The Determinants of Foreign Tourism Demand to Indonesia: Gravity

Model Approach

Dyah Titis Kusuma Wardani

and Nuﬁmbar Susy Anindita Handayani

Department of Development Economics, Faculty Economics and Business, Universitas Muhammadiyah Yogyakarta, Jalan

Brawijaya, Tamantirto, Kasihan, Bantul, Daerah Istimewa Yogyakarta, Indonesia 55183

Keywords:

Tourism Sector, Foreign Tourists, Demand for Tourism, Gravity Model, Panel Data

Abstract:

This study aims to analyse determinants of foreign tourists demand to visit Indonesia. As one of potential

sources of foreign exchange, tourism sector in Indonesia become necessary to foster the Indonesian’s economic

growth. Declining in number of local tourist is not as matter as foreign tourist since it has a potential source

of foreign exchange. Gravity model of travel cost for foreign tourism is estimated using panel data consisting

of eight countries during 2009-2016. Data are obtained from Statistics Indonesia (BPS) and the World Bank

data. The results show that, GDP per capita of both domestic and foreigners also population are signiﬁcant

factors that increase foreign tourists demand. One of a signiﬁcant factor that lower the number of foreign

tourist visiting Indonesia is the distance from the origin country foreigner travelled from. In addition, the

appreciation of Indonesia (domestic) exchange rate against $US also decrease foreign tourism demand. This

research suggests that, Indonesian policy should provide a guarantee of airline access for tourists in order to

attract more visitors. Thus, the increasing in such foreigners to visit Indonesia will lead to expanding in job

creation and the increasing share of GDP which ﬁnally strengthen the Indonesian economy.

1 INTRODUCTION

Tourism is a sector that has experienced rapid growth

in recent decades. With the increasing growth in the

tourism sector, it can encourage a country’s economic

development. Tourism is a potential sector for na-

tional development because it can generate foreign

exchange (Deluna Jr and Jeon, 2014) (Chasapopou-

los et al., 2014). Multiple effects from the tourism

sector certainly affect the economy. Both foreign and

domestic tourists will certainly inﬂuence tourist con-

sumption. The value of tourist expenditure will affect

income, foreign exchange earnings for tourist areas,

and employment opportunities. Tourism is an impor-

tant sector in attracting resources and generating in-

come. Interest and efforts to develop the tourism sec-

tor will help the process of economic development

for a country. Tourism sector does not only bring

contribution to Gross Domestic Product (GDP), but

also directly and indirectly has impacted the whole

economy, partially through it contributions to expand

employment opportunities, enhance source of tax rev-

enue, and open a way to increase welfare of the peo-

ple. Therefore, most countries are trying to remove

barriers that limit the ﬂow of tourists and continue to

increase the beneﬁts of tourism revenues.

Figure 1: The Total Number of Foreign Tourist Visits to

Indonesia, 2009-2016 Source: Statistics Indonesia (Badan

Pusat Statistik Indonesia)

It can be seen from the ﬁgure 1, the development

of foreign tourists every year always shows a positive

level of growth. In 2009 the total number of foreign

tourists are visiting Indonesia was 6,323,730 people

which then continued to increase until 2016 the num-

ber of foreign tourists was 11,519,275. There are

eight countries with the largest number of tourist vis-

its to Indonesia, such as Singapore by 24%, followed

by Malaysia at 22%, Australia 17%, China 15%,

224

Wardani, D. and Handayani, N.

The Determinants of Foreign Tourism Demand to Indonesia: Gravity Model Approach.

DOI: 10.5220/0009867602240229

In Proceedings of the International Conference on Creative Economics, Tourism and Information Management (ICCETIM 2019) - Creativity and Innovation Developments for Global

Competitiveness and Sustainability, pages 224-229

ISBN: 978-989-758-451-0

Japan 8%, Korea 6%, Britain and the United States

4% each. Considering the geographical distance be-

tween Indonesia to some countries such as Singapore

and Malaysia, those countries has become the two

largest number of tourist visiting Indonesia because

Indonesia away closer compared to other countries.

Figure 2: Total Number of Visits of Foreigner from Top

Eight Countries, 2009-2016 Source: Statistics Indonesia

(Badan Pusat Statistik Indonesia)

2 LITERATURE REVIEW

Some previous studies supporting the hypothesis of

the research was conducted by (Pratomo, 2012), he

conducted the research from 1989 to 1997 using

Error Correction Model (ECM). They reveal that,

Malaysian per capita GDP has a positive and sig-

niﬁcant also elastic effect. This means that, in the

long run an increase in Malaysian per capita in-

come impact on the rise in the average number of

tourists.(Selimi et al., 2017) conducted a study and

their analysis was carried out from 1998 to 2014 with

6 countries using econometric panel regression. In

their research, they found that, per capita gross do-

mestic product (GDP) has positive and signiﬁcant ef-

fect on tourism and economic growth. Another study

was also conducted by (Fang Bao and Mckercher,

2008), their study shows that, distance has a negative

and signiﬁcant effect. Therefore, distance plays an

important role in tourism. The further distance, dif-

ference available in terms of travel duration, activities

taken, friends, expenses, and how many times they

can repeatedly visit a certain place for vacation.

