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Tourism as long run determinant of economic growth in Malaysia

Background of the study

Tourism can be defined as for business purposes, travelling and for recreational activities. People with the leisure purpose travelling to many places which is places of their interest. It creates demand and supply in tourism industry that will impact on economic growth in a particular country. Beside that, tourism industry consists of aspects that contribute income in many sectors such as ecotourism, sports tourism, medical tourism and etc. These can be attracted by people to visit or travel to the particular country. Malaysia has been known as tourist destination through the Visit Malaysia and Malaysia truly Asia and other slogan. As there is improvement on the development of the industry, there also the increasing tourist arrival in the country. Domestic tourism and international tourism are the assets of this industry to influence development of the other sectors such as transportation, accommodation and food industry to be advanced.

Problem statement

Determination factor that influence the growth in economic based on tourism.

Is tourism really give maxima impact to economic growth?

Research objective

The objective of the study:

To identify the relationship between the economic growth, tourism demand,GDP, tourist arrival and international tourist.

To estimate the development of tourism in Malaysia

To determine the factors those influence the tourism growth in Malaysia.

To determine the potential scope under the tourism field

Scope and limitation of the study

This study focuses on determining the relationship between the economic growth and tourism field. To determine the independent variables and dependent variable whereby associated with others, the significant of the variable is necessary.

The process of completing this study has several limitations consist of:

Time consume to gain the data related to the tourist expenditure on each of the field in tourism components that contribute revenue on it. Tourism scope including the variation of tourism line such ecotourism, agriculture, dark tourism, nature tourism and etc.

The limitation of gathering the data via an internet. It cannot be accessed smoothly for the data stream information.

There was bureaucracy for government

Significance of the problem

This finding will give some recommendation or ideas in improving the tourism industry locally and internationally. Therefore, the important data which included in the independent variables and dependent variable have to measure accurately.

Chapter outline

Literature Review


Tourism is one of the important sectors in the world because it creates many benefits for the country itself. Domestic tourism and international tourism generate more income year by year and reducing the unemployment rate of a particular country. Together with related activities, tourism and general travel not only represent 11% of world GDP, but exports of tourism services are about 6-7% of total exports of goods and services (Roe, Ashley, Page and Meyer, 2004).” Nowadays, tourism represents one of the most important and dynamic sectors in the world economy” (Neto, 2003; Balaguer and Cantavella- Jordà, 2002; Jamieson, 2000; Lanza and Pigliaru, 1999). The components of tourism such as transportation, entertainments, and attractions create tourism demand among the tourists. According to Tohamy and Swinscoe, (2000),” nevertheless, the contribution of tourism activity to a country’s economy is not easily recognized not only because tourism involves many different products (such as transportation, mails, entertainment,etc.) but also because some products (for example, a meal in a restaurant) can be sold to both tourists and local residents. In this sense, tourism does not represent a clearly identifiable industry”.

Tourism Demand

The tourism demand in Malaysia is determine by the tourism price, travelling cost and income. By the promotion through the Malaysia truly Asia, Malaysia may influence the outsider or foreign to visit this country. Therefore, carrying capacity is necessary to be counted so that there is no over welcomed of visitor. It is used to avoid inflation in Malaysia or even Southeast Asia. Asian nowadays is an important destination for international tourism. It has been known locally and internationally around the world. As tourist destination, it also affects Malaysia as a determinant for long run investment in our country. The number of tourists’ journeys increased from 25 million in 1950 to 700 million in 2003, and is predicted to reach 1.6 billion in 2020 (WTTC, 2006). As tourism is one of the sectors contributes income in a country, small or large country may generate the income from the industry if their has enough infrastructure and facility. International tourism has becoming a major foreign exchange earner for many low-income countries and small islands, and it is a principal export for 83% of developing countries (WTO, 2002). Mohd Hafiz M.H et. Al (2010) found that an increase in GNI per capita cause increase in tourist arrival. Gravity model used to show the pattern and trend of people visit this country. Demand in tourism is depend on GNI, CPI, population and exchange rate. Norlida H. et. Al (2007) stated that the short run and long run is significant with the variable they used by using the ARDL framework. ARDL is appropriate model to be used because it is suitable for small scale in their case.

