$ andSri Lanka Rupee rate (SLRe) hassettled over the last few years, toaround SLRe 95 = $1. Today it isSLRe 175 for 1 Sterling Pound(GB) and SLRe 1.60 for 1 Indi-an Rupee. The currency wasmade available freely to thoseengaged in export and import, aswell as in travel abroad. The onlyrequirement is to inform theController of Exchange aboutthe outflow of currency.

Foreign Direct InvestmentSri Lanka offers one of the mostliberal and dynamic investmentenvironments in South Asia. In2003, the country receivedapproximately $300 million inforeign investment, an all-timehigh that was up by 24% from theprevious year (Slater & Hiebert,2003). As a result, many foreigninvestors have invested in SriLanka, the most prominent ofthese being the United States, theUnited Kingdom, Japan, Aus-tralia, South Korea, Germany,Sweden, Norway, Switzerland,India, Saudi Arabia, United ArabEmirates, and Denmark. Multina-tional and global companies suchas NTT, Shell, Noritake, Naka-gawa, MIC Group, Fuji, SR Gent(UK), Cargills, Ansell, Caltex,KHD Group (UK), and P&O(UK) have made large invest-

Sri Lanka offersone of the mostliberal anddynamic invest-ment environ-ments in SouthAsia.

ments in Sri Lanka. In the soft-ware manufacturing and exportsector, e-Runway, Millennium IT,JKIIT, IFS, IOM, and 3M Groupare major investors. In the com-puter hardware industry, IBM,Apple, and Compaq have alsoinvested widely in Sri Lanka. Inthe telecommunications sector,apart from NTT, Ericsson, Mobi-tel, Celltel, and Suntel are majorinvestors. Strategically situated atthe crossroads of major shippingroutes, Sri Lanka has emerged asthe gateway to the vast Indiansubcontinent, and it offersinvestors a logical base to capturethe massive regional market.Colombo, the commercial city ofSri Lanka, is presently SouthAsia’s main transshipment centerand hub port. Regional Coopera-tion, through SAARC and theeventual South Asia Free TradeAgreement (SAFTA), will ensurea vast market. Sri Lanka offerstotal foreign ownership in mostareas. The safety of foreign invest-ment is guaranteed by the SriLankan constitution and throughbilateral agreements with 20countries. There are no restric-tions on the repatriation of earn-ings and capital.

Incentives for FDI and FinancialLiberalizationOver the years, a number ofincentives have been offered toinvestors (both foreign andlocal). A summary of the sameand the important measures offinancial liberalization articulatedin the 2000 budget are:



1. Foreign investors are wel-come in almost all sectorsof the economy.

2. As indicated above, thesafety of foreign invest-ment is guaranteed by theSri Lankan constitution.

3. The safety of foreigninvestment is also guaran-teed through bilateralagreement with more than20 countries.

4. Total foreign ownership(100%) is offered in areassuch as stock brokering,clothing industry, healthand medicine, trainingand skill development,fisheries, education, soft-ware development, realestate development, andtourism.

5. Foreign ownership inbanking and insurance hasbeen relaxed up to 60%and 90%, respectively.

6. There is no restriction onthe repatriation of earn-ings (profit) and capitalfor foreign investors.

7. The provision of tax holi-days over a number ofyears and other incentivesand facilities vary becausethey have been madeattractive with theincreased amount of capi-tal to be invested and theamount of employment tobe provided.

8. The currency is madeavailable freely for thoseengaged in export,import, and travel.

Sri Lanka hasemerged as thegateway to the

vast Indian sub-continent…

9. There is a full tax holiday(on profit and income)ranging from three years(e.g., for IT and IT-enabled services) to 12years (e.g., for infrastruc-ture projects relating topower generation, trans-mission and distribution,development of highways,seaports, airports, publictransport, water services,and establishment ofindustrial estates).

10. Concessionary tax ratesrange from 10% to 20%.

11. There is an import dutyexemption on capitalgoods and raw materials.

12. There is an exemptionfrom exchange control formore than 70% of invest-ment categories (e.g.,manufacture of nontradi-tional goods, export-ori-ented services, IT services,agriculture and agro-pro-cessing other than blacktea, export trading houses,and so on).

13. Authorization for nonresi-dents to invest in equi-ty/growth unit trusts andoverseas Sri Lankans touse the Share InvestmentRupee Account.

Hot SectorsSri Lanka’s most dynamic sec-tors now are food processing;textiles and clothing; food andbeverages; telecommunications;and insurance and banking. Inaddition to the areas for which



the government has granted taxholidays and incentives, SriLanka has a competitive advan-tage in a few more areas. Asindicated above, the govern-ment has granted attractiveincentives (in the form of a fulltax holiday, a concessionary tax,and import duty and exchangecontrol exemptions) for compa-nies that are investing in infra-structure development projectsin the areas of power genera-tion, transmission and distribu-tion, seaports, airports,development of highways, pub-lic transport, water services,and establishment of industrialparks. Further, special tax con-cessions and facilities have alsobeen provided to institutionsthat: (a) provide training facili-ties in priority areas such as gar-ments, gems, jewelry, electronicgoods, and computer software;(b) give employment to gradu-ates; and (c) expand theirindustries to less congenialareas. The areas in which SriLanka has a competitive advan-tage can broadly be categorizedinto human resources (literacyrate 92%), natural resources,and location-specific industries.The computer software indus-try, clothing, training and edu-cational institutions, andresearch and development rep-resent human resources sectors.Port development projects, seatransport and transshipments,and the tourism industry repre-sent the location-specific indus-tries. Industries coming under

The areas inwhich Sri Lankahas a competi-tive advantagecan broadly becategorized intohuman resources(literacy rate92%), naturalresources, andlocation-specificindustries.

natural resources represent tea,natural rubber, and coconutproducts; raw materials andminerals such as phosphate andgraphite; and the fishing indus-try. In recent years, a rapidgrowth in foreign investmenthas been observed in the areasof computer software, trainingand education, real estate devel-opment, construction, cloth-ing, telecommunications, andshare market dealings.

