Nalyze Investment Opportunities in Sri Lanka

Running head: International Business Experience (BA 670)

BA670 (SN9) Arcadia University International Master of Business Administration

Individual Assignment Sandip Kumar Kundu (Student Id: P000099745)

Word Count: 4300

International Business Experience (BA 670)

Introduction: The end of Sri Lanka’s long-running civil war in May 2009 and prevalence of peace for more than four years has given a new rays of hope to usher an era of sustained positive growth and economic development. Sri Lanka can still be a difficult place to business due to poor infrastructure, corruption and erratic policy environment, but the geographical natural location, the rich culture and cheap skilled labour forces can still outpaces the pulling forces and can prove a great destination for investment. Nonetheless compared to other South Asian emerging market it’s relatively open to foreign investment and offers relatively open financial system, well educated skilled workforce. Some US and other advance countries have realised worthwhile returns on investment in Sri Lanka

Objective The purpose of this report is to study and analyze the effectiveness of Sri Lanka as an emerging economy and relevance of various elements like social-cultural environment, political condition, economic condition, legislation on the development of the country’s economy and prospect for future business growth. The report also provides insights of various industries that have potential to flourish in the country and recommendations for long term sustainable growth of the country in those segments.

Background: Sri Lanka, officially the Democratic Socialist Republic of Sri Lanka, is an island country located in the Indian Ocean off the South-eastern coast of India. As a result of its location in the path of major sea routes, its strategic naval link between West Asia and South East Asia and was colonized by Portuguese, Dutch, English. It got its independence from the British in the year 1948. Sri Lanka is a multi-cultural diverse country home to many religions, ethnicities and languages. The Sinhalese are the main inhabitants, although there are many ethnic minorities like Sri Lankan Tamils, Moors, Indians Tamils, Burghers, Malays, Kaffirs. The country’s recent history has been marred by a thirty year civil war ended in a victory of military in 2009. The country has had a long history of international engagement, being a founding member of SAARC and a member of United Nations, the Commonwealth of Nations, the G 77 . This is the only country in South East Asia having high Human Development Index. Appenix A figure 1 provides the detailed country profile of Sri Lanka.

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International Business Experience (BA 670)

In order to analyze the effectiveness of Sri Lanka as an emerging economy we need to analyze the various factors – like political condition, socio economical culture, economic condition, technology, legal and environment which have that great influence on the success of any business in a country. Conducting global business means dealing with consumers, strategic partners, distributors, competitors, suppliers, government official, financers of different cultural back ground. Political: Sri Lanka is a democratic, socialist republic and a unitary state which is governed by semi presidential system with a mixture of presidential and parliamentary system. The current constitution was adopted in 1978. The political system consists of the President and a Cabinet of Ministers headed by the President. The President, who is elected directly by the people for a six-year term is Head of the State and Head of Government. The Prime Minister is appointed by the President from among the Members of Parliament. The legislature is called Parliament and consists of 225 representatives and the Ministers are appointed by the President from the member of Parliament. The Members of Parliament are elected for 6 year terms at periodical General Elections through a system of proportional representation. The Country over the last decade has undergone a swift change in its political scenario and especially after the end of civil war in 2009 has achieved stability in its political system. Soon after the independence the newly formed national government started to favour the Singhalese, ethnic majority community and discriminating against the Tamil minority. This led to ethnic conflict that fuelled the civil war from 1983 to 2002. Though the two parties laid down their weapons in 2002, but the actual peace was restored after the government and military finally declared official victory over the LTTE (Liberation Tamil Tiger Eelam). The country has developed a strong market economy and a liberal free trade investment regime. Even though Sri Lanka has adopted democratic political system, but current president , Mahinda Rajapakasa has introduced a more authoritarian and centralized rule with majority of the decision taken by him and a small trusted. Although Sri Lanka Initially committed to privatise its national Companies but current government has increased control of state over both Private and Government business and even some cases reversed several privatisations. Necessary due diligence is recommended to avoid contracting corrupt agents in expediting business approval process. It is not uncommon practice to bribe government official to get licenses for business or receiving approval for
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usage of public utilities such as electricity, water. Current political situation is stable and foster growth. Social: Since independence majority of Sinhalese have controlled the government and have stabilized their dominance in the society. Predominantly Buddhist, mostly Sinhalese live in the densely populated southwestern part of the island. The Tamilians are the largest minorities with both Hindu and Muslim religions. The Tamils, who live in the northern and eastern parts of the island, object to attempts to classify them as immigrants, since their ancestors migrated from southern India more than a thousand years ago. Muslim Tamils, known as Moors, form the second-largest Tamil community. Unlike the Sri Lankan Tamils, the Muslim Tamils generally support the government. Their political involvement has concentrated on their demand for a separate province in the East that would contain a Muslim majority. Indian Tamils, who live primarily in the central hills, are descendants of southern Indians brought to Sri Lanka by the British as plantation workers in the 19th and early 20th centuries. Tamils have played an important role in electoral politics, effectively organizing in a trade union, the Ceylon Workers’ Congress (CWC), which also serves as a base for their political party. Regional and Class Divisions: Sinhalese are the main constituents of Sri Lanka and majority of them dwell in the western, southern, central, and north- central parts of the nation. In the rural regions of the wet zone lowlands, they constitute more than 95% of the population. The largest concentration of Sri Lankan Tamils is in the Jaffna Peninsula and the nearby districts of the northern lowlands. Most Indian Tamils work on plantations and live in the higher regions of the central highlands. Appendix B Figure 2 to 5 provides the details of socio Economic condition of Sri Lanka. Education. Education up to the age of 12 is compulsory and is free up to University. 85% of children under age 16 attend school. The Government is rolling out various initiatives to improve the literacy rate which is at 92% in 2009. The statistical data for education system including number of government schools and private school, number of pupils and teachers are shown in chart .

