Introduction
It is known that economic and technological forces greatly impact global production. Global economic growth is now positively impacted by liberalization of trade policies and the introduction of Foreign Direct Investment in several developing countries. In this regard, the ongoing process of globalization provides immense growth opportunities for developing countries and enables faster growth through trading and investments.
During the 1970s, global trade had grown at a faster rate than FDI, because of which international trade was the most significant economic activity in the international arena. However, this situation altered during the 1990s when FDI dramatically impacted several developing countries.
During this period, technologies were transferred, new marketing strategies were established and networks were established in global sales and production.
By entering the country through options provided by FDI schemes, multinational companies stand to gain in making efficient utilization of their resources and assets. At the same time, the home country where investments are made, stand to benefit by way of receiving new technologies and becoming part of the global production and trading networks.
According to the World Development Report (2002), global FDI flows had grown by 24 per cent in 2000 and developing countries witnessed an increase in FDI by 20 per cent during the same period. Having reached peak levels in 2000, global FDI reduced sharply in 2001 by almost 51 per cent in most developing countries.
This was because the three largest economies of the world went into recession. Although the total FDI flows have reduced thereafter, the net inflows of FDI into developing countries have constantly been increasing. The main determinant for establishing manufacturing facilities in a foreign country is the potential to earn higher profits, which encourages multinational companies to make investments abroad.
John Dunning (1981) held that there are three main reasons why firms operate in foreign countries; ownership advantage, location advantage and international advantage. Besides, there are a number of other macro-level theories that explain why companies invest abroad.
Such theories are based upon perceptions about the working of capitalist economies. Nevertheless, FDI enables the provision of required resources to developing countries in terms of access to markets, brands, entrepreneurial ability, managerial skills, technology and capital. Such elements are necessary for developing economies so that they can develop, industrialize and create more employment in order to improve the poverty situation in the economy (Rappaport, 2000).
Consequently, most developing countries have realized the immense potential of FDI and have thus introduced liberal economic policies to encourage investment and investment promotion from the developed nations. FDI flows are positively related with regional integration and globalization (Bekaert, Harvey and Lundblad, 2001). During the last few decades, Sri Lanka has revealed a pattern whereby it is very clear that the nation’s economy has been significantly dependent on foreign assistance.
A number of high-profile assistance programs were launched in the country during 2003. Dependent upon the political environment and return of the peace process in the country, the government’s idea of transforming the country into the gateway to South Asia will become a reality (Haddad and Harrison, 1993).
However, multinational and transnational companies faced major risks in terms of FDI investments in Sri Lanka because of its unstable record of political, social and economic circumstances in the global perspective of investment protection. Although Sri Lanka has a well defined and sophisticated legal framework that covers every aspect of investment procedure, many multinational companies do not appear to be very keen in establishing production facilities in the country because of the unstable political environment.
However, despite the political uncertainty, Sri Lanka has never defaulted in any of its international obligations, which also includes the protection required to be given to foreign investors. The country provides a robust legal framework through bilateral investment agreements that are supported by guarantees provided under article 157 of the country’s constitution.
Sri Lanka has already entered into bilateral agreement with a number of countries such as the United Kingdom, the United States of America, Thailand, Sweden, Romania, China, Norway, Malaysia, Italy, Indonesia, France, Finland, Egypt, Canada, Australia, Japan, Iran, India, Germany, Denmark, Belgium, Switzerland, Singapore, South Korea, Pakistan and the Netherlands.
The government of Sri Lanka is responsible to protect companies against nationalization and has pledged to provide adequate compensation if such measures are ever adopted (Kraay and Loayza, 1999).
The government in Sri Lanka has provided for freedom for remittance of earnings, capital and business charges. Legislation has been introduced that provides for dispute resolution under provisions of global conventions for settlement of disputes.
Additional safeguards have been provided against expropriation while non-commercial risks are taken care of under provisions of the Multilateral Investment Guarantee Agency, of which Sri Lanka is a founding member. Such legal provisions by way of all-inclusive intellectual property rights in relation to trademarks, copyright, trade name, service marks and industrial designs provide adequate protection against unfair competition.
The Board of Investment of Sri Lanka had been given powers to give exemptions for qualifying investment projects from legal requirements. The main benefits of such incentives pertain to the fact that they are irrevocable and are applicable for the entire life of the foreign company in Sri Lanka.
