Investigations

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Investigations

  1. 1. An analysis of the Impact of Foreign Direct Investment on the Economic Growth of Sri Lanka from the period of 2005-2008 Rukshan Colonne (CB001800) Submitted to the Business School In partial fulfillment of the requirements for the degree of Bachelor’s of Arts in Business Administration (Hons) Supervised by: Prof. Kennedy Gunawardana Batch number: GF0931BA (Level 03) Subject code: BLB00096-3 Asia Pacific Institute of Information Technology May 2009, Colombo 1
  2. 2. Abstract With the increasing rate of globalization FDI has become an important source of income to an economy. Even though it was a new concept for the countries, with the globalization it has become very popular among the countries. This has also happened to impact a countries economic growth. Therefore this investigation was based on the analysis of the impact of FDI on the economic growth of Sri Lanka from 2005-2008. As mentioned above the main purpose of the study was to investigate the impact of FDI on the economic growth of Sri Lanka. The study also aimed at finding the amount of FDI contributed by countries during the period of 2005-2008 and to find out which sector gained more FDI during the period. The study also identifies the factors which are important to attract FDI for developing countries. And also the key issues of FDI were identified and recommendations were made in order to overcome these issues. The above mentioned purposes were achieved through analyzing the published data about FDI and related information. As in general, Sri Lanka is doing well with the FDI receiving and will be prosperous in the future. However the government and the BOI should consider factors related to sector wise when setting up a sound environment for FDI. Key words: FDI, Sri Lanka, BOI i
  3. 3. Acknowledgement It is with great pleasure I take this opportunity to convey my utmost gratitude to those who have help me in completing this assignment. First of all I would like to extend my sincere appreciation to my module lecturer Prof. Kennedy Gunawardena, who has guided me throughout this assignment. Without his enormous devotion to his students, I could not have made it. Thank you sir! I would like to extend my gratitude for my colleagues, who shared information; knowledge with one another in completing this assignment. Wish them all best of luck with their assignments! Never the less my parents and friends who contributed in every little way they could to facilitate my assignment. Thank you! Finally a thank you for APIIT for providing the Library facility and Computer labs. ii
  4. 4. Table of Contents Abstract.......................................................................................................................................i Acknowledgement.....................................................................................................................ii Table of Contents......................................................................................................................iii List of Tables..............................................................................................................................v List of Figures ..........................................................................................................................vi List of Abbreviations...............................................................................................................vii Introduction................................................................................................................................1 Problem Statement.....................................................................................................................2 Title of the Research:..............................................................................................................2 Problem Statement:.................................................................................................................2 Justification of the Problem........................................................................................................2 Objectives of the Study..............................................................................................................3 Significance of the Study...........................................................................................................3 Scope of the Study......................................................................................................................4 Literature & Literature Review..................................................................................................5 Definitions of FDI..................................................................................................................5 Total FDI received to Sri Lanka between 1999-2009 ...........................................................9 How FDI is important to developing countries....................................................................10 Analysis and achieving the Objectives.....................................................................................12 To find out the amount of FDI contribution by countries from 2005-2008.......................12 To find out which sector gain more FDI from 2005-2008...................................................16 To identify the issues faced by FDI in Sri Lanka ................................................................24 To suggest recommendation for the enhancement of FDI....................................................26 Conclusion................................................................................................................................28 References................................................................................................................................29 iii
