Seeing is Believing: Travel, Familiarity and International Equity Investments

We examine whether travelling to foreign countries affects international equity investment decisions. Our key conjecture is that travel to a foreign country will increase familiarity with that country, which in turn can stimulate equity investments. The results strongly confirm this hypothesis. To address endogeneity, we estimate an instrumental variable model based on variables shown in the tourism literature to affect recreational travel, and find that our results continue to hold. Travel is more predictive of foreign equity investments when the distance between the home and the foreign country is greater, or when the foreign country is developed. Collectively, our results suggest that tourism has a positive economic externality and allows countries to attract foreign capital.