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

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.

Moderation analysis of exchange rate, tourism and economic growth in Asia

“…A study by Belloumi [45], examined tourism receipts and exchange rate nexus in Tunisia and concluded that there is a cointegrating relationship between tourism and economic growth. An increase in foreign direct investment (FDI) and appreciation of the exchange rate contracts the tourism demand of the country while in the long-run the depreciation of domestic currency and decrease in FDI inflow results in more tourist inflow [41]. Similar findings were obtained by [46] and [47] where they revealed that reduction in FDI inflow and depreciation of foreign exchange rate results in positive tourism development.…”

“…The real and nominal appreciation of the currency leads to a negative impact on the tourism development in the country [40]. Exchange rate has PLOS ONE asymmetric impact on tourism on tourism development in developing countries such as, India, Bangladesh, Pakistan and Nepal in the short run [41]. Boskurt et al [42] applied dynamic common correlated effects (DCCE) approach in their study on demand and exchange rate shocks on tourism development and concluded that effects of the exchange rate shocks are temporary on the tourism development.…”

The role of economic conditions and sustainable rural development on the sustainability of tourism development: evidence from China

“…The results revealed that the exchange rate impacts both economic growth as well as tourism in the selected islands. Similarly, Munir and Iftikhar ( 2021 ) also explored the tourism, foreign direct investment, and exchange rate relationship in different South Asian countries. The data of Bangladesh, India, Nepal, and Sri Lanka as well as Pakistan from 1995 to 2019 was tested by employing ARDL and NARDL approaches.…”

Is pass-through of the exchange rate to restaurant and hotel prices asymmetric in the US? Role of monetary policy uncertainty

“…H 2 Pass-through of monetary policy to restaurant and hotel prices is asymmetric in the US Munir and Iftikhar (2021), Irandoust (2019), and Ongan et al (2018) have examined an empirical connection between exchange rates and tourism and recreation activities. For instance, Munir and Iftikhar (2021), while employing a hidden cointegration analysis within a likelihood-based panel framework for 10 European countries, examined the asymmetric effect of exchange rate on tourism demand.…”

“…H 2 Pass-through of monetary policy to restaurant and hotel prices is asymmetric in the US Munir and Iftikhar (2021), Irandoust (2019), and Ongan et al (2018) have examined an empirical connection between exchange rates and tourism and recreation activities. For instance, Munir and Iftikhar (2021), while employing a hidden cointegration analysis within a likelihood-based panel framework for 10 European countries, examined the asymmetric effect of exchange rate on tourism demand. The investigation affirmed that tourism demand responds asymmetrically to the exchange rate fluctuations especially in the long run, further suggesting that depreciation and appreciation of exchange rates affect tourism demand in different dimensions.…”