  5. 5. Appendix..................................................................................................................................31 Appendix 2- Total FDI received from 2005-2008- by country............................................32 Appendix 3: Countries contributed only in 2008.................................................................33 Appendix 4: FDI 2005-2008 by sector.................................................................................34 iv
  6. 6. List of Tables Table 1: FDI from 2005 to 2008 by Sector, Source: table designed according to the statistics provided by BOI Head Office ........................................................16 Table 2: FDI as a percentage of GDP......................................................................................19 v
  7. 7. List of Figures Figure 1: FDI from 1978 to 2002...............................................................................................9 Figure 2: Top Ten FDI Contribution........................................................................................13 Figure 3: Further Breakdown of Top Ten FDIs ......................................................................13 Figure 4: Lowest Ten FDI Contributions ................................................................................14 Figure 5: Life cycle issues in differential effectiveness of special FDI attraction program.. . .22 Figure 6: Implications of investment policy/program convergence for effectiveness of FDI attraction/repulsion efforts.......................................................................................................23 vi
  8. 8. List of Abbreviations FDI Foreign Direct Investment WTO World Trade Organization BOI Board of Investment OECD Organization for Economic Co-operation and Development MNC Multinational Company IMF International Monetary Fund GDP Goods Domestic Products UNCTAD United Nations Conference on Trade and Development EGR Economic Growth Rate BD3 Benchmark Definition 3 BPM Balance of Payment and Internal Investment Position Manual UNESCAP United Nations Economic and Social Commission for Asia and the Pacific SNA System National Accounts (CSIF) Cabinet Sub-Committee on Investment Facilitation vii
  9. 9. Introduction FDI plays a major role in the world, as it controls the way of doing businesses, and also as it connects business internationally just as trading. Past researchers have shown that countries that rely on FDI thrives the country’s economy and social aspects. Foreign Direct Investment can be defined as an investor investing in another country other than the country of citizenship of the investor while one country receives that investment in order to ensure an economic growth of one country. This was not a new concept for the world. This was evolved from the very old days and with the rapid growth in the world, there were many changes which made this concept a very popular concept among countries. Sri Lanka has experienced heavy growth because of FDI. Form 2006-2008 Sri Lanka has received USD 2500 Millions, which accounted for 50% of the total FDI received from 1978-2008. With the change of the presidency, and with a successive government, they liberated the economy has resulted in a great amount of FDI inflow to Sri Lanka. Asia amounts to nearly 50% of the global FDI, while china absorbs 70% of it. Even though China is considered a threat to attracting FDI, the social and economic relationship has be very good, resulting in China continuously proving FDI for various projects. However the purpose of the study was to investigate the impact of FDI on the economic growth of Sri Lanka during the period of 2005-2008. 1
  10. 10. Problem Statement Title of the Research: An analysis of the Impact of Foreign Direct Investment on the Economic Growth of Sri Lanka from the period of 2005-2008 Problem Statement: What is the impact of Foreign Direct Investment (FDI) on Sri Lankan economic growth and which sector gained more significant development from the FDI during the 2005- 2008? Justification of the Problem FDI is an important measure for both developed and developing countries. FDI benefits both parties expectation. There are thousands of articles on FDI with relevance to developed countries and developing countries. However few articles remain with relevance to Sri Lanka (Balamurali and Bogahawatte 2004). This study is carried out to fill in that gap by analyzing the Impact of Foreign Direct Investment on the Economic Growth of Sri Lanka. 2
  11. 11. Objectives of the Study Research was required to collect Secondary data from various published articles from governments and international organizations to determine the impact of FDI from on Sri Lankan economic growth and which sector gained more significant development from the FDI during the 2005- 2008? The research is built purely on previous qualitative and quantitative research carried out by recognized bodies. The objectives of the research are: • To find out the amount of FDI contributed by countries from 2005-2008. • To find out which sector gain more FDI from 2005-2008. • To identify literature to determinants factors which is important to attract FDI for developing countries? • To indentify key issues in FDI • To suggest recommendations for the enhancement of FDI. Significance of the Study This qualitative research will provide more understanding about what is FDI and what is the importance of FDI to a developing nation like Sri Lanka. By taking this study into account when considering new business opportunities, employment creation, technological assistance, government officials and private sector businesses can better understand the opportunities available in the world and to assist FDI inflow to Sri- Lanka. Moreover other developing nations can take use of this study, since most of the developing nations have similar characteristics. 3