There is fierce competition in thefield of banking and insurance.Nevertheless, there is a potentialfor tapping niche markets,though the size of the marketpotential is questionable for a biginvestment. According to gov-ernment sources, there are anumber of areas that require theattention of foreign investors asthere is hardly any technologyavailable in recycling projects forwaste and garbage, the fertilizerindustry, the steel industry, andthe automobile industry. Someof the service sectors such astourism and hotel industry havealso been attractive for local andforeign investors.

Tariff ImprovementThe previous standard tariff ratesof 5, 10, and 30% were reducedto two rates of 10 and 25% (the35% special rate for strategicagricultural products remains inplace). In the context of therecently signed Free TradeAgreement between Sri Lankaand India, Sri Lanka is imple-



menting a zero duty rate on3,000 items (primarily raw mate-rials) and a 50% margin of pref-erence for about 900 items. Justlike the trade liberalization of theearly 1990s, these tariff improve-ments will help Sri Lanka main-tain its edge in South Asian tradeand further develop its economicresilience.

Import Restrictions and AreasReserved for Sri LankansLicensing requirements forimports are mostly due to publichealth, public morals, environ-mental protection, and securityreasons. Import licenses are nec-essary for firearms; ammunitionand explosives; alcohol; majorfood items such as rice, wheat,and wheat flour; cement andconcrete; industrial waste; phar-maceutical products; motor vehi-cles; aircraft; aircraft spare parts;certain chemicals; and jewelry.Foreign investment is notallowed in the areas of moneylending, pawnbroking, retailtrade with a capital investment ofless than US$1 million, personalservices other than for export orfor tourism, and coastal fishing.

REGIONAL COMPARATIVEADVANTAGE FOR SRILANKA IN ATTRACTING FDI

A comparative analysis of theSouth Asian region highlights SriLanka as a more attractive placefor investors in comparison to itsneighbors. Some of the main fac-

There is fiercecompetition in

the field ofbanking and

insurance.

tors in this regard include itsposition as a regional tradinghub and a provider of strategicaccess to South Asian markets(through bilateral free tradeagreements); the presence of ahighly literate and cost-competi-tive labor force; the existence ofan open economy; the presenceof free trade zones and industrialparks; the existence of reliableinfrastructure; and the relativelyhigh quality of life (see Slater &Hiebert, 2003).

According to the EconomistIntelligence Unit (EIU), SriLanka offers the most friendlybusiness climate in South Asia(see www.eiu.com). Sri Lanka isstrategically located at the cross-roads of both east and west searoutes and serves as the point ofentry to South Asia. According toLloyds’ register, the Colomboport rates as the number-one portin South Asia. Further, a compar-ison of FDI flows between SriLanka and other SAARC nations(see Table 1) highlights the com-parative advantage of the formerover the others.

Table 1 shows that Sri Lanka hasplayed a significant role in attract-ing FDI into the region since the



early 1980s. It is worth notingthat nearly all the regions of theworld shared a decline in FDI in2001, apparently due to per-ceived instability in the invest-ment environment, particularlyafter September 11 (WorldInvestment Report [WIR],2003). However, this eventseems to have had a favorableimpact on Sri Lanka’s internalconflict, where Liberation ofTamil Tigers Elam (LTTE),fighting for a separate state in thenorthern and eastern part of SriLanka, announced a ceasefireagreement with the government.It is believed that this trucehelped to increase the FDI flowsto Sri Lanka. A further increase inFDI is expected this year due tothe above-mentioned incentives,regional advantages, and stablemacroeconomic environment ofthe country. This is further com-plemented by Sri Lanka’s otherstrengths in the form of a skilledand trainable workforce, minimalbureaucracy, and a reputation forservicing global brands. Apartfrom these, Sri Lanka alsooutscores its regional neighborson many other aspects crucial forrapid economic growth. Table 2presents a comparative picture ofthis situation.

Table 1. FDI Flows as a Percentage of Gross Domestic Product

Country 1980 1990 2000 2001 2002Sri Lanka 5.7 8.5 14.7 15.5 16.5India 0.6 0.5 4.1 4.6 5.1Pakistan 2.9 4.8 11.8 9.2 9.8Bangladesh 0.4 0.5 2.2 2.3 2.4

Source: World Investment Report, 2003: Data from Country Fact Sheets.

TOURISM

In addition to Sri Lanka’s attrac-tiveness on FDI, it is blessedwith a rich mix of sunshine,beaches, scenery, wildlife, cul-ture, and historical sites, makingit one of the most popular touristdestinations in the region. Thecountry has a long history andrich diverse cultures spanningover 2,500 years. The lifestyle ofpeople is steeped in tradition andcultural practices. People aregenerally very friendly and hos-pitable. Most locals are conver-sant in English. Being a primetourist destination for severaldecades, Sri Lanka offers a well-developed tourism infrastructurein the form of accommodation,



transport, information, tourguides, and travel agencies. Allprime tourist destinations in SriLanka have well-establishedhotels and are accessible by roadswithin a few hours from Colom-bo. Tourist arrivals exceeded500,000 last year and are expect-ed to increase in the future (formore details, see Slater &Hiebert, 2003).

