Income from international tourism and domestic investment in South Asia: evidence from heterogeneous panel econometrics

Abstract

ABSTRACT International tourism appears to be a driving factor in spurring many local economies through tourism receipt-induced capital formation to reach steady-state point. Given this backdrop, this study aims to examine the proposition of whether inbound tourism can foster the local investment in selected South Asian countries. To this end, we apply several pre-estimation tests, namely cross-sectional dependency, order of integration and slope homogeneity. Our pre-estimation tests indicate to apply the cross-sectional autoregressive distributed lag (CS-ARDL) technique to measure the short-run and long-run impacts of inbound tourism earning on domestic investment by using panel time-series data over 1995–2019. Our empirical investigation reveals that domestic investment corroborates the accelerator principle, as economic growth and international tourism’s earnings elevate the domestic investment. Similarly, financial development spurs the long-run domestic investment in our sample countries. Our analysis is robust, relaxing the assumption of cross-sectional dependency. The empirical findings reinforce South Asian countries to devise sustainable tourism policies to attract international tourists and develop the financial sector to enhance domestic investment to achieve development aspirations.