Business Across Borders: Market and Business Potentiality in Sri Lanka

The report discusses the market and business potentiality in Sri Lanka, analyzing the external factors such as political, economic, social, and technological environments. It also discusses the available resources for gaining competitive advantages and the influence of foreign exchange and reserves on investors. The report concludes with recommendations to enhance the rate of investments in the country.

Running head: BUSINESS ACROSS BORDERS
Business across borders
Name of the student
Name of the university
Author note

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Executive summary
The aim of this report is to discuss about the market and business potentiality in doing business
in Sri Lanka. Diverse external environmental factors of Sri Lanka are being analyzed in this
report. In addition, existing trade policies and regulations along with the influence of foreign
exchange and reserves on the investors are also being discussed in this report. The existing
inflow of foreign direct investment in the country is identified. This report concludes with a few
recommended steps that will further enhance the rate of investments in the country.

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Table of Contents
Introduction......................................................................................................................................3
Overview of the country..................................................................................................................4
Determination of the external factors..............................................................................................4
Political environment...................................................................................................................4
Economic environment................................................................................................................6
Social environment......................................................................................................................7
Technological environment.........................................................................................................8
Available resources for gaining competitive advantages..............................................................10
Influence of foreign exchange and reserve....................................................................................10
Trade policies in Sri Lanka............................................................................................................12
Trend of foreign investment..........................................................................................................12
Recommendations..........................................................................................................................13
Conclusion.....................................................................................................................................13
Reference.......................................................................................................................................15

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Introduction
It is important for the contemporary business organizations to initiate strategy of foreign
investments in order to survive in the current market state of affairs. This is due to the fact that
current scenario is much competitive in nature and it is becoming more important for the
business organizations to go beyond their existing market reach. More organizations are
initiating foreign investments to go beyond their national boundary and increase their market
share in some other countries as well (Aharoni 2015). On the other hand, in relation to the
increasing trend of foreign direct investments, different countries are coming up with various
policies, regulations and incentives to attract more investments.
Therefore, it is important for the business organizations to first identify the different
business factors and environment in the targeted country before going to invest there. Effective
determination of the environment of the targeted country will help to identify the potentiality of
the country in relation to the foreign investments (Salacuse 2017). Sri Lanka is a country from
the South Asian region, which is making news in the recent time regarding attracting favorable
foreign investments in the country.
This report will discuss about the potentiality of Sri Lanka in relation to their business
environment. In addition, the natural resources that can be accessed in Sri Lanka by the business
organizations in gaining competitive advantages will also be analyzed. Prior to the investment in
a particular country, it is important to determine the policies and regulations of that country and
these factors will also be discussed for Sri Lanka.

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Overview of the country
Sri Lanka is located in the Southern part of India and Indian sub continent. Though it is
one of the smallest countries in the South Asian region but in recent time they are improving a
lot in terms of business environment. Furthermore, due to the favorable geographic location in
the Indian subcontinent and having positive diplomatic relationship with its neighboring
countries, Sri Lanka is also positing themselves as one of the safest and potential investment
destinations. Apart from all their geographic and strategic position, Sri Lanka is also having
favorable literacy rate of 92 percent and favorable social structure. Therefore, business
organizations investing in the county will have positive business vibe.
Another major advantage of Sri Lanka that can be gained by the investing firms in the
country is the effective facility of water transportation and sea ports. This is due to the fact that,
Sri Lanka is having some of the world famous sea ports, which will further enhance the business
transactions for the investing organizations (Achchuthan 2013). However, there are still some
factors that will have influence on the business decisions in the long run. The following sections
will discuss about these factors that may get faced in doing business in Sri Lanka.
Determination of the external factors
Political environment
Political environment of Sri Lanka is having both positive and negative factors. One of
the major positive factors is the establishment of democratic government after years of army
disturbances (Ranasinha 2013). Currently, they are having elected government and stable
political system in the country. Moreover, the civil war also came to an end in 2009. Thus,

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currently Sri Lanka is having stable and favorable political environment in the country.
However, on the other hand some challenges also to be face by the organizations.
Figure: 1
Challenges in doing business in Sri Lanka
Source: (Www3.weforum.org 2018)
One of the major political challenges that are identified is the government inefficiency.
Similar to the common culture in the Indian subcontinent, Sri Lanka is having the issue of
inefficiency in government policies and practices. According to the reports, investing business
organizations will face this issue. Labor regulations and tax rates are also identified as the major
challenges for the business in Sri Lanka. Thus, it can be concluded that having favorable and
stable political environment along with the business friendly initiatives of government, business
organizations will have favorable political environment in the country.

