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An analysis of the Impact of Foreign Direct Investment on the Economic Growth of Sri Lanka from the period of 2005-2008
Rukshan Colonne (CB001800)
Submitted to the
Business School
In partial fulfillment of the requirements for the degree of
Bachelor’s of Arts in
Business Administration (Hons)
Supervised by:
Prof. Kennedy Gunawardana
Batch number: GF0931BA (Level 03)
Subject code: BLB00096-3
Asia Pacific Institute of Information Technology
May 2009, Colombo
1
Abstract
With the increasing rate of globalization FDI has become an important source of income to
an economy. Even though it was a new concept for the countries, with the globalization it has
become very popular among the countries. This has also happened to impact a countries
economic growth. Therefore this investigation was based on the analysis of the impact of FDI
on the economic growth of Sri Lanka from 2005-2008.
As mentioned above the main purpose of the study was to investigate the impact of FDI on
the economic growth of Sri Lanka. The study also aimed at finding the amount of FDI
contributed by countries during the period of 2005-2008 and to find out which sector gained
more FDI during the period. The study also identifies the factors which are important to
attract FDI for developing countries. And also the key issues of FDI were identified and
recommendations were made in order to overcome these issues.
The above mentioned purposes were achieved through analyzing the published data about
FDI and related information.
As in general, Sri Lanka is doing well with the FDI receiving and will be prosperous in the
future. However the government and the BOI should consider factors related to sector wise
when setting up a sound environment for FDI.
Key words: FDI, Sri Lanka, BOI
i
Acknowledgement
It is with great pleasure I take this opportunity to convey my utmost gratitude to those who
have help me in completing this assignment.
First of all I would like to extend my sincere appreciation to my module lecturer Prof .
Kennedy Gunawardena, who has guided me throughout this assignment. Without his
enormous devotion to his students, I could not have made it. Thank you sir!
I would like to extend my gratitude for my colleagues, who shared information; knowledge
with one another in completing this assignment. Wish them all best of luck with their
assignments!
Never the less my parents and friends who contributed in every little way they could to
facilitate my assignment. Thank you!
Finally a thank you for APIIT for providing the Library facility and Computer labs.
ii
Table of Contents
Abstract......................................................................................................................................i
Acknowledgement....................................................................................................................ii
Table of Contents....................................................................................................................iii
List of Tables............................................................................................................................v
List of Figures List of Abbreviations.....................................................................................vi
List of Abbreviations.............................................................................................................vii
Introduction..............................................................................................................................1
Problem Statement...................................................................................................................2
Title of the Research:...........................................................................................................2
Problem Statement:..............................................................................................................2
Justification of the Problem....................................................................................................2
Objectives of the Study............................................................................................................3
Significance of the Study.........................................................................................................3
Scope of the Study....................................................................................................................4
Literature & Literature Review..............................................................................................5
Definitions of FDI.................................................................................................................5
Evolution of FDI in Sri Lanka.............................................................................................7
iii
Total FDI received to Sri Lanka between 1999-2009........................................................9
How FDI is important to developing countries................................................................10
Analysis and achieving the Objectives.................................................................................12
To find out the amount of FDI contribution by countries from 2005-2008................12
To find out which sector gain more FDI from 2005-2008...............................................16
To identify literature to determine the factors important to attract FDI for developing
countries..............................................................................................................................21
To identify the issues faced by FDI in Sri Lanka............................................................24
To suggest recommendation for the enhancement of FDI..............................................26
Conclusion...............................................................................................................................28
References...............................................................................................................................29
Appendix.................................................................................................................................31
Appendix 1- FDI 1999-2008 by Sector..............................................................................31
Appendix 2- Total FDI received from 2005-2008- by country.......................................32
Appendix 3: Countries contributed only in 2008.............................................................33
Appendix 4: FDI 2005-2008 by sector..............................................................................34
iv
List of Tables
Table 1: FDI from 2005 to 2008 by Sector..............................................................................16
Table 2: FDI as a percentage of GDP......................................................................................19
v
List of Figures
Figure 1: FDI from 1978 to 2002...............................................................................................9
Figure 2: Top Ten FDI Contribution........................................................................................13
Figure 3: Further Breakdown of Top Ten FDIs.......................................................................13
Figure 4: Lowest Ten FDI Contributions.................................................................................14
Figure 5: Percentage of FDI Received to Each Sector.............................................................17
Figure 6: Life cycle issues in differential effectiveness of special FDI attraction program.. . .22
Figure 7: Implications of investment policy/program convergence for effectiveness of FDI
attraction/repulsion efforts.......................................................................................................23
vi
List of Abbreviations
FDI Foreign Direct Investment
WTO World Trade Organization
BOI Board of Investment
OECD Organization for Economic Co-operation and Development
MNC Multinational Company
IMF International Monetary Fund
GDP Goods Domestic Products
UNCTAD United Nations Conference on Trade and Development
EGR Economic Growth Rate
BD3 Benchmark Definition 3
BPM Balance of Payment and Internal Investment Position Manual
UNESCAP United Nations Economic and Social Commission for Asia and the
Pacific
SNA System National Accounts
(CSIF) Cabinet Sub-Committee on Investment Facilitation
vii
Introduction
FDI plays a major role in the world, as it controls the way of doing businesses, and also as it
connects business internationally just as trading. Past researchers have shown that countries
that rely on FDI thrives the country’s economy and social aspects.
