Relationship between Foreign Direct Investment and Export in Sri Lanka

Abstract

This study investigates the relationship between exports and foreign direct investment and the real exchange rate in the case of Sri Lanka, employing a correlation and regression approach to the data ranging from 1977 to 2021. The coefficient for LnFDI inflow is 0.1279 and was significant. This means that for every 1% increase in FDI, exports will increase by 0.1278 %. The Real Exchange Rate is also positively related to exports of Sri Lanka. The coefficient for LnReeR is 0.9296 and was significant. This indicates that for every 1% change in real exchange rate, exports will change by 0.9296 %. Both variables are strongly related and move in the same direction and explain the changes in Sri Lankan exports. This present study reveals that Sri Lankan exports are positively interrelated and the relationship is complementary. The findings also indicate that foreign direct investment and Real Exchange rate are key determinants of Sri Lankan exports. it is recommended that the government and policymakers engage in FDI diversification to expand the export base of Sri Lanka.