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Health. Sri Lanka’s average life expectancy in 2006 was 69 years for males and 76 for females. Most health services are free in government hospitals and dispensaries, but private health care facilities are available. The level of medical care has improved other the years to a significantly higher level and thereby reducing the infant mortality rate from 34 per 1,000 live births in 1980 to 19 per 1,000 in 2009. The statistical data of Public Health services including number hospital, number of doctors and patients are shown in chart below .

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International Business Experience (BA 670)

Economic: With an economy worth $ 64 Billion (2012 IMF estimate) and $170 Billion (PPP estimate) and per capita GDP of $ 7900 Sri Lanka is undoubtedly one of the emerging economies in South east Asia. Sri Lanka began to shift away from a socialist orientation in 1977. Since then, the government has been deregulating, privatizing, and opening the economy to international competition. The civil war which lasted for more than 25 years also restricts Government to initiate any major diversification and liberalization. Increased privatization, economic reform, and a stress on export-oriented growth helped to improve the economic performance with average annual GDP growth was 5.2% over 1991-2000. In 2001, however, GDP growth was negative 1.4%,the first contraction since independence. The economy was hit by a series of global and domestic economic problems and affected by terrorist attacks in Sri Lanka and the United States. In 2002, the economy experienced a gradual recovery. Early signs of a peace dividend were visible throughout the economy—Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control. However, as the civil war ended in May 2009 the economy started to grow at a higher rate of 8.0% in the year 2010. This growth is mainly attributable to revival of in tourism industry, the agriculture industry and also increased in the foreign Domestic Investment. The largest share in FDI has been the service sector> The Key economic indicators are shown below: All the charts have been extracted from a report Sri Lanka Socio-Economic Data -2011 published by Central Bank of Sri Lanka.

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International Business Experience (BA 670)

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International Business Experience (BA 670)

Legal System: The legal system of Sri Lanka is highly complex and mixture of several laws and reflects diverse cultural influences. The current legal system is based on the frame of legal system of British common laws and Roman- Dutch owing to its colonial history. Criminal law is fundamentally British. Basic civil law is Roman-Dutch. Laws pertaining to marriage, divorce, inheritance are communal additionally it is also influenced by the ancient local laws- Kandayan, Sawalmai law and the Muslim law. Sri Lanka's judiciary consists of a supreme court, a court of appeals, a high court, and a number of subordinate courts. Civil cases are heard by the District Courts, and the Criminal cases by Magistrates’ Courts and High Courts. From decisions of these trial courts, an appeal lies to the Court of Appeals and then to the Supreme Court. Parliament makes law in Sri Lanka. Laws are published in Acts of Parliament. All commercial matters exceeding the value of Rs 3 million (approximately $26,000) fall within the jurisdiction of the Commercial High Court of Colombo. There are also a number of tribunals which exercise judicial functions, such as the Labor Tribunals to hear cases brought by workers against their employers. The Judiciary system often being influenced by politician.

