Impact of Economic Uncertainty on Foreign Direct Investment Inflows of Sri Lanka

Abstract

Foreign direct investment is the heart of economic growth. Sri Lanka faces foreign reserve shortage. Therefore, the researcher studied how foreign investors react on investment flows of Sri Lanka under world, regional, and domestic uncertainty situations of Sri Lanka. The researcher studied on impact of economic uncertainty on foreign direct investment inflows using world, regional and domestic uncertainty indexes which are newly constructed indexes. This study has been used quantitative analysis for impact on economic uncertainty on foreign direct investment inflows of Sri Lanka. The researcher used secondary data for the sample period of 1st quarter, 1996 to 4th quarter, 2019. The researcher used the autoregressive distributed lag model, error correction model for analyzing the short-run and long-run impact on economic uncertainty on FDI inflows of Sri Lanka. Regional economic uncertainty has a significantly impact on foreign direct investment inflows of Sri Lanka in short run and long run. In domestic economic uncertainty has significantly impact on foreign direct investment inflows of Sri Lanka in short run and long run.  However, World economic uncertainty has not significantly impacted on foreign direct investment inflows of Sri Lanka This study has used world, regional, and domestic uncertainty of Sri Lanka indexes, which were newly built to capture uncertainties. Findings of the study could be used for the changes of policies to attract foreign direct investment inflows of Sri Lanka.