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Economic environment
Sri Lanka is considered as a middle income county. However, in the recent time, they are
growing at a positive rate and showing good growth. According to the reports, Sri Lanka was
GDP growth rate of 1.4 percent till January, 2018. Moreover, it is also being reported that they
were having growth rate more than 3 percent in the second half of 2017. Thus, in comparison to
the previous year, growth rate has fallen. Investing business organizations will gain the economic
advantage of positive growth (Jahfer and Inoue 2014). The more will be the growth of the
economy, the more will be the opportunities for the organizations.
According to the reports of World Economic Forum, Sri Lanka is ranked at 38 in terms to
gross national savings. Thus, the average population in the county is having favorable savings
and it will help the investing business organizations in having more market opportunities. On the
other hand, there are few challenges also to be faced by the business organizations in investing in
Sri Lanka. One of the major challenges to be faced is low ranking of Sri Lanka in terms of
government budget balance. This may have negative implication on the fiscal policy in the
country.

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Figure: 2
GDP growth trend of Sri Lanka
Source: (Tradingeconomics.com 2018)
Social environment
Sri Lanka is having smaller size of population with little more than 20 million. Thus, the
market size will be limited for the investing business organizations. However, on the other hand,
the stable social structure and policies of the country is having positive impact on the business
environment. It is reported that the literacy level of the country is more than 92 percent. Thus,
the business organizations operating in Sri Lanka will have the access to the educated and skilled
employees. Moreover, having educated and literate population in place also helps the business
organizations to market their offerings easily.
Though Sri Lanka is having smaller scale population, but they are still having favorable
ranking in terms of domestic market size. According to the report of World Economic Forum, Sri

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Lanka is having the ranking of 57 in terms of domestic market size. Thus, the investing business
organizations will have the opportunity of having favorable market environment in the country.
However, the major social challenges that will be faced by the organizations in operating in Sri
Lanka is the decreasing rate of population. It is reported that the average population is reducing
steadily in Sri Lanka. Thus, the more will be the reduction of the population, the less will be the
market opportunities for the business organizations. World Economic Forum’s report also states
that Sri Lanka is ranked at 60 in terms of quality of education system. Thus, it can be concluded
that Sri Lanka is having favorable ranking in this aspect and it will also be an opportunity for the
business organizations in having educated target customers in place.
Technological environment
Sri Lanka is having increasing trend of investment in research and development.
According to the reports, in the recent years, the investments in this sector are increasing in leaps
and bounds. Furthermore, the major advantages that can be gained by the business organizations
from the development of this sector in Sri Lanka is that majority of the investments are coming
from the public and government sector. In comparison to some other countries, Sri Lanka is
having low rate of investment from the private sector and higher rate from the public sector.
Thus, development of this sector will be accessible to the investing organizations also.

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Figure: 3
R&D expenditure trend in Sri Lanka
Source: (Ips.lk 2018)
According to the report of World Economic Forum, Sri Lanka is having ranking of 90 in
terms of availability of latest technologies. Thus, it may be difficult for the investing business
organizations to have access to the latest and updated technologies in the country. This will be
one of their major challenges. However, it is also reported that ranking of Sri Lanka in capacity
for innovation is 66, which is much more favorable for the business organizations. Moreover, it
also denotes that Sri Lanka is having great potentiality in improving and developing new
technologies in the country. This can be treated as one of the potential opportunities for the
investing business organizations.

