Using a modified international economics model, this paper first illustrates theoretically how side effects – economic, social and, particularly, political – caused by foreign investment in tourism can reduce the true benefits for host communities in the case of small tourism economies. The case study of Macao gives empirical evidence of the existence of side effects, thus contributing to the validity of the theory to a certain extent. It is argued that policy makers in small tourism economies should conduct foreign investment policies upon carefully assessing the impacts and in a broader socio-political framework.