Foreign Direct Investment can be defined as an investor investing in another country other
than the country of citizenship of the investor while one country receives that investment in
order to ensure an economic growth of one country.
This was not a new concept for the world. This was evolved from the very old days and with
the rapid growth in the world, there were many changes which made this concept a very
popular concept among countries.
Sri Lanka has experienced heavy growth because of FDI. Form 2006-2008 Sri Lanka has
received USD 2500 Millions, which accounted for 50% of the total FDI received from 1978-
2008. With the change of the presidency, and with a successive government, they liberated
the economy has resulted in a great amount of FDI inflow to Sri Lanka.
Asia amounts to nearly 50% of the global FDI, while china absorbs 70% of it. Even though
China is considered a threat to attracting FDI, the social and economic relationship has be
very good, resulting in China continuously proving FDI for various projects.
However the purpose of the study was to investigate the impact of FDI on the economic
growth of Sri Lanka during the period of 2005-2008.
1
Problem Statement
Title of the Research:
An analysis of the Impact of Foreign Direct Investment on the Economic Growth of Sri
Lanka from the period of 2005-2008
Problem Statement:
What is the impact of Foreign Direct Investment (FDI) on Sri Lankan economic growth and
which sector gained more significant development from the FDI during the 2005- 2008?
Justification of the Problem
FDI is an important measure for both developed and developing countries. FDI benefits both
parties expectation. There are thousands of articles on FDI with relevance to developed
countries and developing countries. However few articles remain with relevance to Sri Lanka
(Balamurali and Bogahawatte 2004).
This study is carried out to fill in that gap by analyzing the Impact of Foreign Direct
Investment on the Economic Growth of Sri Lanka.
2
Objectives of the Study
Research was required to collect Secondary data from various published articles from
governments and international organizations to determine the impact of FDI from on Sri
Lankan economic growth and which sector gained more significant development from the
FDI during the 2005- 2008? The research is built purely on previous qualitative and
quantitative research carried out by recognized bodies.
The objectives of the research are:
To find out the amount of FDI contributed by countries from 2005-2008.
To find out which sector gain more FDI from 2005-2008.
To identify literature to determinants factors which is important to attract FDI for
developing countries?
To indentify key issues in FDI
To suggest recommendations for the enhancement of FDI.
Significance of the Study
This qualitative research will provide more understanding about what is FDI and what is the
importance of FDI to a developing nation like Sri Lanka.
By taking this study into account when considering new business opportunities, employment
creation, technological assistance, government officials and private sector businesses can
better understand the opportunities available in the world and to assist FDI inflow to Sri-
Lanka.
Moreover other developing nations can take use of this study, since most of the developing
nations have similar characteristics.
3
FDI funders can better understand the economic nature of Sri Lanka, and how Sri Lanka
facilitates potential FDI investors.
This is a qualitative research significant to Sri Lanka as country to be competitive as one.
Scope of the Study
The investigation is built purely on previous qualitative and quantitative research and
published articles carried out by recognized bodies.
Due to financial and time constraints, the research has been limited to the following:-
Limited to the countries who contribute FDT to Sri Lanka.
Limited to the all types of FDI’s
Limited to the period of 2005-2008
4
Literature & Literature Review
Definitions of FDI
There are many definitions to FDI from various professional institutions. For the purpose of
this literature, three definitions are given.
According to Blackhurst & Otten (1996)1, to the World Trade Organization (WTO) defines
FDI as follows, ‘‘FDI occurs when an investor based in one country (the home country)
acquires an asset in another country (the host country) with the intent to manage that asset’’.
FDI can be categorized in to three, first is ‘‘Equity Capita’’ is the value of the MNC's
investment in shares of an enterprise in a foreign country. Second is ‘‘Re-invested Earnings’’
the MNC's share of affiliate earnings not distributed as dividends or remitted to the MNC.
Such retained profits by affiliates are assumed to be reinvested in the affiliate. Third is
‘‘Other Capitol’’ refers to short or long-term borrowing and lending of funds between the
MNC and the affiliate.
The second definition of FDI is extracted from the publication of United Nations Conference
of Trade and Development (UNCTAD) 20022, which quoted the International Monetary
Fund’s (IMF) Balance of Payment Manual 5th edition’s (BPM5) definition as follows ‘‘FDI
refers to an investment made to acquire lasting interest in enterprises operating outside of the
economy of the investor. Further, in cases of FDI, the investor´s purpose is to gain an
effective voice in the management of the enterprise’’.
