Does International Travel Cause Economic Growth? Evidence from China’s Deregulation on Foreigners’ Traveling

Abstract

International travel is a key channel of international knowledge diffusion and has been hypothesized to shape large cross-country differences in productivity and income. However, causal evidence, especially evidence from developing countries, supporting this hypothesis remains scarce. This paper exploits a novel natural experiment, China’s Opening-to-Foreigner-County (OFC) policy, to examine the effect of deregulating foreigners’ traveling restrictions on regional economic outcomes. Using a difference-in-differences strategy, we find that deregulating foreigners’ traveling restrictions leads to a 7.9% additional increase of per capita industrial output for the OFCs in 1985-1991. The positive effects are larger in counties with more foreign equipment and greater industrial human capital. Additionally, the OFCs record more patent applications. The OFC policy’s effect were not triggered by export and FDI entry. We highlight the role of person-based international knowledge diffusion in the economic catch-up of technology recipient countries.

Keywords: International Travel, Opening-to-Foreigner-County Policy, International Knowledge Diffusion

JEL Classification: O19, O33, O53