POLITICAL DEVELOPMENTSAND GOVERNMENT POLICIES

One of the most striking featuresof the political system of SriLanka in the more than fourdecades since independence hasbeen the existence of viable and

Table 2. Comparison of Different Business, Education, and Health Indicators

Sri Lanka Regional Average1) Business Environment

Per capita (US$) 850 470Starting a Business

Number of procedures 8 8Cost (% GNI per capita) 10.2 52.5Min. capital (% GNI per capita) 0.0 85.6

Hiring and Firing WorkersFlexibility of Hiring Index 33 39Conditions of Employment Index 52 68Flexibility and Firing Index 40 39Employment Laws Index 42 49

Closing a BusinessActual time (in years) 2.3 5.4

2) Education and HealthPrimary school completion rate (2000–03) 108 78Literacy rate 92 61Life expectancy at birth 74 63Child malnutrition 33 48Under 5 mortality rate (per 1,000) 19 95Prevalence of HIV in females .04 .54

Source: World Bank (2004).

generally stable political parties.The country has experiencedalliance governments over lastdecade among at least five majorpolitical parties: the UnitedNational Party (UNP), the SriLanka Freedom Party, theJanatha Vimukthi Peramuna(JVP), the Tamil NationalAlliance (TNA), and the SriLanka Muslim Congress(SMC). A shift in ideology inone of the traditional Marxistparties (JVP), which staged twoarmed rebellions in Sri Lanka tooverthrow the then-govern-ment, is also observed lately. In2001, JVP sealed a deal withPresident Kumartunga to saveher government from a humili-ating defeat in parliament (seeJayasinghe, 2001). Perhaps themost crucial political develop-ment of late has been the long-term ceasefire agreementbetween the government andthe LTTE. In early 2002, SriLanka’s government and sepa-ratist Tamil rebels agreed inprinciple to a long-term cease-fire, preparing the way for peacetalks to end their 18-year civilwar. As mentioned above, theTamil Tigers launched their ter-rorist campaign for an inde-pendent homeland innortheastern Sri Lanka in 1983.Since then, around 65,000 peo-ple have died. There have beenseveral failed attempts at apeaceful settlement between theisland’s Sinhalese majority andthe Tamil minority, but the lat-est effort, brokered by Norwe-



gian diplomats, has seemedmore promising than earlierones. The ceasefire has nowheld for more than two years.Recently, the Tigers announcednew proposals for an interimTamil administration withsweeping powers but not quiteindependence (see “Dimmingthe Prospects for Peace,”2004).

These developments have giveninvestors the confidence that theconflict will not resume. Conse-quently, investors from India,Malaysia, other Southeast Asiancountries, Australia, and theUnited States have shown seri-ous interest in Sri Lanka. There’seven interest in investing in theformerly war-torn north by com-panies such as Caterpillar andGrey Worldwide—the advertis-ing giant has moved in to con-solidate its interests in Sri Lanka.Similarly, a number of Indiancompanies (such as Indian Oil,Godrej Appliances, and TataConsultancy Services—India’slargest software firm) haveentered Sri Lanka on a largescale. Meanwhile, a program ofprivatization and deregulation isdrawing foreign investment.Recent examples include the saleof a 35% stake in Sri Lanka Tele-com to Japan’s NTT and thepurchase by foreign investors of16.5 million shares in theNational Development Bank.Examples of large-scale foreigninvestments approved by theBank of Investment include the

Perhaps themost crucialpolitical develop-ment of late hasbeen the long-term ceasefireagreementbetween thegovernment andthe LTTE.

awarding of a concession to aconsortium headed by theBritish P&O company to expandthe port of Colombo; the devel-opment of an export-orientedsteel mill and oil refinery in thesouth of the country by theKorean firm Hanjung; and thedesign of a 1,700-acre industrialtownship at Horna by aMalaysian company (for moredetails, see Slater & Hiebert,2003; World Report on SriLanka, 2004).

Such developments have helpedthe main economic policy of thepresent government and all thesuccessive governments for thelast two decades to pursue eco-nomic liberalization and privatesector-led growth within a freemarket environment. Further,there has been an emphasis onthe development of the exportsector, infrastructure, high-tech-nology industry, public-sectorreforms, trade liberalization, taxrationalization, and commercialand trade law reforms (Fair-banks, 1999). The core focus ofthe investment strategy has beento increase the investment level(both domestic and foreign) toover 30% of GDP, with a specialemphasis on the private sector.

The government and the PublicEnterprise Reform Commission(PERC) have announced theirintention to continue the publicenterprises privatization programwith respect to hotels, graphite,and agriculture and livestock.



Moreover, the government’smedium-term economic pro-gram of “Vision for the 21stCentury” emphasizes building amodern and prosperous econo-my achieving growth rate of7–8% and raising the incomelevel of the poor by raising theirshare of income from the current4% to 15% by the year 2010. Inthis regard, the main policy com-mitments include a reduction offiscal deficit to 3% by 2010; con-taining inflation to around 3%,raising the national savings;developing intercity linkages;modernizing agriculture; andpromoting skills needed forfuture economic progress. Fur-ther, a memorandum of under-standing has been signedbetween the government and theAsian Development Bank (ADB)in 2000, which defines the mainareas of ADB assistance over thenext few years. This will coverprivatization; competition policyand consumer protection; labormobility; and financial-sectorreforms.