The third definition is according Organization for Economic Co-operation and Development
(OECD) (2008)3, benchmark definition (BD3) of FDI is ‘‘FDI reflects the objective of
establishing a lasting interest by a resident enterprise in one economy (direct investor) in an
1 Blackhurst, R., Otten, A. (1996). Trade and foreign direct investment. Available:
http://www.wto.org/english/news_e/pres96_e/pr057_e.htm. Last accessed 9 October 2009.
2 UNCTAD. (2002). Foreign Direct Investment. Available: http://www.unctad.org/Templates/Page.asp?intItemID=3146⟨=1. Last
accessed 9 October 2009.
5
enterprise (direct investment enterprise) that is resident in an economy other than that of the
direct investor’’. The lasting interest implies the existence of a long-term relationship between the
direct investor and the direct investment enterprise and a significant degree of influence on the
management of the enterprise
Further elaboration on the OECD (2008), FDI definition as follows, BD3 of FDI sets the
world standards for direct investment statistics. It is 100% aligned with the principal concepts
and definitions of the IMF’s BPM. It follows the general economic concepts drawn by the
Systems of National Accounts4 (SNA). Within this structure the main focus of BD3 is to
emphasize the FDI statistics surrounding direct investment position and direct investment
financial & income transactional flows. BD3 provide a brief overview of the methodology of
the activities of MNC’s.
3 Investment Division, Directorate for Financial and Enterprise Affairs Organization for Economic Co-operation and Development.
(2008). OECD BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT. Available: http://www.oecd.org/dataoecd/26/50/40193734.pdf. Last accessed 9 October 2009.
4 System of National Accounts by the Commission of the European Communities, International Monetary Fund, Organization for Economic Co-operation and Development, United Nations, and World Bank
6
Evolution of FDI in Sri Lanka
Foreign Direct Investment (FDI) is nothing new to Sri Lanka, as it dates back to its colonial
regime where the large plantation enterprises, insurance companies, banks were originally
built with foreign capital according to Abeysinghe and Jayawickrama (2008).
After gaining independence in 1948, Sri Lanka underwent a policy regime of import
substitution with characteristics of prohibitive trade and government regularity control
(Wijeweera & Mounter 2008). Even though there were limitations in foreign investment and
free flow of FDI to the country within 1950- 1977, there has been somewhat effort to attract
FDI to the country (Athukorala 2003). According to Athukorala (2003), in 1966 a white
paper was presented for FDI along with the formation of ‘‘foreign investment advisory
committee’’ in 1968 to investigate and manipulate policies with relevance to FDI in Sri
Lanka.
However during the pre liberalization era, Sri Lanka’s FDI inflow was virtually zero
according to Wijeweera & Mounter (2008).
After identifying the market oriented economic policy is the most effective source of growth,
the political personal made it a high priority to create an investment friendly economic
condition in 1977 (Athukorala 2003). Sri Lanka opened its doors to foreign nations with the
political shift in 1977 by liberating FDI and economic policies (Athukorala 2004). One of the
key benefits by the liberalization of the economy was the major reform of foreign investment
and trade policies (Wijeweera & Mounter 2008). According to Athukorala (2003), investment
policies in Sri Lanka were reformed to attract foreign investment based on the ‘‘Foreign
Investment Act in 1978’’.
Athukorala (2003), point out that with the successive government and free trade policies and
continuation of liberating the economy has resulted in a great amount of FDI inflow to Sri
Lanka. Athukorala (2003), further states Sri Lanka’s investment laws are transparent and
automatic. And that there are no restrictions on repatriation of earnings, profits & capital
7
proceed. According to Fernando (2007)5, to the United Nations Economic and Social
Commission for Asia and the Pacific (UNESCAP), states foreign ownership is welcomed
from all sectors of the economies except a few. Further it is stated that investors are allowed
to repatriate 100% of their profits and are exempted from most of the exchange control
regulations. Moreover they can enjoy preferential tax benefits and constitutional guarantees
on their investment.
Jayasekara (2009)6, to the UNESCAP states Sri Lanka has opened its service sector to foreign
investment. Further mentions ownership of 100% equity in a range of sectors namely
banking, insurance, telecommunication & tourism.
5 Fernando, D. (2007). Country note on Trade and Investment Policy Coordination Country: Sri Lanka. Available:
http://www.unescap.org/tid/artnet/mtg/tipc_slnotes.pdf. Last accessed 9 October 2009.
6 Jayasekara, D. (2009). Progress of liberalization of trade in Services in SAFTA. Available: http://www.unescap.org/tid/artnet/mtg/bridging_s3douglas.pdf. Last accessed 9 October 2009.
8
Total FDI received to Sri Lanka between 1999-2009
According to the study conducted by Balamurali and Bogahawatte (2004), for the period of
1978-2003 on net FDI in Sri Lanka, it is said that during periods of relative economic and
political stability Sri Lanka FDI inflow has been positive, for example instances during
periods of 1979-1982; 1990-2003; & 2003.
According to the statistic report provided by the BOI Sri Lanka during the period of 1999-
20087, 1999 has a total FDI of USD Mn.224.25, a USD Mn.49.11 increase than 2000 which
has a total FDI of USD Mn.175.14. however there is a drastic drop in FDI in year 2001 with
total FDI of USD Mn.83.35, USD Mn.91.79 less than year 2000.
