The factors that activate the movement of FDI

1. 0 Introduction

The progress of international production is mainly motivated by economic and technological pushes. Additionally it is influenced by the ongoing liberalization of Foreign Direct Investments (FDI) and trade procedures. Foreign Direct Ventures (FDI) identifies a global investment made by a resident entity in one economy (Immediate Investor) with the objective of establishing a enduring interest within an enterprise.

Globalization offers exceptional opportunities for producing countries to accomplish a rapid monetary progress through trade and investment. Foreign Direct Investment is recognized as a major incentive to economic expansion in growing countries, as it contributes to host country financial growth, by improving the country's capital stock, launching complementary inputs, inducing technology copy and skill acquisition, or increasing competition among local sectors. But only a few countries have prevailed in getting significant FDI inflows with their country due to so many reasons.

FDI bring forth much needed resources to developing countries such as capital, technology, managerial skills, entrepreneurial skills, brands and usage of new market segments etc. They are needed for a expanding country to industrialize, develop and create careers attacking the poverty situation in their countries. As such most developing countries recognize the potential value of FDI and also have liberalized their investment regimes and employed in investment promotion. Globalization and local integration arrangements can change the particular level and design of FDI and and yes it reduces the trade costs. However, FDI flows to developing countries began to pick-up in the mid 1990s largely because of this of systematic increase in liberalization of FDI guidelines in these countries and the adoption of generally more outward focused policies.

This report tries to address the impact of FDIs for the development of a region, determinant factors of bringing in FDIs and issues faced by the sponsor countries in bringing in FDIs. With the latter part of the report include suggestions to coordinator country government to look at towards foreign buyers, in order in promoting economic development. For the intended purpose of id of issues and addressing of tips Sri Lanka, a producing country that retains rely on FDIs is used to concern.

2. 0 Host country determinants that affects the inflow of FDI's

FDI decisions depend on a number of characteristics of the sponsor economy,

Size of the Market

There is seen a proper well-known marriage between FDI and how big is the market and as well as with a few of its characteristics (e. g. average income levels and growth rates). When the GDP of your country is relatively small, it is an indicator of low level of national income. Therefore investors prefer to invest in countries where there's a high growth potential and where there is a large market because of their products and services.


Even although investors give consideration on the scale and the progress of the marketplace as important, all the other local market factors are predictably much less relevant in export oriented foreign firms. Wide spread insight is the fact open up economies encourage more foreign investment. One indication of openness is the comparative size of the export sector. Particularly processing exports are a substantial determinant of FDI inflows. Investors prefer countries where there are lenient rules and regulations with regards to foreign trade.

Labour costs and productivity

Labour cost is a key point for foreign shareholders specially when coming up with their purchases in labour intense industries as well as for export focused subsidiaries. (For an example opening up garment factories, export control firms where bigger variety of employees is necessary) Low income rates seriously stimulate traders to make their investment decisions in a particular country. How ever before when the expense of labour is relatively insignificant (when income rates vary marginally from country to country) the skills of the labour make are expected to have an effect on decisions about FDI location

Political Risk

High earnings in the extractive companies seem to pay for political instability. Generally, so long as the overseas company is comfortable of being in a position to operate profitably without undue risk to its capital and personnel, it will continue to commit. Large companies beat some of the political dangers by investing in their own infrastructure maintenance and their own security forces. But these businesses are restrained by small local markets and exchange rate risks since they tend to sell specifically on the international market. When a country is susceptible to a higher amount of riots, labour disputes, and problem of course, if it possesses higher legal level, those would be the determinants that restrain foreign investments.

Infrastructure Facilities

Infrastructure addresses many dimensions ranging from roads, ports, railways and telecommunication systems required to institutional development (e. g. Legal services, accounting etc. ) The scope of transfer facilities and the closeness to major ports has a substantial positive effect on the location of FDI within the united states. Poor infrastructure can be seen both as an obstacle and the as a chance for overseas investment.