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Available resources for gaining competitive advantages
There are various resources ranging from the availability of the natural resources to
strategic resources can be gained by the business organizations in operating in Sri Lanka. Some
of the major natural resources that can be gained by the business organizations in Sri Lanka are
dolomite, graphite and limestone. Thus, business organizations operating in the sectors such as
cement industry will have the advantage of having access to the natural resources. In addition,
another strategic advantage that can be gained by the business organizations in operating in Sri
Lanka is the access to the international sea routes (Barnes and Parkin 2015). As discussed earlier,
Sri Lanka is having some of the major sea ports that will help the business organizations to
initiate their international business strategy. The strategic location of the sea ports in Sri Lanka
can also helps the business organizations to have the easy access to the South East Asian
countries as well as to the Middle Eastern countries.
The geographic location of Sri Lanka in the Indian subcontinent will also help the
business organizations to gain competitive advantages by having the access to the huge market of
India and China. There are various mode of transportation available between Sri Lanka and India
along with having free trade agreements. Therefore, it will be easier for the business
organizations in Sri Lanka to cater to the huge market in the Indian subcontinent.
Influence of foreign exchange and reserve
The current value of the Sri Lankan rupee is 156.66 for US$ 1. Thus, the valuation of the
Sri Lankan currency is much lower than that of the US dollar. This will have both positive as
well as negative implications on the business organizations. Exporting firms in Sri Lanka will
have negative implications due to the reason that they have to pay more in case of further

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devaluation of the Sri Lankan currency (Menkhoff 2013). However, the major business
organizations will have the objective of exporting their products. Thus, it may get affected due to
the lower valuation of the Sri Lankan currency.
Figure: 4
Trend of foreign exchange reserves of Sri Lanka
Source: (Tradingeconomics.com 2018)
According to the above figure and the given reports, trend of foreign reserves with Sri
Lanka is fluctuating in nature. However, the overall trend is favorable and it can help the
business organizations in Sri Lanka by having more positive domestic infrastructure and
globalized business environment (Korinek and Serven 2016).

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Trade policies in Sri Lanka
According to the reports, Sri Lanka is having free market economy with having more
liberalized policies and regulations. Moreover, it is also reported that the business friendly
initiatives by the government of Sri Lanka made them the most liberal and flexible country in the
entire South Asia (Perera, Siriwardana and Mounter 2014). Majority of the sectors are opened for
the foreign investments except for some areas such as retail business if the invested amount is
less than 1 million US dollar, fishing and money lending (Mondaq.com 2018). It is also reported
that government of Sri Lanka is having special economic zones for providing tax incentives and
benefits for the business organizations. The average tariff rate in Sri Lanka is also lower
compared to some other country with maximum rate is 30 percent.
Trend of foreign investment
Figure: 5
Trend of foreign direct investments in Sri Lanka

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Source: (Tradingeconomics.com 2018)
In the recent time, Sri Lanka is witnessing huge growth in inflow of foreign investments
in the country. According to the above figure, January, 2018 witnessed the maximum growth of
foreign investment in the country. It denotes that the business environment of Sri Lanka is
favorable enough sustain foreign investors in the country.
Recommendations
 It is recommended that Sri Lanka should have more strategic agreements with the major
economies especially with the western countries. This is due to the reason that they are
mainly having agreements with the South Asian countries only. This will enhance the
business potentiality of Sri Lanka.
 Sri Lanka should attract more for foreign investors in the research and development
sector in the country. Currently, public organizations are the major contributors in this
sector. Involvement of the private investors will increase the amount of investment and
potentiality.
 Major of the foreign investments for Sri Lanka is coming in the tourism sector and sea
trade. It is recommended that Sri Lanka should attract investments in the manufacturing
sector in order to enhance their domestic infrastructure. The more will be the investments
in the manufacturing sector, the more will be the rate of export for them.
Conclusion
It is concluded that Sri Lanka is having favorable business environment in the country
with having free and flexible trade policies. These are helping them in increasing the rate of
foreign investments in the country. Moreover, this report also discussed about the external

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environmental factors that will be faced by the investors in Sri Lanka. Some challenges as well
as opportunities are being identified from the analysis of external environmental factors. It is also
concluded in this report that strategic location of Sri Lanka in the Indian subcontinent is
providing the opportunity for the business organizations to cater to the huge market of India and
China and access to the international sea routes. A few recommendations are provided, which
will further enable government of Sri Lanka to enhance their potentiality.

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Reference
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of Economics and Sustainable Development, 4(9), pp.147-55.
Aharoni, Y., 2015. The foreign investment decision process. In International Business
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Indian Ocean. Routledge.
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growth in Sri Lanka. International Journal of Economic Policy in Emerging Economies, 7(1),
pp.77-93.
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losses, dynamic gains. Journal of International Money and Finance, 64, pp.104-136.
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