Another study conducted by (Chasapopoulos

et al., 2014) with panel data analysis using Gravity

model from 2001 to 2010. They reveal that, distance

has negative relationship with foreign tourist demand,

whereas trade ties between Greece and countries des-

tination is an important factor that can affect foreign

tourists’ demand for tourism services. Furthermore,

(OTHMAN et al., 2018) was conducted from 2012

using cross-sectional data with regression of ordinary

least squares (OLS) and quantile regression (QR).

The results of his research show that, population and

GDP have a signiﬁcant positive effect while distance

has a signiﬁcant negative effect on tourist arrivals to

Malaysia from Muslim countries. (Blake and Cortes-

Jim

enez, 2007), their analysis was carried out in the

ﬁrst quarter of 1994 to the third quarter of 2006 us-

ing a structural time-series model. Their study shows

that, the exchange rate variable of the country of ori-

gin and the exchange rate of the destination country

have a negative and signiﬁcant effect on the interest

of tourists traveling to UK, while the dummy foot

and mouth disparity variable has positive relationship

with the interest of tourist to travel to UK. (Mariyono,

2017) was conducted his research from 2002 until

2011 using panel data regression. In his study, GDPi

and GDPj have positive relationship with demand for

foreign tourism to Indonesia, whereas distance has a

negative and signiﬁcant effect. Moreover, population

variables have a positive and signiﬁcant effect on the

demand for foreign tourism to Indonesia.

Furthermore, the research was conducted by

(Leit

ao, 2015) using a unit root test panel and dy-

namic data panel (GMM-system estimator). The re-

sulted of his research shows that the ICP variables

such as the number of workers in tourism sector, inﬂa-

tion and consumer prices and ﬁnal government con-

sumption expenditure have negative and signiﬁcant

effect while GDP of foreign country has a signiﬁcant

positive effect. The research conducted by (Deluna Jr

and Jeon, 2014), they investigate determinants of in-

ternational tourism demand for the Philippines using

gravity models. This study reveals that, the variable

of Gross Domestic Product (GDP) has a positive rela-

tionship with the ﬂow of foreign tourist visits.

3 RESEARCH METHODOLOGY

This study mainly focused on eight largest countries

where foreigners mostly is coming from, those are

Singapore, Malaysia, Australia, the United States,

United Kingdom, Republic of China, Japan, and the

Republic of Korea. The selection of the research pe-

riod for eight years is from 2009 to 2016. This study

is used secondary data. The data was obtained from

various credible sources such as Statistics Indonesia

(BPS), the World Bank, and the Ministry of Tourism

for data on the total number of foreign tourist vis-

its to Indonesia, Indonesia’s GDP per capita, foreign

countries GDP per capita, exchange rates of domes-

tic country (Indonesia), distance between two coun-

tries and population of foreign tourists. The research

framework based on macroeconomics theory and pre-

vious study is as follows:

The gravity model has been familiarly used in ex-

plaining the volume of trade, capital ﬂows and re-

The Determinants of Foreign Tourism Demand to Indonesia: Gravity Model Approach

225

Figure 3: Framework of Analysis of Gravity Model

gional science economic geography also migration of

people between countries in the world (Kosnan et al.,

2013). This research applied Gravity model approach,

as research conducted by Sheldon and Var (1985) ex-

plains that initially the gravity model predicts that the

ﬂow of tourism from region i to region j is the same as

from country j to country i. (Kimura and Lee, 2006)

in their study shows that, gravity equations is better

to predict service trade than service trade. Distance

between the two countries is also important in mea-

suring interactions between two countries. In look-

ing at economic interactions between Newton’s grav-

itational law regions, they can be used with equation

(Anderson, 2016):

i j

(1)

Where Xij is the economic interaction of region i

with region j, G is gravitational constant, Yi is eco-

nomic activity in region of origin, Ej is a measure of

economy in the destination region, and Dij is a dis-

tance between countries i and j. The equation ex-

plains that in each region the greater economic ac-

tivity will have a positive effect on economic interac-

tion between two countries, whereas the distance has

a negative effect. In addition, studies that used the

bilateral tourism ﬂows gravity model include(Garin-

Munoz and Amaral, 2000)(Eilat and Einav*, 2004)

