The Effects of Economic Factors on Tourism Demand for Malaysia: A Case of Asian and European Countries

Abstract

This paper investigates the long-run relationship between the number of international tourist arrivals from
the Asian and European countries and four selected variables using quarterly data from 1999 to 2014.
Results of panel unit root test show all series are integrated of order one and there exist long-run panel
cointegration among the selected variables. Based on Hausman test statistic, PMG is the appropriate
estimator for estimating the relationship between tourism demand and the four variables. As expected,
exchange rate, level of income, tourism price and substitute tourism price are important determinants for
tourism demand in Malaysia. Generally, for both cases of Asian and European, the PMG estimates is very
sensitive to lag order whereby high lag order gives larger impact compared to low lag order. The result of
the optimal lag order model suggests that longer period of time will be taken for the tourism demand to
converge to the long-run equilibrium. Thus the government and tourism authorities should continuously
promoting Malaysia in order to sustain the growth of the industry.