Download Foreign Direct Investment (FDI)

Economic Thought, Growth and Economics
Development in Sri Lanka
J.A.Prasansha Kumari
Senior Lecturer
Department of Economics
Part II: Economic Development of Sri Lanka
Contents
• Agricultural development, Industrial development and structural
changes in Sri Lanka
• Education and development
• Population and development and related issues in Sri Lanka.
• Foreign aid and Economic development
• Foreign direct investment (FDI)
• Regional cooperation and Economic development in Sri Lanka
• Poverty and poverty alleviation in Sri Lanka
Foreign Direct Investment and Economic
Development in Sri Lanka
Foreign Investments
• Foreign Investment is “Flows of capital from one nation to another in
exchange for significant ownership stakes in domestic companies or
other domestic assets”.
Types of Foreign Investments
• Portfolio Investment
• Foreign Direct Investment
Portfolio investments
• Portfolio investments include transactions in equity securities, such as
common stock, and debt securities, such as banknotes, bonds, and
debentures.
Foreign Direct investment
Foreign Direct investment refers to an international investment made
by a resident entity in one economy (Direct Investor) with the objective
of establishing a lasting interest in an enterprise (the direct investment
enterprise) resident in another economy
Simple definition of Foreign Direct investment (FDI) in economic term
is own and investment made foreign parties in a country
Eg: As a company in Japan, Toyota has opened a plant in Malaysia
Types of FDI
• Horizontal FDI
Investment in the same industry abroad as a firm operates in at home
• Platform FDI
a source country into a destination country for the purpose of exporting to a third
country
• Vertical FDI
It takes place when a firm through FDI moves upstream or downstream in different
value chains
i.e., when firm perform value- adding activities stage by stage in a vertical fashion
in a host country
Importance of Foreign Direct Investment
• Foreign Direct Investment (FDI) has been used by developing countries as
a tool to solve their economic problems in the recent past.
Budget deficit
Export- Import gap (Balance of payment)
Saving- Investment gap
Unemployment
• FDI encourages the economic development of a country through both direct
and indirect channel.
Methods of FDI flows
The foreign direct investor may acquire voting power of an enterprise in
an economy through any of the following methods:
• By incorporating a wholly owned subsidiary or company anywhere
• Through a merger or an acquisition of an unrelated enterprise
• Participating in an equity joint venture with another investor or
enterprise
Factors for attracting foreign direct interment
• An attractive investment climate
• Consistent macroeconomic policies
• Good governance
• Economic stability
• Guarantee of property rights
• Rule of law and absence of corruption are among the conditions
• Consistency and predictability in economic policies and political
stability are preconditions to attract FDI.
Advantages of FDI to Foreign investors
• Access to markets:
FDI can be an effective way for you to enter into a foreign market. Some countries may
extremely limit foreign company access to their domestic markets. Acquiring or starting a
business in the market is a means for to gain access.
• Access to resources:
FDI is also an effective way for to acquire important natural resources, such as precious
metals and fossil fuels. Oil companies, for example, often make tremendous FDIs to
develop oil fields.
• Reduces cost of production:
FDI is a means for to reduce cost of production if the labor market is cheaper and the
regulations are less restrictive in the target foreign market. For example, it's a well-known
fact that the shoe and clothing industries have been able to drastically reduce their costs of
production by moving operations to developing countries.
• Special interest privilege (e.g tax exemption ) offered by the country
Advantage of FDI to host countries
• Infrastructure and technology transfer increased productive efficiency
due to competition from multinational subsidiaries
• Employment
• Consumer benefit
• Increasing Savings and Investment
Disadvantages
• Entry of Multi National Companies would cause severe displacement
of small and unorganized shopkeepers and traders
• Large giants of the world try to monopolies and take over the highly
profitable sectors
• Such large companies invest more in machinery and intellectual
property than in wages of the local people.
