Causality between Tourism and Foreign Direct Investment: An Empirical Evidence from Pakistan

Abstract

Tourism is evolving to be one of the important sectors in the world’s economy. This study explores the relationship of tourism and FDI inflows along with macro-economic variables in Pakistan over the period ranging from 1979 to 2017. Augmented Dickey-Fuller test results indicate the presence of stationarity in all variables at first difference. Johansen co-integration, VEC model and VECM Granger causality techniques are employed to check short-run and the long-run relationship among the variables. The results of the Johansen co-integration test indicate that FDI, tourism, GDP, exchange rate, inflation and trade openness are co-integrated. The results of VECM model indicate the presence of long-run causality running from tourism, GDP, exchange rate, inflation and trade openness to FDI in Pakistan. The results of VECM Granger causality test signify one way short-run causality running from tourism to FDI, from GDP to FDI, from inflation to FDI, from trade openness to FDI, from GDP to tourism, from inflation to tourism, from tourism to trade openness, from GDP to trade openness and from exchange rate to trade openness. Two-way causality is found in between FDI and exchange rate and no causation is found from FDI to tourism in the short run.

Keywords: Tourism, FDI, Causality, Co-integration, GDP, Inflation, Exchange rate and trade openness

JEL Classification: Z310; F210; C220; E230; E310; F310; F130