Job losses in hotels and restaurants were around 10,000. .... The new virtual agents use existing platforms of ... arrivals, foreign exchange revenues and jobs.
FOREIGN DIRECT INVESTMENT AND TRANSNATIONAL CORPORATIONS IN TOURISM IN DEVELOPING COUNTRIES
Zbigniew Zimny
A background study prepared for UNCTAD1 Fall 2005
GENEVA 1
The study has been used in UNCTAD’s publication FDI in Tourism: The Development Dimension, UNCTAD Current Studies on FDI and Development, No. 4 (New York and Geneva: United Nations, 2007).
2 TABLE OF CONTENTS Chapter I. CONCEPTUAL ISSUES, TRENDS AND THE ROLE OF TNCS AND OTHER KEY ACTORS IN DEVELOPING COUNTRIES ..………………5 Introduction ……………………………………………………………………………5 A. FDI determinants ………………………………………………………………6 B. TNC activities ………………………………………………………………….7 C. FDI in tourism activities ……………………………………………………….10 D. Why FDI in tourism activities is small? ……………………………………….15 E. FDI implications of the international tourism product ………………………...20 F. TNCs and FDI in hotels and restaurants ……………………………………….24 G. Non-equity forms in international hotel chains ………………………………...28 H. International hotels in developing countries ……………………………………30 I. The role of non-FDI activities of tour operators, airlines and global distribution systems ……………………………………………………..34 1. Tour operators …………………………………………………………..35 2. Airlines ………………………………………………………………….41 3. Global distribution systems ……………………………………………..42 Chapter II. THE IMPACT OF FDI IN THE HOTEL INDUSTRY ……………….44 Introduction …………………………………………………………………………….44 A. Capital and investment …………………………………………………………46 B. Knowledge ……………………………………………………………………...51 C. Linkages and leakages ………………………………………………………….54 1. General discussion ………………………………………………………54 2. Evidence on transnational hotels ………………………………………..59 D. Environment …………………………………………………………………….63 E. Domestic enterprise development ……………………………………………….67 Chapter III. A CASE STUDY: THE ROLE OF FOREIGN DIRECT INVESTMENT IN TANZANIA’S TOURISM ……………………………………..71 A. Historical background …………………………………………………………...71 B. Tourism profile ………………………………………………………………….72 1. Tourism assets …………………………………………………………...72 2. Seasonality ………………………………………………………………73 3. Tourists by the country of origin ………………………………………..74 4. Arrivals by the mode of transportation ………………………………….75 5. Types of tourism ………………………………………………………...76 C. The growth and economic significance of tourism ……………………………...77 D. The role and impact of FDI in tourism ………………………………………….80 1. FDI in Tanzania …………………………………………………………80 2. The role of foreign enterprises in Tanzania’s tourism …………………..80 a. Mainland ………………………………………………………81
3 b. Zanzibar ……………………………………………………….84 3. The operations and impact of foreign hotels ……………………………84 a. Profile of surveyed hotels ……………………………………..85 b. Linkages ……………………………………………………….85 c. Employment and skills ………………………………………...86 d. Environment …………………………………………………...87 e. Local initiatives ………………………………………………..87 f. Negotiations and contracts …………………………………….87 g. Problems ………………………………………………………88 E. FDI policy in tourism …………………………………………………………..88 BOXES I.1. Similar attractions, different outcomes ……………………………………..22 I.2. Vertical integration in the United States tourism …………………………..36 II.1. Tourism: is it worth paying the price? ……………………………………..45 II.2. The cost of building a hotel ………………………………………………...47 II.3. Hotels in Mauritius: mainly local but increasingly foreign ………………...49 II.4. Caribbean brand hotel TNCs ……………………………………………….49 II.5. Coping with management skills constraint on China’s hotel boom ………..53 II.6. Food production linkages in Cancun ……………………………………….61 II.7. Botswana: pluses and minuses of niche tourism in Okavango Delta ………65 TABLES I.1. US outward stock of FDI in tourism-related activities, 2002 ………………12 I.2. Globalization of travel and tourism-related activities in selected OECD countries, 1997-1998 ………………………………………………..13 I.3. Illustrative OLI advantages relevant to FDI/TNCs in key tourism activities …………………………………………………………………….17 I.4. Top world’s 15 hotel groups, 2002 …………………………………………25 I.5. Outward and inward FDI stock of selected OECD countries in hotels and restaurants ……………………………………………………26 I.6. Top 10 hotel groups from non-developed countries, 2001 …………………27 I.7. Modes of operations of selected hotel chains, 2002 ………………………..29 I.8. Accor’s modes of operations by type of hotels, 2003 ……………………...30 I.9. Inward stock of FDI in selected developing countries in hotels and restaurants ……………………………………………………………...31 I.10. The largest European tour operators ………………………………………37 II.1. FDI inflows into hotels and restaurants in selected countries, various periods ……………………………………………………………..51 III.1. Mainland, registered investment projects in accommodation, by ownership, 2002-2004 ………………………………………………….82 III.2. Mainland, registered investment projects in accommodation, by type, 2002-2004 ………………………………………………………..82 III.3. Mainland, registered investment projects in tour operations,
