This paper examines the relationship between foreign direct investment and economic growth of Sri Lanka for the period 1977-2003 using Johansen’s full information maximum likelihood method by considering relationship between real gross domestic product, foreign direct investment, domestic investment and openness of the trade policy regime. The results indicate that foreign direct investments exert an independent influence on economic growth and there is bidirectional causality between foreign direct investment and economic growth. The finding suggests that better trade policy reforms, implementation aimed at promoting foreign direct investment and domestic investment, and restoring international competitiveness to expand and diversify the country’s exports have the potential of accelerating economic growth in the future.


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