Contribution of Tourism and Foreign Direct Investment to Gross Domestic Product: Econometric Analysis in the Case of Sri Lanka

Abstract

This study employs time series annual data for the period from 1978 to 2017 to evaluate the contribution of foreign direct investment (FDI) and tourism industry (TR) to Sri Lanka’s Gross Domestic Product (GDP). Sri Lanka’s liberalization and deregulation policies put into effect in 1977 have attracted a huge volume of foreign direct investments into the country. However, the protracted civil war affected the country’s economic base and resulted in poor performance. Recently a more conducive environment has been established after the three decade long ethnic war came to an end. In this context, the Sri Lankan government has taken positive measures to attract foreign direct investment and boost tourism in the country. This study intends to evaluate the contribution of foreign direct investment (FDI) and tourism industry (TR) to the Gross Domestic Product of Sri Lanka, as these two factors are considered to be very effective at increasing the GDP of a country. Unit root test was done on the variables and the method chosen was the Augmented Dicky – Fuller (ADF) test. Co-integration analysis was used for the long run relationship and the Granger causality test was performed to investigate the causal relationship. The empirical study shows that there is a positive and statistically significant relationship between the variable’s TR and FDI to the GDP in the long run. Results of Granger causality test implied that the two-way causality promoted the economic growth of Sri Lanka. E-Views 9 econometrics software was used for the time series data analysis.