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Relative role of external debt, FDI, and domestic investment in economic growth: evidence from Sri Lanka

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Abstract

External financial capital is inevitable for economic growth and the development of developing countries. In the case of Sri Lanka, some recent studies prove that the growing accumulation of external debt is detrimental to growth. Besides, the inflow of foreign direct investment (FDI) is not enough and limited to a few sectors of the economy. The accumulation of domestic capital is sluggish. Under this backdrop, this paper explores the relative role of external debt, FDI, and domestic investment in association with some control variables like financial development, trade openness, human capital investment impacting post-reform income growth in Sri Lanka. The autoregressive distributed lag (ARDL) bounds testing approach to cointegration finds the long-run associations of income with different combinations of debt, FDI, domestic investment, and selective control variables. The error correction representations of the ARDL models prove that the external debt and FDI are not beneficial to augment growth, rather have a detrimental impact. On the other hand, domestic investment spurs short-run and long-run income growth. Also, the negative impact of trade openness and a positive impact of human capital investment are found. The paper concludes that more reliance on the external financial capital would not congenial for the economic progress of Sri Lanka.

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Notes

  1. From the theoretical grounds the impact of FDI on economic growth depends on the state of financial development of the economy [15]

  2. In the analysis of FDI-growth dynamics inclusion of trade openness is also pertinent. It is often viewed that that openness to trade affects growth by impacting the extent of knowledge spillovers from abroad [10].

  3. The study is not based on a preferred combination of variables; rather a number of estimations are done altering the combinations of control variables as well as the main variables.

  4. This is another way we have examine robustness of the impact of investment variables in income.

  5. Like the first three estimations of ARDL model estimations, the same trend assumption and the same lag-length are considered in the present three estimations.

  6. Unlike the long-run, the short-run dynamics is income growth (or economic growth) dynamics. Because, ECM models are presented involving first difference of the logarithmic series used in the study. The first difference of logarithmic income is income growth.

  7. Published by FNF/RELIAL, Friedrich Naumann Foundation for Freedom Red Liberal de América Latina. Retrieved from: http://www.relial.org on 30 March 2020.

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The author would like to acknowledge and thank an anonymous reviewer of this journal for his/her comments to improve the quality of the paper. The usual disclaimer applies.

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  1. Department of Economics, University of Gour Banga, P.O. Mokdumpur, 732,103, Malda, West Bengal, India

    Biswajit Maitra

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Maitra, B. Relative role of external debt, FDI, and domestic investment in economic growth: evidence from Sri Lanka. IJEPS 15, 329–347 (2021). https://doi.org/10.1007/s42495-021-00061-6

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