Additionally, arbitration centers have been established in the country in order to effect speedy settlements of business and economic disputes. The arbitration centers are governed by the Norms and Standards of the Institute of Stockholm Chamber of Commerce with which they are affiliated. Multinational companies are also given freedom to refer disputes for arbitration under provisions of the
International Chamber of Commerce. In the light of such legal and economic framework as provided by the government in Sri Lanka, it appears that a large number of hurdles and apprehensions of multinational companies wishing to enter Sri Lanka through FDI have been removed (Levine, Loayza and Beck, 2000).
Problem Statement
The government of Sri Lanka was the first country in South Asian region that had opened its economy for international investments in 1978. Thereafter, Pakistan and Bangladesh introduced reforms that allowed foreign investors to set up facilities with complete foreign ownership.
However, despite Sri Lanka’s pioneering initiatives to attract foreign investments, the country failed to attract considerable foreign investments in relation to its gross national product, primarily because of prevailing political instability, red-tapism, ongoing terrorism threats and high level of bureaucratic interventions. Such circumstances created risky ventures for multinational and transnational companies that planned to make investments in Sri Lanka.
Research Objective
The objective of the research is to uncertain as to why FDI flows into Sri Lanka had not taken off as anticipated by the government and what impact they have had on the country’s economy. This paper will analyze the risks attached for multinational and transnational companies in making investments in Sri Lanka. Analysis will also be made of the potential for such opportunities and how multinational companies can respond to the given risks while investing in Sri Lanka.
Literature review
Rationale
Sri Lanka’s strategic location in the Indian Ocean and its convenient connectivity and access via the major sea and air routes with the entire world provides the country with unique advantages as an exclusive and rewarding global business and logistics hub. Additionally, Sri Lanka is known to be a multi-religious and multi-ethnic community that is characterized with diverse cultures.
Majority of the population comprises of the Sinhalese community that forms 74 per cent of the country’s estimated population of 20 million. However, in view of its small size, most multinational companies are reluctant to make investments despite the adequate infrastructure and abundant natural resources. As per the World Bank Report 2003, the country accounts for the highest per capita Gross National Product in the entire South Asian region.
As per the index of economic freedom ranking, Sri Lanka has received a rank of 76 amongst 192 nations. In 1978, the government in Sri Lanka had removed all restrictions pertaining to foreign investments and implemented an environment pertaining to an open economic policy in order to attract the maximum FDI.
Initially, there was considerable inflow of FDI because enhanced incentives were provided for investments made in special economic zones. New options were opened up in terms of sea and air transportation, provision of extra energy and power, improved telecommunication and better distribution systems.
The abundant availability of low-cost labor that had immense potential for being trained was a significant attraction for multinational companies to invest in the country by way of labor-intensive and export-oriented manufacturing facilities (Gulf Today, 2010).
Multinational companies can benefit by investing in Sri Lanka if they understand the social structure and values that exist in the country. A significant factor to be considered by such companies is the issue of political stability which comprises of the processes; structures and actions through which a nation administers foreign companies that have set up production facilities in the given country.
It is pertinent to note that the Freedom of World Organization had conducted a survey and found that Sri Lanka is amongst nations that have the highest political risks in terms of doing business. However, multinational companies can now take protection under Article 157 of the nation’s constitution that guarantees safety of foreign investments through protection agreements (Wheeler and Mody, 2002).
Article 157 was passed by two-thirds majority in the Sri Lankan parliament and enjoys unfettered powers because the provisions under this section cannot be contravened by any administrative, executive or legislative actions. Thus, multinational companies can remove their apprehensions in this regard because it is clear that political risks cannot impact FDI flows in Sri Lanka adversely (Serven and Andres, 1992).
The Sri Lankan government has already provided for several schemes such as exemptions and tax holidays depending upon the selected location. Additionally, project-related items can be imported without any duties; foreign investors are granted equal treatment in relation to local entities and free repatriations of dividends and capital can be done at any time without regulatory control or barriers.
Moreover, the government has already put in place corporate income tax and tax treaties, including financial incentives to attract FDI (Levine, Loayza and Beck, 2002). Sri Lanka has signed double tax relief agreements with several countries in order to reduce tax rate on dividends, royalties and interest.
Foreign companies that operate within the country as well as from outside in transacting business with Sri Lanka are eligible for corporate income tax at the rate of 35%. Such rates are in keeping with those that prevailed in developing countries in Asia. Multinational companies that have their corporate or head offices located abroad also have the option of paying additional tax at 33 percent of what they remit abroad. Dividends are not included for the purpose of such remittances (Balasubramanyam, Salisu and Dapsoford, 1999).