Corruption and Bureaucratic Obstacles: Corruption is rampant in Sri Lanka in almost all level. In Transparency International’s Corruption Perception Index for 2009 Sri Lanka ranks 97th with a score of 3.1 out of a possible 10 points. Based on World Bank Control of Corruption Index which ranges from BA 540: Individual Assignment Sandip Kumar Kundu Page 8

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2.5 to +2.5, Sri Lanka has improved to -0.13 in 2006 and 2007 from - 0.26 in 2005. According to Transparency International, corruption is perceived as most common in appointment of the political position to government institutions and in government procurement contracts and also in high frequency/low value transactions. The police force and the judiciary are perceived to be the most corrupt public institutions. Corruption is also a persistent problem in customs clearance and enables wide smuggling of certain consumer items, to the detriment of legitimate manufacturers and importers.

International Trade Agreement: Sri Lanka has free trade agreement with India and Pakistan. This free trade agreement also helps to attract other foreign investors who are entering in India and Pakistan. Under the FTAs, foreign investors in Sri Lanka can enjoy duty free preferential access to India and Pakistan. Sri Lanka is also a member of SAFTA (South Asia Free Trade Area) which offers regionalized tariff reduction for import from member countries. The Government of Sri Lanka has signed investment protection agreements with the United States (which came into force in May 1993) and with the following other countries: Belgium; People’s Republic of China; Denmark; Egypt; Finland; France; Germany; Indonesia; India; Iran; Italy; Japan; Korea; Luxembourg; Malaysia; Netherlands; Norway; Romania; Singapore; Sweden; Switzerland; Thailand; United Kingdom.

Labor Conditions, Labor laws, termination, Trade Union: Sri Lanka’s majority of the labor force is literate with average of eight years of education and two third of labor force is male. In 2009, 7.6 million Sri Lankans were employed, with 43% in services, 25% in industry and 32% in agriculture jobs. Overall, 41% of the workforce is in the private sector and 16% in the government. Self employed workers constitute 30% of all employed while another 11 % were unpaid family workers. About 61 % of the employed are in the informal sector. The unemployment rate is decreasing over the last decade and is currently 5 %. Majority of the workforce like other Asian countries look for “white collar” job ; however the majority of the job offered are manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. The construction, plantation and apparel industries report a shortage of workers. In order to match the demand and supply gap the government has initiated appropriate steps to prepare the
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graduates well suited for the job and also better matches between skill set of graduates and jobs. The labor laws are quite similar to other South East Asian countries and it’s pro-worker. It is very difficult to terminate a worker who has been employed more than six months without paying appropriate severance package which varies from 2.5 months’ salary to 48 months salary depending on the length of service. Also the numbers of official holidays are quite high in compared to other countries which makes the productivity bit low compared to other countries. Currently 20% of the 7 million-strong work force is unionized but this percentage is declining. About 15% of labor in the industry and service sector is unionized and majority of the trade unions are affiliated with political parties, creating a highly politicized labor environment. In many cases several unions, affiliated with different political parties, work together at state-owned enterprises. Several trade unions with affiliations to major political parties have formed themselves into an organized group, the National Association for Trade Union Research and Education (NATURE), to promote education and training among trade unionists. All workers, other than police, armed forces, prison service, and those in essential services, have the right to strike. Human Development Index: Sri Lanka’s HDI value for 2012 is 0.715—in the high human development category— positioning the country at 92 out of 187 countries and territories. Between 1980 and 2012, Sri Lanka’s HDI value increased from 0.557 to 0.715, an increase of 28 percent or average annual increase of about 0.8 percent. All the critical factors like life expectancy, no of years in school and GNI per capita is increasing at rapid progression which is a true indication of economic and social development of the country. Various charts on HDI are extracted from a report “Human Development Report 2013 -The Rise of the South: Human Progress in a Diverse World” published by UN.

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Figure 1: Trends in Sri Lanka’s HDI component indices 1980-2012

Gender Inequality Index (GII) Sri Lanka has a GII value of 0.402 calculated based on gender-based inequalities measured in three dimensions – reproductive health, empowerment, and economic activity. Its current ranking is 75 out of 148 countries in the 2012 index of their male counterparts, which reflects that on this count they are fairly equal. Approximately 33.4.7 % of workforce is female compared to 76.3 for men.In comparison Pakistan and India are ranked at 123 and 132 respectively on this index.

