A study of the Relationship between Foreign Direct Investment and Tourism in Iran with Emphasis on Institutional Quality

The tourism industry has a great potential to generate foreign exchange income and stimulates employment. The industry plays an important role in the process of economic development of Iran. The capacity of an economy to benefit from tourism depends on its access to (foreign) capital to invest in its infrastructures. Given Iran's limited oil revenues and the low rate of fixed capital formation, attracting foreign tourists and foreign direct investment (FDI) are among the urgent needs. In this regard, an investigation of factors affecting these two variables are of particular importance for policymakers. The present study investigates the relationship between these two variables from 1995 to 2016 with regard to institutional quality. For this purpose, Time-Varying Parameter Vector Autoregressions was applied. The results show that foreign direct investment, institutional quality and tourism have positive correlations. With the decline of institutional quality in Iran's economy after 2000, the positive correlation between foreign direct investment and tourism has weakened. Therefore, institutional quality is one of the most important determinants of the correlation between FDI and tourism in the Iran's economy.