• Waste the natural recourses
FDI flows to Sri Lanka
Period of 1815-1948
During the British Colonial Period from 1815–1948, the UK was the
major source of FDI in Sri Lanka. British FDIs focused on the
development of infrastructure facilities that were required for their
investment in the plantation sector of the country.
• Investment in banking sector and communication services
• Investment in railways and roads
(1820 Colombo- Kandy road, 1831 Kandy- Mathale road)
(1867 Colombo – Kandy railway)
Period of 1948-1977
• After achieving independence in 1948, Sri Lanka followed different
strategies with changes in government until 1977. FDI flows were
negligible as a percentage of GDCF (Gross Domestic Capital
Formation) until the late 1970s. The annual average inflow of FDI
during the 1970–1977 was only US$ 0.5 million and it was around
only 0.2% of GDCF.
Period of 1977-1982
• With the economic policy reforms introduced in 1977, the FDI flows
rapidly increased continuously until 1983. The annual average FDI
inflows, as a percentage of GDCF, increased to 4.2% in the period
1978–1982.
• Offered the preferential tax rate and tax holidays
• Establishment of foreign Banks
• Removal of foreign exchange restrictions.
• Establishment of Greater Colombo Economic Commission (GCEC)
1977 Greater Colombo Economic Commission (GCEC)
• Established and operated export processing Zones(EPZs)
• 100 percent foreign ownership in investment project
• 1978 Foreign Investment Advisory Committee (FICA)
• Free trade Zone
• 1978 Board of Investment(BOI)
Period of 1983-1990
• The impressive upward trend in FDI flow was disrupted by the
escalation of ethnic problems into a civil war in 1983.
• Sri Lanka lost its investment potential due to the uncertainty created
by the civil war. As an example, two electronic manufacturing giants,
namely Motorola and Harris Corporation which obtained BOI
approval to establish plants inside the Katunayake free trade Zone in
1982; withdrew their investment projects from Sri lanka with the
uncertainty created by the war.
Period of 1990-2000
• With the second wave of trade and FDI liberalization in the early
1990s, Sri Lanka attracted significant FDI flows.
• Privatization of state-owned enterprises also contributed to attracting
significant amount of FDI between 1990 and 2000.
• In the 1990s the largest 20 foreign investors went into following
sectors
• Telecommunications
• Power generation
• Port and other infrastructure development
• Industrial sector.
However the second half of the 1990s, FDI recorded somewhat of a deceleration
due to the external shocks and political environment of Sri Lanka
Trends of Foreign Direct Investment
Foreign direct investment, net outflows (% of GDP) in Sri Lanka was
0.10 as of 2013. Its highest value over the past 8 years was 0.17 in 2007,
while its lowest value was 0.05 in 2009.
/wEPDwU
Sri Lanka Foreign Direct Investment Net Inflow 20062014
/wEPDwU
Sri Lankan Foreign Direct Net Inflows in 2015
Sri Lanka Foreign Direct Investment Net Inflow 2012-2015
jr\Ih
Y=oaO úfoaYSh iDcq wdfhdack
.,d tauA US$ Million
2012 – July
201
2013- January
283
2014- January
386
2014 – July
351
2015- July
164
Sources : WWW.tradeconomics.com/ Central Bank of SL
Sri Lanka Foreign direct investment, net inflows (% of GDP)
Foreign direct investment; net inflows (% of GDP) in Sri Lanka was last
measured at 1.26 in 2014, according to the World Bank. This table
shows net inflows in the reporting economy from foreign investors, and
is divided by GDP.
