Stock Market Performance, Exchange Rate Volatility and Foreign Direct Investment to Sri Lanka

Abstract

This study investigated the impact of exchange rate volatility and stock market performance on the inflow of foreign direct investment to Sri Lanka using quarterly data from 2004 to 2018. The ordinary least square technique and error correction mechanism was used in estimations. Empirical results suggested that FDI is significantly correlated with the exchange rate volatility. Therefore, monetary and fiscal policy measures are required to reduce budget deficit, trade gap and debt ratios in order to maintain a stable exchange rate. Further, findings indicated long run  uni-directional causality from Stock Market to FDI while there is no short term relationship between the two variables. If the stock market is developed and foreigner participation can be increased then that will motivate FDI inflows to the country. This implies that policy makers must aim at developing the stock market for a resulting increment in FDI flows to the country.