Foreign Direct Investment (FDI): A critical factor for economic revival | Sunday Observer

Foreign Direct Investment (FDI): A critical factor for economic revival

20 June, 2021

Foreign Direct Investment (FDI) is a critical factor for a country with a developing and emerging market such as Sri Lanka.

The country needs international funding to expand into global markets to earn foreign currency. In an increasingly intensifying global competition, FDI is becoming compulsory to achieve desired ambitious economic goals of the Sri Lankan government.

President Gotabaya Rajapaksa recently said that his government intends to increase GDP per capita to US$ 8000 by 2030, thus require maximum possible foreign investments in support. Hence, the Colombo Port City currently is the most effective source to attract investors to the country.

Delivering the keynote address of the Sri Lanka Investment Forum 2021, President Gotabaya Rajapaksa invited investors around the world to invest in Sri Lanka.

Key service

He reiterated that the government’s vision is to make the Colombo Port City a key service hub in the fast-growing South Asian region.

The President invited business leaders to make full use of the unique strengths, exceptional opportunities, and transcendent facilities that the Colombo Port City offers to them. The event was organised predominantly to provide comprehensive information on the FDI and the Capital Market Opportunities in Sri Lanka.

In a nutshell, a Foreign Direct Investment is an investment made by a company or an individual in one country into business interests located in another country through the establishment of business operations in that country. The investor either sets up a new business venture or acquires business assets in the country of investment.

Every single country, regardless of whether they fall into the high-income, middle-income, or low-income category, FDI is essentially vital to sustaining continuous economic growth. Therefore, every country attempts to promote FDI contributions.

For example, the United States of America, the country with the largest economy in the world is the largest recipient of FDI in the world, yet keeps pushing for foreign investments. However, whilst the USA is at the sixth ranking in the ‘Ease of Doing Business Index’ of the World Bank Group, Sri Lanka, with a dire need for FDI, remains at 99th place in the year 2020. Even India, historically known as a difficult country to establish business has come up to the 63rd rank in recent times, advancing far beyond Sri Lanka.

The anticipated foreign investments are expected to assist the country to accelerate the existing average GDP per capita growth of around 4 percent during the past several decades, without considering the Covid-19 situation. Perhaps the initial aim of the government is to elevate the prevailing lower-middle-income classifications to at least upper-middle-income groups as soon as possible.

No doubt that the FDI can boost the Sri Lankan economy substantially. Direct investments have gone far beyond aids, remittances, or portfolio investments as the largest source of external finance. As the current public investment with 60 percent of the fiscal budget is on pre-determined expenditure, the private investment, primarily through FDI is a dire requirement to accelerate the economic growth.

Regrettably, FDI into Sri Lanka is lower at 2 percent of the GDP than in peer countries despite the country’s strategic location and access to lucrative markets. Bringing in FDI is a convenient way of obtaining technology exchange and innovation. The establishment of international business operations enables the introduction of new technologies that can be later replicated by the local firms for increased productivity and global competitiveness. In particular, a business partnership with developing countries where the technology is of high standards is immensely valuable in the long run.

Unrelenting issue

The businesses can receive improved and more modernised practices in management, accounting, legal guidance, and manufacturing from worthy overseas investors. These investors integrate technology and strategised operational practices to the ventures they set up with their investments and in turn improve the standards of the recipient countries. Sri Lanka, for the past many years, has had an unrelenting issue with the trade deficit. The only solution is to boost up the level of exports and obtain foreign currency revenue that can assist to reduce the gap.

Foreign investments can largely enhance the access of Sri Lankan production networks in order to facilitate new value chains. Through FDI, new markets can be developed with diversified activities by introducing new sectors alongside traditional export sectors.

Sri Lanka is experiencing a shortage of capital with an ongoing health crisis and the economic downturn experienced before that due to the Easter Sunday incident.

Also, the drastic drop in GDP during the previous regime added salt to the wound. The country has insufficient savings and foreign exchange to finance regular investment needs. To bridge the gap, the country needs an inflow of foreign capital, primarily from export growth.

Historically, the FDI had been an integral part of the technological improvements in communications, information processing, and transportation throughout the globe, making the commercial organizations of the recipient countries more effective in their respective operations. Hence, the call for investors for Port City is timely.

Although there are challenges and areas where improvements are required, Sri Lanka is a worthwhile location for investors to do business.

The foremost requirement is to cut down the existing red tape to the extent that the incoming investors will have easy access to statutory concerns. As mentioned earlier, Sri Lanka’s position is lying as low as 99th ranking out of 190 economies and one of the primary goals of the government is to improve on this as early as possible.

Concerning FDI, Colombo Port City has offered all facilities required by the investors according to the relevant state authorities. The government has already announced that the Colombo Port City Economic Commission, comprising of eight proficient professionals appointed by the President authorised to grant all required approvals to set up business ventures.

The intention of the government is to provide all services, particularly approvals, to investors under one roof. As per the government sources, Colombo Port City will grant tax concessions, exemptions, and other fiscal incentives to the investors. The important support of the political structure is assured to any investor who is interested in bringing in foreign investments.

The legislations required were already passed by the parliament and the policy now. Except for a few minor political parties, the main opposition has already declared that they are not vehemently against FDI dive, particularly the investments expected from the Port City, although they criticize some of the administrative-related activities. Therefore, the government can assure possible FDI sources that the policies, rules, and regulations will remain intact in the future.

Crucial juncture

At this crucial juncture where the global pandemic decelerates the economic growth of every country, in the world, the Sri Lankan government must take the unparalleled initiative to increase the inflow of FDI by creating the best business climate possible.

Not only by improving the ease of operating in the country but also by assuring the investors that their capital is safe. Criteria such as tax incentives, protection of property, access to fiscal incentives and facilities, and the infrastructure must be guaranteed.

Whatever revenue the government is gaining can be used to improve infrastructure, expand healthcare and education, and modernise local industries, and any other public welfare agendas.

The intention of promoting FDI must be to fill state coffers on one hand and improve the lives of the citizenry on the other. However, the kleptocracy can unstable the possible national wealth created by FDI. The incumbent government has taken much optimistic action to liberalise the policies to make the country more investor-friendly.

However, further action has to taken to curtail unwelcome bureaucracy and make the impressions of the recognised international organisations such as the World Bank and International Monetary Fund which are being constantly referred by the investors before entering into international commercial partnerships. Sri Lanka has tremendous potential for FDI and the stakeholders must make all possible moves to influence and convince investors.