Growth in small country

According to Easterly and Kraay (2000), a corollary of our findings is that the role played by the tourism sector should not be ignored by the debate about whether smallness is harmful for growth. By their finding, it can be concluded that smallness of the country will not harmful the economic performance of the country itself. But there are some view that scale of the country is actually affect the growing the economy. Grossman et. all (1991) and Aghion at. all (1998),reasons for being pessimistic are not difficult to find in the literature, especially in endogenous growth, where scale effects often play a role in the determination of an economy’s growth rate. For the developing country, it doesn’t mean that small country will get the disadvantages because if the country focusing on the industry, it will keep growing faster than the other countries.

Impact on economy

Cortes-Jimenez and Pulina (2006) explored the effects of foreign exchange, specifically tourism on economic growth. Tourism has big potential to economic growth in Malaysia and even in the world. With the development, new technology, infrastructure and transportation provided, there is increasing in tourist arrival in Malaysia. The impact not only give benefit to the industry itself but it helped in maintaining the stability of economic growth based on the investment. If tourism determine the long run contributor for economic growth, it can be a main sector to the country. Gabriel J. at all (2008) has tested using the Granger causality and Johansen analysis to show the cointegration between the tourism expenditure, real exchange rate and economic growth. It is found that there is weak relation between the variables and so as after use the modified Granger. It gives positive impact after a bit downturn.

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According to Balaguer al (2002),”it is found that there is relation between the economic growth and tourism. It has been tested using the Johansen cointegration expansion which is they think is suitable for identify the nonstationary variables.”

Impact on employment

Private sector such travel agency and tour operator had making business which is create the opportunity jobs and increased public spending will continue to play their part in future economic growth. However, tourism also creates the negative impact to the country that is leakages. As the tourism rapidly increases, there are some taxes, wages and revenue paid and transfer outside of the country. The developing country has faced this situation. According to Pleumarom (1999), in this way, large percentages of travelers’ expenditures leave the local economies, more than two-thirds of the revenues from international tourism, sometimes, do not reach the local economies.

International tourist arrival

Factor that contribute to tourism growth not only by the local tourist but including the international tourists that have come in different purposes. According to Lim (1997), “nearlt 80% of empirical studies on tourism demand or arrivals used single equation of linear or log linear equation because the estimated coefficient can be interpreted as elasticities.

Tourist expenditure to economic growh

Based on the theory of Eugenio-Martin et al. (2004), ” the contribution of tourism to economic growth of South-East Asian and Pacific countries was analyzed exploiting a dynamic panel data model”.

Δyit= cons + yit + Xit + i

which can be related to tourist expenditure influenced by population of tourist arrival in the particular country


Theory and model specification

This study measured by the statistical method to analyze the data collected. The data such as international tourist arrival, GDP per capita, tourist expenditure for each sector related, and tourism demand from 1990 to 2010. It will be forecasted in five years revenue for future development. To prove the relationship between the dependent variable and independent variables, the pool OLS approaches will be use to measure the data collected. Unit roots will be used to measure whether there is significant each of the independent variables in different level. Econometrics methods which is about Eviews will be used to forecast development of tourism industry in this country.

Theoretical framework

Gross Domestic product

International tourists arrivals

Economic growth

Tourist Expenditure

Tourism demand



Objective of the study

Problem statement

Methodology used




Norlida Hanim et. al (2007)

To identify and predict the importance of the factors that will affect tourist arrival to Malaysia, from the specific region. Singapore, Japan, Hong Kong and


Other key factors that contribute in tourism such as transportation, entertainment and food industry.


By cointegration,the null hypothesis of no cointegration is rejected.

