A higher amount of foreign direct investment (FDI) of the right type is required to achieve higher sustained economic growth. One of the serious post war failures has been the inadequate inflow of FDI. Expectations that the end of the war and advent of peace would usher in large amounts of foreign investments that would [...]


Shortfall in foreign investment and further setbacks


A higher amount of foreign direct investment (FDI) of the right type is required to achieve higher sustained economic growth. One of the serious post war failures has been the inadequate inflow of FDI. Expectations that the end of the war and advent of peace would usher in large amounts of foreign investments that would boost economic growth has not materialised.

There are new concerns that foreign investors would be deterred from investing in Sri Lanka and that the target of US$ 1.5 billion may not be achieved this year.

The recent conflict between the legislature and judiciary could have an adverse impact on attracting foreign investment. The US State Department spokesperson Victoria Nuland said: “From our perspective, this impeachment raises serious questions about the separation of powers in Sri Lanka, which is a fundamental tenet of a healthy democracy”. And that “actions undermining an independent judiciary would impact on Sri Lanka’s ability to attract foreign investment.”

FDI shortfall in 2012

Nearing four years after the war there are relatively small amounts of foreign direct investment. In 2012 the expected FDI of US $ 2 billion did not materialise. In the first nine months of 2012, the country received only US$ 615 million. The annual figure is therefore likely to fall to less than half the expected amount. We need to increase FDI to about 4 per cent of GDP in the next few years to boost economic growth. Besides this, the type of FDI has also not been those that would enhance the export capacity of the country.

Global FDI

In the global foreign investment environment, we have attracted only a dribble of FDI flows. China, India, Vietnam and South East Asian countries have succeeded in attracting large amounts of relevant FDIs. China gets the highest amount of FDI, but other South and East Asian countries are gaining ground. In contrast, we have been left behind. It is significant that former communist countries have in recent years been some of the largest recipients of FDIs. Their stable political systems, clearly defined policies towards foreign investors and work ethics are among the reasons for this. We are unlikely to attract more FDIs owing to our economic policies and political confusion. It is vital to have a stable polity and economic policies conducive to investment.

FDI critical

The expected higher trajectory of economic growth of 8 per cent and above can only be achieved with higher levels of foreign investment. Foreign investments of the appropriate types are vital for sustaining a high growth trajectory as domestic investment is limited. FDI brings with it technology and markets that enhance the country’s exports. It is not only the amount of FDI flowing into the country that matters but the types of foreign investment as well. FDI is important because of the contribution it could make to the transfer of technology, best management practices and access to international markets. It is important to attract investments in hi-tech industries.

Most of the recent foreign investments have been in tourist-related activities such as building hotels. While the investments in the hospitality trade should be welcomed, as it too would contribute to improvements in hotel management, as well as attract tourists into the country, it is the establishment of manufacturing industries that would contribute most to the country’s industrial development so vital for employment generation and increasing of incomes.

Why inadequate developments

A few years ago the IMF observed that “sustained higher economic growth will require an environment more conducive to domestic and foreign investment.” There have been several developments in the country that are not conducive to higher foreign investment or indeed for even domestic private investment.

These include industrial unrest and labour laws; the equivocal position of the Government towards the private sector, concern with the Government’s expropriation of private enterprises and gaining control of private commercial banks. While there is plenty of rhetoric that the private sector is vital for the country’s economic development these government policies, decisions and actions are detrimental to investor confidence.

Industrial unrest, lack of law and order and the rule of law are also deterrents for foreign investors to bring in capital and establish industries. Compared to countries like Vietnam, China, Malaysia and Singapore, to name only a few, we score poorly in the certainty and predictability of policies conducive for foreign investment. The recent murder of a politician and the killing of tourists are among the string of such incidents that deter foreign investors. The latest in the series of hindrances to investor confidence has been the conflict between the judiciary and legislature over the impeachment of the Chief Justice.

Fostering a conducive environment 

Recognising the importance of FDI for the country’s rapid sustained economic development, the Government must attempt to remove the deterrents to foreign investor confidence. In as much as tax concessions and other economic incentives are important, there is a pressing need to convince the international investor community of the Government’s intent to not interfere with private enterprise. If the country is seriously interested in fostering FDI of the needed amounts and of the right types, it is imperative to generate confidence in the consistency of government policies, limit state intervention, reform labour legislation, provide incentives and promote an environment that would attract such investments.

To attract higher foreign direct investments, these preconditions must be met. In an international background where nearly all countries are competing for FDI of the kind that would be in the long run interests of the country, it is vital that the policy framework is conducive to private investment: that there is industrial peace and consistency, continuity and predictability of government policies.

Private sector

The Government should devote its attention to improving the fundamental macroeconomic conditions and the environment for doing business and let private enterprises mind their businesses. Attempting to gain control of the commanding heights of the economy is counterproductive to the goal of attracting private foreign capital. The government use of its voting powers to change the directorates of several banks and to virtually take control of some of them is a manifestation of the socialist concept of gaining control of “the commanding heights of the economy”. If this be so the Government could give up its expectations of attracting larger amounts of the proper investments needed to develop the economy.

FDI target

The Government’s target of attracting US$ 1.5 billion of FDI in 2013 is wrought with much difficulty. Global conditions are not conducive to increases in capital flows from Western countries. In a competitive international market for foreign investments, Sri Lanka’s environment and policies are not attractive in comparison with other Asian countries. These realities must be recognised to develop a framework conducive for foreign investors.

The preconditions for such an environment are industrial peace, consistency, continuity and predictability of government policies, the rule of law and political stability. It is not the articulated policies and expressions of intent to foster the private sector that matters, but the actual actions of the government.

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