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Foreign Direct Investment and Economic Growth Nexus: Empirical Evidence from Sri Lanka

Sathiendrakumar, R. and Raguragavan, J. (2007) Foreign Direct Investment and Economic Growth Nexus: Empirical Evidence from Sri Lanka. Indian Development Review, 5 (2). pp. 295-315.


Traditionally, foreign direct investment (FDI) has been discussed from the theoretical point of view; however, this discussion gained a new angle in the light of new growth theories. The rapid growth of FDI and its magnitude in many economies has sparked numerous empirical studies dealing with the channels of transmission from FDI to growth. These studies nevertheless, provide contrasting results not only about the existence of a significant link between FDI and growth, but also about the direction of such a relationship. The presence of diverging results has been attributed mainly to econometric issues and to country-specific characteristics. This study investigates the impact of FDI on economic growth for Sri Lanka over the period 1978-2003. It uses the methodology of Granger causality and vector error correction method to overcome the econometric weaknesses inherent in the previous literature. Evidence shows that there is a bi-directional Granger causation from FDI to economic growth and Growth to FDI, with a stronger relationship in the later.

Item Type: Journal Article
Murdoch Affiliation(s): Murdoch Business School
Publisher: Serial Publications
Copyright: Serial Publications
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