UNIVERSITI PUTRA MALAYSIA

MOHAMMAD MOHEBI

FEP 2012 6

REVENUE DETERMINANTS AND TAX EXPORT ABILITY IN THE MALAYSIAN TOURISM MARKET

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REVENUE DETERMINANTS AND TAX EXPORT ABILITY IN THE

MALAYSIAN TOURISM MARKET

MOHAMMAD MOHEBI

DOCTOR OF PHILOSOPHY

UNIVERSITI PUTRA MALAYSIA

2012

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REVENUE DETERMINANTS AND TAX EXPORT ABILITY IN THE

MALAYSIAN TOURISM MARKET

By

MOHAMMAD MOHEBI

Thesis Submitted to the School of Graduate Studies, Universiti Putra

Malaysia In Fulfillment of the Requirements for the Degree of Doctor of

Philosophy

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DEDICATION

Dedicated to my merciful mother

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Abstract of thesis presented to the Senate of University Putra Malaysia in the

fulfillment of the requirement for the degree of Doctor of Philosophy

1

REVENUE DETERMINANTS AND TAX EXPORT ABILITY IN THE

MALAYSIAN TOURISM MARKET

By

MOHAMMAD MOHEBI

April 2012

Chairman: Professor Khalid Abdul Rahim, PhD

Faculty: Economics and Management

Based on the statistics, the number of Malaysian tourist arrivals grew by 25%

during 2006-2008. Comparatively in the same period, the rate was 4% in

Singapore and Thailand. A problem in the Malaysian tourism industry is that the

growth rate of tourism revenue does not correspond to the growth rate of tourist

arrivals. In comparison to Thailand and Singapore, Malaysia had more tourist

arrivals but earned less income.

Tourism expenditure is a source of private revenue. Private sector revenue

depends on own price, income, substitution price, exchange rate and several other

factors which are affecting the expenditure of tourists. In the public sector,

tourism tax is a main source of government revenue from the tourism industry.

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Tax incidence and exportability depends on the price elasticity of supply and

demand.

This study is divided into two parts for analysis. Firstly, to examine the tax

exportability, a system of supply and demand model is estimated using the

W2SLS estimator. The data set includes quarterly time series from 1995q1 to

2009q4 (60 observations). In the second step, to determine the major factor which

is affecting the expenditure of tourists, a panel gravity model has been used for 14

origin countries, from 1998 to 2009.

In the simultaneous equation model most of the explanatory variables in demand

equation are highly significant. The elasticity of income is less than unity and

suggests that Malaysia is a cheap distance and it is not a luxury good. The demand

is inelastic to the price but the supply is elastic in the short run. Hence, if the

government imposes one Ringgit (Malaysian currency) tax on hotel room prices,

the tourists pay is about 89 cents. Therefore, the Malaysian tourism market is tax

exportable.

The results of the expenditure model suggest that the Malaysian price index and

distance have negative impact while per capita income of origin countries and

Malaysian per capita income have positive impact on tourism expenditure. Our

results also show that Singapore is a complementary destination meanwhile

Thailand and Australia are substitute destinations for Malaysia. According to the

2020 vision, government and private sectors are required to finance tourism

industry aims. Our suggestion for the Malaysian government is that they are able

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to export tax to tourists and obtain revenue in the short run. But in the long run,

total tourist expenditure decreases considering our results on demand and supply

elasticity. It should be noted that this occurs if we move on the demand curve,

other factors that affect tourist’s flows being assumed constant.

Based on the result of the simultaneous equations model, tourism equilibrium

price has been calculated as well as the yearly trend for Malaysia. During the

period of 1995 until 2000, the growth rate of the equilibrium price was greater

than the consumer price index, which means that in the Malaysian tourism

market, new infrastructure during this period had not been developed to keep pace

with tourist arrivals. But after year 2002, exceeding demand was not able to

explain the changes in tourism price.

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Abstrak Tesis Yang Dikemukakan Kepada Senat Universiti Putra Malaysia

Sebagai Memenuhi Keperluan Untuk Ijazah Doktor Falsafah

DETERMINAN HASIL DAN KEBOLEHEKSPORTAN CUKAI DALAM

PASARAN PELANCONGAN MALAYSIA

Oleh

MOHAMMAD MOHEBI

April 2012

Pengerusi: Profesor Khalid Abdul Rahim, PhD

Fakulti: Ekonomi dan Pengurusan

Berdasarkan statistik, bilangan kedatangan pelancong Malaysia meningkat

25% dalam tempoh tahun 2006-2008. Untuk bandingan, pada tempoh yang

sama, kadar kedatangan pelancong ialah 4% bagi Singapura dan Thailand.

Masalah yang terdapat dalam industri pelancongan di Malaysia ialah kadar

pertumbuhan pendapatan dari sektor pelancongan tidak selaras dengan kadar

pertumbuhan kedatangan pelancong. Berbanding dengan Thailand dan

Singapura, Malaysia mendapat kedatangan pelancong yang lebih banyak

tetapi memperoleh pendapatan yang kurang.

