The effect of foreign direct investment on trade : empirical evidence from Sri Lanka

Abstract EN

Foreign direct investment and foreign trade are vital factors in economic growth and development.

The purpose of this study is to investigate the long run relationship and short-run dynamics between the two variables in Sri Lankan context.

The study applies the ARDL co-integration and bound test for annual time series data covering the period from 1980 to 2016.

The empirical test finds a significant positive relationship between FDI and foreign trade in the short run as well as in the long run.

The bound test confirms the existence of co-integration relations among the variables.

The error term of the ARDL ECM model is statistically significant with expected sign confirming convergence of short-run shocks into the long run equilibrium.

All the diagnostic and stability tests confirm the validity of the selected model in policy formulating.