The Relationship between Foreign Direct Investment and Tourism Development: An analysis of Granger Causality

Abstract

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Tourism is one of the most important export sectors in many developing countries. It not only increases foreign exchange income, but also creates employment opportunities, stimulates the growth of the tourism industry and as a result, contributes to overall economic growth. As there is a widely accepted belief that tourism plays a fundamental role for developing countries to achieve economic growth and development, tourism development has become an important target for most governments, especially in developing countries. Foreign Direct Investment (FDI) is an important source of capital for the development of die tourism sector in any country. The study investigated the causal relationship between foreign direct investment in tourism (FDIT) and the number of foreign tourist arrivals (TOUR) in Sri Lanka / Foreign Exchange Earnings from Tourism (FEE) using quarterly data for the period 2005:1 to 2013:4. The analysis reveals that the time series TOUR and FDIT/FEE and FDIT are not cointergrated. The VAR systems in first differences of the variables were used to investigate the causality between the variables. The results show that there is uni-directional relationship from FDIT to tourism and FDIT to FEE.