Perbelanjaan pelancongan merupakan sumber hasil swasta. Hasil sektor swasta

bergantung kepada harga sendiri,pendapatan, harga substitusi, kadar

pertukaran, dan pelbagai faktor lain yang mempengaruhi perbelanjaan

pelancong. Dalam sektor awam, cukai pelancongan merupakan sumber utama

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hasil kerajaan dari industri pelancongan. Cukai insidens dan keboleheksportan

bergantung kepada keanjalan harga penawaran dan permintaan.

Kajian ini dibahagikan kepada dua bahagian analisis. Pertama, untuk meneliti

keboleheksportan cukai, satu sistem model penawaran dan permintaan

dijangka menggunakan estimator W2SLS. Set data merangkumi seri masa

suku daripada 1995q1 kepada 2009q4 (60 pemerhatian). Langkah kedua, untuk

menentukan faktor utama yang mempengaruhi perbelanjaan pelancong

menggunakan model graviti panel yang telah diguna pakai untuk 14 negara

asal, dari tahun 1998 sehingga 2009.

Dalam model persamaan serentak, kebanyakan pemboleh ubah penjelas dalam

persamaan permintaan adalah sangat signifikan. Keanjalan pendapatan adalah

kurang daripada uniti dan memperlihatkan bahawa Malaysia merupakan jarak

yang murah dan ini bukan merupakan barangan mewah. Permintaan adalah

tidak anjal berbanding dengan harga tetapi penawaran adalah anjal bagi jangka

pendek. Oleh sebab itu, sekiranya kerajaan mengenakan satu ringgit cukai (

mata wang Malaysia) ke atas harga bilik hotel, pelancong membayar lebih

kurang 89 sen. Dengan ini, pasaran pelancongan Malaysia merupakan cukai

boleh dieksport.

Dapatan model perbelanjaan mencadangkan bahawa indeks harga Malaysia

dan jarak mempunyai impak yang negatif, manakala pendapatan per kapita

negara-negara asal dan pendapatan per kapita Malaysia mempunyai impak

yang positif ke atas perbelanjaan pelancongan. Hasil dapatan kajian

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menunjukkan bahawa Singapura merupakan destinasi komplementari,

manakala Thailand dan Australia merupakan destinasi sustitut bagi Malaysia.

Berdasarkan visi 2020, kerajaan dan sektor swasta perlu membiayai keperluan

industri pelancongan. Cadangan kajian ini bagi kerajaan Malaysia ialah

kerajaan boleh mengeksport cukai kepada pelancong dan memperoleh hasil

bagi jangka pendek tetapi bagi jangka panjang, jumlah perbelanjaan pelancong

berkurangan berdasarkan keputusan kajian ini tentang keanjalan penawaran

dan permintaan. Perkara ini berlaku sekiranya kelok permintaan digerakkan,

faktor lain yang mempengaruhi aliran pelancongan kekal konstan.

Berdasarkan keputusan model persamaan serentak,harga ekuilibrium

pelancongan telah dikira, begitu juga bagi tren tahunan bagi Malaysia. Antara

tempoh 1995 sehingga tahun 2000, kadar pertumbuhan harga ekuilibrium

adalah melebihi daripada indeks harga konsumer yang bermaksud bahawa

dalam pasaran pelancongan Malaysia, infrastruktur baharu bagi tempoh ini

tidak berkembang bagi mengimbangi kedatangan pelancong tetapi selepas

tahun 2002, permintaan yang berlebihan tidak dapat menerangkan perubahan

dalam harga pelancongan.

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ACKNOWLEDGEMENTS

At first my praises and endless thanks be to God, who gave me the strength and

opportunity to complete my study. I hope and promise to use my knowledge for

the people who need it. I would like to convey my deepest appreciation to my

supervisor, Professor Dr. Khalid Ben Abolrahim, for his supervision, valuable

advice, and helpful suggestions in my study, especially his skillful and kind

guidance for my thesis writing that resulted in the completion of my thesis.

Thanks and sincere appreciations go to my committee members, Dr. Khairil

wahidin Awang, Dr. Lee Chin, for their support and, help.

I would like to thank my family “my wife, and daughter.” Without their

emotional support, it would be impossible for me to complete this thesis.

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I certify that a Thesis Examination Committee has met on 24 April

2012 to conduct the final examination of Mohammad Mohebi on his

thesis entitled “Revenue Determinants And Tax Export Ability in the

Malaysian Tourism Market”

in accordance with the Universities and

University College Act 1971 and the Constitution of the Universiti

Putra Malaysia [P.U.(A)106] 15 March 1998. The committee

recommends that the student be awarded the Doctor of Philosophy.