Short run and long run is significant with the variable

M. H. Mohd Hanafiah and M. F. Mohd Harun(2010)

To estimates tourism demand in Malaysia

based on the key economic factors

Gravity model: it used to attract the analogy to explain about the trend and pattern and migration of people.

1% increase in GNI per

capita of the origin countries, it would increase 0.463%

tourist arrivals to Malaysia. 1% increase in CPI ratio,decrease 5.16% tourist arrivals in Malaysia. 1% in CPI of Malaysia has contribute 5.366%.

An economic crisis is not influence the tourism form the Asian countries. But it is positively affected for Western country.

Edgargo Sica(2005)

To verify if tourism represents a determinant of growth in such countries.

Contribution to economic growth not clearly recognized, since tourism is not a clearly identifiable industry.

Pooled OLS


For Pooled OLS, R2 = .99 . It shows the variables is significant at 15 level.

For Arellano-Bond it shows X2 = 6.58 with a p-value = 1.00. Therefore, the null hypothesis is not rejected.

There is relationship between the tourism and economic growth. It means the industry contribute income for the particular country.

Mori Kogid,

Dullah Mulok,

Lim Fui Yee Beatrice,

Kasim Mansur

To investigate the factors that influence and maintain the economic stability.To investigate the relationship and causal pattern of several

determinant factors.

Determining varieties sectors that is determinants to economic growth

Johansen approach multivariate cointegration analysis and Error Correction Model (ECM) approach

It shows that there is more than one cointegrating vectors whereby there are four cointegrating vectors between the GDP and other variables.

Consumption expenditure and exports play an important role in boosting economic growth in Malaysia.

Rinaldo Brau et. al (2003)

To compare and study the economic performance about 14 countries from the 143 sample since 1980 until 1995

Measuring the small countries when specialize in tourism, it can become disadvantage or beneficial.

Solovian growth model

1% confidence interval represents increase of 10% in the ratio of tourism receipts to GDP 9 is associated to an

increase of 0.7% in the annual growth rate of per capita GDP.

The coefficient of the new interactive variable is significant and its value is large.

Balaguer J. at all(2002)

This paper examines the role of tourism in the Spanish long-run economic development.

Johansen’s cointegration

It estimates long-run or cointegration relationships between non-stationary variables using a maximum likelihood procedure which tests for the number of cointegrating relationships and

estimates the parameters of those cointegrating relationships

The cointegration results provide evidence of the existence of a unique

cointegrating vector. Therefore, the interpretation of its estimates should be straightforward.

The analysis shows, then, that a long-run stable relationship between economic growth and

tourism expansion exists.

Gabriel J. at. all(2008)

This paper investigates possible causal

relationships among tourism expenditure, real exchange rate and economic growth by using quarterly data.

Does the tourism sector cause

economic growth and/or can it be a key factor for the Mexican economy

Johansen cointegration analysis.

Granger Causality

The corresponding elasticity of tourism expenditure has a significant effect on economic growth

Cointegration relationship indicating that tourism positively

affects economic growth over time

Chor Foon Tang(2010)

The research note attempts to re investigate the validity of tourism led growth hypothesis for Malaysia based on the data set of 12 different tourism market from January 1995 to February 2009

One of

the pre-test advantages of using disaggregated

data is that it will offer a better explanation on

the role of each tourism market on economic

growth in Malaysia because not all international

tourism markets contribute to economic



bivariate model(monthly data)

not all the international tourism

markets contribute to economic growth.


the variables under investigation are integrated

of order one, I(1) process.



Data, Population Sampling Methods

For completing this study, data is important to obtain the accurate finding later. This study used the data from 1990 to 2010, recovering 20 years. The population including the Malaysian population and sample of population from other countries which keep contribute in tourism expenditure.

Y=βo + β1TA+ β2Exp+β3GDP


This paper considering the factors that contributing revenue to the country through the tourism sector using the OLS models and Econometrics.

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