CHAPTER TWO - LITERATURE REVIEW

2.1 CHAPTER INTRODUCTION

The second chapter provides an insight into the findings of other researchers on the topic. It
starts by explaining the impact of exchange rate on tourism followed by the influence of
exchange rates on tourist behaviour. Moreover, the influence of exchange rate for tourists on
economic development is also described before providing empirical evidence on the topic.

2.2 EXCHANGE RATE CHANGES AND TOURIST ARRIVALS

It would be useful to investigate the impact of exchange rate on tourism as per Abbot et al.
(2012). Gil-Pareja et al. (2007) claim that although may studies have proved that any sector can
be impacted by exchange rates, interesting findings have been obtained on how a major economy
may influence tourism. In the previous six decades, international tourist flows have sharply
risen and the tourism sector is one of the biggest and more rapidly expanding sector
internationally. As per the latest statistics (UNWTO, 2014), in 1950 tourist arrivals stood at 25
million and increased to 278 million in 1981, to 528 million in 1995 and finally in 2013 tourist
arrivals amounted to 1087 million. Hence, in 2013, the tourist arrivals growth rate was 5% as per
UNWTO (2014). In addition, increases in the number of tourist arrivals is expected to have a
long term growth of 3.3% yearly which represents an average of 43 million each year and in
2030 it would reach 1.8 billion (UNWTO, 2011). The emerging economies would benefit from
these increases in the number of tourist arrivals as they have a 57% share in contrast to the 43%
share that advanced economies have in tourist arrivals. In addition, some regions such as the
Pacific, Asia and Europe would benefit from most of the new arrivals and Africa, Middle East
and America would witness lower increases. However, pertaining to the growth rate, the Pacific
region and Asia are expected to have the biggest growth rates (UNWTO, 2014).

However, there is tough competition between different countries in the attraction of tourists and
several factors influence tourist arrivals in countries and some include the social, political and
economic stability of the destination (Zhang et al., 2009). This stability is usually viewed in
terms of the exchange rate stability by tourists that can in turn be attributed to the economic
policies that policymakers follow in the country (Dwyer et al., 2011). For instance, disturbing or
conflicting economic policies of a country would mirror the exchange change volatility and can
result in lesser tourist arrivals in the country. Previous researchers have demonstrated that
changes in the exchange rate share a correlation with changes in international arrivals (Cheng Ka
Ming, 2012; Patsouratis et al., 2005). More specifically, devaluation in the destination incites
more inflow whereas devaluation in the origin country would hinder international tourist
outflow.

The Exchange Rate Volatility (ERV) has been found to be a major determinant for tourism in the
long term tourism demand (Thompson and Thompson, 2010). The researchers claimed that when
there are too many changes in the exchange rate of their initial destination country, tourists who
are risk averse could decide to delay, cancel or switch to other destinations. Besides, changes in
the exchange rate of the destination country can also demonstrate social unrest or political
instability in that country which in turn discourages tourists from visiting that country. Webber
(2001) also investigated tourism flows in Australia and found that changes in exchange rates can
result in tourists dropping the idea of visiting a destination in nearly 40% of cases. The same
conclusions were reached by Chiang et al. (2009) who studied the impact of changes in the
exchanges rate in tourist flows in Taiwan. Furthermore, Yap (2012) sought to investigate if
changes in exchange rates would raise the uncertainty of tourism flows into Australia concluded
that changes in exchange rates lead to a spillover impact on international tourist flows in the
country and the impact range from weaker to stronger as it depends on the origin country. Santa
Gallego (2010) also asserted that an ERV of zero (a common currency), impacts the most on
tourism and that the Euro has raised tourism flows by almost 6.4%. A similar study was
conducted by Thompson and Thompson (2010) and their findings revealed a positive Euro
impact because of the zero ERV in Greece. Fang et al. (2007) stated that the impact of changes in
exchange rates on tourist arrivals are largely dependent on whether the tourists are risk-lovers or
risk-averse. Serenis and Tsounis (2014) added that changes in exchange rates negatively impact
on risk-averse tourists decisions to visit a destination and hence the country has lower tourist
arrivals whereas it has a positive effect on risk-loving tourists as it is perceived as an opportunity
to make profits and hence results in more arrivals.

Since 2012, China and Japans exchange rates significantly diverged and an interesting trend in
the tourism flow was observed. There were more visitors in China as compared to Japan while
Japanese tourists to China decreased every year. Duty-free shopping and other attractions were
build to attract Chinese tourists in Japan. However, the exchange rate fluctuations have also
greatly influences the movements in the two largest tourist markets.