From 2002-2004 total annual average FDI was at USD Mn.221.59. from 2006-2008 with the
change of the presidency in Sri Lanka, the total FDI in Sri Lanka has a hyper increase of
USD Mn.(603.68, 734.36, 888.935) respectively.
7 Refer Appendix : Appendix 1- FDI 1999-2008 by Sector (Statistic Unit/Research Dept.-BOI)
9
Source: Balamurali, N., Bogahawatte, C. (2004). Foreign Direct Investment and Economic Growth in Sri Lanka .
Sri Lankan Journal of Agricultural Economics. 6 (1), p42.
Figure 1: FDI from 1978 to 2002
According to Perera (2009) to the Daily News reports that Deputy Director General BOI Mr.
A.M.C Kulasekera stated to the Daily News that Sri Lanka has received 50% of total
Investment within 2006-2009. The total amount received from 2006-2009 mount to USD
Mn.2500 out of USD Mn.5000 from 1978-20098.
How FDI is important to developing countries
Recognized international organization and other external advisors have recommended that
developing nations should rely primarily on FDI as a source of external finance
(Nunnenkamp & Spatz 2003). According to Nunnenkamp & Spatz (2003) it is argued that the
FDI inflow has a stronghold in stimulating economic growth than other sources of capital
inflow.
The rapid growth of international production is fueled by the economic and technological
forces. This will be greatly benefiting a developing nation like Sri Lanka by generating
capital, employment, improves productivity, growth in export and skill transfer etc...
(Balamurali & Bogahawatte 2004, Abeysinghe & Jayawickrama 2008, (Kok & Ersoy 2009).
Growth and Employment:
Having long-term productive FDI which bring long term sustainable capital inflow to the
country is important to increase the aggregate demand of the economy.
Moreover domestic companies will perform well due to the threat of competition that arise
from FDI, and find solutions to counter competition which will ultimately led to high
productivity and growth of the economy.
Employment creation occurs when there is a positive FDI inflow to the country. The more
FDI inflows to the country the less of unemployment in the country will grow the country
with monetary and skilled benefits in the long run.
8 Perera, H. (2009). Foreign investments in Sri Lanka 1978 - 2009. Available: http://www.dailynews.lk/2009/10/06/bus03.asp. Last
accessed 9 October 2009.
10
Technology Know How
FDI acts as a main source of technology transfer and expertise knowledge and in favor
creates more productivity. A developing country like Sri Lanka will not be able to import the
required technology from abroad since the transfer of technology to firms with less
experience is risky, difficult and moreover highly expensive. FDI is important to fill the
Technology Gap (TGAP) between developing countries and developed countries (Kok &
Ersoy 2009).
Access to Goods and Services
Foreign firms will bring new goods and services through FDI, which will enable local
consumers to enjoy a greater variety of commodities while increasing the standard of living.
Fill the Savings Gap
The fee and licenses for FDI will fill in the gaps between the needed funded and the internal
savings capacity of the country. This is a major source of revenue to the government.
Exploitation of new land
Through FDI, new investors will be willing to set up manufacturing companies n unexploited
lands. This will open new windows for the country to seek and develop regional hubs &
labor.
Overall FDI s important to a developing country due to the fact that it will create generates
capital formation while enhancing and introducing technology. Transfer of general
knowledge of how to do thing right and be par with the world economic and social standards
through experience and skilled labor and work ethics. FDI will also act as a motivator for the
local business to think globally and produce goods and services more productively, which in
return will contribute to the economy. According to Balamurali and Bogahawatte (2004),
technology plays a major role to the success of the economy along with FDI.
11
Analysis and achieving the Objectives
To find out the amount of FDI contribution by countries from 2005-2008.
This section will analyze the FDI contribution pattern to Sri Lanka within the periods of
2005-2008.
After completing the table9 of FDI contributed countries (statistics were provided by the BOI
head office) the following has been identified and reviewed.
Forty nine (49) FDI contributing countries were identified from 2005- 2008. However not all
countries have contributed continuously. Countries such as Monaco, Oman, Thailand, and
Iran & Gibraltar contributed only in year 200810 with a total of LKR Bn.149.94 for 2005-
2008. However Thailand has contributed a major portion of LKR Bn. 140.02 out of LKR Bn.
149.94. Bangladesh contributed only in 2006, which was worth LKR Bn. 2.25 while Russia
has contributed only in 2005 which was worth LKR Bn. 1.73
The top 10 contributing countries during the period of 2005-2008 are shown in the Chart 1
below. It is clear at sight that Malaysia is the highest FDI contributing country to Sri Lanka
with a grand total of LKR Bn. 1844.3, while rest of the countries remain between LKR Bn.
