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

Biswajit Maitra ()
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Biswajit Maitra: University of Gour Banga

International Journal of Economic Policy Studies, 2021, vol. 15, issue 2, No 4, 329-347

Abstract: 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.

Keywords: Domestic investment; External debt; FDI; Financial development; Human capital; Income growth; Trade openness; H63; F21; F34; O40; C22 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s42495-021-00061-6

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