1. Introduction
Foreign Direct Investments (FDI) has been playing a critical role in the Sri Lankan economy since last four decades. Similar to many developing countries in the world, Sri Lanka also focuses on seeking and attracting FDI through many public policy measures due to many positive sides of FDI.
FDI could be defined as an international investment made by a resident entity in one economy (Direct Investor) with the objective of establishing a long term interest in an enterprise (the direct investment enterprise) resident in another economy (N. Samarappuli& G.C.R. Tharanga, (2009). While bringing foreign capital into the country, FDI supports economic growth by transferring knowledge, technology, managerial skills and best practices and creating employment opportunities (Dharma de Silva, 2011).

When considering the Sri Lankan context, with the termination of three-decades lasing civil war, Sri Lanka is moving itself towards a faster economic growth reaching the upper-middle income status. With these objectives, the importance of attracting FDI has become a high priority of the Government’s strategies. The Sri Lankan Government has been adopting very liberal FDI policy in order to encourage and attract foreign investors into the country. As per the report on “Recent Economic Developments” published by the Central Bank of Sri Lanka (CBSL), net FDI has increased to USD 368 million during the first six months of 2012, compared to USD 364 million during the corresponding period in 2011. Major proportion of FDI has concentrated on sectors as infrastructure, utilities, manufacturing and tourism.

This study focuses on analyzing the attractiveness of FDI towards the tourism industry of Sri Lanka.

2. Back Ground
With the elimination of three decades lasting civil war, the Sri Lankan economy is experiencing a rapid growth.With this economic expansion, many avenues have been open to both local and foreign investors to invest in different kinds of industries.
The tourism industry is a main industry which attracts large proportion of FDI into the country. As per the statistics of the Board of Investment (BOI), 19% of FDI had been focused into the hotel and restaurant sector which represent the tourism industry.
Tourism has been considered as a major driver of the economy of any country after infrastructure, energy and petroleum as it plays a vital role in development, reconciliation, social interaction, creating employment and poverty alleviation. As per the “Economic and Social Statistics of Sri Lanka – 2012” published by the Central bank of Sri Lanka, the tourist receipts in the year 2012 was USD 830 million and the number of employments in the tourism industry was 138,685.
In line with the increasing economic growth, the tourism sector of Sri Lanka also has been experiencing an impressive growth in terms of number of arrivals as well as revenue, since the end of civil war in 2009. Following graph depicts the growth of tourist arrival during the past decade.