Multidimensional Poverty Index (MPI) Based on 2003 survey data 5.3 percent of the population lived in multidimensional poverty (the MPI ‘head count’) an additional 14.4 percent were in danger of entering into multiple deprivations. The MPI value of Sri Lanka, which is the share of the population that is multi- dimensionally poor adjusted by the intensity of the deprivations, was 0.021. 7 % of Sri Lanka’s population lives below poverty based on PPP US$1.25 per day.

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Comparative Assessment:
This section of the report analyzes the comparative advantage of Sri Lanka against emerging economies having similar background and natural resources. Based on 2010 statistics, services accounts for 57 % of Sri Lanka’s GDP, industry 30 % and 13% on account of agriculture. The GDP rose from 2091 B in 2004 to 5602 B Rs in 2010and the majority of the increase was attributed to increase in GDP for services from 1230 B Rs. To 3236 B in the same period Other sectors like industry and agriculture also rose appreciably in the same time period but it’s the service industry dominated by its tourism industry which set off the pace. Sri Lanka’s tourism industry was a victim of ethnic conflict from early 1980 to 2009Post civil war to capitalize from the expanding global tourism industry, Sri Lanka reorganized and restructured its tourism industry where Government controlled the policy making, implementation and control and private sectors participated in providing the hardware for the tourism facilities such as hotels, resorts, travel bookings etc. Sri Lanka gained considerable advantage as a tourist destination for low end tourist primarily because of its natural geographic beauty, great beaches, unique cultural heritages and low labour cost; however poor infrastructure and other socio political issues such as corruption, law and order acts as deterrent for many tourists from developed countries. As such the country has all the major natural resources including skilled labour force to attract foreign investment in all the three sectors- service, industry and agriculture. Apart from the tourism industry, another industry which is going to flourish in the service sector is the education industry. With the need of highly skilled labour in both service and industry segments (IT, BPO) this industry is poised for a rapid growth. With the reduction is government fund allocation in this sector and a reduced level of engagement from private sector enterprises it is quite obvious that there is a huge opportunities for the

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private colleges and universities to venture out. The number of public schools remains very high (3, 932, 722) compared to private schools (117,362)

Salient features of Sri Lanka’s competitiveness against other emerging nations are summarized in table below. The graphs showing the comparison is attached in Appendix B

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Based on the above comparative analysis its quite obvious that Sri Lanka has substantial edge over its close competitors as possible destination for foreign investment in service, education and tourism industries.

SWOT analysis: SWOT analysis has been performed to assess the current situation of the country and based on its Strength and Weakness and possible Threats and Opportunities decision is to be made in which sector investment is to be made to improve the competitiveness of Sri Lanka.

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Future potential assessment of the country:
Prior to venturing into any country it’s essential to carry out an accurate analysis of country specific advantages using some of the scientific models. To explore Sri Lankas’s competitiveness in global industry I’d employ Michael Porter’s diamond model as a theoretical frame work to analyze.

A. Factor Conditions: A country creates its own important factors such as skilled resources, cheap labour, modern management practices, physical resources, knowledge base and infrastructure. The effectiveness of a country depends to the extent how these factor conditions are upgraded and employed rather than stock of these factors. In order for Sri Lanka to improve its competitiveness it has to implement necessary strategic initiates to upgrades these factors.
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Human Resources: Cheap labor, which is abundantly for production which is the main advantage for its competitive edge will be eroded over time as other countries like Vietnam, Myanmar and Madagascar are having lower wages. Also the productivity of Sri Lankan workers is lower compared to other countries like China. Skill level of the Sri Lanka’s worker has a positive factor as the workforce is easily trainable and also has much higher literacy rate.

Physical resources: Geographic natural beauty, great beaches, export processing zones providing tax benefits, availability of raw material for apparel industry have positive contribution; where as poor road and travel infrastructure are some of the negative factors. Knowledge Factor: Sri Lankan universities are upgrading themselves to impart the knowledge and skill the work force require in the areas of technical and design, marketing, production , R&D, quality control and customer service for the industries to flourish. As such the knowledge factor for Sri Lanka is positive compared to other South Asian countries. Infrastructure: Due to strategic location Sri Lanka is having advantage in infrastructure condition compared to other South Asian countries. Also the recent expansion of Bandaranayke air port and proposed port at Katunayake provides some positive outlook. The cost of infrastructure facilities such as electricity, water is providing some negative factor for Sri Lanka’s industrial and service sector growth (Refer Figure 4 of Appendix B). Zero VAT structure and efficient in customs procedures are providing another positive spin. Overall Sri Lanka is still positive compared to other South Asian countries. Capital: The investment policies adopted by Sri Lanka provide positive outlook and enhancing foreign investment.

