Asymmetric Impact of FDI and Exchange Rate on Tourism: Evidence From Panel Linear and Nonlinear ARDL Model

Kashif Munir,Mehwish Iftikhar

doi:10.1177/21582440211046589

Abstract

This study analyzes the long run as well as short run linear and nonlinear impact of foreign direct investment (FDI) and exchange rate on tourism in South Asian countries. The study uses annual panel data of five South Asian countries that is Bangladesh, India, Nepal, Pakistan, and Sri Lanka from 1995 to 2019 and applies panel linear autoregressive distributive lag (ARDL) and nonlinear autoregressive distributive lag (NARDL) methodology to analyze the long run and short run relationship among the variables. Results show that an increase in FDI and appreciation of exchange rate contracts tourism, while a decrease in FDI and depreciation of exchange rate expands tourism in the long run. Both FDI and exchange rate shows asymmetric behavior with tourism in the long run in South Asian countries. Results of individual countries show that FDI has asymmetric impact on tourism in Bangladesh, India, Pakistan, and Sri Lanka in the short run, while exchange rate has asymmetric impact on tourism in Bangladesh, India, Nepal, and Pakistan in the short run. Moreover, unidirectional causality exits from FDI, exchange rate, partial negative sum of FDI, and partial positive sum of exchange rate to tourism as well as from tourism to partial positive sum of FDI and partial negative sum of exchange rate. Therefore, there is a need to expand tourism sector through attracting FDI in tourism sector, while FDI attraction and tourism development must be well coordinated among different departments as well as maintain exchange rate at a reasonable level to encourage international tourism.

Highlights

Tourism is becoming an important industry in global economy due to its contribution in the growth process of a country
The results show that tourism and exchange rate are integrated of order I(1), while foreign direct investment (FDI) is integrated of order I(0)
Results of panel linear autoregressive distributive lag (ARDL) model for combine effects show that an increase in FDI contracts tourism, while depreciation in exchange rate expand tourism in South Asian countries in the long run

Summary

Introduction

Tourism is becoming an important industry in global economy due to its contribution in the growth process of a country. Tourism helps to boost the economy by increasing its exports, creating employment opportunities, improving infrastructure, and increasing foreign exchange income of the country (Satrovic & Muslija, 2018). Specialization in tourism is a stimulator for economic development and growth specially in developing economies. Due to increase in globalization, developing countries are paying more attention toward the development of their tourism sector. Improvements in tourism lead the economy toward services oriented growth (Fauzel et al, 2017). Tourism contributes directly to economic growth as well as stimulates other sectors of the economy like transport, food and beverages, entertainment, and leisure

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Results

Conclusion