Prioritising National Benefit, People’s Wellbeing, and Environmental Sustainability
Introduction
Foreign Direct Investment (FDI) is widely seen as a driver of economic growth, technology transfer, and employment. As of June 2025, Sri Lanka’s Board of Investment (BOI) reports a year-on-year increase of 18% in FDI inflows, receiving 79 investment proposals valued at US$ 4,669 million—US$ 3,899 million of which is foreign capital. Yet these aggregate figures obscure deeper concerns.
FDI in Sri Lanka, as in much of the Global South, has often entrenched extractive patterns, environmental degradation, labour exploitation, and a loss of policy sovereignty. Amid Sri Lanka’s ongoing crisis—defined by external debt, inequality, and declining public services—a reorientation is imperative. The country needs a people- and environment-centred FDI strategy aligned with national goals and long-term resilience.
The Failure of the Current Model
Sri Lanka’s traditional approach—liberalisation, tax concessions, and export processing zones—has generated foreign exchange and jobs, particularly in garments and electronics. However, these gains come with high social and ecological costs.
Garment workers frequently earn below a living wage, with minimal labour rights, weak unionisation, and limited job security. Industrial zones emphasise low-cost labour and market access rather than value addition or technological advancement. Meanwhile, infrastructure and tourism investments have caused deforestation, land grabs, and ecosystem damage. In many cases, foreign investors profit while local communities bear the burden.
Moreover, FDI has often justified unsustainable borrowing, deepening Sri Lanka’s dependence on foreign creditors and exposing it to external conditionalities.
Imperfect FDI
Several high-profile foreign direct investment (FDI) projects in Sri Lanka have generated serious concerns regarding sovereignty, environmental sustainability, and social justice. The Colombo Port City has raised alarms over sovereignty, legal autonomy, and coastal degradation. Similarly, the Hambantota Port project, leased after Sri Lanka’s debt default, has deepened external dependency without delivering promised economic gains. The Norochcholai coal power plant, plagued by breakdowns and pollution, exemplifies FDI-induced fossil fuel entrenchment. Meanwhile, the Horana Tyre Factory and tourism ventures in Kokilai and Kuchchaveli have been criticised for bypassing environmental assessments, displacing communities, and threatening sensitive ecosystems. These cases highlight a recurring pattern: opaque agreements, limited community consultation, and weak regulatory oversight, often resulting in long-term harm to local livelihoods and national autonomy. They underscore the urgent need for a just and sustainable FDI framework that prioritises national interest, social equity, and environmental stewardship.
Principles for a Just Investment Approach
Sri Lanka’s FDI strategy must shift from quantity to quality—prioritising investments that serve national development, equitable returns for workers, and ecological sustainability.
FDI should target sectors aligned with inclusive development. In agriculture, support should favour agro-ecology and localised food systems over monoculture and export-oriented agribusiness. In energy, investment must prioritise solar, wind, and small-scale hydro, but avoid energy colonialism. Community ownership, local component manufacturing, and grid integration should be encouraged.
In manufacturing, FDI should enable a transition to value-added production in garments, food processing, eco-materials, and electronics. This requires conditions on local sourcing, skills development, and environmental compliance. Public health and education investments must expand access and build domestic capacities. In the digital economy, FDI should promote open knowledge platforms, ethical AI, and data sovereignty.
Strengthening Governance and Accountability
Achieving this vision requires strong governance. A National Investment Review Board—comprising government, civil society, labour, and environmental representatives—should vet major FDI proposals. Evaluation must consider financial, social, and environmental impacts, along with technology transfer and employment potential.
Mandatory, participatory environmental and social impact assessments should be introduced for medium- and large-scale projects. Projects meeting equity and sustainability standards may receive targeted incentives such as tax breaks or fast-tracked approvals. Conversely, those imposing social or ecological harm should face disincentives, including land-use restrictions or regulatory penalties.
Worker and community participation must be integral. Mechanisms such as labour councils, co-ownership schemes, and community advisory boards can ensure those affected have a say. Annual public reporting on investor performance will strengthen transparency and accountability. In addition, online monthly performance dashboards can provide real-time updates on progress toward agreed social and environmental targets, enabling continuous public scrutiny and informed policy oversight.