Incentives and working conditions

Removal of limitations and provision of a wholesome environment for businesses that contains better operating conditions, lower tax rates or tax holidays are generally thought to have a positive effect on stimulating FDI. Further bonuses like the granting of equivalent treatment to overseas investors in relation to local counterparts and the checking of new marketplaces (e. g. air transfer, retailing, banking) have been reported as critical indicators of encouraging FDI moves to a particular country.


Through privatization they have attracted some international investment inflows in recent years. But when moving on to the majority of the growing, low income countries improvement continues to be low anticipated to divestments of state assets. It has become political issue that demotivate investors. For a good example employee level of resistance and their aggressive activities over privatization or other moves which threaten their existing jobs and worker privileges may become a deterring factor of FDI.

3. 0 Issues to get FDI

Majority of the reduced income countries including Sri Lanka neglect to draw in large FDI flows in to their countries as local marketplaces are small in proportions. Investors are unwilling to install their factories if they are unable to attract a crucial mass for his or her products.

Impossibility of bringing in FDI as a consequence to lack of openness in the economy as the export developing sector is governed by rigid guidelines and the issues experienced by the industry as a consequence to lack of or abolishing of quota.

Labour market rigidities and high income rates in the formal sector with evaluation abroad like china, Vietnam is often viewed as a deterring element in order to draw in significant in moves into the export sector in particular. Lower productivity with comparability to countries like China and countries in sub Saharan Africa and insufficient engineers and technical staff is reported as positioning back potential foreign investment, especially in developing exports sector. Further it lessens the elegance of investing in productive sectors.

Higher degree of labour disputes, strikes, riots, corruption in the united states and the as some of government rigid guidelines inefficiency in the public sector will be the causal factors that prevent shareholders from buying Sri Lanka.

Poor infrastructure is seen as an obstacle to draw in FDI to lower income countries like Sri Lanka. Host government can draw in significant FDI by permitting more substantial foreign contribution in the infrastructure sector. In Sri Lanka even tough there is a significant increase in FDI in telecommunication and air lines. Other more basic infrastructure such as roads, buildings continue to be unattractive reflecting both he low profits and higher politics hazards of such assets.

Even though the authorities has removed certain constraints recently, which includes been imposed earlier on FDI, the lack of transparency, excessive hold off in investment agreement procedures, lack of clear cut insurance policy for investment agreement and intensive bureaucratic systems are still become deterring factors of international investments.

Due to employee perception regarding international employers and their ambitious actions against privatization and propensity towards point out own enterprises act as a barrier to attract foreign investors. Further a number of structural problems are constraining the process of privatization. Poor development and lower degree of competition in financial markets which includes been characterized by inefficiencies, insufficient depth and transparency and the lack of regulatory types of procedures as those remain continued to be dominated by federal government activity and tend to be safeguarded from competition.

Even although behaviour of the civil contemporary society on the impact of FDI on opportunities for local business and economical activities is positive and the net attitude of international firms toward FDI discloses that the investment local climate has not improved upon in Sri Lanka as a result of lack of good governance, problem, political instability and disturbance, bureaucratic inertia and poor low and order situation.

4. 0 Overall constraints in FDI

Most South Parts of asia have liberalized equity limitations on FDI in the assistance sector to encourage trade under Function 3, i. e. Trade through commercial occurrence. Taking stock of the liberalization of services that has taken place in several countries in your community, in different industries, significant unilateral liberalization has taken place under Function 3 in Sri Lanka.

Though countries are attempting to get FDI in many of their services, by liberalizing services, the talk about of the region in global FDI in services is still very low. One of the reasons for this is actually the existence of obstacles to FDI in South Asian countries. There are so many obstacles and constraints at various levels beginning with the idea of access that deter investors. Despite the fact that there are no constraints on equity possession, so a great many other restrictions can be found at the idea of entry, stretching out from mere notification requirements to outright prohibition of FDI; others may focus on the businesses of organizations; while just one more category may limit the area of possession and control.

