Abstract
The present study investigates the relationship between financial development, Foreign direct investment and economic growth in Sri Lanka for the period 1980 to 2019 by applying the Augmented Dickey-Fuller Unit root test along with the ARDL approach in process of achieving the desired objective. The outcome of this study shows that except GDP and FDI all other variables such as Capital investment as a percent of GDP (CI), Bank credit to the private sector as a percent of GDP (BCP), net foreign direct investment inflows in % of GDP (FDI) are stationary at first difference. The findings reveal that net foreign direct investment inflows are a positive relationship with economic growth in the long run. It means a one percent increase in net foreign direct investment inflows increases the GDP by 0.826439 percent. At the same time, a one percent increase in bank credit to the private sector decreases the GDP by 0.864320 percent. Moreover, in the short run FDI, CI and BCP have a positive and significant impact on GDP. Diagnostic tests such as normality test, heteroskedasticity and serial autocorrelation are employed to validate parameter estimation outcomes. Further, the stability of the variables confirms by the CUSUM test. The country should propose Strategies to boost the growth of efficient domestic financial institutions and encourage policy to attract greater FDI inflows that meet the needs of the knowledge-based economy.
Highlights
Financial development and Foreign Direct Investment (FDI) are well known as very much important aspects of the economic growth of a country
Local financial markets and FDI harmonizing principally attract the development of technological diffusion, and this in turn promotes the economic growth of the nation
The results show that financial development and foreign direct investment have positive significance in explaining Sudan’s economic growth
Summary
Financial development and Foreign Direct Investment (FDI) are well known as very much important aspects of the economic growth of a country. Sri Lanka invites FDI because, it accomplishes a major role to upgrade economic growth and as a result of that, it can be seen an improvement of the investment and the living standard of the population. Sri Lanka has launched numerous policies to attract foreign direct investments to the country since its open economic policy. Alfaro et al (2004) recommend that through the creation of the backward linkage local financial market allowing FDI to inspire the economic growth of the country. Local financial markets and FDI harmonizing principally attract the development of technological diffusion, and this in turn promotes the economic growth of the nation
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