China is a major source of empirical observations with which to test different hypotheses relative to tourism research. In this paper, the author constructs a spatial model of tourism industry development and, considering spatial distance, uses Chinese tourism panel data to analyse the relationship between market potential, industrial density and the revenue of tourism firms. The study provides evidence that tourism market potential and agglomeration density are statistically significant and quantitatively important in explaining the revenue of tourism firms. This finding is robust, controlling for input factor density and endogeneity using instrument variables. Tourism market potential is found to matter through the mechanisms promoted by new economic geography theory. The estimated coefficients are consistent with plausible values for the predication of the model.
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