Geopolitical risk and tourism: Evidence from dynamic heterogeneous panel models

Abstract This paper provides an empirical insight into how geopolitical risks impact international tourism demand. An augmented tourism demand function was developed and empirically estimated in line with classical theory for a panel of 16 countries from 2005M1 to 2017M12 through the AMG and CCEMG estimation techniques that address underlying heterogeneity, non‐stationarity, and cross‐sectional dependence. The study further examines the potential moderating effect of covid‐19 outbreak on the relationship between geopolitical risk and tourism by investigating the interactive effect of past outbreaks and geopolitical risks on tourism demand. Additional insight on causal relations between geopolitical risks and tourism demand was obtained using panel bootstrapping technique. The results show that geopolitical risk negatively impacts tourism demand, and that pandemic outbreaks aggravate the negative impact of geopolitical risks on tourism demand. Panel causality outcomes further confirm that geopolitical risk is a significant predictor of tourism demand (captured by either tourism receipts or number of inbound tourists). Our findings confirm that the dynamic attributes of both local and international political environments significantly impact the consumption decision of tourists and the economic performance of tourist destinations. Our recommendation is that pre‐crisis, in proposing policy directions for tourism sector development, policy‐makers should establish crisis management plans to protect the tourism sector. Post‐crisis, policy‐makers should initiate aggressive recovery marketing strategies to re‐establish the image of safety and attractiveness required to reassure potential tourists of the safety of the destination, thereby ensuring return to competitiveness and economic recovery.