Modelling and forecasting the demand for Hong Kong tourism

Abstract

The main objectives of this paper are to identify the factors which contribute to the demand for Hong Kong tourism with the aid of econometric models and to generate forecasts of international tourism arrivals to Hong Kong for the period 2001–2008. The general-to-specific modelling approach is followed to model and forecast the demand for Hong Kong tourism by residents from the 16 major origin countries/regions and the empirical results reveal that the most important factors that determine the demand for Hong Kong tourism are the costs of tourism in Hong Kong, the economic condition (measured by the income level) in the origin countries/regions, the costs of tourism in the competing destinations and the ‘word of mouth’ effect. The demand elasticities and forecasts of tourism arrivals obtained from the demand models form the basis of policy formulations for the tourism industry in Hong Kong.

Introduction

Known as the ‘City of Life’ and ‘Asia's Most Popular Travel Destination’, Hong Kong has a unique culture that combines western life style with Chinese traditions. Cultural events, such as the heritage tour, dragon boat festival, and various food and arts festivals, have helped Hong Kong to build a favorable image overseas and attracted a large number of international visitors.

In 2000 Hong Kong was ranked 14th in the World Tourism Organization's list of top destinations, and the growth rate of tourist arrivals in Hong Kong reached 15.3%, while the world and regional average rates of growth in the same year were 7.4% and 14.5%, respectively. Tourism has become the second largest foreign currency earner since 1995 and the income generated from tourism has contributed around 6% to Hong Kong's gross domestic products (GDP) over the last decade (Zhang et al., 2001). International tourism arrivals in Hong Kong increased from 0.93 million in 1975 to 13.06 million in 2000, representing an average annual growth rate of around 9.2% which was higher than most of the destinations in the Asia–Pacific region during the same period. The growth of tourist receipts has been even more spectacular, rising from HK$2,975 million in 1975 to HK$61,514 million in 2000 with an annual growth rate of about 11.6%.

Zhang et al. (2001) show that Japan was the biggest origin country of Hong Kong tourism in the 1970s, occupying more than 30% of the total market followed by the Southeast Asia (21.3%) and Americas (17.8%). Europe (11.0%) and Australia and New Zealand (9.1%) ranked fourth and fifth, respectively. In the 1980s the Southeast Asia and the Americas emerged as the leading markets replacing Japan. In the mid-1990s, however, Mainland China and Taiwan became the first and second largest source markets for Hong Kong tourism followed by Japan, Southeast Asia and Europe. The main factor which has contributed to the rapid intra-Asia travel increase has been the fast economic growth experienced by many Asian economies including Mainland China and Taiwan.

Tourist receipts had a very high growth rate during the 1970s and 1980s and this trend continued until mid-1990s. The Asia financial crisis caused a significant decline in tourist receipts in 1997 and 1998. This decline was partly due to a huge drop in visitor numbers from the crisis-hit countries, but price reduction also played a significant role in reducing tourism revenue. The largest drop in tourist spending came from the long haul markets, while most short haul markets performed relatively well in this regard. Mainland China, however, under performed compared with other short haul markets, with a moderate decline of around 5.4% in 1999 compared with 1998. Despite this performance, Mainland China remained the biggest contributor to tourist spending in 1999, accounting for 16.4% of the total. The contributions of Taiwan and Japan to tourist receipts made them the second and third largest markets after China.

Although the tourism industry has played an ever-increasing role in the generation of wealth and employment in Hong Kong, it also faces the critical problem of creating and maintaining a sustainable competitive advantage in an environment of increased globalization and economic integration in Southeast Asia. In particular, Hong Kong will have to compete for international tourists with such destinations as Singapore, Taiwan, Thailand and Mainland China. In order to respond effectively to this challenge, the policymakers and businesses in the service sector need to know the comparative position of the industry in the region. To achieve this, the determinants of international tourism demand in Hong Kong and the future trend of this demand should be properly assessed. The objectives of this paper are, therefore, to identify the key factors that contribute to the demand for Hong Kong tourism with the aid of econometric models and to generate the forecasts of this demand for the period 2001–2008.

The rest of the paper is organized as follows. Section 2 discusses the theoretical framework of analyzing tourism demand with a particular focus on the determinants of tourism demand. Section 3 presents the empirical results of the demand models. The forecasts of tourist arrivals in Hong Kong for the period 2001–2008 are generated based on the estimated models in Section 3 and the final section concludes the paper.