Estimating demand elasticities for intra-regional tourist arrivals to Hong Kong – the ‘bounds’ testing approach

Abstract

The aim of this study is to develop econometric models for estimating tourism demand elasticities using the Autoregressive Distributed Lag (ARDL) approach to cointegration analysis, and to explain the effects of economic determinants on inbound tourist flows to Hong Kong from four major short-haul markets. The cointegration test used is the ‘bounds’ test of Pesaran et al. (2001) that is based on the estimation of an Unrestricted Error-Correction Model (UECM). This article addresses one of the major problems of how to use a relatively small sample to estimate tourism demand elasticities using cointegration approaches, which is faced by many researchers in modelling tourism demand. The results show that permanent income is the most important explanatory variable for all origin countries, but there are substantial variations between countries with the long-run elasticity ranging between 1.74 for China and 3.05 for Australia. Price elasticity is the next most important variable with the long-run elasticities ranging from 0.35 (Australia) to 0.98 (Taiwan). The findings are consistent with economic theory and have implications for government policies and strategies on investment, marketing and promotion and pricing.