  12. 12. FDI funders can better understand the economic nature of Sri Lanka, and how Sri Lanka facilitates potential FDI investors. This is a qualitative research significant to Sri Lanka as country to be competitive as one. Scope of the Study The investigation is built purely on previous qualitative and quantitative research and published articles carried out by recognized bodies. Due to financial and time constraints, the research has been limited to the following:- • Limited to the countries who contribute FDT to Sri Lanka. • Limited to the all types of FDI’s • Limited to the period of 2005-2008 4
  13. 13. Literature & Literature Review Definitions of FDI There are many definitions to FDI from various professional institutions. For the purpose of this literature, three definitions are given. According to Blackhurst & Otten (1996)1, to the World Trade Organization (WTO) defines FDI as follows, ‘‘FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset’’. FDI can be categorized in to three, first is ‘‘Equity Capita’’ is the value of the MNC's investment in shares of an enterprise in a foreign country. Second is ‘‘Re-invested Earnings’’ the MNC's share of affiliate earnings not distributed as dividends or remitted to the MNC. Such retained profits by affiliates are assumed to be reinvested in the affiliate. Third is ‘‘Other Capitol’’ refers to short or long-term borrowing and lending of funds between the MNC and the affiliate. The second definition of FDI is extracted from the publication of United Nations Conference of Trade and Development (UNCTAD) 20022, which quoted the International Monetary Fund’s (IMF) Balance of Payment Manual 5th edition’s (BPM5) definition as follows ‘‘FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor´s purpose is to gain an effective voice in the management of the enterprise’’. The third definition is according Organization for Economic Co-operation and Development (OECD) (2008)3, benchmark definition (BD3) of FDI is ‘‘FDI reflects the objective of 1 Blackhurst, R., Otten, A. (1996). Trade and foreign direct investment. Available: http://www.wto.org/english/news_e/pres96_e/pr057_e.htm. Last accessed 9 October 2009. 2 UNCTAD. (2002). Foreign Direct Investment. Available: http://www.unctad.org/Templates/Page.asp? intItemID=3146〈=1. Last accessed 9 October 2009. 3 Investment Division, Directorate for Financial and Enterprise Affairs Organization for Economic Co- operation and Development. (2008). OECD BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT. 5
  14. 14. establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor’’. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise Further elaboration on the OECD (2008), FDI definition as follows, BD3 of FDI sets the world standards for direct investment statistics. It is 100% aligned with the principal concepts and definitions of the IMF’s BPM. It follows the general economic concepts drawn by the Systems of National Accounts4 (SNA). Within this structure the main focus of BD3 is to emphasize the FDI statistics surrounding direct investment position and direct investment financial & income transactional flows. BD3 provide a brief overview of the methodology of the activities of MNC’s. Available: http://www.oecd.org/dataoecd/26/50/40193734.pdf. Last accessed 9 October 2009. 4 System of National Accounts by the Commission of the European Communities, International Monetary Fund, Organization for Economic Co-operation and Development, United Nations, and World Bank 6
  15. 15. Evolution of FDI in Sri Lanka Foreign Direct Investment (FDI) is nothing new to Sri Lanka, as it dates back to its colonial regime where the large plantation enterprises, insurance companies, banks were originally built with foreign capital according to Abeysinghe and Jayawickrama (2008). After gaining independence in 1948, Sri Lanka underwent a policy regime of import substitution with characteristics of prohibitive trade and government regularity control (Wijeweera & Mounter 2008). Even though there were limitations in foreign investment and free flow of FDI to the country within 1950- 1977, there has been somewhat effort to attract FDI to the country (Athukorala 2003). According to Athukorala (2003), in 1966 a white paper was presented for FDI along with the formation of ‘‘foreign investment advisory committee’’ in 1968 to investigate and manipulate policies with relevance to FDI in Sri Lanka. However during the pre liberalization era, Sri Lanka’s FDI inflow was virtually zero according to Wijeweera & Mounter (2008). After identifying the market oriented economic policy is the most effective source of growth, the political personal made it a high priority to create an investment friendly economic condition in 1977 (Athukorala 2003). Sri Lanka opened its doors to foreign nations with the political shift in 1977 by liberating FDI and economic policies (Athukorala 2004). One of the key benefits by the liberalization of the economy was the major reform of foreign investment and trade policies (Wijeweera & Mounter 2008). According to Athukorala (2003), investment policies in Sri Lanka were reformed to attract foreign investment based on the ‘‘Foreign Investment Act in 1978’’. Athukorala (2003), point out that with the successive government and free trade policies and continuation of liberating the economy has resulted in a great amount of FDI inflow to Sri Lanka. Athukorala (2003), further states Sri Lanka’s investment laws are transparent and automatic. And that there are no restrictions on repatriation of earnings, profits & capital proceed. According to Fernando (2007)5, to the United Nations Economic and Social 5 Fernando, D. (2007). Country note on Trade and Investment Policy Coordination Country: Sri Lanka. Available: http://www.unescap.org/tid/artnet/mtg/tipc_slnotes.pdf. Last accessed 9 October 2009. 7
  16. 16. Commission for Asia and the Pacific (UNESCAP), states foreign ownership is welcomed from all sectors of the economies except a few. Further it is stated that investors are allowed to repatriate 100% of their profits and are exempted from most of the exchange control regulations. Moreover they can enjoy preferential tax benefits and constitutional guarantees on their investment. Jayasekara (2009)6, to the UNESCAP states Sri Lanka has opened its service sector to foreign investment. Further mentions ownership of 100% equity in a range of sectors namely banking, insurance, telecommunication & tourism. 6 Jayasekara, D. (2009). Progress of liberalization of trade in Services in SAFTA. Available: http://www.unescap.org/tid/artnet/mtg/bridging_s3douglas.pdf. Last accessed 9 October 2009. 8
