Effects of Foreign Capital on Tourism: Evidence from Macao and Hong Kong

Although most economists defend the positive role of foreign investors in tourism development, a number of tourism geography studies present divergent views on the local impact of foreign investment on host communities. To trace the issue to its root, a simple analytical framework has been developed to show that the effects of free capital mobility highly depend on the geographical size and degree of economic diversity of a tourism destination. In the case of a small tourism economy, liberal economic doctrines tend to shape host communities' policy-making towards a higher degree of openness to foreign factors of production than is optimal. Therefore, policymakers should develop foreign investment policies based on a careful assessment of tourism's impacts and bear in mind the need for sustainable development. Data and facts from Macao and Hong Kong lend support to our theoretical predications.