4 by ownership, 2002-2004 …………………………………………………83 III.4. Mainland, registered investment projects in restaurants, by ownership, 2002-2004 …………………………………………………83 FIGURES I.1. Share of foreign affiliates in sales in selected OECD countries; manufacturing, services, hotels and restaurants and transport, 1997-1998 ……..15 II.1. Tourism value chain ………………………………………………………..55 III.1. Quarterly seasonality of tourism in Tanzania, 2003 ………………………73 III.2. Monthly seasonality of tourism in Tanzania, 2003 ………………………..74 III.3. Tourists’ arrivals by region, 2003 …………………………………………75 III.4. Arrivals by the mode of transportation, 2003 ……………………………..76 III.5. Tourists’ arrivals to Tanzania, 1985-2003 ………………………………...78 III.6. Mainland, tourism exports revenues, 1985-2003 ………………………….79 III.7. Mainland Tanzania, average annual FDI inflows, 1991-2004 …………….80 References for chapters I and II ………………………………………………………90 References for chapter III ……………………………………………………………..92
5 Chapter I. CONCEPTUAL ISSUES, TRENDS AND THE ROLE OF TNCS AND OTHER KEY ACTORS IN DEVELOPING COUNTRIES Introduction The tourism literature tends to ascribe to transnational corporations (TNCs) and foreign direct investment (FDI) large and often dominant role in tourism in general and in international tourism of developing countries – the focus of this study – in particular. References – usually general, not substantiated with data – to very high or even excessive dependence of developing countries’ tourism on foreign ownership are frequent in this literature. This contrasts with an almost total lack of interest in tourism in TNCs and FDI literature. Except for a few articles, usually very old, on the hotel industry, the TNC literature, which tends to examine thoroughly industries with significant TNC roles, has not paid much attention to tourism. Furthermore, an increasing number of developing countries has been trying, with mixed success, to attract FDI into tourism.2 Is there then too much or too little FDI in tourism in developing countries? This may, of course, vary from country to country, but if there is “too much”, what would be policy implications? Should countries with too much FDI try to reduce it or, at least, not to let it grow, by imposing, for example, entry restrictions on foreign investors in tourism? This would be out of line with the dominating trend in developing countries’ FDI policy, which has not only been, for some two decades, its liberalization, but increasingly, also FDI promotion. Moreover, countries have increasingly competed for more attractive kinds of FDI, especially export-oriented manufacturing and services FDI, where TNCs have a vast choice of attractive locations around the world. It would be, indeed, difficult to find any references to “too much” export-oriented FDI in the mainstream TNC literature. A frequently asked question rather is, why only a limited number of developing countries has succeeded in attracting enough FDI to make a difference in their export positions in world markets? As WIR 2002 has put it, “the potential benefits of TNC export activity are still far from fully exploited and they are still growing” (p. 189). Furthermore, “to benefit most from TNC-associated export competitiveness, developing countries must make continuous efforts to root TNC activities in host economies, raise the level of local content, increase the value added by these activities, upgrade them into more sophisticated areas and make them sustainable” (ibid.). International tourism is not only an export industry but it is one of the largest export industries in a great number of developed and developing countries. In many of the latter it is the largest export and the main source of foreign exchange revenues. Are these the countries with excessive levels of FDI in tourism or they have achieved tourism export competitiveness without much FDI? Is tourism an exception among export industries, in that there can be too much FDI or FDI can hurt export competitiveness?