  17. 17. Total FDI received to Sri Lanka between 1999-2009 According to the study conducted by Balamurali and Bogahawatte (2004), for the period of 1978-2003 on net FDI in Sri Lanka, it is said that during periods of relative economic and political stability Sri Lanka FDI inflow has been positive, for example instances during periods of 1979-1982; 1990-2003; & 2003. Source: Balamurali, N., Bogahawatte, C. (2004). Foreign Direct Investment and Economic Growth in Sri Lanka . Sri Lankan Journal of Agricultural Economics. 6 (1), p42. Figure 1: FDI from 1978 to 2002 According to the statistic report provided by the BOI Sri Lanka during the period of 1999-20087, 1999 has a total FDI of USD Mn.224.25, a USD Mn.49.11 increase than 2000 which has a total FDI of USD Mn.175.14. however there is a drastic drop in FDI in year 2001 with total FDI of USD Mn.83.35, USD Mn.91.79 less than year 2000. From 2002-2004 total annual average FDI was at USD Mn.221.59. from 2006-2008 with the change of the presidency in Sri Lanka, the total FDI in Sri Lanka has a hyper increase of USD Mn.(603.68, 734.36, 888.935) respectively. 7 Refer Appendix : Appendix 1- FDI 1999-2008 by Sector (Statistic Unit/Research Dept.-BOI) 9
  18. 18. According to Perera (2009) to the Daily News reports that Deputy Director General BOI Mr. A.M.C Kulasekera stated to the Daily News that Sri Lanka has received 50% of total Investment within 2006-2009. The total amount received from 2006-2009 mount to USD Mn.2500 out of USD Mn.5000 from 1978-20098. How FDI is important to developing countries Recognized international organization and other external advisors have recommended that developing nations should rely primarily on FDI as a source of external finance (Nunnenkamp & Spatz 2003). According to Nunnenkamp & Spatz (2003) it is argued that the FDI inflow has a stronghold in stimulating economic growth than other sources of capital inflow. The rapid growth of international production is fueled by the economic and technological forces. This will be greatly benefiting a developing nation like Sri Lanka by generating capital, employment, improves productivity, growth in export and skill transfer etc... (Balamurali & Bogahawatte 2004, Abeysinghe & Jayawickrama 2008, (Kok & Ersoy 2009). Growth and Employment: Having long-term productive FDI which bring long term sustainable capital inflow to the country is important to increase the aggregate demand of the economy. Moreover domestic companies will perform well due to the threat of competition that arise from FDI, and find solutions to counter competition which will ultimately led to high productivity and growth of the economy. Employment creation occurs when there is a positive FDI inflow to the country. The more FDI inflows to the country the less of unemployment in the country will grow the country with monetary and skilled benefits in the long run. Technology Know How 8 Perera, H. (2009). Foreign investments in Sri Lanka 1978 - 2009. Available: http://www.dailynews.lk/2009/10/06/bus03.asp. Last accessed 9 October 2009. 10
  19. 19. FDI acts as a main source of technology transfer and expertise knowledge and in favor creates more productivity. A developing country like Sri Lanka will not be able to import the required technology from abroad since the transfer of technology to firms with less experience is risky, difficult and moreover highly expensive. FDI is important to fill the Technology Gap (TGAP) between developing countries and developed countries (Kok & Ersoy 2009). Access to Goods and Services Foreign firms will bring new goods and services through FDI, which will enable local consumers to enjoy a greater variety of commodities while increasing the standard of living. Fill the Savings Gap The fee and licenses for FDI will fill in the gaps between the needed funded and the internal savings capacity of the country. This is a major source of revenue to the government. Exploitation of new land Through FDI, new investors will be willing to set up manufacturing companies n unexploited lands. This will open new windows for the country to seek and develop regional hubs & labor. Overall FDI s important to a developing country due to the fact that it will create generates capital formation while enhancing and introducing technology. Transfer of general knowledge of how to do thing right and be par with the world economic and social standards through experience and skilled labor and work ethics. FDI will also act as a motivator for the local business to think globally and produce goods and services more productively, which in return will contribute to the economy. According to Balamurali and Bogahawatte (2004), technology plays a major role to the success of the economy along with FDI. 11
  20. 20. Analysis and achieving the Objectives To find out the amount of FDI contribution by countries from 2005-2008. This section will analyze the FDI contribution pattern to Sri Lanka within the periods of 2005-2008. After completing the table9 of FDI contributed countries (statistics were provided by the BOI head office) the following has been identified and reviewed. Forty nine (49) FDI contributing countries were identified from 2005- 2008. However not all countries have contributed continuously. Countries such as Monaco, Oman, Thailand, and Iran & Gibraltar contributed only in year 200810 with a total of LKR Bn.149.94 for 2005-2008. However Thailand has contributed a major portion of LKR Bn. 140.02 out of LKR Bn. 149.94. Bangladesh contributed only in 2006, which was worth LKR Bn. 2.25 while Russia has contributed only in 2005 which was worth LKR Bn. 1.73 The top 10 contributing countries during the period of 2005-2008 are shown in the Chart 1 below. It is clear at sight that Malaysia is the highest FDI contributing country to Sri Lanka with a grand total of LKR Bn. 1844.3, while rest of the countries remain between LKR Bn. 1000 to 3000. Second highest FDI contribution is by UK worth LKR Bn. 2889.3, closely followed by India worth LKR Bn. 2469.8 9 Refer Appendix : Appendix 2- Total FDI received from 2005-2008- by country 10 Refer Appendix : Appendix 3- Countries contributed only in 2008 12