B. Demand Conditions: As Sri Lanka is pushing for more aggressive FDI and investing more in infrastructure, education and other service industries this will increase the Country’s overall economy which can be seen from the growth in GDP over last several years. This will also lead to increase in the purchasing power of the local people leading to increase in local demand for certain products like Agricultural, apparel,
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education. As such local firms will provide more attention to these products than foreign firms which will in turn lead to competitive advantage for the local firms in Sri Lanka when they begin exporting. The cultural and geographic proximity to emerging Niche markets like India and other South Asian countries and direct historic and cultural link with EU and EU will act as catalyst for further growth in demand.

C. Related and Supporting Condition: Considering tourism industry, apparel industry, agricultural industry are the prime industry for Sri Lanka the related support industries are product and services, knowledge services industry and the education industry. The Knowledge services industry can provide superior IT solution and making the business process much faster and also increase the speed in communication and effectiveness of the business. The IT industry can revolutionize the whole industry by brining speed and automation. The education industry on the other hand can help all the industries by supplying skilled workers as well as managers to run these businesses. Since most of the industries in Sri Lanka lack in their capabilities in design, R&D, centralized product development there is a demand for developing such skills locally which could be offered by SMEs. Also

D. Firm Strategy, Structure, and Rivalry Sri Lanka’s comparative advantage from the very beginning remained its cheap, skilled and trainable labour forces, geographic natural beauty and rich culture. As such Sri Lanka should adopt the strategy of cost leadership which can create immediate market for its economic growth and for long term sustenance it can slowly move to service leadership, whereby it can provide better quality of services to its customer in comparison to other nations who are providing similar services. Currently Sri Lanka is focusing too much on beach segment tourism, but they should also focus on other areas like casinos, integrated resorts cultural monuments to diversify its tourism portfolio to expand the arena of tourism industries and collaborate with other foreign universities to promote growth in education industries.

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Conclusions and Recommendation: Sri Lanka in many ways is superior destination for foreign direct investment in tourism, education and BPO outsourcing industries compared to Vietnam and many other South East Asian countries. The country, following the recede of war is uniquely positioned to offer companies talented and dedicated workforce, favourable business environment, reasonable good quality and moderately priced infrastructure. As the industry grows the cost of doing business will continue to grow but Sri Lanka will undoubtedly maintain its competitive advantage as a very favourable business environment merely because of its ability to offer better quality of service at competitive cost. With various initiatives taken by Government and continued efforts to expand the talent base, reduce red tape, improve infra- structure, and establish new knowledge cities around the country, we can expect Sri Lanka to become a major player in the tourism, education and IT, BPO, and knowledge services industry in the next few years. However to maintain sustainable long term growth of economy Sri Lanka should consider the following: 1. Collaborate with Foreign universities to improve the quality of education specifically in the field of R&D and management development so that it can generate enough technocrats and managers to run its business profitably 2. To implement an effective marketing strategy to brand itself a great tourist destinations to attract foreign tourists. 3. To promote eco-tourism and also venture into Casinos and integrated resort to compete with other Asian countries like Singapore, Hong Kong, Malaysia. 4. Invest in education and workforce development and initiate drive to improve quality of services offer and move from cost leadership to service leadership. 5. Improve infrastructure and political governance to reduce corruption level

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References Sri Lanka Socio-Economic data 2011- Vol.XXXIV – by Central Bank of Sri Lanka The competitive Initiative (TCI) in Sri Lanka by JE Austin Associates Inc. for the World Bank International Trade Department. Sri Lanka Country Report – BTI 2012 Competitive Benchmarking: Sri Lanka Knowledge services by A. T. Kearney Analysis Does one size fit all? A dual double diamond approach to country-specific advantages – Dong-Sung Cho, Hwy-Chang Moon, Min-Young Kim 22nd October 2008

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APPENDIX A Figure 1:

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Figure:3

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APENDIX B

Comparison chart of various parameter between Sri lank and other Countries Figure -1

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Figure-3

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Figure -5

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Figure-7

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Figure-9

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