As indicated above, the countryhas developed effective economicand trade relationships with othercountries in the region. TheSouth Asian Association forRegional Corporation, compris-ing India, Pakistan, Sri Lanka,Bangladesh, Nepal Bhutan, andMaldives, came to an agree-ment—SAPTA (South AsianPreferential Trading Agree-ment)—to remove tariff andnontariff barriers with a view to

The country hasdeveloped effec-

tive economicand trade rela-tionships with

other countriesin the region.

promoting free trade and eco-nomic cooperation betweenSAARC member countries.SAPTA offers tariff reduction on226 products. The only countryto have offered concessions in thehigher value-added manufactur-ing categories is Sri Lanka. Rela-tions of Sri Lanka with its SouthAsian neighbors have always beengood. India has always supportedthe elected government, and in1987 India, at the request of thegovernment of Sri Lanka, sent itsforces (Indian PeacekeepingForces) to suppress the LTTE,but the mission proved futile incontrolling the situation. At pres-ent, India is assisting both the SriLankan and Norwegian govern-ments through “back-channel”diplomacy to maintain the cease-fire agreement of the LTTE.

On the business front, India andSri Lanka have a three-year-oldtrade pact that has boosted bilat-eral business. Similarly, Sri Lankaand Pakistan are set to sign abilateral-trade pact. A large num-ber of Indian firms in telecoms,oil and gas, and information tech-nology have entered the SriLankan market. The growingbusiness trust between the twonations is largely perceived as verypositive. The spokesperson for theBoard of Investment of Sri Lankamade an interesting remark in thisregard: “We want to position our-selves as the Hong Kong ofIndia” (see Slater & Hiebert,2003). Similarly, there are posi-tive developments regarding busi-



ness-related initiatives by manyother countries in Sri Lanka.

LEGAL SYSTEM

Many different systems of lawhave affected the development ofthe law and the legal system ofSri Lanka. These are Sinhaleselaw (Kandyan law), English law,Roman-Dutch law, Tesawalamailaw, Buddhist law, Muslim law,and Hindu law. The existence ofa multiplicity of law systems isthe result of historical develop-ment and the place occupied bythe various systems in the legalsystem. Today, the 1978 Consti-tution (see the constitution pre-sented in the next section),Judicature Act of 1978, and sev-eral other statutes provide thelegal framework of the judicialadministration of Sri Lanka.

English principles have beenreceived to the exclusion of allother laws with respect to crimi-nal law, mercantile law, and theLaw of Evidence. The Laws ofPersons, Property, Succession,Contracts, and Torts are funda-mentally Roman-Dutch law mod-ified by statute and English lawincorporated through judicialdecisions. English law principlesapply to copyrights, patents andtrademarks, and insurance. In thegeneral law of contracts too, Eng-lish principles have been appliedby judicial decisions. The Law ofObligation is fundamentallyRoman-Dutch law. The English

Many differentsystems of lawhave affectedthe developmentof the law andthe legal systemof Sri Lanka.

contribution to the legal system isnot restricted to the field of sub-stantive and procedural law. Theorganizational patterns of thecourt as well as the practices andtradition of the court, the Bench,and the Bar have been influencedby English ideas. The distinctionbetween the barristers and solici-tors of the English system wasabolished in Sri Lanka in 1973,and today all lawyers are referredto as attorneys-at-law.

Kandyan law is a system of lawbased on the age-old customsprevailing among the Sinhalese.Today it is the customary lawapplicable to Kandyan Sinhalese.The main customary areas rele-vant to this law are marriage,divorce, and property. Tesawala-mai is the customary law applica-ble to the Tamil inhabitants ofJaffna—an administrative districtin north Sri Lanka. This lawappears to have evolved from theancient Tamil customs of India.

THE CONSTITUTION ANDTHE STATE

Sri Lanka was a British colonyuntil 1948. The Ceylon Inde-pendence Act (1947) was enact-ed by the parliament of theUnited Kingdom to grant SriLanka the powers of dominionunder the Statue of Westminster.Thus, Sri Lanka achieved politi-cal independence of dominionstatus on February 4, 1948.With the introduction of Cey-



lon’s Republican Constitution in1972, Ceylon became the repub-lic of Sri Lanka, a free, sovereign,and independent state, and thusceased to be a dominion.

The current constitution of thecountry, which was passed in1978, embodies the presidentialform of government, being anamended form of the Frenchmodel. It bestows on all peoplefreedom, equality, justice, funda-mental human rights, and theindependence of the judiciary.According to this constitution,Sri Lankan is a free, sovereign,independent, and democraticcountry. The sovereignty of thepeople is exercised and enjoyedin the following manner:

1. The executive power of thepeople is exercised by thepresident, the head of thestate.

2. The legislative power of thepeople is exercised by Parlia-ment.

3. The judicial power of thepeople is exercised throughcourts and tribunals.

The Executive PresidentThere is a president of the repub-lic who is the head of the state, thehead of the government, and thecommander-in-chief of the armedforces. S/he is elected by the peo-ple and holds office for a term ofsix years. The president has theright at any time to attend,address, and send messages toParliament, and is a member of

The current con-stitution of thecountry, whichwas passed in

1978, embodiesthe presidential

form ofgovernment…

Parliament as well as the head ofthe cabinet provided that whenthe cabinet is dissolved, the presi-dent shall continue the office. Thepresident, from time to time, inconsultation with the prime minis-ter, where s/he considers suchconsultation to be necessary,appoints or changes cabinet minis-ters. The president may assign tohim/herself any subject or func-tion not assigned to any minister.

