Abstract:
Globalisation has led to an increase in foreign direct investment (FDI), which is most
useful way to gain foreign investment. Hence, FDI has been used by developing
countries as a tool to solve their economic problems in the recent past. It is important to
ensure investment climate to attract FDI. There are many conditions to attract FDI.
Good governance plays a more significant role in influencing FDI. Most of the times
investors are ready to pay more for companies to have good governance standards. This
research aimed at tracing the impact of good governance on FDI using the time series
annual data from 2002 - 2015 in Sri Lanka. Data for FDI and governance indicators were
collected from World Bank databank. The six world bank indicators on good governance
are control of corruption (CC), government effectiveness (GE), regulatory quality (RQ),
political stability and absence of violence (PV), rule of law (RL) and voice and
accountability (VA). Augmented Dicky Fuller Test (ADF) was used to test whether these
data are stationary or non-stationary. After checking the stationary of time series data,
Cointegration regression model for foreign direct investment net flow was developed
using fully modified Ordinary Least Square (OLS) method. This study concluded that
there is a long run relationship among the good governance indicators and foreign
direct investment. In order to increase the foreign direct investment, Sri Lankan
Government should improve the good governance, especially, control of corruption and
government effectiveness. The positive coefficient of dummy variable for GSP plus
suggests that government should try to get back GSP plus to expand the export amount
and destination for textile product. This export opportunity may attract foreign direct
investment in Sri Lanka.
