Sri Lanka recorded a notable rebound in Foreign Direct Investment (FDI) in 2025, with the Board of Investment of Sri Lanka (BOI) reporting inflows of $ 1.057 billion, a 72% increase compared to 2024. 

Manufacturing accounted for 46% of total inflows, port development 26%, and tourism 11%, while Singapore, India, France, the Netherlands, and Luxembourg ranked among the leading source countries. 

Although the increase marked an important milestone after the 2022 economic crisis and sovereign default, the broader data suggest that FDIs into Sri Lanka remain modest in relation to the size of the economy and in comparison with several fast-growing Asian peers.

Sri Lanka’s economy is valued at over $ 80 billion, which places annual FDI inflows at roughly 1% of GDP. In economies that have leveraged foreign investment as a primary engine of industrial transformation, the ratio is often several times higher. 

The question therefore extends beyond recovery from crisis conditions and moves towards a deeper examination of why Sri Lanka continues to attract comparatively limited volumes of sustained, large-scale foreign capital.

The structure of recent inflows

The composition of 2025 inflows offers useful insight into the nature of investor engagement. Of the $ 1.057 billion recorded during the year, $ 167 million arrived as equity capital, $ 213 million as reinvestments, $ 567 million as intra-company borrowings, and $ 110 million as foreign commercial borrowings. 

A total of 188 companies infused FDIs during 2025; however, only 24 represented new investment projects contracted during that year, and those projects contributed $ 134 million, equivalent to 13% of total inflows. The majority of capital therefore originated from expansions and financial infusions by companies already operating within the country.

Reinvestments suggest that firms already present in Sri Lanka retain a degree of operational confidence, whereas new projects indicate fresh external validation of the investment environment. 

During 2025, BOI approval was granted for 146 projects, including 70 new ventures and 76 expansions, with a total approved value of $ 1.906 billion, of which $ 896 million is expected as foreign capital inflow. While approvals signal activity in the pipeline, realised inflows remain the more reliable measure of investor commitment.

Bureaucracy and ease of doing business

Economists have identified regulatory procedures and administrative complexity as central structural constraints. Verité Research Lead Economist Anushan Kapilan described the difficulty of doing business as a core deterrent.

“One of the main issues investors face is that doing business in Sri Lanka is very difficult,” he said. “When the index was available, Sri Lanka’s ranking was very low. That means it is hard to do business here, which is why investors are not coming.”

Sri Lanka previously ranked outside the top tier in the World Bank’s Ease of Doing Business Index, with persistent challenges in areas such as construction permits, contract enforcement, tax administration, and cross-border trade procedures. For investors evaluating multiple regional options, regulatory clarity and administrative efficiency influence decisions at an early stage.

Kapilan also pointed at the role of transparency in regulatory systems.

“There is too much bureaucracy and too many Government rules, and those rules are not transparent. Someone from abroad who wants to come needs to know how to do business just by looking at a website. They should be able to find things online.”

The ability to access clear guidelines, standardised requirements, and predictable timelines reduces uncertainty and transaction costs, which in turn affects investment risk calculations.

Regulation and corruption risk

Sri Lanka has historically defended extensive regulatory frameworks as safeguards against corruption and malpractice. Kapilan argued that excessive procedural rigidity may fail to deliver the intended result.

“Sometimes you have too many rules, very hard rules, and they are very difficult to follow,” he said. “To create business opportunities and more FDIs, sometimes corruption becomes the way to enter. In some cases, it is only by paying bribes that you can even enter into the market.”

He suggested that tightening layers of regulation without simplifying the overall system may discourage legitimate investors without necessarily eliminating corruption risk.

“If you stop bribery and corruption, strict rules alone still do not help. Previously, some entered the market through bribes. Now, they will not even be able to enter because the rules are very strict and difficult to follow.

“The solution to reduce corruption and improve efficiency is to simplify the rules and make things very transparent. When everything is written transparently and you can do things without having to know someone, and when you digitalise processes, that reduces corruption and improves business efficiency.”

Digitised approvals and rules-based systems can reduce discretionary authority and improve predictability across agencies.

A South Asian pattern

Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe placed Sri Lanka’s FDI performance within a regional framework, arguing that the challenge extended beyond a single country.

“Overall, FDIs remain a problem that many parts of the world outside East Asia actually face,” he said. “Particularly in South Asia, the form of that is very specific.”

Damsinghe noted that FDI, as a share of the GDP in India, did not differ dramatically from Sri Lanka’s ratio, despite frequent announcements of high-profile investment deals. To understand the disparity between East Asia and South Asia, he pointed to historical drivers of foreign investment.

“The kinds of investments that have historically attracted FDIs have been either resource extraction-based or low-cost, high-labour manufacturing.”

Sub-Saharan African economies attract capital through extractive industries, while East and Southeast Asian economies draw manufacturing investment supported by cost competitiveness, export integration, and large industrial clusters.