The LegislatureThe constitution has providedfor a unicameral legislature calledParliament. It consists of 225elected members. Its term is sixyears and it may be dissolvedsooner, but its term cannot beextended. The country has beendivided into 24 electoral districtsand 9 provinces. Parliament hasthe power to make laws, includ-ing laws having effect on andrepealing or amending any provi-sion of the constitution providedthat it cannot make any law (a)suspending the operation of theconstitution or any part thereofor (b) repealing the constitutionas a whole unless such law alsoenacts a new constitution toreplace it. Parliament has fullcontrol over public finance. Notax rate or any other levy can beimposed by any local authorityor any other public authority,except by or under the authorityof a law passed by Parliament.

The JudiciarySubject to the provisions of theconstitution, the institutions for



the administration of justice thatprotect, vindicate, and enforcethe rights of the people are: (a)the Supreme Court (SC), (b) theCourt of Appeal (CA), and (c)the High Court (HC), and suchother courts of first instance, tri-bunals, or such institutions asParliament may from time totime ordain and establish. TheSC consists of a chief justice andnot less than six and not morethan ten judges who are appoint-ed by the president. It is thehighest and final superior courtof record. It exercises jurisdictionin respect to constitutional mat-ters, election petitions, breach ofprivileges of Parliament, and theprotection of fundamental rights.The CA consists of the Presidentof the Court and between six andeleven other judges appointed bythe President of the State. TheCA has, and exercises, subject tothe provisions of the constitutionor of any law, an appellate juris-diction for the correction of allerrors in fact or in law committedby any court of first instance, tri-bunal, or other institution. TheHC is the highest court of firstinstance exercising criminal juris-diction. It exercises such jurisdic-tion and powers as Parliamentmay by law vest or ordain.

HUMAN RESOURCES ANDTHE LABOR MARKET

According to World Banksources, Sri Lanka was one of thefirst developing countries to

Parliament hasfull control overpublic finance.

understand the importance ofinvesting in human resources andpromoting gender equality. As aresult, it has a fairly well-devel-oped human resource base andachieved human developmentoutcomes more consistent withthose of higher-income coun-tries. For example, all of the fol-lowing Sri Lankan humanresources indices are the highestin South Asia. Human develop-ment index (0.665), literacy rate(92%), pupils completing primaryschools (97%), and life expectan-cy (71 years). Foreign investorshave noted that the Sri Lankanlabor force is highly trainable.

Sri Lanka has nearly 50 laborstatutes, of which only 10–15 areoperational. The Termination ofEmployment and Workmen Act(TEWA) is among those regula-tions that are operational. TheTEWA protects all workers whohave job tenure of at least oneyear in an establishment with 15or more staff members. Accord-ing to this legislation, termina-tion of employment is possibleonly with prior written consentof the employee or the commis-sioner of the labor. An addition-al constraint is the developmentof several small and often adver-sarial trade unions due to outdat-ed trade union legislature datingto 1935. For instance, a unioncan be legally established with amembership of only seven per-sons; the position of union offi-cers and leaders is not restrictedto persons employed in the



industry or trade, thus leavingroom for outsiders with politicalmotivations to hijack the agendaof the union (Kelegama &Gunatilake, 1996).

Recent developments in the fieldof human resource management(HRM) bear witness to the factthat both the Sri Lankan govern-ment and private-sector organi-zations have recognized theimportance of the role HRMplays in the nation’s growth andin achieving a sustainable com-petitive advantage in the globalmarketplace. For example, (1)the formation of the HumanResource and Education(HR&E) Subcommittee (June1999) by the Ceylon Chamberof Commerce in order to bridgethe country’s human resourcedevelopment gap, with the col-laboration of private-sectororganizations and Sri Lankanuniversities, (2) the formation ofthe Association of HR Profes-sionals (AHRP), having recog-nized the pivotal role that HRMplays in the present global andregional environment, in orderto give due recognition toHRM, which will benefit theprofessional as well as the wholecountry, to share knowledge andexperience among HR managersand to establish strategicalliances with other institutionsin order to carry out researchprojects on HR in collaborationwith academic institutions, and(3) the establishment of theCommercial Mediation Centre

Foreign investorshave noted thatthe Sri Lankan

labor force ishighly trainable.

(CMC) of Sri Lanka by an Act ofParliament in order to act as aviable alternative to litigationwhen dealing with business dis-putes and conflicts, besides help-ing the parties save face andcontinue their existing relation-ships (e.g., employer andemployee relationships).

Key HRM ObservationsWhile the supply of formal-sec-tor (state-sector) jobs is restrict-ed, the demand for suchemployment is strong in SriLanka. The World Bank notesthat this is due to the high levelof education and aspiration oflabor force participants. It alsoshows the reluctance of the laborforce to be employed in the pri-vate sector. The World Bank fur-ther says that, from alonger-term perspective, SriLanka’s past growth perform-ance is below what the country’shuman capital would predict. SriLanka’s public sector, with 12%of the labor force in 1999, suf-fers from low effectiveness andefficiency (World Bank, 2000).Moreover, the World Bank saysthat top policy makers and pro-fessionals are insufficiently com-pensated, and the inevitablefallout of this situation is theinability to attract and retainskilled employees in the publicsector.

