Contents

INTRODUCTION...................................................................................................... 2
MACRO-ECONOMIC FACTORS................................................................................. 2
POLITICAL RISK FACTOR...................................................................................... 2
THE ECONOMIC FACTORS................................................................................... 2
THE SOCIAL FACTORS......................................................................................... 3
OPENNESS.......................................................................................................... 3
PHARMACEUTICAL BUSINESS RELATED ISSUES.....................................................4
MARKET SIZE...................................................................................................... 4
COMPETITION ANALYSIS...................................................................................... 4
LABOR COST....................................................................................................... 4
SKILL LABOR....................................................................................................... 4
TAX BENEFIT....................................................................................................... 5
PROCESS OF FDI IN SRI LANKA.............................................................................. 5
STARTING A BUSINESS........................................................................................ 5
DEALING WITH CONSTRUCTION PERMITS...........................................................6
CONCLUSION......................................................................................................... 7

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INTRODUCTION
I have selected pharmaceutical industry in Sri Lanka to invest my 50crores TK. With
increasing health awareness among Sri Lankans come a booming demand for medications
and other pharmaceutical products. In recent years, the pharmaceutical industry in the country
has grown tremendously. If you have enough capital to set up a pharmaceutical company, you
will make lots of profit in the long term. But if your capital is low, you can start small by
buying pharmaceutical products as a wholesaler or retailer and selling to consumers.

MACRO-ECONOMIC FACTORS
POLITICAL RISK FACTOR

A host economy with high political risk tends to discourage FDI flows into its market, since
political volatility hurts the profitability of foreign investment. Foreign investors who expand
into a foreign market, thus, have to worry about political risk of the host economy, since
political volatility and violence may damage the investment, diminish the efficiency of
overall market and, thus, hurt the profitability or survival of their investment. Political risk is
an important determinant of foreign investors location decisions, also due to the nature of
FDI.

Three major types of political risk discourage foreign investment since they damage its
profitability and survival:

1. Nationalization or expropriation of foreign assets, which tends to be rare, and breach

of contract, which occurs more often, threaten foreign investment;
2. Policy instability and arbitrary regulation in FDI-related policies create uncertain
investment environments and hurt the profitability of foreign investments; and,
3. War and political violence, including terrorist activities, can damage foreign assets
immediately and discourage the productivity of a host economy in the long run.

THE ECONOMIC FACTORS

Sri Lankas gross domestic product grew by 7.4 during 2014, up slightly from 7.2 a year
earlier. Continued high growth was driven by faster expansion in industry, which offset
substantially weaker growth in agriculture.

Provisional estimates show that industry provided the lift to growth as it is advanced by
11.4%, up from 9.9% a year earlier, reflecting fast expansion in construction and a pickup in
manufacturing apparel for export. Performance would have been better if not for a temporary
slowdown in garment manufacturing and exports in October and November. Growth in 2015
will be affected by the political transition and the revised priorities of the government.
Construction will slow after leading growth in recent years, driven by large government
infrastructure projects. Political uncertainty would retard private investment. While

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investment is likely to lose momentum in 2015, consumption is expected to pick up. Price
reductions for food and fuel will encourage private consumption, and government
consumption will rise with the shift in the budget toward recurrent expenditure.

THE SOCIAL FACTORS

The social status of the host country can also be considered as an important determinant of
FDI. However, FDI models based exclusively on host country social status characteristics
have yet to be developed. This may be attributed to the difficulties associated with the
measurement of social status as well as the possible correlation between social status
characteristics and economic considerations. Poor socio- economic conditions of Sri Lanka
discourage FDI. Population growth rate and literacy rate of labor force are used as proxies to
measure socio- economic condition of the country. The literature shows strong support for the
conjecture that redistributive social welfare state policies are valued by multinationals,
because they signal a governments commitment to social stability. Higher literacy rate means
greater productivity, thus higher returns to investment.

OPENNESS

Sri Lanka government has increasingly been liberalizing its FDI regimes since early to mid-
1980s depending on the region and is looking for best practice policies. In theory FDI can
bring stable external finance, new techniques, skills and management expertise and market
access, but FDI can also lead to rising inequalities, direct and indirect crowding out of local
capabilities and perhaps an erosion of the tax base and labor and environmental standards. In
practice, it is not enough to focus on the level of FDI and one has to rely on econometric
studies. There are many macro and sectorial empirical studies showing a positive correlation
between FDI and growth or productivity, but micro-level evidence finds that such studies
confuse composition effects with genuine spillover effects. At the micro-level, the evidence is
mixed.

PHARMACEUTICAL BUSINESS RELATED ISSUES

MARKET SIZE

Market size as measured by GDP or GDP per capita seems to be the most robust FDI
determinant in econometric studies. Sri Lanka has a quite good market with a population of
20,483,000 and per capital income $3170. This is the main determinant for FDI. FDI will
move to countries with larger and expanding markets and greater purchasing power, where
firms can potentially receive a higher return on their capital and by implication receive higher

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profit from their investments. Market-size hypothesis supports an idea that a large market is
required for efficient utilization of resources and exploitation of economies of scale.

