The study analyzes the impact of terrorism on Malaysia’s tourism demand. Panel data from the 25 top source countries, covering the period from 2000Q4 to 2017Q4 is obtained from the Global Terrorism Database, and the Malaysian Tourism Board (MyTourismData). For analysis, a panel Fully Modified OLS (FMOLS) procedure is employed. The results indicate that an increase in terrorism activity in Malaysia depresses international arrivals to the country. Furthermore, spillover effects from terrorism activity in neighboring South East Asian countries are identified. Increased terrorism activity in Thailand is found to boost tourist arrivals in Malaysia from each of the four source continents (Europe, North America, Oceania, and Asia) as well as overall. However, increased terrorism activity in Indonesia depresses arrivals from each of the four source continents as well as overall, possibly due to closer physical and cultural proximity. Increase in terrorism activity in Philippines generally creates a negative effect on Malaysia tourism arrivals except for fatalities which induces a positive effect from North America and Oceania. It is suggested Malaysia should coordinate counter terrorism strategies with Indonesia and Philippines to reduce negative spillover. Malaysia tourism providers should also emphasize differentiation of Malaysia tourism products from Indonesian and Philippine products. Future research should assess how terrorism attack patterns affect tourism demand across different nationalities.
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