(Gil-Pareja et al., 2007) (Hanaﬁah et al., 2010) (Mo-

hebi et al., 2010) (Kosnan et al., 2013) (Ghani, 2016)

(OTHMAN et al., 2018) Model is applying the grav-

ity model of international trade which is introduced

by (Tinbergen, 1962). In estimating tourism de-

mand, some adjustments are made by the Rodrigue

(2004). Therefore, it become more convenient with

the tourism model. The model that has been proposed

by Rodrigue (2004) as follows:

T Dx

i j

(2)

Where:

TDij: represents tourist arrivals from country, i to des-

tination country, j. K is a constant, mi is a factor that

generate the ﬂow of international tourism, mj is a fac-

tor that attracts the ﬂow of international tourism. Dij

is the distance between origin country, i and destina-

tion country, j.

4 RESULT AND DISCUSSION

The aim of this research is to analyze the effect of the

Indonesian GDP per capita, foreigner countries GDP

per capita, the distance between Indonesia and the

foreign countries, Indonesia exchange rate, and for-

eign countries population in 2009-2016 toward total

number foreign tourist visits. This study uses panel

data analysis with a random effect model. The results

shown in this chapter are the best estimation results

to meet the criteria of theory, econometrics and eco-

nomics.

The aim of this research is to analyze the effect

of the Indonesian GDP per capita, foreigner countries

GDP per capita, the distance between Indonesia and

the foreign countries, Indonesia exchange rate, and

foreign countries population in 2009-2016 toward to-

tal number foreign tourist visits. This study uses panel

data analysis with a random effect model. The results

shown in this chapter are the best estimation results

to meet the criteria of theory, econometrics and eco-

nomics. The table of regression result is indicated in

Figure 4 as follow:

Figure 4: Regression Results.

ICCETIM 2019 - International Conference on Creative Economics, Tourism Information Management

226

From the estimation results of the Figure 4, ran-

dom effect estimation model can be made through the

following equation:

ln(tot f oreignvisits) = −1, 126+1, 217ln(GDPcap

)

+ 0, 939ln(GDPcap

)–1, 622ln(Distance

i j

)

–0.141ln(ER

) + 0, 469ln(Population

) (3)

Where:

α = -1,126, this means that, when all independent

variables (Indonesian GDP, foreign tourists’ GDP,

distance, exchange rate, population) are considered to

be zero, then the demand for foreign tourists to In-

donesia is -1.126. b1 = 1,217, this means that, with a

1% signiﬁcance level, for each 1% increase in Indone-

sia’s GDP per capita will increase the total number

of foreign tourist visits by 1,217% (ceteris paribus).

Furthermore, b2 = 0.939, this means that, with a 1%

signiﬁcance level, for each 1% increase in GDP per

capita of foreign tourists’ countries will increase the

total number of foreign tourist visits by 0.939% (ce-

teris paribus). Moreover, b3 = -1,622, is identifying

that, with 1% signiﬁcance level, for every 1% increase

in distance reduces will decrease the total number

of foreign tourist visits by -1,622% (ceteris paribus).

Then, b4 = –0.141, this means that, with 10% sig-

niﬁcance level, for each 1% increase in domestic ex-

change rates, will decrease the total number of foreign

tourist visits by- 0.141% (ceteris paribus). b5 = 0.469

means that with 5% signiﬁcance level, for each % in-

crease in population of foreign tourists’ countries will

increase the total number of foreign tourist visits by

0.469% (ceteris paribus).

Based on the results, an analysis of the discus-

sion on each of the effects of the independent vari-

ables can be made on the demand for foreign tourism

to Indonesia which can be interpreted as follows, the

regression results in this study show that the proba-

bility of Indonesian GDP per capita is 0,000 which

means that the variable GDP of Indonesia does affect

the total number of foreign tourists with a signiﬁcance

level of 5%. This is in line with the research hypoth-

esis. The coefﬁcient of Indonesia’s GDP per capita

is 1,217, means that an increase of 1% in Indone-

sia’s GDP per capita will increase the total number

of foreign tourists by 1,217%. The positive relation-

ship between Indonesia’s GDP per capita and the total

number of foreign tourist visits to Indonesia is con-

sistent with the study by (Deluna Jr and Jeon, 2014).

Their study reveal that, per capita income in Indone-

sia has a strong inﬂuence on tourists’ tourist decisions

because per capita income in Indonesia reﬂects the

economic condition of the country. The regression re-

sults show that, the probability of GDP per capita for-

eign tourists’ countries is 0,000 which means that the

variable GDP per capita of foreigner countries the to-

tal number of foreign tourist visits with a signiﬁcance

level of 5%. This result is as stated by the research

hypothesis. The coefﬁcient value of GDP per capita

foreign countries is 0.939, it means that, an increase

of 1% of GDP per capita foreigners, will increase the

total number of foreign tourists by 0.939%. The pos-

itive relationship of foreign countries GDP per capita

with the total number of foreign tourist visits is in line

with the theory of (Garin-Munoz and Amaral, 2000).

