Abstract
The impact of foreign direct investment(FDI) on host country economic growth is a debatable issue in the recent economic literature. The purpose of this study is to examine this issue for a country which practiced comparatively more liberal economic policies within the South Asian region over four decades. The ARDL approach to cointegration is applied to identify long-run relationship and short-run dynamics between selected variables for the period of 1978 to 2015 for Sri Lanka. The empirical result confirms the long run relationship between the variables. FDI is positively correlated with economic growth in the short run and long run, but it is not a significant factor for economic growth in Sri Lanka. Sri Lanka will have to undertake policy reforms related to FDI in order to attract more greenfield investments to boost economic growth creating new job opportunities and expanding exports in the manufacturing sector. These findings would be an example for other small open economies with similar economic characteristics.
Highlights
The relationship between FDI and economic growth has been extensively discussed in the economic literature
The impact of foreign direct investment(FDI) on host country economic growth is a debatable issue in the recent economic literature
The aim of this study is to find out FDI-economic growth relationship of Sri Lanka for the period of 1978-2015
Summary
The relationship between FDI and economic growth has been extensively discussed in the economic literature. FDI is considered as a significant factor for economic growth due to many reasons. It plays a key role in transferring advanced technology which is available in developed countries to developing countries. FDI improves human capital and institutes in host country stimulating domestic investment. Further it is argued that high-tech knowledge, technology, and managerial skills can be spill-over from foreign firms to domestic firms improving the productivity of local firms (Athukorala, 2003; Balasubramanyam et al.,1996; Hakimi & Hamdi, 2016; Haruna, 2012; Iamsiraroj & Ulubaşoğlu, 2015; Mahmood, 2013; Makki & Somwaru, 2004; Tsai, 1995; Zilinske, 2010)
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