Research studies conducted inrelation to Sri Lankan organiza-tions indicate some other behav-ioral and performance-related



issues. First, Nanayakkara (1993)claims that Sri Lanka’s workforceis not adequately exposed toindustrial culture values, mainlydue to the fact that the majorityof workers are in plantations,agriculture, and small businesseswhere the scope for learningindustrial values is limited. Sec-ond, Vishnath (1997) revealsthat some of the most significantfactors that have badly affectedboth private- and public-sectororganizations in Sri Lanka arelow-commitment, low-produc-tivity, lack of cooperation andtrust, and conflict and poor rela-tionships between managementand employees. Third, the WorldBank (2000) says that SriLanka’s development and utiliza-tion of human resource capaci-ties have been well below itspotential. Commenting on theway to improve performance,productivity, and competitive-ness in both private- and public-sector organizations in SriLanka, the Central Bank of SriLanka (1999, p. 24) emphasizesthat “the strategy should includemechanisms to improve workethics and performance, withappropriate performance evalua-tion systems, training andretraining schemes, financial andother incentives based on per-formance, accountability andtransparency of operations andother mechanisms to ensureadaptability to changing condi-tions including absorption ofnew techniques and technolo-gy.” MNCs have the capabilities

While the supplyof formal-sector(state-sector)jobs is restricted,the demand forsuch employ-ment is strong inSri Lanka.

to change such raw resources(for example, human resources)into refined ones and increasetheir efficiency. Recent studiesconducted both in the Chineseand Indian context highlightsuch happenings (see Bjorkman& Lu, 1999; Venkata Ratnam,1998).

A recent study by Chandraku-mara and Sparrow (2003) high-lights the nature of work- andpeople-management practicesin Sri Lanka. The analysis isbased on the responses ofCEOs and HR managers ofboth local and foreign-investedmanufacturing companies. Themain aspects of work-andpeople-management practicesinclude the existence of:

1. A moderate level of HRplanning and empoweringsystem;

2. A performance-based rewardssystem with business-driventraining;

3. A functional perspective onjob-person fit; and

4. Job- and behavior-relatedcompetence and rewards.

A closer analysis highlights dif-ferences between domestic andforeign firms (either fully ownedmultinationals or joint ventures).For example, in comparison todomestic firms, foreign firmstend to adopt a more structured,formal, and rationalizedapproach to all the above-men-tioned HRM practices.



CHARACTERISTICS OFCONSUMERS

It is recognized that Sri Lankahas a unique and rich culturalheritage. These cultural traitshave had a profound impact onbehavioral patterns of SriLankans. Habits once formed aredifficult to change; brand loyaltyis profound and, in mostinstances, single-dimensional. Asa prominent Asian trait, familyinfluence is very significant.These cultural and subculturalcharacteristics have a majorimpact on the purchase behaviorof Sri Lankan consumers. Someof these characteristics can beelaborated as follows:

1. There is a general tendencyof the culture to indicate thatpeople do not say “No” gen-erally, especially if somethingis offered on a complementa-ry basis. This can have animpact on predicting marketsize for commercializing aproduct. When a productconcern is actually commer-cialized, only a fraction ofthe respondents may make apurchase. Therefore, test-marketing results should beinterpreted with caution.

2. Sri Lankan consumers arefiercely brand loyal in mostinstances. Loyalty is also acultural trait. Loyalty toone’s family and friends isextended to commercialspheres in terms of products,brands, and dealer loyalty.

It is recognizedthat Sri Lankahas a unique

and rich culturalheritage.

Once Sri Lankan consumersbecome familiar with abrand, it is very difficult toencourage them to switchbrands. Even if they switchfor promotional reasons, it ismost often temporary. Thelesson to marketers may beto strive to build brand loyal-ty and to work even harderto retain it. The loyalty isalso extended to retailers andsupermarkets. Sri Lankanconsumers have their ownfavorite retailers that theypatronize. They remain loyalto these retailers, sometimeseven when they are not treat-ed as special, mainly forhabitual reasons.

3. Product quality is somethingSri Lankans are aware of andpay attention to when mak-ing purchases. One cannotmislead them with poor-quality products.

4. The country of origin/man-ufacturer is another impor-tant criterion that Sri Lankanconsumers consider. In gen-eral, a greater preference isobserved for products madeoverseas, especially fromWestern markets. This isgradually changing, andAsian brands are being con-sidered on an equal footing.

5. Marketers would do well topay attention to buildingfavorable images for theirbrands in order to overcomenegative country perceptions.

6. Sri Lankan consumers seekreferences from their family



and friends in most purchasesituations. Strong referencesfrom primary and secondaryreference groups influencethe Sri Lankans. For exam-ple, when purchasing a car, astrong reference would be abrother/sister or friend. Thisreference seeking can beobserved for both serious aswell as habitual purchases.

7. Price sensitivity is quiteprominent among SriLankans for obvious reasons.However, the cheapest-priced product may not bethe most successful. Theproduct that succeeds offersgood value for money. Thisis a key characteristic of theSri Lankan consumer, andmarketers would do well tonote that the cheapest priceis not all that important.

8. Sri Lankans in general haveshort memories and need tobe reminded through themass media on a regular basis.TV advertising is quite wellreceived by Sri Lankans, ascan be observed with the suc-cess of brands that carry outaggressive TV advertising.

In general, there are certain spe-cial traits as well as general traitsof Sri Lankan consumers. Thebottom line is that marketersneed to have a profound under-standing of the market, whichcould be obtained by referring torelevant journal articles, visitingmarkets on a regular basis andinteracting with target cus-

Strong refer-ences from pri-mary and sec-ondary referencegroups influencethe Sri Lankans.

tomers, and carrying out marketresearch.