1000 to 3000. Second highest FDI contribution is by UK worth LKR Bn. 2889.3, closely
followed by India worth LKR Bn. 2469.8
9 Refer Appendix : Appendix 2- Total FDI received from 2005-2008- by country
10 Refer Appendix : Appendix 3- Countries contributed only in 2008
12
13
Chart 1: Top 10 FDI contributing countries from 2005-2008
Source: Chart designed according to the statistics provided by BOI Head Office
Figure 2: Top Ten FDI Contribution
Chart 2: Further break down of the top 10 FDI contributing countries from 2005-2008
Source: Chart designed according to the statistics provided by BOI Head Office
Figure 3: Further Breakdown of Top Ten FDIs
Chart 2 will provide a further break down of the top 10 FDI contributing countries by each
year. To begin with it should be mentioned that the best FDI contributor Malaysia has the
highest contribution throughout the years. Especially in 2007 a major FDI contribution of
LKR Bn. 3425.5 surpasses all other countries as the single highest contributor. However in
2008 FDI contribution was almost half than 2007.
Hong Kong shows a doubled FDI contribution in 2008 compared to 2007, while India has
almost tripled its FDI in 2008 than 2007. Japan compared to 2005 has a good FDI
contribution in 2006 & 2007, yet another fall in contribution in 2008. Luxemburg contributed
LKR Bn. 624.60 in 2006 and contributed one tenth of 2006 FDI in 2007, despite the short
contribution in 2007, in 2008 FDI contribution was nearly a billion rupees. New Zealand than
the rest of the countries has a unique FDI contribution, in 2005 & 2006 the contribution was
less than LKR Bn. 1.5 & in 2007 zero FDI, however in 2008 the FDI contribution was well
over LKR Bn.1300. Singapore and Sweden remain consistent with the contribution. UK
contributed over LKR Bn.1000 each in 2007 & 2008. USA has contributed FDI at steady
phase.
14
Chart 3: Lowest 10 FDI contributing countries from 2005-2008
Source: Chart designed according to the statistics provided by BOI Head Office
Figure 4: Lowest Ten FDI Contributions
According to chart 3 the lowest FDI contributing country is Monaco with the FDI
contribution of LKR Bn. 0.27 while the rest of the countries contribution is below Rupees six
billion. Almost all of these countries are FDI receiving countries. Therefore expecting a lot
from them is difficult.
15
To find out which sector gain more FDI from 2005-2008.
This section will analyze which sector gained more contribution from FDI during the period
of 2005- 200811 with the use of the table made from the statistics from the BOI Head Office.
According to the chart 4, it is clear that the service sector is the highest FDI receiving sector
between 2005 and 2008, and a FDI worth of LKR Bn. 20538.89, while the least FDI
receiving sector is the agricultural sector FDI worth LKR Bn. 48.69 from 2005-2008.
Second highest earning sector is the textile sector gaining FDI worth LKR Bn. 3302.17. Food
beverage tobacco sector gained the third highest FDI worth LKR Bn. 1204.08 &
manufactured products sector gained just above rupees billion from 2005-2008.
Foreign Direct Investment 2005 - 2008 –
by Sector
2005 2006 2007 2008 FDI
Sector FDI FDI FDI FDI 05 - 08
Food Beverages and Tobacco 339.54 394.09 299.67 170.37 1204.08
Textile, Wearing Apparel & Leather 546.41 1195.92 723.47 835.35 3302.17
Wood and wood Products 10.63 50.74 8.90 25.52 95.81
Paper & Paper Products, Printing & Publishing 94.31 8.78 0.00 9.92 113.05
Chemicals, Petroleum, Coal, Rubber & Transport
Eq
232.76 498.68 566.76 461.44 1760.16
Non-Metallic Mineral Products 68.19 60.91 54.43 147.57 331.19
Fabricated Metal, Machinery & Transport Eq 177.28 162.72 144.92 166.22 651.36
Manufactured products (N.E.S) 95.00 341.39 212.88 370.00 1019.57
Agriculture 5.43 7.74 4.85 30.65 48.69
Service Infrastructure 1749.85 4255.75 6471.11 8056.38 20538.89
Total FDI for the Year 3319.40 6976.73 8487.00 10273.42
Total FDIs received from 2005 to 2008 LKR (Bn.) 29056.55
Year 2005 2007 2007 2008
GDP LKR Bn. 245278.2 357869 357869 441056.7
11 Refer Appendix: Appendix 4 Foreign Direct Investment 2005 - 2008 – by Sector
16
Table 1: FDI from 2005 to 2008 by Sector, Source: table designed according to the statistics provided by BOI Head Office
According to the pie chart it is highly visible which sector gained FDI between 2005- 2008.
Service infrastructure accounts for 53% of the total FDI inflow throughout the four years
indicating that the service sector is the FDI attracting source. Government joining hands with
the BOI should really focus on further developing the service sector infrastructure to further
facilitate FDI.
The second highest percentage is for the textile sector at 17% and is a dominant trade in Sri
Lanka. Due to cheap and skilled labor & technological knowhow make it an attractive sector.
