Does governance quality matter for FDI-led tourism development? A supply-side perspective

This study examines the relationship between governance, foreign direct investment (FDI), and tourism demand. Rather than treating governance as a direct determinant in a tourism demand model, the multifaceted nature of this concept is recognized and nested in the broader supply-side environment of a destination. Reducing five World Governance Index (WGI) dimensions into one holistic governance measure, which is then utilized as an instrument and operates through FDI, this study incorporates the indirect impact of governance on tourism demand in a two-stage least square (2SLS) regression model. The key findings demonstrate that governance is positively associated with FDI accumulation and that this effect is positively conducive to tourism demand. The results suggest a development strategy for building a competitive and sustainable tourism industry should be encompassed in a broader project of enhancing the political-economic environment of the destination.

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