Today tourism has been converted into the most dynamic economic sectors in the world. Even if the majority of international tourism still becomes a great income resource for many countries and most governments support tourism industry actively. The objective of this study is presenting a methodology for examining the causal relationship between international tourist arrivals, foreign direct investment and Gross Domestic product in Spain and Italy. By using annual data of Spain and Italy for the period of 1980-2010, the results reveal that there was no causality among three variables in Spain. While in Italy, the empirical study shows that an increase in foreign direct investment will lead to upward increasing in economic growth. Moreover, Granger causality analysis investigates the short-run co-movements and interaction between economic growth and foreign direct investment. A discussion follows and major policy implications are suggested.

CONTENTS
ABSTRACT iii
ACKNOWLEDGMENTS iv
CONTENTS v
LIST OF TABLES vii
LIST OF FIGURES viii
CHAPTER ONE INTRODUCTION 1
1.1 Research background and motivation 1
1.2 GDP, FDI, ITA in Spain 5
1.3 GDP, FDI, ITA in Italy 6
1.4 Research Objectives and Scopes 7
CHAPTER TWO LITERATURE REVIEW 11
2.1 Causality connection of ITA and GDP 11
2.1.1 Unidirection causality running from ITA to GDP 12
2.1.2 Unidirection causality running from GDP to ITA 16
2.1.3 Bidirection causality between ITA and GDP 17
2.1.4 No causality between ITA and GDP 18
2.2 Causality connection of ITA and FDI 19
2.2.1 Unidirection causality running from ITA to FDI 19
2.2.2 Unidirection causality running from FDI to ITA 20
2.2.3 Bidirection causality between ITA and FDI 20
2.3 Causality connection of GDP and FDI 21
2.3.1 Unidirection causality among GDP and FDI 21
2.3.2 Bidirection causality among GDP and FDI 24
2.3.3 No causality among GDP and FDI 25
CHAPTER THREE RESEARCH METHODOLOGY 30
3.1 Unit Root Test for Time Series 32
3.2 Optimum Lag length of ADF Test 33
3.3 Co-integration Test for Time series 34
3.4 Vector Autoregressive Model for time series 35
CHAPTER FOUR EMPIRICAL ANALYSIS 37
4.1 Unit root Test for GDP, FDI and ITA Time Series 37
4.2 Cointegration test 39
4.3 Optimal lag length test 40
4.3 Vector Autoregression model 42
4.4 Granger Causality Test for of Spain’s GDP, FDI and ITA time series 44
4.5 Granger Causality Test for of Italy’s GDP, FDI and ITA Time Series 45
CHAPTER FIVE CONCLUDING REMARKS AND SUGGESTIONS 47
5.1 Causality connection of GDP, FDI, ITA in Spain 47
5.2 Causality connection of GDP, FDI, ITA in Italy 48
5.3 Policy implications for Italy and Suggestions 49
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