Exchange rate, exchange rate volatility and foreign direct investment in Sri Lanka

This paper investigates the effect of exchange rate, exchange rate vol­atility, and expected exchange rate on foreign direct investment and the fac­tors, which are influential on exchange rate volatility in Sri Lanka during the period 1978-2012. Two equations were fitted and estimated using Zellner’s seemingly unrelated regression model. Results of the equation 1 revealed that standard deviation of exchange rate, total electricity provision and trend were significant on foreign direct investment. According to the equation two, foreign direct investment, inflation and trade shocks were significant on ex­change rate volatility during 1978-2012 period. The results indicated that sta­bility of exchange rate and improved infrastructure facilities were important to attract foreign direct investment.

Sri Lanka Journal of Advanced Social Studies, 2013; Vol 3(2); Page 75-96