Demand for tourism in Malaysia by UK and US tourists: A cointegration and error correction model approach

Abstract

The travel and tourism industry is one of the world's largest and most diverse industries. Many nations rely on this dynamic industry as a primary source for generating revenues, employment, infrastructure development and economic growth. Over the last few years, tourism has become one of the fastest growing industries in the service sector and the second largest gross domestic product (GDP) contributing industry for Malaysia. The industry performed favorably as reflected in the growth of tourist arrivals and tourist receipts. According to theMalaysia Tourism Promotion Board (MTPB),1 total tourist arrivals reached a high record of 20.7 million in 2007 as compared to 1.2 million in 1974. The share of tourism revenue in total earnings of the services account of the balance of payment increased from 32.7% in 2000 to 43% in 2005 while net contribution by tourism improved by RM11.2 billion to RM18.1 billion for the same period.2 Despite the important role of tourism industry in the Malaysian economy, the industry faces several issues and challenges such as decline in tourist arrivals from the short-haul, and regional markets such as South Korea, Japan, Thailand and Indonesia as the won, yen, baht and rupiah suffered from the recent regional currency crisis. TheMalaysian tourism industry also faced increasing competition from other developing countries within the Asian region to gain market share in the tourism industry. At the same time, well-known industry players such as Thailand, Hong Kong, Indonesia and Singapore are launching aggressive promotions to attract tourists particularly from the long-haul markets (the US and Europe). In addition, a series of mishaps such as the Asian financial crisis (1997), avian influenza (1997), the September 11 incident in the United States (2001), Bali blasting on October 12 (2002), the Iraq War (2003), JW Marriot Hotel bombing in Jakarta (2003), the SARs (2002) and the Tsunami aftermath (2004), have adversely affected the tourism industry. The number of tourist arrivals declined substantially because foreign tourists are concerned about their safety and security when traveling in the Asian region. Even though the global tourism industry had gradually recovered since then, the economic recovery was not strong as expected. Hence, international tourism remains in a precarious situation. Even without the complication of disaster, tourists or potential tourists still have preconceived ideas of the risk associated with travel to certain areas where uncertainty is high. Perceived danger has a negative effect to tourism industry. Given the highlighted issues, the challenge faced by theMalaysian tourism industry is to increase and sustain the growth in tourist arrivals since Malaysia is the second most-visited country in Asia.3 In order to increase and sustain arrivals, it is important to understand the factors that influence tourism demand in Malaysia. Hence, the main objective of this study is to investigate the long-run relationship between tourism demand and factors that influence tourism demand in Malaysia using a battery of cointegration tests and error correction models. The short-run error correction model is then estimated to obtain the short-run elasticity of income, relative price of tourism in Malaysia and the price of tourism in the competing destinations. Modelling the short-run dynamics will provide information concerning how rapid is the adjustment taking place among the various variables to restore long-run equilibrium in response to short-term disturbances in the demand for tourism in Malaysia. The paper proceeds as follows: Section 4.2 provides an overview of the Malaysian tourism industry. Section 4.3 reviews related literature. Section 4.4 explains the data and methodology used, followed by Section 4.5 which presents the empirical results and discussion. Finally, Section 4.6 concludes the paper. © Physica-Verlag Heidelberg 2009.