According to (Garin-Munoz and Amaral, 2000), the

amount of GDP per capita in the destination country

can illustrate the magnitude of economic activity in

the country. The good condition of a country’s in-

come allows its citizens to travel more frequently to

other regions.

The regression results indicate that, distance co-

efﬁcient is -1.622, this means for each 1% increase

of the GDP per capita of foreigner countries will re-

duce the total number of foreign tourists by 1.622%.

The negative relationship between distance and the

total number of foreign tourist visits in Indonesia is

along the lines of the theory. Distance is important

in affecting the number of foreign tourists. The fur-

ther the distance, the more costs will be incurred by

tourists to visit a country destination. According to

(Fang Bao and Mckercher, 2008) Distance plays an

important role in tourist visits. Indonesian exchange

rate inﬂuences tourist demand. This is in line with

the research hypothesis. The coefﬁcient value of In-

donesian exchange is -0.141, this means that, for an

increase of 1% point of domestic exchange rate (IDR

against US $, appreciates), this reduces the total num-

ber of foreign tourists by 0.141%. The negative rela-

tionship of the Indonesia exchange rate with the total

number of foreign tourist visits is in agreement with

the theory of (Blake and Cortes-Jim

enez, 2007). Ex-

change rates of foreigners greatly inﬂuence the total

number of foreign tourist visits to Indonesia. This

is because when the currency of Indonesia depreci-

ates against the US$, then the total number of foreign

tourist visits to Indonesia increases and vice versa.

The population coefﬁcient value of 0.469, this in-

dicates that, for 1% increase in GDP of the country

of origin of foreign tourists will increase the number

of tourist demand by 0.469%. The positive relation-

ship of the population with the demand of tourists

to Indonesia is in line with the theory. This is be-

cause the population in the world grows from time to

time, and the arrival of tourists to a country will also

increase along with population growth in the world.

This result in accordance with the study of (Santer-

amo and Morelli, 2015) which states that the greater

The Determinants of Foreign Tourism Demand to Indonesia: Gravity Model Approach

227

the population of a foreigner’s country, the higher the

demand for tourism. Population also corresponding

to the tourism market in the destination countries.

5 CONCLUSION AND

RECOMMENDATION

Determinants of the number of foreign tourists to In-

donesia from 2009 to 2016, can be concluded as fol-

lows, both Gross Domestic Product per capita (GDP

per capita) of Indonesia and foreign countries have

positive and signiﬁcant effect on the total number

of foreign tourist visits to Indonesia. This explains

that the greater the GDP per capita of Indonesia, the

greater the total number of foreign tourist visits to In-

donesia. At the same time, the greater the GDP per

capita of foreign countries, the greater the total num-

ber of foreign tourist visits to Indonesia. This situa-

tion also indicates the larger market of tourism sec-

tor in foreign countries, with the increasing GDP per

capita of foreign countries reﬂects purchasing power

and demand power. Moreover, the better living stan-

dard, the higher ability of foreign tourist to travel for

vacation purposes. Therefore, this is also means a

large potential for foreigners to travel to Indonesia,

since Indonesia is well-known as one of interesting

tourism destination. Distance between Indonesia and

foreign countries is signiﬁcant and it affects the de-

mand for foreign tourism with a negative relation.

This means that, the further the distance a country,

the fewer the total number of foreign tourist visits

to Indonesia, this is because transportation cost will

also become more expensive with the further distance.

Domestic exchange rates of Indonesia has a negative

and signiﬁcant effect on the total number of foreign

tourists to Indonesia, this explains that, when the ex-

change rate of the Indonesia currency weakens, the

tourism cost will reduce, then the total number of for-

eign tourists to Indonesia increases, and vice versa.

Population of foreign countries has a positive and sig-

niﬁcant effect on the total number of foreign tourist

visits. This reveals that, the more population of for-

eign countries, the greater chance the number of for-

eign tourists to visit Indonesia.

Based on the conclusions, we can provide some

policy recommendation for the Indonesian govern-

ment as, the ﬁrst, this research is expected to be a

material improvement and consideration for the gov-

ernment in improving and maintaining the stability of

Indonesia’s income to maintain the number of foreign

tourists to visit Indonesia. The second, the govern-

ment is expected to increase cooperation in the expan-

sion of international airline routes to reduce distance

constraints in order to increase the number of tourists

from various countries.

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