You may have heard that . At the same time, the government aims to improve the lives of Sri Lanka’s citizens by generating one million new and better jobs.
This isn’t a pipe dream. T , and high-value-added food processing and apparel.
What is foreign direct investment and why does Sri Lanka need it?
Very simply, foreign direct investment (or FDI) is an investment made by a company or an individual in a foreign country. Such investments can take the form of establishing a business in Sri Lanka, building a new facility, reinvesting profits earned from Sri Lanka operations or intra-company loans to subsidiaries in Sri Lanka.
The hope is that these investment inflows will bring good jobs and higher wages for Sri Lankan workers, increase productivity, and make the economy more competitive.
Attracting more FDI can help achieve that goal and fulfill the promise of better jobs.
Here are five reasons why:
1. FDI and domestic investment are at the heart of economic growth.
. Annual real GDP per capita growth averaged a bit above 4% in Sri Lanka over the past 3 decades. Accelerating this to 6% would speed up reaching upper-middle-income status – imagine reaching Singapore standards of living roughly a generation early. To get there, higher investment is needed.
2. FDI can boost economic growth
. In 2017, public sector investment in Sri Lanka was at an all-time high. However, The island’s fiscal budget is rigid with almost 60 percent of the expenditure being pre-determined. Public investment is low and private investment needs to take up its share of the burden. FDI and private investment from domestic sources can help accelerate growth and create jobs.
3. FDI can drive technology exchange and innovation
FDI can enable the introduction of new technologies and innovative ways of production and service provision, which can then be replicated by local firms increasing their productivity and competitiveness and plugging them into domestic and global value chains.
Particularly useful could be establishing innovation partnerships between firms in developing countries who have much in common and can easily transfer production and managerial strategies that are relevant to their country context.
4. FDI can diversify and increase exports
In addition, FDI here has largely been concentrated in traditional sectors with the composition of Sri Lanka’s basket of exported goods remaining largely unchanged for around 25 years.
, thereby increasing added value in production and accelerating economic growth. It would also diversify the economy’s composition as new sectors are introduced alongside traditional sectors, making Sri Lanka more resilient to external shocks.
5. New investments can help with government revenue and foreign exchange reserves
FDI also helps governments boost tax revenues, providing the space for reduced borrowing — Sri Lanka’s borrowing is high — or for further budget spending on social benefits such as health and education. Since FDI comes in foreign-denominated currency, it is always useful in a country with external borrowing.
, for example.
Next week, I’ll examine how the country can do it in 6 ways Sri Lanka can attract more foreign investment