Inward Foreign Direct Investment-Induced Technological Innovation in Sri Lanka? Empirical Evidence Using ARDL Approach

Abstract

Fostering innovation is considered one of the key policy priorities in most governments’ agendas in developing countries. Foreign direct investment (FDI) is a principal resource for financing sustainable development, corresponding to 17 sustainable development goals (SDGs). This study analyzes how inward FDI affects innovation in Sri Lanka using secondary data from 1990 to 2019. We used the Autoregressive Distributed Lag (ARDL) cointegration procedure to examine the long-run relationships between variables. As per the study results, the coefficient of inward FDI is a negative sign while the coefficients of education expenditure (EDU) and research and development expenditure (RDE) show positive signs of 0.26 and 5.7, respectively, and are statistically significant in the long run. It is demonstrated that research and development expenditure is vital in explaining technological innovation, and inward FDI inflows do not contribute to widening technological innovation in Sri Lanka. More FDI inflows will not bring higher innovation. Shaping the future of FDI in Sri Lanka is essential to foster innovation capability.