Abstract:
Sri Lanka is one of the major tourist attraction destinations in South Asian region. After the
economic reforms in 1977, the successive governments have implemented various attractive
policies and programmes to promote tourism in pursuing economic growth and development.
Moreover, the government has employed a number of initiatives in order to encourage and attract
Foreign Direct Investment (FDI) towards the tourism industry. The aim of this study is to
investigate the long-run and the short-run relationship between tourism and Foreign Direct
Investment in Sri Lanka. Annual data gathered for the period from 1978 to 2013 were used for
the study. Data were analyzed using E-Views while preliminary calculations were done using
MS Excel. Augmented Dickey-Fuller (ADF) is used for unit root test, while Engle–Granger is
used for co-integration, whereas Granger causality test was employed to find the causal
relationships. The empirical evidence shows that there is a statistically significant positive
relationship between tourism receipts and Foreign Direct Investment in the long-run and the
short run. Granger causality test revealed that there exists two way causality implying that
Foreign Direct Investments helped to boost tourism sector while tourism earnings stimulated the
Foreign Direct Investment. In addition, this research has identified various problems faced in
attracting FDI in the Tourism sector and the appropriate recommendations have been presented
in order to realize the major benefits from FDI inflow into the country on tourism industry.