2011
2012
2013
2014
1.5
1.4
1.3
1.2
Source :http://data.worldbank.org/indicators
Sri Lankan Foreign Direct Net Inflows in 2015
• Foreign Direct Investment in Sri Lanka increased by 164 US$ million
by in the second quarter of 2015. FDI averaged 127. 31 US$ million
from 2001-2015 reaching an all time high of 386 US$ million in the
fourth quarter 0f 2013 and record low of 20 US$ million un the
second quarter of 2001
Top Five FDI Sources of Sri Lanka (US Dollars,
Millions)
Country
Amount
Percentage from Total
Inward
Netherlands
1851
21
U.K
1131
13
Malaysia
841
09
Switzerland
829
09
Mauritius
783
09
Recent Agreements on Investment Protection
• Sri Lanka is one of the safest countries in the world to invest in, due to a
number of mechanisms in place to protect investors. The Article 157 of the
island's constitution guarantees the safety of investment protection treaties
and agreements approved by parliament by a two thirds majority.
• Sri Lanka has signed bilateral Investment Protection Agreements (IPA)
with 28 countries. The country has a very independent system of courts
which can redress any concerns of investors.
• Sri Lanka also has bilateral Double Tax Avoidance Agreements (DTAA)
with 38 countries. Sri Lanka is a founder member of the Multilateral
Investment Guarantee Agency (MIGA), an investment guarantee agency of
the World Bank. This provides a safeguard against expropriation and noncommercial risks.
Investment Opportunities
While focusing sectorial investment promotion approach of BOI, Sri Lanka
promotes following competitive sectors to attract Foreign Direct Investments.
Maritime Sector
• Sri Lanka is situated in one of the best locations in the world to gain
competitive advantage in the naval and maritime industries.
Investment opportunities
• Construction of new terminals
• Developing skills required for maritime industries
• Supporting logistic establishments
• Ship building and repairing industries
• Developing minor ports & connectivity
• Expanding related leisure activities
• Further research on exploring sea bed potential
• Marine support industries
• Rigging & offshore engineering
• Supply of spares, food, water and other goods
• Bunkering service
• Maintenance services
• Transshipments services
Aviation Sector
• Sri Lanka is situated close to many of the world's main air routes.
Most of the main cities in the world can be reached from Sri Lanka
within few hours and therefore the country has a high potential for
becoming an Aviation Hub.
Investment opportunities
• Improving aviation services to become a “location for aviation
services”
• Improving airport facilities to become a good destination as well as a
good transit point.
Knowledge Sector
• The concept of knowledge hub was introduced to make Sri Lanka as
the most preferred country for higher education in the Asian
subcontinent by attracting foreign students and getting the services of
foreign experts.
Investment opportunities
• Establishment of Higher education institutes with appropriate
programs in order to produce qualified personnel as sought by the
Industries and services nationally and internationally.
• Establishment and operation of IT software development, Knowledge
Process Outsourcing / Business Process Outsourcing companies, IT
and IT enabled services and IT Training Centers.
Energy Sector
• In order to attain the peak demand and to satisfy the electricity requirement
in Sri Lanka, altogether 142 Grid Connected Power Plants with total
installed capacity of 3,277 MW have been operated in the first half of 2012.
Out of these Power Plants, 25 have been owned and operated by Ceylon
Electricity Board including 17 Hydro Plants, 07 Thermal Plants and 01
Wind Power Plant.
• Investment opportunities
• Developing & Promoting of Non conventional energy sources with
improved technology
Manufacturing Sector
Manufacturing industries is one of the key sectors of the
economy, which generates over 75% of national industrial
exports. A wide range of targeted industrial sub-sectors are to
be promoted for investment. There are many success stories
in the manufacturing sector of Sri Lanka with foreign direct
Investments as indicated below.
• Apparel industry
• Rubber based products – mainly solid tyers and surgical
gloves
• Food Processing Industries – Prima Ceylon
• High-tech manufacturing
Investment Opportunities
In line with the new policy guidelines of the government the
manufacturing sector is to be promoted in three different segments.
• Export oriented industries such as food processing , rubber based
products, apparel, value added mineral based product, ship & boats.