3. Analysis
This report analyses the attractiveness of the tourism industry for FDIs in terms of different macroeconomic factors.The PESTEL model is used for the analysis and each PESTEL factor is further evaluated using Strengths, Weaknesses, Opportunities and Threats involved with the particular factor.
PESTLE analysis is an important framework of macro-environmental analysis which is used to understand the situation of an industry in an overall perspective. It stands for Political, Economic, Sociological, Technological, Legal and environmental factors affecting a particular industry. PESTEL analysis is usually used in conjunction with a SWOT analysis.
3.1 Political Environment
The political environment prevailing in a country is a major determinant of the success or failure of any industry in that country.
3.1.1 Strengths
The Sri Lankan government follows a very liberal economic policies and strategies which encourage foreign investments. Further, the tourism sector was opened for international investors under the Policy Framework and under the Budget proposal of 2010. Allowing total foreign ownership across many areas of the economy, not having any retractions on repatriation of earnings, fees, and capital and forex transactions relating to the current account payment and having bilateral investment protection agreements with 27 countries and double taxation voidance agreements with 38 countries (source: BOI) are some examples for the transparent investment policies adopted by the Sri Lankan government aiming to promote FDI. As per the Index of Economic Freedom, which measures the pro-business policy environment of countries, Sri Lanka has been ranked 97 of 19 countries in 2012 where many of Asian countries such as India, China, Pakistan, Bangladesh and Vietnam are behind Sri Lanka.
The government holds a very positive perception towards the tourism industry. Tourism has been identified as a priority sector by the government and measures have been taken to actively promote it. The government’s ambitious objective is to attracting 2.5 million foreigners by 2016. Parallel to this objective, the government has already signed agreements with top tier hotel and tourism investors of the world such as the Premier Asian luxury hotel chain, the Shangri-La Group (Hong Kong/Singapore), India’s upscale ITC Group, Thailand’s Minor Group and the Mustafa Group of Singapore.
Other than the above, the Government has addressed several policy related issues that affect the tourism industry, such as simplification of licensing procedure, reduction of high electricity tariff, unification of the regulatory environment and simplification of the investment approval process by setting up of a “One Stop Shop” for tourism related investments (Tourism Development Strategy 2011-2016 by Ministry of Economic Development).
Eradication of three decades lasting civil war is yet another strength of the political environment of the country. The peaceful domestic condition prevailing in the country encourages tourism.
3.1.2 Weaknesses
The inability to reform inflexible labour legislations in the country can be considered as a major disincentive for foreign direct investments. Compared to many Asian countries, Sri Lanka has relatively rigid labour rules. This becomes a major disadvantage as other countries are far more flexible in their labour rules where companies can recruit or dismiss employees depending on the condition of the business environment.
Most of the Western and European countries hold negative perception towards the political environment of Sri Lanka specially in terms of human right violation. The inability to change this perception is a weakness of the government which de-motivates Western investors entering into the Sri Lankan market.
The youth unrest, strikes and many protests that are carried against the government demonstrates the inefficiency of the governance of the ruling party. This type of practices send bad image about the country to the international market.
High level of corruption in the government sector and more personalized involvement which replaces the streamlined process hinders the efficiency of FDI flow into the country. Due to unnecessary political influences, purely driven by personal interests, many Hotel projects funded through FDI have been delayed. Hence, the government needs to take actions to streamline its various institutions such as Customs and Inland Revenue Department in order to support a transparent and efficient investment system independent from political influences (“FDI and Tourism”, Daily FT, 26th April, 2013).

3.1.3 Opportunities
Sri Lanka is experiencing a peaceful domestic condition after eradication of the civil war. This situation is a good opportunity to promote tourism of the country as many South Asian countries such as India, Pakistan, Bangladesh and Taiwan are still suffering from domestic civil wars and terrorism.
As per the Sri Lanka Tourism Development authority, in parallel to the objective of achieving 2.5 million tourist in 2016, the government has opened up 14 areas for FDI. They are for
To buttress the overall growth of the industry, the report, says, there will be 14 areas for Foreign Direct Investments that the Government has planned to open up. Therese areas are golf courses, water parks, marinas, entertainment studios, light aircraft services and sea planes, convention and exhibition centres, gaming cities, race courses, theme parks, shopping malls, adventure sports, boat manufacturing and boat hiring and taxi services. Widening the horizon of investment opportunities encourages more investors to come into the country.
3.1.4 Threats
Pressure created by international groups and the allegations made in international arena against Sri Lanka is a major threat which negatively influence foreign investors’ decision regarding coming into Sri Lanka.
The campaign in the Tamil Nadu State of India against Sri Lanka is yet another threat to the tourism industry of the country. As a result, the tourist arrival from India has declined by 1.7% during the first six months of 2013 (Colombo Page News Desk, Sri Lanka. 16th July, 2013).

