Bilateral tourism demand between Malaysia and Indonesia

Abstract

Malaysia and Indonesia are two countries in Southeast Asia region that has established a long-standing close relationship due to similarity in culture and socioeconomic background. Statistics on the arrival of tourists reveals that both countries are interdependent in attracting tourists during the period of study. Traditonally both Malaysia and Indonesia are very popular in tourism which are focused on enviromental attractions, rich cultural heritage and religious tourism which had become an attraction among international tourists. This study uses monthly data for the period from 1995-2016 by applying the concept of Almost Ideal Demand System (AIDS) to investigate the extent tourism prices and volatility of global oil prices determines the bilateral tourism demand between these two countries. The results of this study reveal that Malaysian tourists to Indonesia displays a bidirectional Granger causality relationship with the effect of elastic oil prices. On the other hand, the presence of Indonesian tourists to Malaysia has a unidirectional Granger causality relationship towards the elasticity of demand of tourism prices in Thailand. Both countries have a differing level of speed of adjustment from short run equilibrium to long-run equilibrium with the magnitude of 10.8% (for Malaysian tourist to Indonesia) and 33% (for Indonesian tourist to Malaysia). It is evident that tourism development between these two countries have grown immensely and impacted the economic growth of these countries. As such, we can conclude that bilateral tourism demand between Malaysia and Indonesia does not have any influence on tourism price elasticity of demand. The findings of this study are useful to policy-makers to plan strategies to increase the bilateral tourism demand as a long-term strategy specifically in transforming Southest Asia region which has its own uniqueness as an attractive international tourist destination.