• High end industries such as automobiles, electrical and electronics,
chemicals
• Import replacement industries such as pharmaceuticals, textile, dairy
products, fertilizer
Commercial Hub Related Services
Considering the strategic advantages of the location, rapid development of
infrastructure and other facilities have been initiated to establish Sri Lanka as
one of Asia's foremost commercial centers in the field of commercial services
and international banking.
Investment Opportunities
• Supply Chain Management
• Total logistics service
• Establishment and operation of Shopping malls that offer International
branded products
• BOI has been empowered to grant concessions for new investors in the Hub
related activities in Free Ports and other designated areas. Details are given
in the dedicated section titled produce on “Commercial Hub Activities”.
Tourism Sector
• The Sri Lankan government has identified the Tourism sector as a key
growth area in the post conflict development era, with an ambitious
target of attracting 2.5 million visitors by 2016.
• Tourism arrival has increased by 160 % since 2009, as the number of
arrival was recorded in 2014 was 1.5 mn compared to 0.5 mn in 2009.
• Priority has been given for development of required accommodation
facilities and other related infrastructure for leisure activities.
Investment Opportunities
• Construction and management of hotels, resorts, leisure &
entertainment complexes
Infrastructure Sector
• Development of road net work including highways, expressways and railways,
• Expansion of existing international sea port & air port and establishment of
new ones
• Housing, Shopping malls and urban development
• Water supply and sanitation,
• Establishment of industrial zones,
• Warehousing and logistic centers etc.
Investment Opportunities
• Northern expressway
• Mixed Development complexes and other commercial facilities in Colombo
and other cities
• Housing -Apartments
• Export processing zones with state-of-the-art technology
• Warehousing and logistic centers etc.
Service Sector
Telecommunication Sector
The country has developed its telecommunications industry on par with the developed country
standards.
As a result of the pertinent regulatory initiatives, the local telecommunications sector has taken pride
in being the prime figure to introduce some of the most latest global telecommunications
technologies in the South Asian Region. Sri Lanka has facilitated some of the most advanced
technologies in the world such as GSM, 3G, 3.5G and HSPA (High Speed Packet Access) which
allows high speed mobile broadband. Sri Lanka is also the first country to introduce Next Generation
Networks such as 4G, which would enable the use of WIMAX (Worldwide Interoperability for
Microwave Access) and LTE (Long Term Evolution). The subscriber Base Sector has indicated a
quadrupled growth rate in 2009, with an escalating number of 13 Mn. mobile subscribers. In
Investment opportunities
Telecommunication related services mainly to improve the quality by
improving speed &coverage
Agriculture Sector
The agriculture sector plays a key role in the country's economic development with
10.1%contribution to national GDP. Fisheries sector potential include of offshore/deep sea,
in land fisheries and agriculture development. The fisheries sector has contributed around
1.3% to GDP in 2014 and employs over 650,000 people directly and indirectly through
related activities. The livestock sector consists mainly of the dairy and poultry sub-sectors,
which are considered as priority areas for growth, employment generation and increasing
income of rural farmers. The livestock sector accounted for about 1.3 per cent of GDP in
2014. Milk and products valued at over US$ 339 have been imported in 2014 and it
represented 1.75 percent of Sri Lanka's food imports.
• Investment opportunities:
Investments in this sector is targeted to improve productivity, level of technology
innovation, access to international markets, develop quality seeds and planting
materials and improve overall value addition. With diverse agro zones for agro
based industries and access to a large fishing area, Sri Lanka has much to offer for
both local and foreign investors in Agriculture sector including
Livestock and Fisheries sub sectors.
Horticulture,
Prospects and preconditions for promoting FDI to
SL
• Sri Lanka needs to develop the physical and technological
infrastructure
• Enhance its human capital and improve its labor market conditions and
administrative capabilities to induce higher levels of foreign
investment
• Consistent macroeconomic stability
• Healthy economic indicators
• Identify and promote investment opportunities on tourism, education,
agricultural and services sector