Determinants of FDI Inflows: Bounds Testing Approach

Abstract Nowadays, heightened academic interest in foreign direct investment (FDI) inflows derives from a shift in host-country policymakers' perspectives on encouraging and attracting more FDI, which would generate possibilities and assist developing nations in achieving sustainable development. This study analyzes the determinants of FDI inflows in Sri Lanka using secondary data from 1978 to 2019. We used the Autoregressive Distributed Lag (ARDL) bound testing procedure to examine the long-run relationships between variables. The result revealed that the gross domestic product (GDP) growth rate positively affects FDI inflows to Sri Lanka. A higher GDP paves the way to higher market size, leading to more FDI in Sri Lanka. Openness to trade also positively impacts foreign FDI inflows into Sri Lanka, and this effect is statistically significant. It means that trade liberalization policies implemented since 1978 have increased FDI inflows into Sri Lanka. The exchange rate has a significantly positive impact on FDI inflows to Sri Lanka