However, it is believed that there are more risk-averse tourists as compared to risk-seeking ones
and given that package tourism dominates tourist arrivals, the tour operators would be more
likely to switch destinations in view of avoiding ERV (Fang et al., 2007). Hence, exchange rate
is one of the most influential factors in the long run which impacts on tourism demand
(Agiomirgianakis et al., 2014) and this study also seeks to investigate the impact of exchange
rate on tourist arrivals in Mauritius.

2.3 IMPACT OF EXCHANGE RATE ON TOURIST BEHAVIOUR

Tourist spending is one of the main advantages derived from tourism in Mauritius. Although
tourism spending is only part of the total spending that visitors contribute to a destination, it
relates to the most direct advantage of tourism to the countrys economy. Tourists also have some
prepaid expenditures such as meals and accommodations. When the exchange rate rises, tourist
spending decreases which implies a negative relationship between the two. Moreover, it was also
observed that the ERV influences the competitiveness of a countrys tourism since a stronger
currency would require tourists to increase their travel wallet or decrease the length of stay in a
country. Moreover, it was found that fluctuations in the exchange rates would require tourists to
make adjustments in the short term or select other destinations in the long term.

Bonner and De Hoog (2011) investigated the changes in Dutch tourists behaviour and how they
used economizing strategies to plan their stay in other countries. The researchers revealed that
fluctuations in exchange rates would result in tourists making three main choices which are
(Bonner and De Hoog, 2011):

Having a shorter length of stay in the destination, which was ranked first
Changing their destinations and visiting other countries, ranked second
Cancelling the tour operators and selecting a self-arranged vacation
Making changes in their vacation periods
Choosing a later or earlier booking moment
Employing other transport means
Selection other types of accommodations
 Conducting other or fewer activities on the spot, which was ranked third
Looking for cheaper alternatives having the same types of accommodations.

Hence, it can be observed that fluctuations in the exchange rates impact on tourist behaviour in a
destination. Most tourists would be more likely to shorten their length of stay in a country if
there is a rise in the exchange rate which would in turn require them to spend less in the country.
They would have to spend lesser amount of money to pay for accommodation, food, transport
and shopping. Moreover, the travelers expenditure is also significantly influenced by their length
of stay and has a positive impact on total tourist expenditure (Wang et al., 2008).

While some other tourists would simply change their destinations and look for other countries
who have more appropriate exchange rates with respect to their currencies where they can enjoy
their stay, do shopping and stay in 5 star hotels (Loretan, 2005). A negative relationship was
observed between destination choice and exchange rate rises. That is, when there is a revaluation
in the currency of a country, tourists can decide to change their destination and choose another
country to visit (Qadri and Zheng, 2010).

Some tourists can also only choose to visit the countries and decrease their number of activities
when the exchange rate of the destination rises (Singh, 2009). In the contrary case, when there is
a devaluation in the destinations currency, tourists can choose to conduct more activities in the
country. Hence, it may be said that there is a negative relationship between devaluation of a
currency and number of activities conducted by tourists in the destination (Singh and Upneja,
2007).

The exchange rate volatility in different countries between different currencies have aroused
several questions about how consumer and tourist behaviour is impacted by the changing
currency values. In the United States, it was observed that the relationship between hotel demand
and currency exchange rates is rather complicated (Smith Travel Research, 2012). The relative
purchasing power of the either weakening or strengthening currencies against the U.S dollar
could lead to some important influences on the amount of hotel rooms sold in the country.
However, some hotel chains could experience the changes more than other hotels (Smith Travel
Research, 2012). For instance, customers could choose to book 3 or 4 stars hotels instead of 5
star ones.
The exchange rates also impact on consumer shopping behaviour. When the currency in the
origin country rises, tourists can spend more in their destination country while if the currency in
the origin country decreases, tourists would not seek to spend in the destination country (Bailey
et al., 2009). Moreover, when the currency in the destination country increases, tourists would
not engage in shopping that much whereas if the currency in the destination country decreases,
tourists would be more motivated to engage in shopping.

Hence, from the above literature, it can be deduced that the fluctuations in exchange rates impact
on tourist behaviour in the destination country. Researchers have demonstrated that most tourist
would be prone to have a shorter length of stay, conduct fewer activities and change their
destinations in case the currency in the destination country gains value so as to save money
(Bailey et al., 2009).