  21. 21. Chart 1: Top 10 FDI contributing countries from 2005-2008 Source: Chart designed according to the statistics provided by BOI Head Office Figure 2: Top Ten FDI Contribution Chart 2: Further break down of the top 10 FDI contributing countries from 2005-2008 Source: Chart designed according to the statistics provided by BOI Head Office Figure 3: Further Breakdown of Top Ten FDIs 13
  22. 22. Chart 2 will provide a further break down of the top 10 FDI contributing countries by each year. To begin with it should be mentioned that the best FDI contributor Malaysia has the highest contribution throughout the years. Especially in 2007 a major FDI contribution of LKR Bn. 3425.5 surpasses all other countries as the single highest contributor. However in 2008 FDI contribution was almost half than 2007. Hong Kong shows a doubled FDI contribution in 2008 compared to 2007, while India has almost tripled its FDI in 2008 than 2007. Japan compared to 2005 has a good FDI contribution in 2006 & 2007, yet another fall in contribution in 2008. Luxemburg contributed LKR Bn. 624.60 in 2006 and contributed one tenth of 2006 FDI in 2007, despite the short contribution in 2007, in 2008 FDI contribution was nearly a billion rupees. New Zealand than the rest of the countries has a unique FDI contribution, in 2005 & 2006 the contribution was less than LKR Bn. 1.5 & in 2007 zero FDI, however in 2008 the FDI contribution was well over LKR Bn.1300. Singapore and Sweden remain consistent with the contribution. UK contributed over LKR Bn.1000 each in 2007 & 2008. USA has contributed FDI at steady phase. Chart 3: Lowest 10 FDI contributing countries from 2005-2008 Source: Chart designed according to the statistics provided by BOI Head Office Figure 4: Lowest Ten FDI Contributions 14
  23. 23. According to chart 3 the lowest FDI contributing country is Monaco with the FDI contribution of LKR Bn. 0.27 while the rest of the countries contribution is below Rupees six billion. Almost all of these countries are FDI receiving countries. Therefore expecting a lot from them is difficult. 15
  24. 24. To find out which sector gain more FDI from 2005-2008. This section will analyze which sector gained more contribution from FDI during the period of 2005- 200811 with the use of the table made from the statistics from the BOI Head Office. According to the chart 4, it is clear that the service sector is the highest FDI receiving sector between 2005 and 2008, and a FDI worth of LKR Bn. 20538.89, while the least FDI receiving sector is the agricultural sector FDI worth LKR Bn. 48.69 from 2005-2008. Second highest earning sector is the textile sector gaining FDI worth LKR Bn. 3302.17. Food beverage tobacco sector gained the third highest FDI worth LKR Bn. 1204.08 & manufactured products sector gained just above rupees billion from 2005-2008. Foreign Direct Investment 2005 - 2008 – by Sector 2005 2006 2007 2008 FDI Sector FDI FDI FDI FDI 05 - 08 Food Beverages and Tobacco 339.54 394.09 299.67 170.37 1204.08 Textile, Wearing Apparel & Leather 546.41 1195.92 723.47 835.35 3302.17 Wood and wood Products 10.63 50.74 8.90 25.52 95.81 Paper & Paper Products, Printing & Publishing 94.31 8.78 0.00 9.92 113.05 Chemicals, Petroleum, Coal, Rubber & Transport 232.76 498.68 566.76 461.44 1760.16 Eq Non-Metallic Mineral Products 68.19 60.91 54.43 147.57 331.19 Fabricated Metal, Machinery & Transport Eq 177.28 162.72 144.92 166.22 651.36 Manufactured products (N.E.S) 95.00 341.39 212.88 370.00 1019.57 Agriculture 5.43 7.74 4.85 30.65 48.69 Service Infrastructure 1749.85 4255.75 6471.11 8056.38 20538.89 Total FDI for the Year 3319.40 6976.73 8487.00 10273.42 Total FDIs received from 2005 to 2008 LKR (Bn.) 29056.5 5 Year 2005 2007 2007 2008 GDP LKR Bn. 245278. 357869 357869 441056.7 2 Table 1: FDI from 2005 to 2008 by Sector, Source: table designed according to the statistics provided by BOI Head Office 11 Refer Appendix: Appendix 4 Foreign Direct Investment 2005 - 2008 – by Sector 16
  25. 25. Percentage of FDI received to each sector from 2005- 2008 Figure 5: Percentage of FDI Received to Each Sector Source: Chart designed according to the statistics provided by BOI Head Office According to the pie chart it is highly visible which sector gained FDI between 2005- 2008. Service infrastructure accounts for 53% of the total FDI inflow throughout the four years indicating that the service sector is the FDI attracting source. Government joining hands with the BOI should really focus on further developing the service sector infrastructure to further facilitate FDI. The second highest percentage is for the textile sector at 17% and is a dominant trade in Sri Lanka. Due to cheap and skilled labor & technological knowhow make it an attractive sector. However due to the quota restrictions textile sector is having a difficulty in attracting FDI. If 17
  26. 26. the government intervene and do some promotion for potential foreign investors to fabricate some sort of material in Sri Lanka will give the sector a good leverage to gain more FDI. Food beverage and tobacco accounts for 10% of the total FDI received. The above mentioned three sectors grab 80% of total FDI received during 2005-2008, leaving the rest of the 8 sectors hold account for the remainder 20% throughout 2005-2008. 18
  27. 27. FDI as a percentage of GDP from 2005- 2008 Table 2: FDI as a percentage of GDP Source: table designed according to the statistics provided by BOI Head Office As per the table 2, FDI as a percentage of the GDP for each sector will provide the contribution it will make to the GDP. However all the sector percentage is below 2%, only services sector makes a maximum of 1.83% out of all ten sectors. According to the detailed table in the appendix12 all contribution on or below LKR Bn. 10 will show a zero percentage (0%). 12 Refer Appendix: Appendix 4 Foreign Direct Investment 2005 - 2008 – by Sector 19
