Impact of Tourism and Foreign Direct Investment on Gross Domestic Production: Forecasts for the Case of Sri Lanka

Abstract

Tourism industry is found as the second rapidly growing business after the information and communication technology in the global arena. A number of economies are triumphant in marketing their tourism destinations along with the generation of a considerable amount of foreign currency earnings due to the origination of tourism industrial sector. After economic reforms initiated in Sri Lanka in year 1977 onwards, the governments have thereafter implemented a number of various fruitful policies and development projects so as to promote the tourism industrial sector in pursuit of economic growth and development. This study investigates the Contribution of Tourism and Foreign Direct Investment (FDI) to Gross Domestic Production (GDP) in Sri Lanka. The software such as EViews 10, Excel, and Minitab are used to analyze the data. To achieve its goal, the nonparametric approaches such Nearest Neighbor Fit, Kernal Fit, and Confidence Ellipse to find the relationship were used in this study. Error Correction Mechanism, Co-Integration, and Analysis of Causality are the econometric techniques used to find the relationship. This study employs annual data for the period from 1977 to 2017and forecasted the data from 2018 to 2022 in order to find out the future potential of the contribution. The co-integration regression result revealed that the relationship between Tourism Receipts and Gross Domestic Production has been positively and statistically significant. The Foreign Direct Investment and Gross Domestic Production have been positively and statistically significant. However short run effect impact multiplier of Tourism Receipts is statistically not significant but Foreign Direct Investment statistically significant. The results of Granger Causality tests, in the variables are one-way causal relationships. According to the results of this study suggests that it is vital for Sri Lankan government to implement some of the marketing efforts to develop the tourism industrial sectors as one of the best destinations in Asian region.