The multidimensional impact of financial development on tourism: international evidence

Tourism has long emerged as a driving force for economic activity, while common knowledge is that financial development contributes positively to the economy and to specific economic sectors. However, limited research has been conducted on the impact of financial development on tourism, while existing studies focus on overall financial development. The objective of this paper is to investigate the multidimensional impact of financial development on international tourist arrivals considering overall financial development, its two components – financial institutions and financial markets – as well as its dimensions, such as depth, access, and efficiency. Using a panel of 51 countries over the period 1997–2020, we employ the two-step system generalized method of moments (GMM) and instrumental variables (IV) estimators. The empirical findings indicate that the development of financial institutions has statistically significant positive effects on international tourist arrivals, whereas the development of the financial markets is statistically insignificant. This implies that the bank-based financial system is more influential than the market-based financial system in promoting tourist arrivals. Moreover, the dimensions of financial institutions affect positively tourist arrivals, while only financial market depth has a positive effect. These results highlight the importance of financial institutions’ development in enhancing international tourism arrivals.