However due to the quota restrictions textile sector is having a difficulty in attracting FDI. If
17
Percentage of FDI received to each sector from 2005- 2008Percentage of FDI received to each sector from 2005- 2008
Figure 5: Percentage of FDI Received to Each Sector
Source: Chart designed according to the statistics provided by BOI Head Office
the government intervene and do some promotion for potential foreign investors to fabricate
some sort of material in Sri Lanka will give the sector a good leverage to gain more FDI.
Food beverage and tobacco accounts for 10% of the total FDI received. The above mentioned
three sectors grab 80% of total FDI received during 2005-2008, leaving the rest of the 8
sectors hold account for the remainder 20% throughout 2005-2008.
18
As per the table 2, FDI as a percentage of the GDP for each sector will provide the
contribution it will make to the GDP.
However all the sector percentage is below 2%, only services sector makes a maximum of
1.83% out of all ten sectors. According to the detailed table in the appendix12 all contribution
on or below LKR Bn. 10 will show a zero percentage (0%).
12 Refer Appendix: Appendix 4 Foreign Direct Investment 2005 - 2008 – by Sector
19
FDI as a percentage of GDP from 2005- 2008
Table 2: FDI as a percentage of GDP
Source: table designed according to the statistics provided by BOI Head Office
Due to the concentrated flow of FDI to service infrastructure sector, there is a 0.71% - 1.83%
increase from 2005-2008. From 2005 to 2006 there is a 0.74% increase, 0.36% increase from
2006-2008, 0.2% increase from 2008-2009, and a positive gap of 1.12% from 2005-2008 in
the service infrastructure sector.
The total FDI as a percentage of GDP for the year 2005 is 1.35 & 2.37% is same for both
2006 & 2007, a 1.02% positive gap. 2008 has a 2.33% a negative slope of 0.04% compared
with 2006 & 2007
Since the service infrastructure sector alone accounts for almost half the total FDI as a
percentage of GDP, this portion will contrast ratios without service infrastructure sector
accounted. Therefore a clear contribution to the rest of the sectors together can be seen. For
2005 it is 0.61% with an increase of 0.31% in 2006. Moreover 2008 was 0.5% which is less
than 2005.
For the purpose of gaining more FDI to the country, government can better look in to the
existing facilities and adjust them to attract and facilitate foreign investor.
20
To identify literature to determine the factors important to attract FDI for
developing countries.
Trade has been the driving force linking national economies to create international
economies. FDI is similar linking national economies, therefore complementing and
reinforcing each other. FDI has a wide impact on the host country’s or known as the recipient
country economy. FDI impacts on the income; production; prices; employment; economic
growth; development and general welfare of the society (Kok & Ersoy 2009).
The increase in FDI over the years has been a sign of globalization of the world for the past
two decades; therefore FDI plays a major role in the economic growth in developing
countries (Kok & Ersoy 2009). International organization and other external advisors have
recommended that developing nations should rely primarily on FDI as a source of external
finance (Nunnenkamp and Spatz 2003).
Even though there s a large number of studies carried out to identify the FDI determinants,
there is no consensus found. Results have sown that FDI are highly sensitive to factors low in
robustness such as labor costs; trade barriers; trade balances; exchange rate; R&D an taxes
which has both positive and negative impact (Kok & Ersoy 2009).
According to Kok & Ersoy (2009), Wint & Williams (2002), mentions that Dunning (1993)
states international production is the result of a process affected by ownership,
internationalization, & localization advantages. Kok & Ersoy further states that Dunning’s
‘’OLI’’ Paradigm is all about, ‘‘FDI is undertaken if ownership specific advantages (“O”)
like property technology exit together with location-specific advantages (“L”) in host
country, e.g. low factor costs, and potential benefits from internationalization (“I”) of the
production process’’.
However (Kok & Ersoy (2009) states that the most important factor an investor would focus
on in selecting a project in a foreign location are as follows. Factors affecting the availability
of natural resources; the size of the market; geographical location; the position of the
economy; the culture and the political environment; factor prices; transport costs; & element
of the economic policies (trade, industrial, budget & tax policies).21
Developing countries exert their level best to attract FDI through liberalization of policy
regime. By liberating investments regime favorable for the foreign firms, easy entry will be
facilitated (Wint & Williams (2002). Wint & William states according to UN (1999) report,
that 60 countries changed 145 regulatory changes. And out of the 60 countries 90% create
more favorable investment changes. However all good things must come to an end. The more
countries keep on changing their policies to attract FDI; another country will make counter
policy change. And at the end there will not be enough differentiation to attract FDI which
will result in float. In terms of promotion campaigns to attract foreign investment, all
countries are in good state of play or worse state of play in general. See below figure1.
22
Figure 5: Life cycle issues in differential effectiveness of special FDI attraction program.
Adapted from: Wint, A., Williams, D. (2002, p.365)
Only first movers in the game were able to grab a good portion of the pie for some time. Soon
imitators arrive looking at the new effectiveness of the best practices and will reduce the
portion of the pie the early mover gets.
Moreover consider of a separation of investment policy regime and investment promotion
program. While there is convergence between countries with respect to investment policies,
differentiated and divergent programs will be effective to distinguish one country from
another as the best site for business.