Advertising and MarketingSri Lanka has a growing middleclass and therefore the majorityof the population’s income goesto consumption. Companies tendto exploit this opportunity byadopting aggressive advertisingand marketing techniques. Sin-halese, Tamil, and English areused as national languages, whileEnglish is the dominant businesslanguage. The practices of mar-keting are largely based on prod-uct and selling concepts ratherthan marketing orientation inwhich the customer is treated asthe core of business. The absenceof highly competitive productsand markets seems to be themajor reasons for adopting thistype of market orientation.Advertising in all three languagesis acceptable. TV, radio, andnewspaper advertisements are themost famous and pervasivemodes. Radio channels are morepopular in remote and ruralareas. The Sri Lanka Broadcast-ing Corporation is the nationalbroadcaster, while a number ofprivate broadcasting channels arealso available for marketing andadvertising purposes. The nation-al television network consists oftwo major channels: “Rupavahi-ni” and “ITN” (IndependentTelevision Network). A numberof private television networkssuch as MTV, TNL, SIRASA,ETV, and SWARNAWAHINI arealso very popular among ordi-



nary people as well as the busi-ness community. There are atleast three daily English languagenewspapers: the Daily News, TheIsland, and the Daily Mirror, andfour weekend newspapers: theSunday Observer, the SundayTimes, the Sunday Island and theSunday Mirror. Advertising in the“Yellow Pages” of telephonedirectories and magazines such asBusiness Today and LMD are alsoquite popular among the businesscommunity. Banners and postersare used in many social and cul-tural events and in property sales.

It would also be useful forinvestors to know the potentialusage of different advertisingand promotional media. Thenumber of radios, telephones,and televisions per 1,000 peopleis 211, 44, and 108, respectively.The number of Internet hostsper 10,000 people is 1.2. Thedaily newspaper circulation andthe number of motor vehiclesper 1,000 people is 29 and 36,respectively.

Promotion and DistributionPromotion of many productsand services is normally donethrough trade fairs, exhibitions,and conferences. These are verypopular in Colombo, the capitalcity, and in a few other cities suchas Kandy and Galle, located inthe central and southernprovinces, respectively. The Cey-lon Chamber of Commerce,Export Development Board,Board of Investment, and Min-

Promotion ofmany productsand services isnormally donethrough trade

fairs, exhibitions,and conferences.

istry of Trade and Commerce arethe major institutions that facili-tate foreign investors to promotetheir products and services.Although the two traits may notalways be compatible, customersare in general both quality- andprice-conscious. Most customershave a very positive attitudetoward foreign-made products.In addition to sales promotionstrategies such as free offers, cus-tomer competitions, and bonusand gift vouchers, personal sell-ing and public relations are alsoimportant in marketing.

The distribution network con-sists of a number of modes, rang-ing from a producer’s owndistribution to franchising. Theproducers’ own distribution sys-tem is generally used by foodproducers (bread, fish, milk,snack items). Moreover, produc-ers’ own retail shops, as well asagents appointed by the produc-ers, have also become importantmodes of distribution for suchproducts as LP gas, fuel, softdrinks, tobacco products, andgarments. Many small-scale aswell as large-scale producers usewholesale selling and retailingdistribution networks. Thismode is generally used for bothdurable and nondurable prod-ucts, almost all convenienceproducts, shopping goods, gar-ments, and raw materials. Fran-chising has become anotherrecently popularized mode ofdistribution for products andservices such as fast food, hotels



and restaurants, soft drinks, andtraining and education offeredby foreign universities and pro-fessional bodies.

Regarding the transportationsystem of Sri Lanka, it has rail-way lines of 1,508 kilometers, itstotal highways are 11,285 kilo-meters (10,721 kilometers pavedand 564 kilometers unpaved),and 430 kilometers of water-ways. Its main ports and harborsare Colombo, Galle, Jaffna, andTrincomalee. There are 15 air-ports in Sri Lanka.

BUSINESS CUSTOMS ANDPRACTICES

In general, Sri Lankans are morecollectivist in social and familysituations but display more indi-vidualistic orientations in workorganizations. They are veryhospitable and respectful to for-eigners. Sri Lankans display notonly their respect and obedienceto elders and seniors, but alsostrongly depend on them both insocial activities and business mat-ters. In negotiations and deci-sion-making situations, many tryto maintain silence and harmonyby not proposing counterpro-posals or arguments before supe-riors and elders as a mark ofrespect. In addition, they do nottry to maintain direct eye contactwith the other party that repre-sents superiors and elders as agesture of respect. This is a veryunfavorable aspect in many deci-

The distributionnetwork consistsof a number ofmodes, rangingfrom a produc-er’s owndistribution tofranchising.

sion-making situations becausetrue opposition cannot be seendirectly. Gender equality in socialactivities and work organizationsis commonly accepted and legal-ly ensured. Both social relationsand professionalism are veryimportant in business manage-ment. Punctuality in businessmeetings is encouraged,although it is not a habit. Themost important individuals aregenerally introduced andacknowledged by names and bypositions in business meetings.Criticism of individuals in publicis not expected.

The official system of measure-ment in Sri Lanka is metric.There are about 26 public, bank,and mercantile holidays. Thisincludes 12 full moon Poya days,particularly important for Bud-dhists; February 4 (NationalIndependence Day); April 13and 14 (Sinhalese and TamilNew Year Days); May Day;Good Friday; Deepavali FestivalDay; Hadji Festival Day; andChristmas Day. A work permit isrequired for expatriate employ-ees, and a residence permit isrequired for the stay of foreign-ers beyond a period of sixmonths. The labor law of thecountry recommends a 40-hourweek (8 hours per day with fiveworking days from Monday toFriday). Many private-sectororganizations do a half-day ofwork on Saturdays too. Workinghours vary among differentorganizations but generally fall in



the range of 8–9 A.M. and 4–5P.M., respectively.

The most common businessdress for men is trousers andshirt. Top executives wear fullWestern suit, while junior-levelexecutives and managers wear atie with trousers and shirt.Women generally wear an IndianSaree, skirt and blouse, ortrousers and shirt.

