Influence of Exchange Rate on Foreign Direct Investment in Sri Lanka

Abstract

The objective of this study was to examine the impact of exchange rate and foreign direct investment in Sri Lanka. For the independent variable of exchange rates, USD, Canadian Dollar, Yen, Euro and GBP were obtained, the dependent variable foreign direct investment was obtained from Central Depository System foreign account holders’ monthly detail, foreign purchases, and foreign sales in Colombo Stock Exchange for the period of from January 2013 to December, 2014 monthly basis. Collected data were analyzed using graphical method and statistical methods such as correlation and regression analysis are conducted to identify the relationship. Results did not support the hypotheses. This means there is no any relationship between the exchange rate and FDI. The findings of this study would suggest that to attract more FDI in Sri Lanka the governments need to make policies such as monetary policy to maintain the stable Exchange rate. Trade liberalization and reduction in trade barriers have turn out to be the important economic policies in developing countries like Sri Lanka, to motivate domestic economy, generate employments for growing population and searching for new technology foreign direct investment plays a crucial role. Implications, limitations and areas for future research also discussed.

Keywords: Exchange rate, central depository system, foreign purchases, foreign sales