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: This paper* investigates the causal relationship between foreign direct investment (FDI) and the number of foreign tourist arrivals (Tour) in India using the quarterly data for the period 1995 to 2007:

Many countries make changes to their economic policies in order to attract foreign investors and India is no exception. India’s liberalisation and deregulation policies during the early 1990s have attracted a huge amount of FDI in recent years. Policy makers in many countries believe that FDI will lead their country’s overall development, including the tourism sector. For a developing nation like India, FDI could play a significant role in its economic development by improving the country’s infrastructure such as airports, highways, hotels and modern technologies. For this investigation, various time series econometric techniques such as unit-root test, cointegration and causality are employed. The analysis reveals that the two-time series Tour and FDI are both I(1) and are not co-integrated. We then use the VAR system in first-difference of the two variables to investigate the causality between Tour and FDI. The results show that there is only a one-way causal relationship from FDI to tourism. That is, FDI has a causal effect on the number of foreign tourist arrivals in India. This evidence once again adds to the need for appropriate policies and plans to further expand and develop tourism given that FDI flow into India is expected to be strong in the coming years, bringing along a demand for tourism as well.