Multicollinearity in Tourism Demand Model : Evidence from Indonesia

Abstract

The demand for tourism in Indonesia continues to increase every year but cannot reach the
predetermined target. Studies on tourism demand have been done a lot, especially in Indonesia.
The selection of the dependent variable in tourism demand is not problematic and acceptable,
however, the selection of the independent variable is still unclear. This study aims to provide an
appropriate Indonesian tourism demand model and analyze the determinants of tourism demand
in Indonesia. The estimation technique used is a static panel regression. The results of this study
prove that there is multicollinearity in the tourism demand model when exchange rate and relative
price are combined into one model, showing that relative price are good proxies in representing
tourism price, and showing that substitution price are the main determinants of tourism demand in
Indonesia. The policy implications recommended in this study are monitoring the economic
growth of the origin countries of most tourists visiting Indonesia, improving the qual ity of
Indonesian tourism, and developing the Wonderful Indonesia program.