3.2 Economic Factors
3.2.1 Strengths
Sri Lanka has been able to record an averaged GDP growth rate of 6.8% over last decades. This is a relatively growth ration when compared to other South Asian countries. Future growth momentum of the country is also at a high level owing to massive infrastructure developments happening in the country. The national road network is rapidly developing. The newly constructed habour at Hambanthota and the Maththala airport sends positive signs of further development to foreign investors.
Many tax incentives such as exemption on corporate income tax, customs duty, Value Added Tax, and Ports & Airports Development Levy have been introduced to promote foreign investments. Further, Sri Lankan government has signed bilateral Investment Protection Agreements (IPA) with 27 countries and bilateral Double Tax Avoidance Agreements with 38 countries.
In 2010, the International Monetary Fund (IMF” upgraded Sri Lanka to the status of “Middle –income economy”. This has enabled the country to strengthen its image in the international financial markets.
The financial system of Sri Lanka was resilient enough to face a tough external shock like the global economic crisis. Having such a stable financial system is one of the strengths of the country.
3.2.2 Weaknesses
Poor performance and non-stability of Sri Lankan stock market is a great weakness that the country should overcome. The rumors on the market allegations of the Colombo Stock Exchange (CSE) discourage foreign investors entering into the trading and deter FDI flowing into the country.
The overall debt ratio of the government was as high as 80% in 2012 which put the credibility of the economy in repayment of external debt at risk.
3.2.3 Opportunities
Sri Lanka is experiencing a declining trend of the interest rate. However, owing to the global economic crisis, many Western Countries as well as some Asian countries as Japan, suffer from even more low interest rates. As the interest rates of such countries are low, emerging markets like Sri Lanka become more attractive for foreign investors.
3.2.4 Threats
As per the below chart, 39% of tourists arrived to the country comprise of Asians whom cannot be identified as spending tourists. If this trends grows further, it would not be beneficial to the tourism industry.

The global economic crisis has affected the lifestyles and spending patterns of many foreigners.

3.3 Sociological Factors
3.3.1 Strengths
As per the Human Development Index, Sri Lanka is raked 92 of 186 countries being the leader of South Asian region. The country has a competitive edge over regional rivals owing to strong adherence to international labour laws, non-usage of child labour and emphasizing gender equality.
The Sri Lankan society is well known for its hospitality throughout the history. Hence, the tourism is a well accepted industry in Sri Lanka.
As per the Annual Report 2012 of CBSL, the work force participation of Sri Lanka is 47% of the total population. The literacy rate of the country is 92% and approximately 50% of the students who have completed their higher education are trained in technical and business disciplines. Sri Lanka has a relatively lower labour cost per worker when compared to other rival South Asian Countries. These factors make the tourism industry of Sri Lanka more attractive to FDI.
3.3.2 Weaknesses
The contribution of domestic travellers to the tourism industry of Sri Lanka is at a very low level. The leisure activities as tourism posses a minimal recognition in the spending pattern of most of Sri Lankans. It is very important to encourage domestic tourism as it helps producing social and cultural benefits for the domestic population, promoting ethnic, racial and religious tolerance. Availability of a solid domestic market is a key factor to attract FDI into the country.

3.3.3 Opportunities
Influenced by Buddhist culture, Sri Lanka has many religious places such as Anuradhapura, Polonnaruwa, Kandy and Gampola which are capable of attracting more tourists.
Country like Sri Lanka has an opportunity of attracting more religious tourists or the people who are willing to tour for pilgrimage purpose. Because in Sri Lanka there are four different religions therefore both religious tourists can visit special temples situated in Sri Lanka such as Dhalatha Maligawa, thirukketheeswaram, Madu Maatha church and Mosques.
3.3.4 Threats

3.4 Technological factors
Technological environment is yet another factor which influences FDIs to a country. During the past decade, Sri Lanka has been able to achieve a rapid growth in the Information Technology (IT) sector. As per the Global Information Technology Report issued by the World Economic Forum, Sri Lanka has been ranked 66th place of 138 countries in the Network Readiness Index in 2010/2011.
As the most effective global communication medium, the internet plays a vital role in the tourism industry as well. “Sri Lanka Tourism”, the institution established to promote tourism in Sri Lanka, has developed an improved web portal which is accessible to any potential tourist searching information about Sri Lanka. This web portal is highly interactive.
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3.5 Legal Factors
Sri Lanka has introduced attractive and transparent laws to foreign investors which cover areas as tax holidays and preferential tax rates and exemption from custom duties. The Constitutional Guarantee of Investment Protection Agreements has been accepted by two third majority of the Parliament which ensures the investors’ security of foreign investors.
Investor friendly legislations of Sri Lanka provides foreign investors protection against nationalization, 100% free remittance of earnings, capital and business fees and settlement of disputes under the International Convention for Settlement of Investment Disputes (ICSID).
However, labour legislations of the country are comparatively rigid when compared to other South Asian countries in terms of dismissal of employees.