The Causal Links between Trade Openness and FDI Inflows in Sri Lanka

Abstract

The study examines the causal links between trade openness and FDI inflows in Sri Lanka from 1997 to 2019 using the ARDL test and Granger causality test. The results of the ARDL bound test indicate that an increase in trade openness does not affect FDI in the long run. However, short-run results indicated that an increase in trade openness attracts more FDI. The Granger causality test shows that Sri Lanka has a unidirectional causal relationship that runs from trade openness to FDI. The study suggests that the government should focus on long-term FDI target trade policies in order to improve the investment climate in Sri Lanka.