The Impact of Foreign Direct Investment on Economic Growth: Evidence from Sri Lanka

Abstract

Foreign direct investment (FDI) has been one of the defining feature of the world economy as it considered as an important economic force through which developing countries can carry out economic growth consequently. This study explores the impact of FDI inflows to the economic growth (Gross Domestic Product – GDP) in Sri Lankan context. Though many research studies were carried throughout the world, due to the lack of studies within the country was made a great interest to carry a research study in the Sri Lankan context. As well as due to the empirical studies shown mixed results as positive, negative and no any relationship, the willingness to carry the research study was increased. As the result, it created the main objective of this study as to emphasize the extent of FDI inflows influence on economic growth in Sri Lanka. The independent variable used in the study was therefore FDI and the dependent variable was GDP. In addition, the study employed four mediating variables, labor force, exports, unemployment and gross domestic fixed capital formation, to identify the impact of FDI on GDP. The study used secondary data over a period of twenty-nine years from 1990 to 2018 and used descriptive statistics, a correlation to establish relationships between variables. Nine regression models were also used in the analysis to investigate how the relationship between the independent variable and the dependent variable existed through the mediating variables. The Pearson correlation was computed for FDI inflow and GDP shows a strong positive correlation between the variables. As per the regression analyses employed, they showed that there is a significant relationship between the independent and dependent variables by mediating with labour force, gross domestic fixed capital formation, exports and unemployment. These findings have led to the conclusion that there is a significant positive impact of FDI inflows on the Sri Lankan economic growth. It therefore suggests that opening up the country to international markets and attracting more foreign investment to the country and making it useful to the labor market will improve economic stability.

Keywords: Foreign direct investment, Economic growth, Sri Lanka