Foreign Direct Investment in Tourism and Economic Growth: Panel Data of OECD Countries

It is debated whether foreign direct investment (FDI) exerts significant influence on economic growth. This paper aims to examine the effect of FDI in tourism on economic growth. The particular focus on tourism provides insight on possible contradictory process that previous literature have captured. This paper analyzes panel data of 18 OECD countries from 2005 to 2012 using system GMM developed by Arellano and Bover (1995) and Blundell and Bond (1998). The results show that FDI in tourism industry does not significantly affect economic growth. Furthermore, the absorptive capacities, human capital and trade openness, that are proven to work for aggregate FDI do not work for tourism-related FDI. Therefore governments are advised to take precaution against the common wisdom that FDI (in aggregate) contributes to economic growth. As this paper suggests, tourism industry, among other sectors, presents itself as an exception.