Causality Between Foreign Direct Investment and Tourism: Empirical Evidence from India

Abstract

India's liberalization and deregulation policies during the early 1990s have attracted a huge amount of foreign direct investment (FDI) into India in recent years. India has been ranked as the second most favored FDI destination in the world, just behind China. Policy makers in many countries believe that FDI will lead their country's overall development, including the tourism sector. This article investigates the causal link between FDI and tourist arrivals in India by employing the Granger causality test under a VAR framework. A two-way causality link is found between FDI and tourist arrivals in India. This explains the rapid growth in the tourism sector as well as FDI in India during the last decade. Our two-way causality results in relation to India are similar to the findings of a number of small island developing states (SIDS).