The Relationship Between the Stock Market and Foreign Direct Investment(FDI) in Sri Lanka aEvidence from VAR and Co-integration Analysis
The low level of savings in developing countries like Sri Lanka is a major reason for the slower economic growth, In order to enhance domestic investment and accelerate growth a country needs to find the capital required. Consequently most of the countries turned to foreignsources of financing during the transition from a centrally planned to a marketeconomy The dominant form of foreign capital inflowswas foreign direct investments (FDI), which, due to theircharacteristics, may have many positive effects on the host economy. The objective of this study is to explore the existence and characteristics of both thelong- and short-term relationships between FDI and the stock market in Sri Lanka. This study used quarterly data for FDI and Stock Market Trading Volume From 1994,Q1 to 2017 Q2. Unit root tests indicated a Vector Auto Regression Model and it was run with two lags. Wald Tests and Granger Causality tests were carried out. Findings indicated uni-directional causality from Stock Market to FDI. This implies that policy makers must aim at developing the stock market for a resulting increment in FDI flows to the country.