Multinational companies that set up facilities in Sri Lanka are required to pay income tax at a reduced rate of 15 per cent for a maximum period of 20 years. However, a withholding tax of 15 percent is imposed by the government on dividend earnings that have to be paid in the case of all companies other than those that are publicly listed.
The withholding tax is eligible to be credited against individual income taxes and listed public companies are required to reduce the withholding tax on dividends and packages given to nonresidential holders. Incomes up to Rs. 300,000 are entirely exempted from income tax and individuals that are not citizens of Sri Lanka and are employed with multinational companies are required to pay a reduced tax of 15 per cent.
Ever since Sri Lanka’s economy was opened up to the world in 1978, the country has honored all its global loan commitments without having sought opportunity for the reschedule of such obligations. The prevalent regulations in regard to FDI are now completely transparent for all investors.
Multinational companies wishing to enter Sri Lanka through FDI have the added security of entering into bilateral investment agreements that provide for protection and investments under article 157 of the nation’s constitution, which is enforceable under law. The section offers adequate protection against nationalization, free remittance of funds and protection against expropriation and non-commercial risks that is provided for under provisions of the Multilateral Investment Guaranty Agency.
The legal framework in the context of foreign direct investment is appropriately supported by an all-inclusive intellectual property system in the context of copyright, trademark and industrial designs that adequately protect against unfair competition in keeping with the interest of multinational companies.
Such provisions are an integral part of the Code of Intellectual Property Act of 1979, which has been amended a number of times in order to accommodate the required changes in the context of multinational companies. Such companies are also provided legislative protection for their trademarks in the country on the basis of desperation that is done under the local registry of trademarks. Such protection is provided for goods and services that are produced in Sri Lanka and the procedure in this regard is followed as per provisions of global classifications provided by the Nice Agreement of the World Intellectual Property Organization.
An arbitration centre that has been established in Sri Lanka for dealing with cases pertaining to multinational companies is directly associated with the arbitration Institute of the Stockholm Chamber of Commerce. The Arbitration Act in Sri Lanka also recognizes the New York Convention on the recognition and enforcement of foreign arbitral awards. Such provisions imply that all arbitration decisions that are made in foreign countries can also be enforced in Sri Lanka.
Similarly, arbitration awards that are made in Sri Lanka can be enforced in other countries. Multinational companies operating in Sri Lanka have the leverage to refer disputes for arbitration under provisions of the rules of the International chamber of commerce. The competition policy in Sri Lanka is devised in a manner that competitive market structures are created and monopolistic practices are discouraged.
The Fair Trading Commission was set up under provisions of the FTC act number one of 1987, which is the official agency with power to control monopoly, anti-competitive practices and mergers in addition to being invested with responsibility to formulate and implement the country’s pricing policies. Internal trade policy in Sri Lanka has been geared up to include a more significant role in relation to market forces and trading activities.
The government’s intervention in trading is limited to the maintenance of price stability and measures to ensure sufficient supplies of essential goods. State trading corporations have been established by the Ministry of Internal and International Trade and Shipping Development, while the two agencies such as the Fair Trading Commission and the Department of Internal Trade performed functions to ensure that there is fair competition in a liberalized economic environment.
Apart from this, the government has started the process of deregulating and privatizing a number of sectors that have made many global companies to evince keen interest in establishing their production facilities in the country through FDI options. The government recognizes the advantages that can accrue from free trade zones and had started the process of establishing them several years ago, which have been set up at Malwatte, Mirigama, Pallekelle, Seethavaka, Koggala, Biyagama and Katunayake.
The country now has more than 160 foreign export processing companies that operate in these seven zones. The primary purpose of these free-trade zones is to expand export earnings and create employment opportunities. In addition to such measures, the Sri Lankan government has entered into a number of investment protection agreements with several countries, including the USA.
A significant development in terms of foreign investment was in 2002 when India became one of the biggest investors in the country. A significant reason for this pattern was the creation of partnership through the Indo-Lanka Free-trade Agreement, which provided attractive options to Indian investors to establish production facilities in Sri Lanka for further re-export of manufactured products to India.
In order to create a favorable business environment for foreign investors that have established production facilities in Sri Lanka, the government plans to sign additional agreements with other South Asian countries such as Pakistan.
