Analysis of Foreign Direct Investment in Sri Lanka (Part 1)

Sri Lanka and foreign direct investments read a bit like a hit and miss story. But it was not always the case. Before 1983, businesses such as Motorola and Harris Corporation planned to set up plants in the export processing areas of Sri Lanka. Others including Marubeni, Sony, Sanyo, Tokyo Bank, and Chase Manhattan Bank had early 1980s pipeline investments in Sri Lanka. Before 1983, businesses such as Motorola and Harris Corporation planned to set up plants in the export processing areas of Sri Lanka. Others including Marubeni, Sony, Sanyo, Tokyo Bank, and Chase Manhattan Bank had early 1980s pipeline investments in SriLanka.

All this altered when the nation was convulsed by the war and its development derailed. Companies left and took with them their foreign direct investment (FDI). Sri Lanka is now in a very distinct location almost a century after the civil conflict finished in 2009. In 2017, Sri Lanka's Foreign Direct Investment (FDI) rose to more than $1,710 billion, including foreign loans obtained from businesses registered with the BOI, more than doubling the past year's $801 million.

But there are still methods in Sri Lanka to attract more FDI. FDI presently stands at just 2 percent as a proportion of GDP and lags 3-4 percent behind Malaysia and 5-6 percent behind Vietnam. More importantly, Sri Lanka's FDI has been skewed away from worldwide manufacturing networks with high value-added. And the more significant proportion of FDI inflows has concentrated on infrastructure at the moment. While these investments may momentarily increase employment and development during the building era, they have little long-term effect.

Compare this to a plant or a new IT service company that would hire individuals as long as they make a profit and export, pay taxes and add to Sri Lanka's decades-long development. Also, elevated FDI infrastructure depends on few and big deals on infrastructure that are unlikely to be replicated and maintained over time. On the other side, production and services hold a stronger long-term promise, but even there, a substantial proportion of FDI is linked to traditional industries and low-value-added local market-oriented operations where productivity gains are low.

Sri Lanka will need to create concerted and ambitious attempts to tackle gaps and play its strengths to maintain and boost FDI flows. Simply put, by establishing a more hospitable investment climate, Sri Lanka can enhance FDI. It is also crucial for national investment to take measures in this direction, not just FDI. And while the government has already started to target issue regions, it needs a lot more. There are six ways in which Sri Lanka can enhance FDI for this purpose:

•     Trade policy reworking - More trade will assist in diversify the economy and exports and lift the burden of driving development from the government-industry. It can also actively encourage technology absorption, skill upgrading, and enhanced competitiveness, resulting in benefits for employees, customers, manufacturers, and the government in the long run.
•      Improve logistics and facilitate trade - Sri Lanka can take advantage of its distinctive location and trade contracts to overcome its small-scale dis-economies. The port of Colombo, which already sees 80% of its volume coming from trans-shipment cargo, is about to develop. However, with high growth in other ports in Pakistan and India, Sri Lanka can not take its place for granted.