Sri Lanka has exposed its services sector to international investment. Foreign ownership of 100% collateral is allowed in range of services sectors such as bank, insurance, telecommunications, travel and leisure, stock brokerage, development of residential structures and roads, normal water supply, mass travel, production and circulation of energy, professional services and the establishment of liaison office buildings or local branches of international companies. How ever before some of the restrictions still is present, restricting FDI in services even when 100% collateral is allowed are, international commercial finance institutions are allowed to open branch office buildings in Sri Lanka at the mercy of an economical needs ensure that you agreement by the Central Bank of Sri Lanka. International investors are permitted to hold 100% equity in local banks subjects to restrictions on individual talk about ownership. Even though the government has recently privatized status own insurance firms, how ever before resident Sri Lankans are prohibited from obtaining foreign insurance policies apart from health insurance and travel.

The restrictions may also vary with the type of the industry. For an example distribution services, restrictions can include performance requirements, zoning restrictions, advertisement limitations etc. In professional services limitations used are usually of the type of nationality and residency requirements and lack of recognition of foreign qualifications. There fore even if the equity restrictions are removed, there could be other restrictions that might not allow the inflow of FDI into the services sector. Please send Annexure 1 for a few existing obstacles to FDI in various countries in South Asian region.

5. 0 Known reasons for Extreme care of FDI

Even though it is stated that FDI has much impact on improving the growth and development of a nation, there are several reasons for developing countries to stay with average constraints in services or even to have other barriers to investments in services. In addition to the awareness of services with ethnical, interpersonal, distributional or strategic significance, there are monetary concerns too. Among them,

To avoid the chance of foreign traders out competing domestic investors.

Sale of open public utilities to foreign businesses raises complicated issues related to privatization and the rules of natural monopolies.

Entry by large transnational firms involves competition insurance plan things to consider and many web host countries might not exactly feel to cope with technical or legal issues involved.

It is difficult to assess the impact of liberalization in a particular sector, particularly if it employees a big volume of unskilled people. As a result it's important to undertake an in depth study prior to the decision to allow foreign businesses. But many countries lack the will or knowledge to attempt such research.

Most of the international traders are monopolies and the point is need to be regulated; domestic legislation are often difficult to set up place.

6. 0 Recommendations

Government should concentrate its attention on obtaining international investor involvement in producing infrastructure. So far Sri Lankan authorities operates the role of infrastructure facilitator. But it should think about on bringing in FDIs to build up infrastructure sector as well, not only in attractive & most profitable few areas like telecommunication and airlines, but also in constructing of streets, highways, flyovers, rail roads, buildings etc. BOO (Built, Functioning, Possession), BOT (Built, Working, Transfer), BTO/Turnkey Projects (Built, Transfer, Operate), BLT (Built, Rent, Transfer) and various other mechanisms to improve the foreign buyer participation in this respect.

Government should concentrate its attention on applying an available door plan where it motivates foreign investors. It will improve the quality of the prevailing Export Processing Areas (EPZ's) and Free Trade Zones (FTZs) to be able to stimulate investors to come and open up their developing or processing plants in Sri Lanka.

Government disturbance and domination on financial sector should be minimized unless to exercise a control over such establishments to guarantee the transparency and proper performing of them. Existing stock market should be popularized among the general public and really should be opened up for foreign shareholders.

Even though there are no constraints on equity ownership there are several obstacles at the idea of entry, stretching out from mere notification requirements to outright prohibition of FDI etc. These may deter overseas investors from committing within the country. Thus this reality should be taken in to Consideration during the policy making process.

It is often criticized the grade of the end result of Sri Lankan education system. It is stated that there is a mismatch between your workplace requirements and the education provided to the students or undergraduates. Thus Higher education policies especially in relation to secondary, tertiary and college or university education curriculum should be changed in order to meet employer expectations. Ample training opportunities provided to them to be able to identify and unleash their potentials and skills. Thus more emphasis should get towards the value of industry training when constituting higher education policies.