Members of the Thesis Examination Committee were as follows:

Alias bin Radam, PhD

Associate Professor

Faculty of Economics and Management

Universiti Putra Malaysia

(Chairman)

Ahmad Zubaidi bin Baharumshah, PhD

Professor

Faculty of Economics and Management

Universiti Putra Malaysia

(Internal Examiner)

Shivee Ranjanee A/P Kaliappan, PhD

Senior Lecturer

Faculty of Economics and Management

Universiti Putra Malaysia

(Internal Examiner)

Nada Kulendran, PhD

Professor

Victoria University

Australia

(External Examiner)

SEOW HENG FONG, PhD

Professor and Deputy Dean

School of Graduate Studies

Universiti Putra Malaysia

Date: 23 July 2012

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This thesis was submitted to the senate of Universiti Putra Malaysia and has been

accepted as fulfillment of the requirement for the degree of Doctor of Philosophy.

The members of the Supervisory Committee were as follows:

Khalid Abdol Rahim, PhD

Professor

Faculty of Economics and Management

Universiti Putra Malaysia

(Chairman)

Khairil wahidin Awang , PhD

Senior lecturer

Faculty of Economics and Management

Universiti Putra Malaysia

(Member)

Lee Chin, PhD

Senior Lecturer

Faculty of Economics and Management

Universiti Putra Malaysia

(Member)

BUJANG BIN KIM HUAT, PhD

Professor and Dean

School of Graduate Studies

Universiti Putra Malaysia

Date:

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DECLARATION

I declare that thesis is my original work except for quotations and citations, which

have been duly acknowledged. I also declare that it has not been previously, and

is not concurrently, submitted for any other degree at Universiti Putra Malaysia or

other institutions

MOHAMMAD MOHEBI

DATE: 24 April 2012

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TABLE OF CONTENTS

PAGE

ABSTRACT v

ABSTRAK viii

ACKNOWLEDGEMENTS xi

APPROVAL xii

DECLARATION xix

LIST OF TABLE xvi

LIST OF FIGURE xx

LIST OF ABBREVIATION xxi

CHAPTER

1 INTRODUCTION

1.1 Introduction

1.2 Tourism Definitions

1.3 Tourism and Economic Growth

1.4 A Brief History and Geography of Malaysia

1.5 The Malaysian Economy

1.6 Tourism Industry in Malaysia

1.7 Malaysian Tourism Revenue

1.8 Problem Statement

1.9 Objectives of the Study

1.10 The Significance of the Study

1.11 Organization of the Thesis

1

1

3

4

6

7

8

14

20

26

27

30

32 REVIEW OF LITERATURE 2

32 2.1 Introduction

33 2.2 Demand Function

34 2.2.1 Concepts of Demand Elasticity

36 2.3 Demand of Tourism

37 2.3.1 Tourism Demand Model

39 2.4 Tourism Supply

41 2.4.1 Travel Commodities

44 2.4.2 Accommodation Sector

45 2.4.3 Elasticity of Tourism Supply

46 2.5 Tourism Market Equilibrium

48 2.6 Hotel Room Tax

51

56

2.7 Incidence of Tax

2.8 Exportability of Tax

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56 2.8.1 Tax Exportability and Elasticity

58 2.9 Gravity Model

61

2.10 Empirical Study

81 METHODOLOGY 3

81 3.1 Empirical Model

82 3.2 Demand Model of Tourism

84 3.3 Supply Model of tourism

92 3.4 System of Equations

93 3.5 Methodology (The System Model Approach)

93 3.5.1 Simultaneous Equations

95 3.5.1.1 The Identification Problem

96 3.5.1.2 Necessary and Sufficient Condition

98 3.5.1.3 Methods of Estimation

99 3.5.1.4 Two-stage Least Squares (2SLS)

100 3.6 Tourism Expenditure Empirical Model

103 3.6.1 Dependent and Explanatory Variables

107 3.7 Methodology (Tourism Expenditure Model Approach)

107 3.7.1 Panel Data Analysis

107 3.7.1.1 Various Kinds of Panel Analytical Models

107 3.7.1.2 The Constant Coefficients Model

108 3.7.1.3 The Fixed Effects Model

108 3.7.1.4 The Random Effects Model

109 3.7.1.5 Specification Tests

110 3.7.1.6 Model Estimation Method

110 3.8 Variables and Measurement

110 3.8.1 System Model Variables

113

3.8.2 Expenditure Model Variables

120 EMPIRICAL RESULTS AND DISCUSSION 4

120 4.1 Introduction

121 4.2 System Model

122 4.2.1 Test for Autocorrelation

123 4.2.2 Heteroscedasticity Test

124 4.2.3 Normality Test

124 4.3 System Results

131 4.3.1 Exportability of Tax

135 4.3.2 Price Trend

139 4.4 Panel Model

141 4.5 Panel Model Results

150

4.6 Summary and Conclusion

152 SUMMARY AND CONCLUSION 5

152 5.1 Overview

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152 5.2 Summary

161 5.3 Limitations of the Study

162 5.4 Policy Implications

166 5.5 Suggestions for Future Research

167 REFERENCES

APPENDICES

BIODATA OF STUDENT

176

185