The Institute of Policy Studies (IPS) was conceived in the mid-1980s as an autonomous institution designed to promote policy-oriented economic research and to strengthen the capacity for medium-term policy analysis in Sri Lanka. It was established by an Act of Parliament in December 1988 and was formally set up as a legal entity by gazette notification in April 1990 managed by a Board of Governors and the Executive Director. From its inception, the IPS was supported through a collaborative project between the Royal Netherlands Government and the Government of Sri Lanka under four phases of operations to allow the Institute to gradually diversify its income and resource base. In the interim, the IPS has been successful in establishing its own Endowment Fund and setting in motion the transition to full financial independence with the formal ending of the fourth phase of operations in June 2006 .

Operational independence from financial and administrative regulations of the government were very much part of the rationale for setting up an independent IPS. Since its inception, the IPS has functioned under the key ministries involved in economic policy making and implementation in Sri Lanka while enjoying considerable autonomy in setting and implementing its research programme. Its institutional structure has allowed the IPS to acquire a unique position as an authoritative independent voice in economic policy analysis, working closely with the government, private sector, academia and civil society.

Since its establishment, there has been a substantial expansion of activities undertaken by the IPS. The number of areas on which it sustains on-going research has expanded significantly with the systematic strengthening of expertise of its research staff. The expanding research output has been reinforced by professional in-house support services in overall finance and administration management and in the provision of information and resources including the Institute’s own library, publications, information technology, web development and database services