Is Sri Lanka a red-ocean country?

Questions over whether Sri Lanka is a "red-ocean country" have been raised after levels of foreign direct investment (FDI) remained low despite significant improvements to the business environment.

The term "red-ocean" is commonly used in business strategy rhetoric to refer to a company that is easy to enter but hard to survive. However, analysis by Verite Research has led to suggestions that the term should be adopted to the business environment in Sri Lanka, after composite indices and the Doing Business Index revealed some interesting insights.

Sri Lanka jumped 15 places on the World Bank’s well respected Ease of Doing Business Index (covering 185 economies) this year, which usually prompts a surge in overseas investment to the tune of approximately US$1 billion, according to a subsequent report entitled “Does doing business matter for foreign direct investment?” However, Sri Lanka’s FDI actually fell over the two year period from US$896 to US$813 million, which raises several questions.

Despite doing well on seven of the ten indicators that make up the World Bank index, Sri Lanka is doing extremely poorly on three: paying taxes, enforcing contracts and registering property. These are three elements that can directly impact investor confidence, and could hold the secret to the country’s downfall. Considering the investment climate is only as healthy as its weakest links, the high variance amongst key component indicators could be deterring investment.

Authors of the Verité Research report concluded: “The insight then is simple: the lack of reliable long term FDI is related to the problem of long term confidence; and the priority for policy is not to achieve improvements in the composite business index, nor to provide ad-hoc concessions, but to make significant improvements in the three areas in which Sri Lanka is showing up at the tail end of the race.”

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