  28. 28. Due to the concentrated flow of FDI to service infrastructure sector, there is a 0.71% - 1.83% increase from 2005-2008. From 2005 to 2006 there is a 0.74% increase, 0.36% increase from 2006-2008, 0.2% increase from 2008-2009, and a positive gap of 1.12% from 2005-2008 in the service infrastructure sector. The total FDI as a percentage of GDP for the year 2005 is 1.35 & 2.37% is same for both 2006 & 2007, a 1.02% positive gap. 2008 has a 2.33% a negative slope of 0.04% compared with 2006 & 2007 Since the service infrastructure sector alone accounts for almost half the total FDI as a percentage of GDP, this portion will contrast ratios without service infrastructure sector accounted. Therefore a clear contribution to the rest of the sectors together can be seen. For 2005 it is 0.61% with an increase of 0.31% in 2006. Moreover 2008 was 0.5% which is less than 2005. For the purpose of gaining more FDI to the country, government can better look in to the existing facilities and adjust them to attract and facilitate foreign investor. 20
  29. 29. To identify literature to determine the factors important to attract FDI for developing countries. Trade has been the driving force linking national economies to create international economies. FDI is similar linking national economies, therefore complementing and reinforcing each other. FDI has a wide impact on the host country’s or known as the recipient country economy. FDI impacts on the income; production; prices; employment; economic growth; development and general welfare of the society (Kok & Ersoy 2009). The increase in FDI over the years has been a sign of globalization of the world for the past two decades; therefore FDI plays a major role in the economic growth in developing countries (Kok & Ersoy 2009). International organization and other external advisors have recommended that developing nations should rely primarily on FDI as a source of external finance (Nunnenkamp and Spatz 2003). Even though there s a large number of studies carried out to identify the FDI determinants, there is no consensus found. Results have sown that FDI are highly sensitive to factors low in robustness such as labor costs; trade barriers; trade balances; exchange rate; R&D an taxes which has both positive and negative impact (Kok & Ersoy 2009). According to Kok & Ersoy (2009), Wint & Williams (2002), mentions that Dunning (1993) states international production is the result of a process affected by ownership, internationalization, & localization advantages. Kok & Ersoy further states that Dunning’s ‘’OLI’’ Paradigm is all about, ‘‘FDI is undertaken if ownership specific advantages (“O”) like property technology exit together with location-specific advantages (“L”) in host country, e.g. low factor costs, and potential benefits from internationalization (“I”) of the production process’’. However (Kok & Ersoy (2009) states that the most important factor an investor would focus on in selecting a project in a foreign location are as follows. Factors affecting the availability of natural resources; the size of the market; geographical location; the position of the economy; the culture and the political environment; factor prices; transport costs; & element of the economic policies (trade, industrial, budget & tax policies). 21
  30. 30. Developing countries exert their level best to attract FDI through liberalization of policy regime. By liberating investments regime favorable for the foreign firms, easy entry will be facilitated (Wint & Williams (2002). Wint & William states according to UN (1999) report, that 60 countries changed 145 regulatory changes. And out of the 60 countries 90% create more favorable investment changes. However all good things must come to an end. The more countries keep on changing their policies to attract FDI; another country will make counter policy change. And at the end there will not be enough differentiation to attract FDI which will result in float. In terms of promotion campaigns to attract foreign investment, all countries are in good state of play or worse state of play in general. See below figure1. Figure 5: Life cycle issues in differential effectiveness of special FDI attraction program. Adapted from: Wint, A., Williams, D. (2002, p.365) 22
  31. 31. Only first movers in the game were able to grab a good portion of the pie for some time. Soon imitators arrive looking at the new effectiveness of the best practices and will reduce the portion of the pie the early mover gets. Figure 6: Implications of investment policy/program convergence for effectiveness of FDI attraction/repulsion efforts. Adapted from: Wint, A., Williams, D. (2002, p.366) Moreover consider of a separation of investment policy regime and investment promotion program. While there is convergence between countries with respect to investment policies, differentiated and divergent programs will be effective to distinguish one country from another as the best site for business. 23
  32. 32. To identify the issues faced by FDI in Sri Lanka Increasing globalization has made countries to do business with one another resulting in more knowledge and resource sharing. With the globalization, MNCs expand their wings in to foreign countries. This helps to those countries to develop. However there are factors which prevent FDIs inflow to such countries. Sri Lanka is a developing country therefore the need for FDIs are very important for the countries growth and success. However many issues were identified in practical situation of Sri Lanka. But BOI and other regulatory The FDIs gained last few years has not worked effectively. According to Jayasekara (2006) many projects (1177 projects) approved by BOI were reported failures. There he identified reasons for failures as failing to commence projects • Financial difficulties • Disputes among investors • Labor issue • Policy related issues • Inadequate co-operation from government agencies • Market related issues. Further SundayObserver (2009) mentions that impact of the global economic crisis on global FDI Flows and designed for investment promotion practitioners and policymakers to focus on issues faced by investment promotion agencies including emerging challenges and opportunities on how to attract and retain FDI. This explains that global economy crisis is one of the major factors that affect on the FDI inflow. 24