23
Figure 6: Implications of investment policy/program convergence for effectiveness of FDI attraction/repulsion efforts.
Adapted from: Wint, A., Williams, D. (2002, p.366)
To identify the issues faced by FDI in Sri Lanka
Increasing globalization has made countries to do business with one another resulting in more
knowledge and resource sharing. With the globalization, MNCs expand their wings in to
foreign countries. This helps to those countries to develop. However there are factors which
prevent FDIs inflow to such countries.
Sri Lanka is a developing country therefore the need for FDIs are very important for the
countries growth and success. However many issues were identified in practical situation of
Sri Lanka. But BOI and other regulatory
The FDIs gained last few years has not worked effectively. According to Jayasekara (2006)
many projects (1177 projects) approved by BOI were reported failures. There he identified
reasons for failures as failing to commence projects
Financial difficulties
Disputes among investors
Labor issue
Policy related issues
Inadequate co-operation from government agencies
Market related issues.
Further SundayObserver (2009) mentions that impact of the global economic crisis on global
FDI Flows and designed for investment promotion practitioners and policymakers to focus on
issues faced by investment promotion agencies including emerging challenges and
opportunities on how to attract and retain FDI. This explains that global economy crisis is one
of the major factors that affect on the FDI inflow.
24
In practice, much unfair competition for project bids also identified, when considering the
FDI on Colombo port authority. Hutchison Port Holdings have cheated to get the bid. This
involved about 780 million US dollars. Thus companies tend to involve in such activities to
gain unjust advantages.
Considering projects in progress, many of FDI projects are not accomplished on time. The
Colombo Katunayake road, Mathara Colombo road are being experiencing many delays and
high inefficiencies.
Further there are many factors identified that would discourage FDIs. One of those is rigid
labor laws. Sri Lanka is one of the countries who have high labor regulations in the country.
Even the powers of labor unions are also high in the country. Thus foreign investors are not
that enthusiastic in investing.
The legal structure of Sri Lanka is also not that good to attract investment; according to
Daniel (2009) judicial activism may not be in good interest in attracting investments.
Environment and other laws are also act in the same disadvantage manner. The most new
barrier was the publicity of human right violation. This has affect a lot to the alteration of
foreign direct investments.
However, the setting up of the Cabinet Sub-Committee on Investment Facilitation (CSIF)
headed by the President to resolve the major policy issues faced by the investors is further
proof of importance Sri Lankan authority’s accord to and of their commitment to the
promotion and facilitation and retention of Foreign Direct Investment.
25
To suggest recommendation for the enhancement of FDI.
Since the liberalization of FDI policy regime in 1977, Sri Lanka emerged in to the world of
open economy. Since then to ride to success has been full of bumps and scratches. Despite
the three decade civil was Sri Lankan government has constantly been exploiting new
investor opportunities. However with the end of the civil war is the dawn of a new era which
will bring Sri Lanka the tremendous foreign investor potential.
As a part to building Sri Lanka, the government has given great interest to gain foreign
investment. The government has facilitated several investment opportunities through line
ministries and BOI to minimize the regional disparity & relocate industries outside of
Colombo (Central Bank 2008).
According to Central Bank (2008) in the 1st quarter of 2008 there was an FDI inflow with a
significant 60.8% while US dollars 290.8 million was to telecommunication, US dollars 61.3
million for manufacturing & US dollars 46.7 million for power generation. These sectors
absorbed 94% of the total FDI inflow during the first half of 2008.
BOI acts as the main investment promotion institute of the country, and has a major role in
attracting FDI to the country. There are 15 country desk offices representing BOI in foreign
lands, and regional hubs. This is one of the primary FDI attracting mechanisms currently in plays
and performance is excellent. According to the Dailymirror13 report the World Bank’s
Investment Climate Advisory Service has ranked BOI of Sri Lanka as the best in South Asia
for investor promotion and facilitation. In the latest issue of Global Investment Promotion
Benchmarking 2009 the BOI has been described as the only “Good” performing Investment
Promotion Intermediary (IPI) in South Asia.
This achievement is will be very useful when promoting BOI investments and partnership
opportunities that investor do not have to consider according to the Dailymirror.
13 Dailymirror. (2009). WB-IFC ranks BOI as best in South Asia. Available: http://www.dailymirror.lk/DM_BLOG/Sections/frmNewsDetailView.aspx?ARTID=64870. Last accessed 16 October 2009.
26
In the report assessment over 70% of intermediaries may be missing foreign investment and
job-creating opportunities by failing to provide accurate and timely information to potential
investors. Therefore Sri Lanka could take this in to account to better equip those who are
engaging with potential investor promotions & relations.
The BOI approved 263 projects under Section 17 and 16 of the BOI Act, with the investment
commitment of Rs. 366 billion in the first half of 2008 compared to Rs. 275.8 billion in the
first half of 2007
This investigation attempts to scrutinize the impact of FDI on the economic growth of Sri
Lanka.
