Complementarity of trade and FDI liberalization in industrial growth: lessons from Sri Lanka

Abstract

This paper examines industrialisation experience in Sri Lanka following the market-oriented policy reforms initiated in 1977, with emphasis on the complementarity of trade and foreign direct investment (FDI) policies in shaping the reform outcome. It is found that the reforms helped to transform a primary product exporting economy into one in which manufactures dominate exports. Improved performance of domestic manufacturing through greater export orientation saw improvement in output and total factor productivity growth, and employment generation. The Sri Lankan experience highlights the complementary role of investment liberalisation for exploiting the potential gains from trade liberalisation. This industrialisation outcome is particularly impressive given that it occurred during a period of persistent civil strife and macroeconomic instability.