Building Domestic Capacity Through FDI
Investment must be a means to develop domestic capabilities. FDI contracts should include enforceable provisions on local procurement, training, and knowledge sharing. Joint ventures with state-owned or cooperative enterprises can facilitate long-term skills transfer. Universities and research institutions should be embedded in investment planning to support innovation and national development.
Regional Cooperation and Alternatives to Debt-Led Investment
A just FDI strategy must be embedded in regional and international solidarity. Sri Lanka should collaborate with South Asian and Global South countries to set common standards for labour rights, environmental safeguards, and ethical investment—reducing harmful competition.
Regional development banks and sovereign wealth funds can provide alternative financing to debt-driven investments. Additionally, Sri Lanka should resist debt-swap mechanisms — that fail to provide sustainable debt restructuring solutions such as debt cancellation and large haircuts.
Energising Overseas Sri Lankans
The Sri Lankan diaspora can be a key partner in this reoriented investment strategy. Beyond remittances, diaspora members bring skills, global networks, and a vested interest in national wellbeing. Their investments often prioritise social returns over short-term profit, supporting public goods like education and green infrastructure.
To harness this potential, Sri Lanka must establish clear policy frameworks that encourage diaspora contributions aligned with national priorities—offering incentives, institutional support, and participatory mechanisms for engagement.
Political Will and Institutional Reform
Transforming FDI governance will require overcoming resistance. Certain foreign investors may oppose labour or environmental regulation, invoking protections under investment treaties. Sri Lanka must review and renegotiate any bilateral investment treaties that limit sovereign regulatory space.
Institutional reform is also essential. Coordinated action across ministries, enforcement of laws, and robust monitoring mechanisms are prerequisites. Public support will be vital to ensure democratic legitimacy and political resolve.
Charting a Different Course
Sri Lanka faces an economic, ecological, and social crisis. It reflects the failure of a growth model rooted in export orientation, debt dependence, and deregulated capital inflows. But this crisis presents an opportunity to redefine national development.
By crafting an FDI strategy based on justice, sustainability, and sovereignty, Sri Lanka can ensure that investment serves the people and the environment. Rather than rejecting FDI, the country must reform its terms—welcoming investment that builds national capacity, respects ecological limits, and advances a fairer, greener future.
Reference:
Sri Lanka Sees Significant Surge in Foreign Direct Investments Amid Stable Investment Climate—BOI
Author:
Charith Gunawardena
APPENDIX: Towards Ethical and Impact-Driven FDI in the Global South
Foreign Direct Investment (FDI) is often heralded as a catalyst for development, yet in many cases, it prioritises profit over people and the planet. However, a growing number of investments in the Global South are demonstrating that it is possible to centre human wellbeing and environmental sustainability while still achieving viable economic outcomes. These high-quality, impact-driven investments offer alternative models that challenge the extractive tendencies of traditional FDI.
One compelling example is Grameen-Danone Foods in Bangladesh, a joint venture that produces fortified yoghurt for undernourished children while supporting rural farmers and women entrepreneurs. Operating as a social business, the model reinvests profits for community benefit, prioritising health and livelihoods over returns. Similarly, Solar Sister’s operations in Uganda, Nigeria, and Tanzania empower rural women to distribute clean energy technologies, addressing both gender inequality and energy poverty while reducing environmental harm.
In South Africa, the Jeffreys Bay Wind Farm, developed by Mainstream Renewable Power, showcases how renewable energy investment can include local ownership, job creation, and community development. Meanwhile, the EcoEnterprises Fund in Latin America invests in biodiversity-friendly enterprises such as organic agriculture and ecotourism, supporting both conservation and sustainable rural livelihoods.
These cases demonstrate several common principles: alignment with local development needs, willingness by investors to accept moderate financial returns in exchange for social or environmental impact, and strong governance mechanisms that ensure accountability and local participation. Crucially, they also highlight the importance of enabling policy environments—such as South Africa’s REIPPPP—that promote inclusive, green investments.
As Global South countries like Sri Lanka seek to reorient their economies toward resilience, equity, and ecological responsibility, these examples offer important lessons. High-quality FDI must not only bring capital and technology but also support long-term goals such as community empowerment, environmental regeneration, and economic sovereignty. Moving forward, governments, investors, and civil society must work together to mainstream investment models that put people and the planet before profit.