Determinants of foreign direct investment of infrastructure industry in Sri Lanka

Abstract

The objective of this study is to identify influential factors which affect the attractiveness of inward foreign direct investment (FDI) of infrastructure sector in Sri Lanka. Foreign direct investment is one of the main components of the development of a country. Through FDI, new technologies, new capital goods and human capital development programs can be obtained. Even though attracting foreign investors to the developing country is relatively difficult. Though Sri Lanka is top compared to India, Pakistan and Bangladesh, which have relatively poor index value still, Sri Lanka is behind in attracting FDIs in South Asian region, according to “Ease of doing business index”. With that background, this empirical study tried to identify what are the determinants which effect on inward foreign direct investment in Sri Lanka. For convenience, the research area was narrowed down and limited to infrastructure related industries. Primary data was collected through questionnaires using Likert scale including firms operate in Telecommunication, Port Services and Construction sectors of infrastructure industry. The importance of each selected factors (market size, level of transportation facility, level of telecommunication facility, economic growth, civil war existed in the country, cultural distance, geographical position, political stability, government assistance and changes made in imposed barriers on imports) were analyzed. Test and effect from each variable on the attractiveness of FDI were tested. The results obtained from the SPSS software, seven factors out of selected ten factors have shown an effect on the attractiveness of FDI in Sri Lanka. They are market size, level of transportation facility, level of telecommunication facility, economic growth, and civil war existed in the country, cultural distance and geographical position. The rest of the factors (political stability, government assistance and changes made in imposed barriers on imports) do not show effect on the FDI attractiveness. As the recommendations, government should involve in regional development such as transportation and telecommunication facility. Also, it is necessary to implement new trade agreements.