IMPACT OF THE TRADE AGREEMENT ON FOREIGN DIRECT INVESTMENT IN SRI LANKA

Abstract

Sri Lanka is a developing country which is belong to the South Asian region. Foreign direct investment (FDI) can be considered as a key contributor which brings economic growth and development of developing countries like Sri Lanka. Because of the benefits of FDI Sri Lanka has implemented policies and strategies to attract FDI into Sri Lanka. Even though there are many FDI policies and strategies Sri Lanka is still lagging behind in attracting FDI into the country. There may be some issues of FDI policies and strategies in Sri Lanka. To expand the market share bilateral and multilateral trade agreements are established. The Indo-Sri Lanka Free Trade Agreement (ISFTA), the Pakistan Sri Lanka Free Trade Agreement (PSFTA) and South Asian Free Trade Agreement (SAFTA) can be identified as the most important trade agreements in Sri Lanka. Macroeconomic stability is vital for encourage FDI inflows. The objective of this study is examined the desirability of bilateral trade agreements and multilateral trade agreements in attracting FDI into Sri Lanka. A negative significant impact can be seen in ISFTA while other two trade agreements (PSFTA, SAFTA) are not significant. However according to the LM test all the three trade agreements (ISFTA, PSFTA and SAFTA) show significant impact on FDI. Macroeconomic stability of a country can be considered as the most important factor in attracting more FDI into Sri Lanka. The findings of this research are important for policy makers, foreign investors, scholars and researchers.