Tourism and Capital Formation in Highly Innovative Regional Countries: Evidence from Feasible Generalized Least Squares Method

The objective of this paper is to investigate the nexus between capital formation and tourism demand in some European countries. Particularly, the study aims to determine empirically the degree of elasticity of tourism demand in response to the changes of capital formation. The demand elasticity in terms tourism requires further clarification due to insufficient exploration in the literature. Due to the absence of cross-national evidence on this issue, the paper involves the application of Feasible Generalized Least Squares (FGLS) in panel data framework for this purpose. By imposing the assumption of highly innovative and developed status, a group of European countries with highly innovative index clarified by the Global Innovation Index are chosen as sample for the study. The result shows robust findings in which the sensitivity of estimation is checked as well as the correction for bias estimates is implemented with the Seemingly Uncorrelated Regression (SUR) method. The conclusion is in favor to the null hypothesis specified in this paper where tourism demand is inelastic to the changes of capital formation in this group of innovative and developed countries.