Nonlinear effect of foreign direct investments on tourism demand

Abstract

ABSTRACT This study examines whether FDI has asymmetric effects on tourism demand in China over the period 1982–2017. The non-linear autoregressive distributed lag approach is applied to examine asymmetric cointegration. Structural breaks are identified with the Bai-Perron test. Substitute prices are identified using principal component analysis (PCA). Causality is examined using the Toda-Yamamoto approach. The results indicate that a 1 percent increase in FDI increases tourism demand by 0.22 percent, whereas a 1 percent decrease in FDI decreases tourism demand by 0.54 percent. Unidirectional causality from FDI to tourism is noted. The contribution is reflected in the asymmetric association between FDIs and tourism in China. Specifically, tourism demand is 2.5 times more sensitive to declines in FDI compared to increases. The results provide useful insights for policymakers managing tourism sector FDI.