As FDI in services has grown, lots of issues attended to the forefront of insurance policy making. One of the important issues is that getting FDI in services where it is most desired. i. e. services sectors where domestic capacities are limited by focus on the growing demand or where in fact the domestic providers do not have the ability or capacity to supply the required quality of services, for a good example telecommunication, and travel services. Consequently more concessions to get for the traders those who are willing to purchase those areas to be able to encourage them.

Regulatory frame work to be strengthened to be able to attract shareholders and also to avoid monopolistic situations. Countries without necessary regulatory frame work may loose by rushing in to liberalization. Particularly when a reversal of liberalization is hard to achieve or when liberalization has systemic implications as regarding financial industry.

Generally, the positive growth effects of FDI have been more likely when FDI is attracted into competitive markets, whereas negative effects on development have been much more likely when FDI is attracted into heavily secured business (Encarnation and Wells, 1986). So domestic industries should be strengthened to a diploma in order to provide them the capability to compete with foreign investments.

7. 0 Conclusion

This statement has evaluated the factors that encourage the circulation of FDI and the issues that limitations or restrains a country from bringing in FDIs predicated on Sri Lanka, a producing country that entertains FDI. It is undoubtedly accepted that there surely is a positive hyperlink between FDI and expansion. Particularly when Sri Lanka concerns a direct and positive progress impact of FDI on the Sri Lankan overall economy and its growth has not reflected during the past and the as in today's.

Attitude of the civil world and foreign firm towards FDI in the united states is positive. However the investment climate hasn't improved in Sri Lanka therefore of politics instability and disturbance, poor legislations and order situation, immediate and indirect regulatory obstacles, politics instability and the implied insurance plan instability, inadequately developed infrastructure facilities, lower level of human capital, lack of transparency in the trade policy etc. Consequently the protectionist trade insurance policies, immediate and indirect regulatory barriers (that raise the expense of investment to international companies, for example it has found that in Sri Lanka about 13 percent of capital costs and thirty percent of gains are lost scheduled to impediments in the regulatory platform), political instability and the implied balance, improperly develop infrastructure facilities, lower level of literacy and investment in real human capital too discourage shareholders. Insufficient transparency in the trade policy, discrimination against non-export driven industries like plantations and high lending rates are too act as constraints to FDI moves in Sri Lanka.

The need for FDI can not be overstated, as consequence, that investment local climate in the united states must be better through appropriate steps such as de-regulation in economic activity, increase home saving, producing port network, road network, railways and telecommunication facilities etc, creating more transparency in the trade plan and more flexible labour markets and setting the right regulatory body work and tariff framework. Currently Sri Lanka provides an attractive investment plan however the response from the investor is not very motivating. If the ultimate objective of the federal government is to draw in FDI for development, poverty reduction and development, then a proper policy mix is essential to accomplish these.

8. 0 Annexure

Annexure 1

Table 1: Amount of Liberalisation in Setting 3 in Selected Services


Substantially Liberalised

(100% collateral)

Moderately Liberalised

Less than Moderately Liberalised/


Sri Lanka

Banking, Insurance, Telecommunications,

Tourism, Structure,


Professional services.

Shipping and travel

agencies, Freight forwarding, Higher education, Mass


Non Lender Money Loaning,

Retail trade with capital

investment of significantly less than $1mn, Extra education, Air transportation,

Coastal delivery.


Computer and

information services,



Banking, Insurance,

Air Transport, Structure.

Retail trading,

Railways, Property,

Professional services like Postal, Accountancy etc.



Banking services,

Legal and engineering consultancy services,

Transport, Engineering,

Computer and information services.






Construction, Computer

and information services,

Banking and Insurance services.




Banking, Insurance,


Computer and information

services, Travel and leisure.

Personal Business Services,

Consultative services.

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