COMPETITION ANALYSIS

The State Pharmaceuticals Corporation was established in 1971. After the establishment 28
years SPC has been the sole supplier of pharmaceuticals, surgical consumable items,
laboratory chemicals and equipment to all institutions administered by the health ministry.
Their well-established island wide network of distribution ensures that their products reach
every part of the country. Still SPS continuing to hold about 30% of the private sector market
share which is the largest share for any single pharmaceutical firm. Hams pharmaceutical
over the last six decades they have held the position as Sri Lankas leading pharmaceutical
importer and distributor, and they have got the figures to show for it. When combined with
Hemas Surgicals & Diagnostics, their annual turnover exceeds 9 billion LKR. Additionally,
they boast a collective team of over 650 talented employees and represent more than 25 of the
most distinguished international and regional pharmaceutical manufacturers

LABOR COST

Sri Lanka has a statutory minimum wage hourly $0.51, and no worker in Sri Lanka can be
paid less than this mandatory minimum rate of pay. Employers who fail to pay the Minimum
Wage may be subject to punishment by the Labor Department. While the Wages Board
Ordinance of 1941 and Shop and Office Employees Act of 1954 play a dominant role in the
wage fixing mechanism; Regulations, Collective and Individual Bargaining also work in the
formal sectors of the Sri Lankan economy.

SKILL LABOR

While Sri Lankans spend more time in the education system when compared to their South
Asian counterparts, when it comes to labor market demands, employers find the supply of
skills does not meet the market needs. Thus the quality and relevance of the education system
is questioned. In addition to the skills mismatch, the shortfall of skills in demand in the labor
market undermines productivity and challenges the growth ambitions of Sri Lanka. This lack
of skill labor may cause some problems for the FDI.

TAX BENEFIT

High rate of corporate taxes in host countries reduces the amount of return available for
foreign investors. Sri Lankan Government provides a very lucrative investment opportunity

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in their pharmaceutical industry with the tax exemption of 5years and after that it will be
charged 12% tax on pharmaceutical foreign direct investment.

PROCESS OF FDI IN SRI LANKA

Sri Lanka ranks 99 in doing business rank, the best among the south Asia.

STARTING A BUSINESS

There are nine steps to follow for starting a business in Sri Lanka.

Serial Procedure duration Required cost

no
1. Reserve a unique company name 2 days LKR 1,000 + 12% VAT

2. The company secretary and 1 day see procedure details

director sign a consent
3. Register at the Department of the 2 days LKR 15,000 as the registration fee
Registrar of Companies for Form 1 and LKR 1,000 for
each of Forms 18 and 19 and the
articles of association + 12% VAT
4. Public Notice of Incorporation 3 days LKR 7,000

5. Register with the tax authorities 1 day no charge

and obtain (TIN) from Taxpayer
Services Unit of Inland Revenue
Department
6. Register for VAT with the Inland 1 day no charge
Revenue Department VAT
Registration Branch
7. Payment of stamp duty on the 1 day 0.5% of the total stated capital in
issued shares at Stamp Duty multiples of LKR 5
Branch of Inland Revenue
Department
8. Notice to the Department of 1 day LKR 1,000 for Form 6
Registrar and Companies
regarding the issue of shares
9. Register with the Department of 1 day no charge
Labor and obtain the EPF number

DEALING WITH CONSTRUCTION PERMITS

Serial Procedure duration Required cost

no

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1. Submit building permit application to Municipal 1day no charge
Council of Colombo (CMC)
2. Receive on-site inspection from Municipal Council 1day no charge
of Colombo (CMC)
3. Receive on-site inspection from Fire Service 14days no charge
Department and obtain fire safety clearance for
proposed building
4. Obtain building permit from Municipal Council of 67days LKR 150
Colombo (CMC)
5. Request and receive water sanction inspection and 1day LKR 204
sewage inspection
6. Request and receive on-site inspection by fire 1day no charge
inspector of Fire Service Department of CMC
7. Obtain the water sanction and the drainage 7days LKR 21,420
certificate from Water and Drainage Department of
the Municipal Council of Colombo (CMC)
8. Request and receive on-site inspection by Area 1day no charge
Inspector of the Planning Department of the
Municipal Council of Colombo (CMC) to check the
conformity of the warehouse to the development
permit
9. Obtain certificate of conformity from Municipal 42days LKR 701
Council of Colombo
10. Apply for water connection from National Water 1day no charge
Supply and Drainage Board
11. Receive on-site inspection by inspector from 1day no charge
National Water Supply and Drainage Board
12 Obtain water connection 32days LKR 31,000

CONCLUSION
From an investors point of view, the case for Sri Lanka is getting strong. While there are
risks to investing anywhere, Sri Lanka has one of the best cases for an economy with the stars

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aligned in its favor. The demand for pharmaceutical product in Sri Lanka is increasing
everyday but some major risks are also involve in this investment.