Incentives that were provided by the government in keeping with stabilization and structural adjustment programs during the 1990s have proved to be of great help in enhancing FDI inflows. FDI has significantly increased in the last decade, but it is difficult to ascertain the specific magnitude in view of non-reporting problems (Balasubramanyam, Salisu and Dapsoford, 2001).
In a sense, many multinational companies have been dissuaded to enter Sri Lanka because of such shortcomings. The country primarily remains an attractive destination for sectors such as leather, apparel, tobacco products and food and beverage enterprises. However, in recent times a number of big multinational companies have shown a keen interest in areas such as e-government, e-commerce and varied services sectors.
The current advantages of investing in Sri Lanka pertain to its close proximity to the significant world transshipment routes. Sri Lanka’s free-trade agreements with India and Pakistan have given it access to the world’s largest consumer markets. The present areas in which the country is soliciting foreign investments are tourism, mineral processing, power and energy, oil storage, ship repairing and shipbuilding.
Other areas in which the government desires to attract FDI are water supply, information technology, ports, power, connectivity and waste management. In keeping with these aspirations, the Sri Lankan government has introduced a new set of incentives to attract more foreign investors in order to develop other regions that have so far not received adequate FDI.
This is in keeping with the government’s policies of encouraging balanced investment and economic development in all regions of the nation to keep up with its proactive goal of generating more employment and technology transfer. It is evident that in having such objectives the government in Sri Lanka is serious about welcoming multinational and transnational companies to share in its development and economic prosperity (Alfaro, Chanda, Kalemli-Ozcan, and Sayek, 2003).
Previous Research
Although a number of developing countries have been offering a large number of incentives in attracting FDI, it is evident that most of such plans have had little impact on new investments. They have also not resulted in transparency of the business climate and have led to the imposition of higher taxes.
Tax benefits provided in free-trade zones are utilized by many countries to attract investors in spite of uncertainty about their positive impact on FDI inflows (Carkovic and Levine, 2002). As per a survey carried out by Pradip Agrawal (2000) about the economic effect of FDI in South Asian countries, there are complimentary and linking impacts amongst national and foreign investments.
Such results were determined by analyzing the FDI patterns in terms of cross-sectional examination of time-series data from countries such as Nepal, Sri Lanka, Bangladesh, Pakistan and India. The author argued that prior to 1981 the impact of FDI on the growth in gross domestic product was negative; was a little positive during the early 1980s and became strongly positive during the late 1980s and early 1990s.
Most of the South Asian countries had been following import substitution policies and introduced massive tariffs on imports during the 1960s and 1970s. Such systems were changed over time and by the beginning of the 1990s, most of the countries had replaced import substitution strategies with open international trade policies that were introduced in keeping with market-oriented strategies.
Bautan and Sumlihskhi (2002) and Kohpaiboon (2002) conducted research on the influence of FDI on economic growth due to investments on account of FDI. They carried out their analysis through case studies in Thailand during the period 1970-1999, which revealed that the impact of FDI on growth appears to be higher in the case of export promotion trade regimes as compared to import substitution regimes.
Annual studies in the context of 23 countries were conducted during the period 1978 1996 by Oman and Brooks, (2001) in order to ascertain short-term and long-term impact of FDI. They made analysis of the integration estimates that suggested there was a long term integrated relationship amongst gross domestic product and FDI for all twenty-three countries.
In the case of open economies, the causality amongst gross domestic product and FDI appeared to be bidirectional. However, causality proves to be bidirectional only during the short term for comparatively closed economies.
Long-term causality in the case of closed economies tends to be unidirectional and moves from gross domestic product to FDI. Tadesse and Avenue (2002) held that the bilateral trade agreements had resulted in the increase of more than 30 per cent FDI into Vietnam during the first year and that such results boosted economic development by 0.6 per cent per year.
However, the research done by Brecher and Diaz-Alejandro (1977) gives a clear indication that foreign investments can reduce economic growth by resulting in enhanced profits in a country that has drastic trade distortions in terms of high tariff rates. In this context Borensztein, De Gregorio and Lee (2002) have asserted after conducting econometric studies on FDI and GDP growth that the external components of FDI do not result in a strong and independent impact upon economic growth.
In this regard, consensus has not been reached about steady states and dynamic impacts of FDI on economic growth. Although some researchers have argued that the influence of FDI on economic growth can be quite heterogeneous amongst nations that have comparatively open economies whereby statistical data reveals a positive growth rate; while other studies have maintained that directions pertaining to causality amongst two variables are dependent upon the receiving countries trade policies.
