This study applies panel causality methods to investigate the relationship between foreign direct investment (FDI) and tourism in Small Island Developing States (SIDS). The results of the homogenous and instantaneous causality tests suggest that there is a bi-directional causal relationship between the variables. However, this causality is not homogenous for the group of countries. Indeed, heterogeneous causality procedures indicate that there exists a bi-directional causal relationship for only a small set of countries. For the most part, the causal relationship runs from FDI to tourism, implying that FDI provides much needed capacity for SIDS and therefore allows these countries to expand their tourism product.
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