Sri Lanka lacks large-scale extractive resources such as oil or significant mineral deposits, which eliminates one major historical pathway for FDIs.

“Neither of those two areas – resource extraction or low-cost labour manufacturing – are areas where Sri Lanka has a strong advantage,” Damsinghe said.

Labour costs in Sri Lanka exceed those in several lower-income Asian economies, and upward wage expectations affect long-term cost predictability.

“People are looking at very significant upward movement. The ability to maintain low-cost labour for long periods becomes difficult,” he said.

Factor constraints: Land, energy and infrastructure

Beyond labour, structural factors influence competitiveness. Damsinghe highlighted “factor problems like land, labour, and even energy,” noting that production-oriented investment required reliable access to industrial land, consistent power supply, and predictable input costs.

Land acquisition procedures can involve multiple approvals and coordination among agencies, which may extend project timelines. 

Energy supply disruptions during the 2022 crisis exposed vulnerabilities in fuel imports and electricity generation. Although macroeconomic stabilisation has improved conditions, investors assess infrastructure reliability over extended periods.

Given Sri Lanka’s strategic maritime position along major shipping routes, port development continues to attract significant FDIs. In 2025, port development accounted for 26% of total inflows, and in the first quarter of 2025, 41% of realised FDIs was directed towards the sector. However, translating maritime advantage into industrial depth requires integration with manufacturing supply chains and export ecosystems.

Macroeconomic stability and crisis legacy

The 2022 economic crisis reshaped investor perceptions. Sri Lanka declared sovereign default amid acute foreign exchange shortages, while inflation peaked near 70% and shortages of fuel and electricity disrupted economic activity. Political instability added to risk assessments.

Stabilisation measures implemented since 2023, supported by an International Monetary Fund programme, have improved fiscal management and moderated inflation. Foreign reserves have increased and exchange rate volatility has declined, while tourism arrivals reached 2.36 million in 2025, generating earnings exceeding $ 3.2 billion.

Despite improvements, investors consider medium-term policy consistency and institutional strength rather than short-term recovery alone.

Incentives and institutional reforms

The Government has introduced tax concessions of up to 10 years for strategic investments ranging between $ 50 million and $ 300 million in sectors including tourism, manufacturing, and agriculture, with eligibility criteria requiring the creation of at least 50 local jobs. Concessions also apply to capital goods and construction materials necessary for project implementation.

Industry and Entrepreneurship Development Deputy Minister Chathuranga Abeysinghe pointed to regulatory reform and institutional strengthening as part of the investment strategy.

“We have two broad investment opportunities: the Colombo Port City, which is being developed as a regional financial hub, and projects under the Board of Investment,” Abeysinghe said during an overseas investor forum. “Some investments qualify for tax holidays of up to 15 years, along with other incentives.”

Abeysinghe further acknowledged the inconsistencies in past policies and stressed reform efforts.

“Our economy is now stable and predictable. Key reforms are being implemented, policies are consistent, and the legal framework for investment is being strengthened,” he said, adding that digitisation initiatives and land policy reforms were addressing long-standing bottlenecks.

These measures aim to improve procedural clarity and reduce delays in approvals, although long-term impact will depend on implementation consistency.

Sectoral concentration and export linkages

Meanwhile, manufacturing remains the largest recipient of FDIs, followed by port development and tourism. In the first quarter of 2025, realised FDI totalled $ 203 million, reflecting a 90% increase compared with the same period in 2024. Of that amount, 34% flowed into manufacturing and 20% into tourism and leisure.

BOI enterprises continue to play a substantial role in export performance. From January to April 2025, BOI export-oriented enterprises recorded merchandise exports of $ 2.658 billion, representing 59% of national merchandise exports and 73% of national industrial exports.

Concentration within a limited number of sectors can create exposure to external shocks, particularly in tourism and global trade cycles, while diversification into higher value-added manufacturing and renewable energy technologies could broaden the investment base.

Service and knowledge industries

Damsinghe suggested that service-oriented investment aligned more closely with South Asia’s structural profile.

“Anything that has some service orientation is where South Asia has historically been able to attract investment,” he said.

Sri Lanka has developed a base in information technology services and business process outsourcing, supported by educational attainment and English proficiency. Service exports require less physical infrastructure compared with heavy manufacturing, though they depend on digital connectivity and regulatory clarity.

Sri Lanka’s FDI performance improved in 2025, driven by macroeconomic stabilisation and renewed engagement with investors. Manufacturing, ports, and tourism attracted capital, while reinvestment by existing firms indicated operational continuity. Nevertheless, inflows remain modest relative to economic size and development objectives.

Structural constraints include regulatory complexity, limited comparative advantages in extractive industries and low-cost manufacturing, infrastructure reliability concerns, and the legacy of policy inconsistency. 

Ongoing reforms aim to streamline approvals, strengthen legal frameworks, and digitise processes. The future expansion of FDIs will depend on sustained implementation of these reforms, integration into global value chains, and consistent macroeconomic management.