Determinants of tourism in African countries: the market value of the economy, financial factors and country risk

This thesis identifies new factors that significantly affect inbound tourism flows in African countries. In order to examine tourism flows, we employ a gravity model which is based on Newton’s law of gravitation and takes into account the push and pull factors that influence inbound tourism flows. The majority of the empirical studies on tourism analysis use the gross domestic product (GDP) or GDP per capita as a proxy for tourism income, but GDP is an imperfect measure of economic performance and is generally not effective when it comes to cross-country comparison. GDP is a flow variable gross of depreciation and provisions for loss that does not distinguish between production costs and value of output, while the market value of the economy from financial theory is a stock variable that incorporates the effects of production costs, output value, depreciation and expected losses. Hence, the market value of the economy from financial theory is employed as a proxy for tourism income. The global financial market index is then introduced into the model as a proxy for the effect of financial assets. We then investigate the effects of financial assets, financial development and financial risk (based on the Black–Scholes option pricing formula), on a country’s tourism inflow. Financial risk is largely ignored in the tourism literature where most of the research concentrates only on economic or political factors. Next, we examine the effect of composite country risk, which includes economic, financial and political risks as they all play a significant role in determining inbound tourism flows. Therefore, the overall country risk that comprises all three of these risk components may be a better measure rather than focusing only on political or economic risks.
The main findings that emerge from this thesis indicate that the market value of the economy from financial theory may be a more appropriate proxy for measuring income from tourism countries of origin. The results also suggest that the global financial equity market index is a significant factor that influences inbound tourism flow. The findings also indicate that financial risk, financial assets and financial development are important factors in determining inbound tourism flows. The results of the thesis also reveal that country risk has a significant influence on inbound tourism flows and political instability has an adverse effect on tourism. Above all, the results indicate that inbound tourism flows are not only driven by the factors mentioned in the tourism literature but that there are also other factors that may improve the efficiency of the tourism demand model. Developing better tourism models requires identification of new variables. The specifications of Chapters 4, 5 and 6 can easily be stretched, without loss of generality, to more countries of origin and destination, and can be adapted to alternative contexts such as the demand for specific regions in the world or specific regions within a country.