2.4 IMPACT OF TOURISM ON ECONOMIC GROWTH

The tourism industry remains an essential component which helps to promote economic growth,
especially in developing countries such as Mauritius. Many researchers have attempted to
investigate the relationship between tourism, economic growth and exchange rates. The
hypothetical relationship between tourism and growth is referred to as the tourism-led growth
hypothesis. For instance, Oh (2005), investigated the relationship between economic
development and tourism in South Korea. The researcher observed that tourism-led economic
growth did not hold in the country. Moreover, Othman and Salleh (2008) also investigated the
correlation between economic growth and tourism development in 4 ASEAN countries. The
researchers noticed that there is a long-term co-integrating relationship between tourism and
economic development in all the countries selected. However, two mitigated findings were
obtained. For instance, in Singapore and Malaysia, a unilateral causality was found between
economic growth and tourism development while in Thailand and Indonesia it was observed that
economic development results into tourism development. Kreishan (2010) also investigated the
relationship between economic development and tourism in Jordan between 1970 to 2009 using
the Granger causality test. It was revealed that there is a positive correlation between economic
development and tourism in the long term. Kasimati (2011) observed that there is a co-inegrating
relationship between tourism and economic growth in Greece but he did not found evidence for
any direct relationship between these two.

A major benefit of tourism is that it is labour intensive and hence a rise in production would
increase employment in the country. This benefits economies who seek to lower their
unemployment rates. However, it also leads to a shock in the job market due to rising wages and
induces mobility in the sectors. Hence, from a macroeconomic point of view, tourism leads to
employment and economic growth (Eugenio-Martin & Morales, 2004). Moreover, it was
suggested that two viewpoints have to be considered when interpreting the relationship between
economic activity and tourism which are the benefits and drawbacks of tourism development.
The positive impact of tourism includes the provision of hard currency that helps in alleviating
the gap in foreign exchange and finance imports of capital goods, additional job opportunities,
higher tax revenues and personal income (Corgel, 2012). Moreover, tourism also helps in
expanding the demand for specific goods and services which include transportation facilities,
airports and roads which are mostly tourism-specific. Besides, tourism expenditure by visitors
may improve the domestic tourism construction and help in accumulating physical capital and
the need for skilled labour in the sector would cause an increase in human capital investment
(Chang, 2009). Therefore, it may be said that tourism contributes considerably to economic
growth in a country, however it depends on the exchange rate volatility since as observed in the
earlier section, the exchange rate impacts on tourism behaviour in a destination country (Chang,
2009).

2.5 EMPIRICAL EVIDENCE

Previous researchers have identified four main determinants of international tourist flows which
are the transportation cost, the income (through the GDP of origin country), relative prices
between origin country and destination, and the Real Effective Exchange Rate (Li, 2005; Zaki,
2008, Song and Li, 2008). The researchers have also concluded that a devaluation in the
exchange rate at the destination country would attract tourists while a revaluation of the
exchange rate at the origin country would decrease tourist outflow. Agiomirgianakis (2014)
claimed that the tourists are more familiar with their countrys exchange rate and employ them as
a proxy for the cost of living in other countries. Hence when the income of individuals in the
origin country increases, they are further able of traveling to other countries (Stabler et al.,
2010). On the other hand, Dwyer et al. (2010) asserted that tourism inflows shares a negative
correlation with the cost of living at the destination country relative to the origin which is
calculated through the relative consumer prices between origin country and destination.
Moreover, the transportation cost, which forms part of the traveling cost to a destination also has
a negative correlation with tourist flows (Yap, 2012). Chang et al. (2009) have found that
previous researchers have laid considerable emphasis on the fluctuations, shocks and changes in
the exchange rates when studying the impact of exchange rates on tourism flow. Moreover,
Santana and Gallego (2010) observed that the only factor identified which helps to determine
tourist flow remains the fluctuations in the exchange rate which can also be the case for
Mauritius.

Wang et al. (2008) investigated the relationship between exchange rates and international tourism
demand in Asian countries and found that there was a negative correlation between exchange rate
and international visitors in Asia. In other words, stronger destination currencies decrease the
amount of international visitors to the country and vice versa. Furthermore, an asymmetrical
impact of exchange rate on international tourists, with the impact of appreciation of the
destination countrys currency stronger than the currency depreciation was observed.

Finally, Nowjee et al. (2012) investigated the relationship between tourism, economic growth
and exchange rate using annual data from Mauritius for the period of 1981 to 2010. The
researcher observed that Granger cause tourist arrivals but the arrivals granger caused real
exchange rates. This infers that the number of tourists in Mauritius was not affected by the
exchange rate changes between the tourists currency and the local currency which is the
Mauritian rupee. However, on the other side, the real exchange rate is affected by the number of
tourists to Mauritius due to the exchange market size for the Mauritian rupee and the
considerable size of tourism relative to the domestic economic (8.2% in 2010, Statistics
Mauritius, 2012).

While some other tourists would simply change their destinations and look for other countries
who have more appropriate exchange rates with respect to their currencies where they can enjoy
their stay, do shopping and stay in 5 star hotels (Loretan, 2005). A negative relationship was
observed between destination choice and exchange rate rises. That is, when there is a revaluation
in the currency of a country, tourists can decide to change their destination and choose another
country to visit (Qadri and Zheng, 2010).