Greetings and GesturesIn Sri Lanka, offering gifts is acommon practice when visitingfriends and relatives. Gift parcelsare not normally opened in thepresence of the relevant parties.The exchange of gifts is a com-mon practice in meeting andnegotiating situations with top-level officials and foreign dele-gates. As a gesture of greeting,men shake hands with both menand women, while women hugeach other. They normally usethe right hand in these socialencounters. A soft handshake isgiven upon meeting and leaving.As a gesture of respect, peopletend to slightly bow their head togreet a guest or host. There isalso a tendency to allow superiorsto precede you in doorways andat formal gatherings. In general,Sri Lankans use hand gestures inconversation, but pointing atsome one is considered impolite.In public places such as buses andtrains, older people, children, andfemales are given priority. In gen-eral, people do not tend to showaffection in public.

In Sri Lanka,offering gifts is acommon practice

when visitingfriends and

relatives.

CONCLUSION

This article presented key infor-mation about Sri Lanka. A num-ber of positive aspects emergefrom the above analysis thatshould be of great interest to for-eign investors. These include astable economic environment, ahighly educated and youngworkforce, continuity in eco-nomic reforms, a unique socio-cultural set-up (which embracesboth Eastern and Western workpractices), natural resources, anda relatively supportive infrastruc-ture. However, there are a num-ber of things that affect businessgrowth in Sri Lanka. First,despite having a very high per-centage of educated labor force,its effectiveness and efficiency ispoor. The compensation levelsare low, and firms experienceproblems related to the retentionof skilled employees. Perhaps theway forward is an increasedemphasis on the development ofskills and competencies. MNCscan play a significant part in thisregard, as they have the requiredsources to develop humanresources. Second, locals tend tohave a strong preference to workin public-sector organizations, asthey provide more job security.As indicated in the above analy-sis, only a small proportion oflabor legislations are strictlyimplemented. If Sri Lanka is tomaintain its good economicgrowth, then it has to seriouslythink about the welfare of itslabor force, and implementation



of the provisions of labor laws isperhaps the very first step in thisregard. Sri Lanka can learn a lotfrom the success story of Singa-pore. There are also environ-ment-related issues (such asdeforestation, air pollution, andsoil erosion), Sri Lanka, being asmall island, needs to be verycareful in this regard, and seriousefforts should be made to main-tain its natural resources.

By far, the most important factorfor Sri Lanka’s future economicsuccess is its political stability.The recent political conflictbetween the president and primeminister risks wrecking the bestchance so far of resolving the 20-year civil war with Tamil sepa-ratists. Given the small size of SriLanka, a related concern is howto attract investments to the war-torn areas of the country. More-over, there is a need for seriousattention to the functioning ofthe three prominent sectors ofthe Sri Lankan economy—name-ly, textiles, tea, and ports. Theconsumption of tea worldwide isfalling because of competitionfrom other beverages. Moreover,due to the war in Iraq, theexports to the Middle East werehit, and the price of tea declinedby 10 cents per kilogram. Fur-ther competition from countriessuch as Vietnam is also affectingexports of tea from Sri Lanka. Insuch conditions, the possible wayforward for Sri Lanka is to cut itsproduction, further improve thequality of its tea, and build a

By far, the mostimportant factorfor Sri Lanka’sfuture economicsuccess is itspolitical stability.

brand image (also see Penna,2003). After the 9/11 episode,Sri Lanka’s apparel industryshrank by 15%. The problems forthe industry, which accounts forover half of the country’s foreignexchange earning have beencompounded by competitionfrom China, sub-Saharan Africa,and Mexico. The possible wayforward for the textile industry,like the tea industry, may be topursue niche production, withvalue addition, and look tobecome a “total service-provider,” not just to high-streetstores in the United States andEuropean Union, but to toplabels worldwide. If things arenot controlled quickly, then theyare further expected to aggravatein the post-2004 scenario, afterthe Multi-Fibre Agreements arecompletely phased out. Finally,on the port front, although SriLanka aspires to become aregional hub, the progress ofwork at the South Asia GatewayTerminals at the Port of Colom-bo is not progressing as planned.Perhaps the recent contract tothe P&O Company for the workat the Port of Colombo mightspeed up the operations. Theway forward is not only to priva-tize the work but also to act fast,ensuring world-class standards.However, Sri Lanka’s greateststrengths are its superior geo-graphic location and a sizeablecargo-container volume basedon significant export-importpotential. These two attributescan ensure world-class services.



To sum up, because of the manyopportunities provided, SriLanka presents a promising placefor foreign investors. The gov-ernment, the excellent economicclimate and an educated work-force are some of the main rea-sons for entrepreneurs to go toSri Lanka.

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Vishnath, W. (1997). Business process andinformation systems re-engineering: Ananalysis in the Sri Lankan context. Sri LankanJournal of Management, 2(1&2), 69–99.The World Bank. (2000, June). Sri Lanka:Recapturing missed opportunities (ReportNO: 20430-CE), Washington, DC: Author.The World Bank. (2004). Snapshot of busi-ness environment—Sri Lanka. Retrieved June27, 2004, from http://rru.worldbank.org/DoingBusiness/ExploreEconomies/BusinessClimateSnapshot.aspx?economyid=174The World Fact Book. (2003). Sri Lanka.Retrieved March 28, 2004, from http://www.odci.gov/cia/publications/factbook/geos/ce.html World Investment Report. (2003). RetrievedJuly 12, 2004, from http:// www.unctad.org/fdistatistics World Report on Sri Lanka. (2004). Investingin a paradise island. Retrieved July 22, 2004,from http://www.is.lk/spot/worldrep/article2.html

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Doing business in…Sri Lanka