Therefore this investigation is conducted to clearly identify the types of FDI available, which
sector gain more FDI, the relationship of the Economic Growth Rate & FDI, FDI
determinants that’s attracts to Sri Lanka, in order to better support the problem statement.
What is the impact of FDI on Sri Lankan economic growth and which sector gained more
significant development from the FDI?
27
Conclusion
This report was based on the concept of FDI, and it mainly focused on the impact of FDI to
the economic growth of Sri Lanka. There were many purposes of this study such as to
investigate the amount of FDI received during the period of 2005-2008 and to identify the
sector which received the highest amount of FDI during the period. Also it identified the
issues faced by countries which are related to FDI, and in order to improve the growth and
success of FDI several recommendations were made.
Several findings were investigated from this study after analyzing the secondary data
gathered on FDIs of Sri Lanka. Some of the findings include the amounts of FDI received to
Sri Lanka from several countries and identifying the countries and the amounts offered from
those countries during the period of 2005-2008. And also after analyzing the amounts and the
countries related to FDI, the sector which got the highest amount of FDI was identified.
To conclude it can be stated that FDI is a very important concept for a country’s economic
and social growth. Therefore a country should understand this concept very well in order to
use it correctly for the development of a country. Even though a country is facing several
issues which are related to FDI, the country should also find ways of overcoming these issues
in order to use this concept successfully for the development of the country.
28
References
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29
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Appendix
Appendix 1- FDI 1999-2008 by Sector (Statistic Unit/Research Dept.-BOI)
31
Source: Board of Investment of Sri Lanka
Level 26, West Tower, World Trade Center, Colombo 01, Sri Lanka.
Appendix 2- Total FDI received from 2005-2008- by country
Total FDI Received From 2005 to 2008- by country Values in (LKR Bn.)
Country 2005 2006 2007 2008 Total FDI 05-08
Australia 38.35 51.63 17.45 101.55 208.97Bahamas 3.57 0.05 1.16 4.97 9.74Baharain 0.00 0.00 2.54 1.04 3.58Bangaladesh 0.00 2.25 0.00 0.00 2.25Belgium 96.87 93.28 160.41 154.29 504.84Bermuda 0.00 0.00 1.24 6.00 7.23British Virgin Island 1.48 19.17 3.18 38.36 62.19Canada 8.18 18.81 2.31 3.36 32.67Cayman 0.00 9.13 3.03 45.90 58.06China 11.29 51.15 124.00 316.15 502.59Cyprus 0.00 1.62 3.47 3.86 8.95Czech Rep 0.00 3.03 0.00 0.98 4.01Denmark 3.20 48.81 35.70 42.66 130.36Dubai 0.00 2.31 0.35 0.00 2.66France 0.00 36.51 18.47 2.08 57.06Germany 24.54 59.17 96.89 51.19 231.79Gibraltar 0.00 0.00 0.00 1.27 1.27Holland 13.52 3.12 9.89 0.00 26.53Hongkong 178.76 534.37 416.47 853.54 1983.15India 206.35 312.65 495.56 1455.32 2469.88Indonesia 0.00 2.61 2.72 0.54 5.87Iran 0.00 0.00 0.00 5.40 5.40Ireland 7.87 0.10 0.14 0.29 8.40Israel 0.00 0.00 14.93 2.45 17.38Italy 122.08 224.81 210.74 81.14 638.77Japan 47.37 446.26 563.74 193.31 1250.69Korea 57.68 121.52 122.92 107.40 409.52Luxembourg 200.07 624.60 69.10 950.61 1844.38Malaysia 1150.57 1903.11 3425.54 1738.25 8217.48Maldives 11.29 21.25 1.24 7.27 41.05Mauriteus 46.92 86.06 2.76 16.21 151.96Monaco 0.00 0.00 0.00 0.27 0.27Morocco 4.22 0.59 0.00 0.00 4.81Netherland 6.99 145.78 330.91 0.00 483.68New zealand 1.16 0.12 0.00 1354.73 1356.01Norway 22.57 30.85 57.69 50.87 161.98Oman 0.00 0.00 0.00 2.98 2.98Pakistan 1.73 12.98 6.13 14.94 35.78Russia 1.73 0.00 0.00 0.00 1.73Singapore 353.94 341.66 231.06 238.21 1164.88South Africa 0.00 0.08 0.00 11.24 11.33Sweden 117.07 576.13 363.51 436.58 1493.29Switzerland 17.46 50.10 11.77 37.20 116.53Thailand 0.00 0.00 0.00 140.02 140.02
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Taiwan 28.38 30.86 18.20 22.41 99.85UAE 82.14 231.56 185.19 107.41 606.29UK 304.49 466.75 1107.58 1010.50 2889.32USA 147.42 410.71 304.89 656.62 1519.64USSR 0.00 0.45 10.23 3.44 14.12Total annual FDI 3319.29 6976.00 8433.09 10272.84Total FDI from 2005-2008 29001.22
Appendix 3: Countries contributed only in 2008
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Appendix 4: FDI 2005-2008 by sector
34