  33. 33. In practice, much unfair competition for project bids also identified, when considering the FDI on Colombo port authority. Hutchison Port Holdings have cheated to get the bid. This involved about 780 million US dollars. Thus companies tend to involve in such activities to gain unjust advantages. Considering projects in progress, many of FDI projects are not accomplished on time. The Colombo Katunayake road, Mathara Colombo road are being experiencing many delays and high inefficiencies. Further there are many factors identified that would discourage FDIs. One of those is rigid labor laws. Sri Lanka is one of the countries who have high labor regulations in the country. Even the powers of labor unions are also high in the country. Thus foreign investors are not that enthusiastic in investing. The legal structure of Sri Lanka is also not that good to attract investment; according to Daniel (2009) judicial activism may not be in good interest in attracting investments. Environment and other laws are also act in the same disadvantage manner. The most new barrier was the publicity of human right violation. This has affect a lot to the alteration of foreign direct investments. However, the setting up of the Cabinet Sub-Committee on Investment Facilitation (CSIF) headed by the President to resolve the major policy issues faced by the investors is further proof of importance Sri Lankan authority’s accord to and of their commitment to the promotion and facilitation and retention of Foreign Direct Investment. 25
  34. 34. To suggest recommendation for the enhancement of FDI. Since the liberalization of FDI policy regime in 1977, Sri Lanka emerged in to the world of open economy. Since then to ride to success has been full of bumps and scratches. Despite the three decade civil was Sri Lankan government has constantly been exploiting new investor opportunities. However with the end of the civil war is the dawn of a new era which will bring Sri Lanka the tremendous foreign investor potential. As a part to building Sri Lanka, the government has given great interest to gain foreign investment. The government has facilitated several investment opportunities through line ministries and BOI to minimize the regional disparity & relocate industries outside of Colombo (Central Bank 2008). According to Central Bank (2008) in the 1st quarter of 2008 there was an FDI inflow with a significant 60.8% while US dollars 290.8 million was to telecommunication, US dollars 61.3 million for manufacturing & US dollars 46.7 million for power generation. These sectors absorbed 94% of the total FDI inflow during the first half of 2008. BOI acts as the main investment promotion institute of the country, and has a major role in attracting FDI to the country. There are 15 country desk offices representing BOI in foreign lands, and regional hubs. This is one of the primary FDI attracting mechanisms currently in plays and performance is excellent. According to the Dailymirror 13 report the World Bank’s Investment Climate Advisory Service has ranked BOI of Sri Lanka as the best in South Asia for investor promotion and facilitation. In the latest issue of Global Investment Promotion Benchmarking 2009 the BOI has been described as the only “Good” performing Investment Promotion Intermediary (IPI) in South Asia. This achievement is will be very useful when promoting BOI investments and partnership opportunities that investor do not have to consider according to the Dailymirror. 13 Dailymirror. (2009). WB-IFC ranks BOI as best in South Asia. Available: http://www.dailymirror.lk/DM_BLOG/Sections/frmNewsDetailView.aspx?ARTID=64870. Last accessed 16 October 2009. 26
  35. 35. In the report assessment over 70% of intermediaries may be missing foreign investment and job-creating opportunities by failing to provide accurate and timely information to potential investors. Therefore Sri Lanka could take this in to account to better equip those who are engaging with potential investor promotions & relations. The BOI approved 263 projects under Section 17 and 16 of the BOI Act, with the investment commitment of Rs. 366 billion in the first half of 2008 compared to Rs. 275.8 billion in the first half of 2007 This investigation attempts to scrutinize the impact of FDI on the economic growth of Sri Lanka. Therefore this investigation is conducted to clearly identify the types of FDI available, which sector gain more FDI, the relationship of the Economic Growth Rate & FDI, FDI determinants that’s attracts to Sri Lanka, in order to better support the problem statement. What is the impact of FDI on Sri Lankan economic growth and which sector gained more significant development from the FDI? 27
  36. 36. Conclusion This report was based on the concept of FDI, and it mainly focused on the impact of FDI to the economic growth of Sri Lanka. There were many purposes of this study such as to investigate the amount of FDI received during the period of 2005-2008 and to identify the sector which received the highest amount of FDI during the period. Also it identified the issues faced by countries which are related to FDI, and in order to improve the growth and success of FDI several recommendations were made. Several findings were investigated from this study after analyzing the secondary data gathered on FDIs of Sri Lanka. Some of the findings include the amounts of FDI received to Sri Lanka from several countries and identifying the countries and the amounts offered from those countries during the period of 2005-2008. And also after analyzing the amounts and the countries related to FDI, the sector which got the highest amount of FDI was identified. To conclude it can be stated that FDI is a very important concept for a country’s economic and social growth. Therefore a country should understand this concept very well in order to use it correctly for the development of a country. Even though a country is facing several issues which are related to FDI, the country should also find ways of overcoming these issues in order to use this concept successfully for the development of the country. 28