At the same time, most researchers have not paid much attention to possibilities pertaining to bidirectional linkage amongst the two variables (Blomstrom, Lipsey and Zejan, 1994).
According to Kholdy (2002), inflow of FDI in Sri Lanka has increased at a steady pace during the last decade because of favorable investment policies implemented by the government.
The increasing pattern of FDI inflows is the result of liberalization policies followed since 1978 and the structural adjustment and stabilization policies. Incentives were given to foreign companies that resulted in a surge in FDI during the 1990s. It is evident from the literature that the inflow of FDI creates a positive impact upon economic development in the host country (Greenway and Sapsford, 2002).
Methodology
The research methodology of this research analyzed the conceptual framework, data analysis methods, data collection, questionnaire design, sample size, population and research design. The research was done in two phases. The first phase comprised of secondary research whereby a review of the relevant literature, reports, books, publications and journals were made.
The second phase included the collection of primary data through structured questionnaires. The total number of respondents chosen for the survey was 25 FDI entrepreneurs amongst whom questionnaires were distributed through e-mail. The respondents were chosen after verbal confirmation was obtained from them about their conformed participation in the survey.
The collective start-up was analyzed by way of factor analysis correlation, which was utilized in grouping and filtering the most accurate testing pertaining to the reasons of how FDI inflow into Sri Lanka could be increased in the future and what were the risks attached with FDI investments being made in the future by multinational and transnational corporations. In analyzing the statistics, factor analysis correlation and frequency were used to ascertain the findings.
The primary purpose of factor analysis was to reduce the data by getting a summary of specific information from different variables. Different components were identified, named and integrated accordingly. The factor analysis pertaining to this research was done in various steps by using factor extraction method, relation metrics and criteria in relation to the number of factors required to be extracted. On the basis of the research findings, recommendations can be made to the concerned government departments.
Additionally, the results provide information that can be given to multinational corporations that wish to establish production facilities in Sri Lanka. As a result of the findings of this research, multinational and transnational companies that wish to enter Sri Lanka through FDI can formulate appropriate investment policies to make their foreign direct investment decisions in line with their perceptions.
It was found from the responses that the following major factors impact the inflow of FDI into Sri Lanka and strongly influence the decision-making process of multinational companies that wish to enter the country through FDI:
- Political, legal and government factors,
- social and cultural factors,
- economic and market factors,
- financial factors,
- location and geographical factors.
A random sampling method was used for the research that was based on the responses of foreign entrepreneurs who have set up business in Sri Lanka up to the year 2007 by making use of the FDI option. The questionnaires were devised by keeping in mind the objectives of this research.
The questions were framed so that the questionnaire was short and concise and required short and clear answers so that the responses could be easily judged. The questionnaire was in two parts; the first part requiring the respondent to understand the purpose of the survey in addition to providing general information in regard to FDI inflows in Sri Lanka. The second part of the questionnaire aimed at ascertaining factors that affect FDI.
In order to make sure that there was accuracy in the questions and responses, the questionnaires were designed by taking into account publications, research articles and academic literature. The questions were pre-tested to make sure that respondents understood all aspects of the items in proper perspective.
A combination of statistical as well as descriptive tools was used to make analysis of the findings. Descriptive statistical analysis was utilized in converting the raw data into forms that enabled easy understanding and interpretation. Techniques such as creating simple tables were used to ascertain the mean and standard deviations.
The fundamental objective of the data analysis was to provide a basis for multinational companies to understand the risks, procedures and business potential in terms of choosing to invest in Sri Lanka through FDI. The results of the analysis can be used by multinational companies to determine for instance, how political issues impacted multinational companies in relation to economic and market circumstances.
The results of the survey clearly indicated that Sri Lanka continues to experience political strife; the investment environment is quite liberal and transparent in allowing multinational and transnational corporations to move ahead with their investment plans. The prevailing regulations and industrial environment are quite favorable In Sri Lanka.
It is also evident from the outcome of the research that in adopting the given procedures for entering the country through FDI firms will not face any hurdles or unreasonable risks. Most of the respondents were entrepreneurs from other countries and did not indicate any adverse circumstances that could prevent or jeopardize the interest of multinational corporations.
