Zoned Out: Export Ambitions Hindered by Land Limitations

Abstract

The experiences of East Asian and Southeast Asian countries such as Malaysia, Vietnam and Thailand, show that foreign direct investment (FDI) into export-oriented sectors is critical to accelerate growth in manufactured exports. But, compared to these countries, Sri Lanka has a poor track record of attracting foreign direct investment (FDI). The total yearly FDI inflows into Sri Lanka have remained below USD 1 billion for decades. In contrast, during the last decade, average annual FDI into Malaysia was USD 10 billion, Thailand USD 9 billion, and Vietnam USD 12 billion. With an annual FDI track record of over USD 2 billion, even the Least Developed Countries (LDCs) in the region, such as Cambodia and Bangladesh, fare better than Sri Lanka.

Sri Lanka has known for a considerable time that the difficulty of accessing land, a basic requirement for any investment, is a key bottleneck investors face in Sri Lanka. For example, enterprises surveyed by the World Bank in 2011 identified access to land as the most critical challenge faced when investing in Sri Lanka.

Industrial zones, specifically export processing zones (EPZs), have been the blueprint for many East and Southeast Asian countries to create industrial land suitable for investments within a short period. These zones offer multiple benefits, such as pre-allocated land, reliable utility services, better road and port connectivity and unified customs services, eliminating the many infrastructure gaps and bureaucratic hurdles investors face in developing countries.

When Sri Lanka embarked upon an export-oriented investment drive in the 1980s it followed the same path and invested in EPZs. Today, it has 15 operational EPZs. However, a study by the Harvard Center for Development Studies in 2016 found that the country's EPZs were operating at nearly full capacity. In the largest zones, namely in Katunayake, Biyagama, Koggala, Seethawaka, Horana and Mirigama, less than 10% of the land was vacant.