  37. 37. References Journal references:- Abeysinghe, T., Jayawickrama, A. (2008). Singapore's Direct Investment in Sri Lanka: Past Experience and Future Prospects. Singapore Centre for Applied and Policy Economics. - (-), p2-29. Athukorala, W., Sisira Jayasuriya. (2004). Complementarity of Trade and FDI Liberalization in Industrial Growth: Lesson from Sri Lanka. 10 Year ASARC an International Conference. - (-), p1-28. Athukorala, W. (2003). The Impact of Foreign Direct Investment for Economic Growth: A Case Study on Sri Lanka. 9th international Conference on Sri Lanka Studies. - (-), p2-21. Balamurali, N., Bogahawatte, C. (2004). Foreign Direct Investment and Economic Growth in Sri Lanka. Sri Lankan Journal of Agricultural Economics. 6 (1), p38-49. Kok, R., Ersoy, B. (2009). Analyses of FDI determinants in developing countries. International Journal of Social Economics. 36 (-), p105-123. Nunnenkamp, P., Spatz, J. (2003). Foreign Direct Investment and Economic Growth in Developing Countries. Kiel Institute for World Economics. - (-), p1-38. Wijeweera, A., Mounter, S. (2008). A VAR Analysis on the determinants of FDI inflow: The Case of Sri Lanka. Applied Econometrics and International Development. 8 (1), 190-198. Wint, A., Williams, D. (2002). A changing role for the government? Attracting FDI to developing countries. 15 (5), p361-374. 29
  38. 38. Website references:- Blackhurst, R., Otten, A. (1996). Trade and foreign direct investment. Available: http://www.wto.org/english/news_e/pres96_e/pr057_e.htm. Last accessed 9 October 2009. CENTRAL BANK OF SRI LANKA. (2008). RECENT ECONOMIC DEVELOPMENTS HIGHLIGHTS OF 2008 AND PROSPECTS FOR 2009 . Available: http://www.cbsl.gov.lk/pics_n_docs/10_publication/_docs/efr/recent_economic_development /Red08En/Red08data/C-2-e.pdf. Last accessed 9 October 2009. Dailymirror. (2009). WB-IFC ranks BOI as best in South Asia. Available: http://www.dailymirror.lk/DM_BLOG/Sections/frmNewsDetailView.aspx?ARTID=64870. Last accessed 16 October 2009. Fernando, D. (2007). Country note on Trade and Investment Policy Coordination Country: Sri Lanka. Available: http://www.unescap.org/tid/artnet/mtg/tipc_slnotes.pdf. Last accessed 9 October 2009. Investment Division, Directorate for Financial and Enterprise Affairs Organisation for Economic Co-operation and Development. (2008). OECD BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT. Available: http://www.oecd.org/dataoecd/26/50/40193734.pdf. Last accessed 9 October 2009. Jayasekara, D. (2009). Progress of liberalization of trade in Services in SAFTA. Available: http://www.unescap.org/tid/artnet/mtg/bridging_s3douglas.pdf. Last accessed 9 October 2009. Perera, H. (2009). Foreign investments in Sri Lanka 1978 - 2009. Available: http://www.dailynews.lk/2009/10/06/bus03.asp. Last accessed 9 October 2009. UNCTAD. (2002). Foreign Direct Investment. Available: http://www.unctad.org/Templates/ Page.asp?intItemID=3146〈=1. Last accessed 9 October 2009. 30
  39. 39. Appendix Appendix 1- FDI 1999-2008 by Sector (Statistic Unit/Research Dept.-BOI) Source: Board of Investment of Sri Lanka Level 26, West Tower, World Trade Center, Colombo 01, Sri Lanka. 31
  40. 40. Appendix 2- Total FDI received from 2005-2008- by country Total FDI Received From 2005 to 2008- by country Values in (LKR Bn.) Country 2005 2006 2007 2008 Total FDI 05-08 Australia 38.35 51.63 17.45 101.55 208.97 Bahamas 3.57 0.05 1.16 4.97 9.74 Baharain 0.00 0.00 2.54 1.04 3.58 Bangaladesh 0.00 2.25 0.00 0.00 2.25 Belgium 96.87 93.28 160.41 154.29 504.84 Bermuda 0.00 0.00 1.24 6.00 7.23 British Virgin Island 1.48 19.17 3.18 38.36 62.19 Canada 8.18 18.81 2.31 3.36 32.67 Cayman 0.00 9.13 3.03 45.90 58.06 China 11.29 51.15 124.00 316.15 502.59 Cyprus 0.00 1.62 3.47 3.86 8.95 Czech Rep 0.00 3.03 0.00 0.98 4.01 Denmark 3.20 48.81 35.70 42.66 130.36 Dubai 0.00 2.31 0.35 0.00 2.66 France 0.00 36.51 18.47 2.08 57.06 Germany 24.54 59.17 96.89 51.19 231.79 Gibraltar 0.00 0.00 0.00 1.27 1.27 Holland 13.52 3.12 9.89 0.00 26.53 Hongkong 178.76 534.37 416.47 853.54 1983.15 India 206.35 312.65 495.56 1455.32 2469.88 Indonesia 0.00 2.61 2.72 0.54 5.87 Iran 0.00 0.00 0.00 5.40 5.40 Ireland 7.87 0.10 0.14 0.29 8.40 Israel 0.00 0.00 14.93 2.45 17.38 Italy 122.08 224.81 210.74 81.14 638.77 Japan 47.37 446.26 563.74 193.31 1250.69 Korea 57.68 121.52 122.92 107.40 409.52 Luxembourg 200.07 624.60 69.10 950.61 1844.38 Malaysia 1150.57 1903.11 3425.54 1738.25 8217.48 Maldives 11.29 21.25 1.24 7.27 41.05 Mauriteus 46.92 86.06 2.76 16.21 151.96 Monaco 0.00 0.00 0.00 0.27 0.27 Morocco 4.22 0.59 0.00 0.00 4.81 Netherland 6.99 145.78 330.91 0.00 483.68 New zealand 1.16 0.12 0.00 1354.73 1356.01 Norway 22.57 30.85 57.69 50.87 161.98 Oman 0.00 0.00 0.00 2.98 2.98 Pakistan 1.73 12.98 6.13 14.94 35.78 Russia 1.73 0.00 0.00 0.00 1.73 Singapore 353.94 341.66 231.06 238.21 1164.88 South Africa 0.00 0.08 0.00 11.24 11.33 Sweden 117.07 576.13 363.51 436.58 1493.29 Switzerland 17.46 50.10 11.77 37.20 116.53 Thailand 0.00 0.00 0.00 140.02 140.02 Taiwan 28.38 30.86 18.20 22.41 99.85 UAE 82.14 231.56 185.19 107.41 606.29 UK 304.49 466.75 1107.58 1010.50 2889.32 USA 147.42 410.71 304.89 656.62 1519.64 USSR 0.00 0.45 10.23 3.44 14.12 Total annual FDI 3319.29 6976.00 8433.09 10272.84 Total FDI from 2005-2008 29001.22 32
  41. 41. Appendix 3: Countries contributed only in 2008 33
  42. 42. Appendix 4: FDI 2005-2008 by sector 34

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