Discussion
The outcomes of this study have enabled useful information about the factors that impact FDI inflows and the risk factors that are associated for multinational companies while entering foreign countries to establish their manufacturing facilities. Thus, the results allow multinational and transnational companies to frame plans so that they can take care of the prevailing risks while taking the maximum advantages from the opportunities created for investing through Foreign Direct Investments in Sri Lanka (Root and Ahmed, 1989).
Such companies can manage and plan to allocate resources in Sri Lanka in order to extract the maximum advantages. The results are also an indicator for the Sri Lankan government to remove the risk factors and other difficulties that have been highlighted in the research. By taking remedial action, the Sri Lankan government will encourage a favorable investment climate in the country.
The research has been able to identify the different factors that are of significance in attracting FDI into Sri Lanka and in building positive relationships (Salvatore and Hatcher, 2001).
Kawai (2001) has asserted that large multinational companies continue to play a dominating role in Sri Lanka, primarily because they are able to cope with the risks associated with high tech investments in the country. A significant risk pertains to the fact that foreign investors may not be able to sell all the products that they manufacture in Sri Lanka, thus creating idle capacity.
But proactive companies can find viable options to utilize this excess capacity in different ways (Blejer and Khan, 2003). Since hi-tech ventures have larger incubation periods and products develop over time, the investment decisions tend to become complex because the real book values do not retain the same values.
Thus multinational companies have to consider the option of expanded roles of technology and intellectual properties while making foreign investments (De Long and Summers, 2001). According to Hall and Jones (2004), the following aspects have to be considered while responding to the risks faced in Sri Lanka:
- Licensing and technology transfer to promote collaboration amongst business and academic communities.
- Reciprocal distribution agreements should be entered into on the basis of trade options instead of direct investment.
- Joint ventures and hybrid strategic alliances should be entered into with local companies to avoid tipping the competitive scale in favor of competitors. This would give access to such companies to get access to intellectual capital in terms of human capital.
- The main purpose of FDI is to control interest through portfolio investment, which is usually not considered as direct investments. It is better to associate two to three local companies by way of soft investments so that they have mutual interest and utilize their shareholder power accordingly to have better management controls.
Limitation
A major limitation for this research pertained to the fact that in a research of this nature it becomes very difficult to collect maximum information from home countries because of the limited time that is available. Thus, the time periods provided for the collection of information and data had to be adjusted in keeping with the topic selected for this purpose.
Conclusion
The best option for multinational companies that enter Sri Lanka through FDI options is to frame goals and objectives that are directed towards:
- Avoiding pressure from the Sri Lanka government to manufacture products for the local market.
- Evading trade barriers that could be hidden or otherwise.
- Make efforts to change their focus from exporting domestically produced goods towards sales efforts made in focusing local markets.
- Enhance capabilities to improve production capacities.
- Create opportunity for co-production, licensing, joint marketing agreements and joint ventures with local partners.
Depending upon the sector in which the investments are to be made, FDI can prove to be a profitable option for multinational companies that wish to enter Sri Lanka. Access to new markets is the most important reason to enter such markets and reasonable and calculated risk can be taken in this regard (Germidis, 1997).
This is because a time will come when the cost of exporting locally manufactured goods will reach levels that will exceed critical mass and thus allow the foreign investments and production activities to become considerably cost-effective. Thus, multinational firms will have to make assessment of internal resources, competitiveness, market analysis and market expectations (Aitken, Hanson and Harrison, 2003).
Although the current pattern of recession that prevails globally could have made some developing nations to consider FDI as a kind if global capital inflow but evidence clearly indicates that the specific advantages for multinational companies from FDI still appears to be quite sketchy.
As outlined in this research, host countries encourage and attract FDI mainly for their benefit and thus, multinational companies should make careful and realistic assessments and research about the impact of their investments.
The empirical work in this research has focused upon the underlying issues that explain the general and location advantages of FDI or about the cyclical patterns associated with FDI by demonstrating the problems through macroeconomic variables. There are a number of potential objectives related to FDI and it becomes very difficult to relate a single model with all possible outcomes and circumstances.
The kind of openness that Sri Lanka claims to provide will certainly provide gains from FDI inflows, but because of the absence of appropriate measurement in the country in the context of skimming technology that is used by Foreign Direct Investments, domestic companies cannot differentiate amongst companies with low and high productivity levels.
Such circumstances would encourage them to make assumptions about investment levels being the same for different groups of companies that may be acquired by entering multinational companies. However, it is well established through research as well as experience that FDI creates a positive economic environment in both the home country and in terms of economic viability for foreign investors.
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