Abstract:
Foreign Direct Investment is one of the crucial forms of
international equity flows for having undeniable growth in gross
domestic product among emerging countries. The main objective of
the study is to investigate the empirical relationship between
foreign direct investment and real gross domestic product in Sri
Lanka. Net foreign direct inflow was considered as the independent
variable while real gross domestic product was considered as the
outcome variable in this study. However, Exchange rate and money
supply were selected as the control variables on the relationship
between foreign direct investment and real gross domestic product.
The current study used annual time series data over the period from
1970 to 2019 which were collected from the annual reports of the
Central Bank of Sri Lanka. Stationary of the data was tested using
the Augmented Dickey-Fuller test. Johansen co-integration rank
test, max Eigen value test, Vector Error Correction (VEC) were
used to estimate the relationship between foreign direct investment
and real gross domestic product. At the 5% level of significance,
the co-integration rank test and max Eigen value test revealed that
there is only one co-integration equation existing in the study.
Therefore, it was concluded that foreign direct investment has long run impact on economic growth. Likewise, VEC revealed that
foreign direct investment, exchange rate and money supply cause
real GDP in the short run. The results support the theoretical
prediction that foreign direct investment would play an active role
in economic growth as it positively leads to the GDP. The study,
therefore, concludes that foreign direct investment is driving the
economic growth in Sri Lanka.