Brinda et al. (2009) investigated the relationship between international tourist expenditure and
exchange rate in Chile and observed that there is a co-integration relationship between tourist
expenditure and exchange rate. Moreover, Ghartey (2010) also provided empirical evidence that
there is a relationship between tourist expenditure and exchange rate.

Crouch (1993) also studied the influence of exchange rate on international tourist behaviour. The
researcher used data from 286 exchange rate elasticities of demand from 80 empirical studies. It
was found that when the currency of the origin country decreases in value, the real incomes and
standard of living also decline in that country. As a result, the increase in exchange rates and
decline in income harm foreign tourism. Moreover, the researcher observed that inflation rates,
such as the origin countrys currency decreasing in value, makes inflation rise. Hence, the
destinations price through the relative inflation rates also decline.

Moreover, as per Lim (2006), when tourists find that the exchange rates are too high in a
destination country, they can choose to make changes their vacation periods. They may prefer to
visit the country when they receive their bonuses and have more money or plan their vacations at
earlier date if they believe the currency will rise shortly. Moreover, they can change their
vacation periods when the hotels are cheaper instead of visiting during peak time or festive
seasons.

As per a research conducted by Tourism Australia (2016), it was found that the travel decisions
are influenced by a set which is interrelated and complex and differs by age, travel type and
market. It was also observed that exchange rates is an important element which helps to explain
the travel choices of international travelers, Australian travelers and their impacts are relatively
short term and modest. Moreover, it was found that in the long term, tourism arrivals is greatly
influenced by income growth. Besides the exchange rates, it was observed that costs linked with
the trip purchase such as visitor attractions and accommodations and airfares also influence
international tourism demand while exchange rates impact on tourist demand varies by market.
For instance, exchange rates are considered more by travelers from Hong Kong, Korea and
Singapore while tourists from Canada are less responsive.

In addition, Yap and Allen (2011) claimed that exchange rates impact on visitors spending when
they reach Australia and influences the number of international visitors to a lesser extent. There
are different impacts of the exchange rates as per the different travel segments and their purpose
also influences their decision to travel. For example, exchange rates influence international
holiday tourists the most as compared to those visiting relatives and friends or travelling for
business purposes. Moreover, the youngsters aged between 15 to 29 are not as impacted by
exchange rates when thinking about visiting Australia while middle aged travelers between 30 to
40 years old are least influenced by exchange rates when it comes to expenditure when they
reach the country. As per RET (2010), the exchange rate between the source country and travel
country (bilateral exchange rate) has an important role in their purchasing decisions as compared
to the overall performance of the countrys exchange rate.

Case Studies from the World Travel and Tourism Authority (2016):

China and Japan

It was observed that the Chinese and Japanese visitors considered the exchange rates differently
between 2012 and 2015. The was an increase in the number of Chinese travelers to Japan since
2013 while the number of tourists from Japan to China decreased significantly in 2012. Some
other factors such as duty free shopping help to attract Chinese visitors significantly. However, it
would be difficult to argue against the essential part that exchange rate movements have plats in
the two largest travel and tourism markets in Asia.

Eurozone

Although they form part of the single currency bloc, travel and tourism destinations within the
Eurozone have experienced different real effective exchange rate dynamics significantly in the
recent years. The reason was attributed due to the different visitor origin profiles and different
inflation rates. Between 2012 and 2015, Ireland witnessed the most considerable competitiveness
gain due to the depreciation of its visitor weighted exchange rates and low inflation. This was
also due to the fact that most of its travelers were from UK and USA and the Euro depreciated
large against the US Dollar and . This is one of the main reasons why the tourist arrivals
increased significantly between 2012 and 2015. The destinations which significantly depend on
the other Eurozone origin markets have observed limited changes in their competitiveness as all
the origin markets shared the same currency. On the other side, tourism performance and
competitiveness in Finland decreased due to its high reliance on the Russian market.

North America

Due to the US dollars strength in the recent years, the visitor weighted exchange rates of Mexico
and Canada significantly depreciated in contrast to the USA. Travel is not more expensive from
Canada and Mexico to the USA whereas US outbound travel in the opposite direction is now
cheaper. This in turn directly impacts on travel performance in the USA, Canada and Mexico.

2.5 CONCLUSION

This chapter has successfully explained the topic under investigation. As stated in the previous
sections, the exchange rates remain an important element in determining the number of tourist
arrivals in a country and empirical evidence on the topic has also provided several examples of
how tourist arrivals is impacted by the exchange rate. Furthermore, tourist behaviour is also
influenced by the exchange rates since it determines their choice of hotel, length of stay,
shopping priorities, activities to be conducted in the destination and various other elements.
Tourism has been found to have a positive impact on the economy of any country and hence it is
important to ensure that tourists are attracted to a country. The next chapter now explains the
research design and methodology which has been employed for conducting this research.