2
“FDI needed in the Vietnamese tourism industry”, http://www.dbav.org/news/801582
6 The purpose of this chapter is, applying concepts, definitions and methodologies from the TNC literature, to look into some of these puzzles, especially those related to the role of TNCs and FDI in tourism in general and in tourism in developing countries in particular. Given the prominence attributed to TNCs, how globalized is tourism in terms of foreign ownership and the role of foreign affiliates, as compared to other industries? If TNCs are so dominant in tourism in developing countries, and tourism is a large or often one of the largest activities in these countries, tourism should also be one of the largest FDI industries, accounting for a high share of foreign capital inflows. Is it? A. FDI determinants FDI takes place when three sets of determining factors exist simultaneously (Dunning, 1993): the presence of ownership-specific competitive advantages in a transnational corporation (TNC), the presence of locational advantages in a host country, and the presence of superior commercial benefits in an intra-firm as against an arm’s-length relationship between a foreign investor and a recipient or a provider of goods and/or services. The analytical framework on which this description is based is known as the “OLI (ownership, location, internalization) paradigm”:
The ownership-specific advantages, also referred to as competitive advantages, (e.g. proprietary technology, superior quality of branded goods or services, or advantages associated with a large size) of a firm – if exploited optimally – can compensate for the additional costs of establishing production facilities in a foreign environment and can overcome the firm’s disadvantages vis-à-vis local firms.
The ownership-specific advantages should be combined with the locational advantages of host countries (e.g. attractive natural resources, large and dynamic markets or lower costs of resources and/or superior infrastructure).
Finally, the firm finds greater benefits in exploiting both ownership-specific advantages and locational advantages by internalization, i.e. through FDI rather than arm’s length transactions. This may be the case for several reasons. For one markets for assets or production inputs (technology, knowledge or management) may be imperfect, and may involve significant transaction costs or time lags. For another it may be in a firm’s interest to retain exclusive rights to, or at least control of, assets (e.g., knowledge related to a new product, new technology or a brand name), which confer upon it a significant competitive advantage resulting in higher profits or monopoly rents. These are referred to as “core” assets or competitive advantages.
While the first and third conditions are firm-specific determinants of FDI, the second is location-specific and has a crucial influence on a host country’s inflows of FDI. If only the first condition is met, firms will rely on exports, licensing or the sale of patents to service a foreign market. If the third condition is added to the first, FDI becomes the preferred mode of servicing foreign markets, but only in the presence of location-specific
7 advantages. Within the trinity of conditions for FDI to occur, locational determinants are the only ones that host governments can influence directly. It should be observed that while majority ownership (that is, a 51 per cent or more equity stake in a foreign affiliate) confers a de jure right of the firm – a transnational corporation (TNC) – to control the use of the ownership advantages it transfers to the foreign affiliate as well as the use of locally sourced resources, de facto such control might be assigned to the TNC by minority ownership or even only a contract, without equity stake, concluded between it and a local investor or owner of a production or service facility. In consequence, international production, that is foreign value-adding activities of TNCs, should also embrace non-equity or contractual activities, wherever these give the TNC substantial control or influence over firms located in host countries and not necessarily owned by TNCs. Therefore these activities are often referred to as non-equity forms of FDI, and local entities linked through these forms to TNCs are considered foreign affiliates. But they are very difficult to capture statistically. First, the word “substantial” is difficult if not impossible to define and to measure. Second, some contracts (such as licensing or turnkey agreements) may involve very little continuing long-term relationship between a resident entity in one economy in an enterprise resident in another economy and very little lasting interest of the former in the latter, both the defining features of FDI. Consequently, statistical offices, while collecting FDI data, rely only on measurable aspects of FDI relationship, that is on control through equity (typically more than 10 per cent of equity ownership), leaving out non-equity forms of FDI. B. TNC activities To assess the extent of TNC activities, including in tourism, it is necessary to distinguish them from other, non-TNC, international activities of firms. Some distinctive features of TNCs were already mentioned. Thus, a TNC is a firm that engages in FDI in equity or non-equity forms and owns and controls value-adding activities in more than one country. This allows the TNC to organize and coordinate these activities across national borders and to internalize cross-border markets for the intermediate products arising from these activities. Consequently, “no other institution engages in both cross-border production and transactions” (Dunning, 1993, p.4). Other international business transactions between independent economic agents located in different countries – be it trade in goods, services or financial and non-financial assets – are activities of exporters and importers. They can also be based on contracts of different duration in which either buyers and sellers, depending on their economic power, can have great influence and control over the terms of transactions.3 But they do not 3
Sometimes the asymmetry in power, resulting from the market structure or the way an industry is organized, can lead to situations of nearly total control over the destiny of one of the contractors. Dunning gives such examples. “If an automobile assembly firm sub-contracts its production of shock absorbers to an independent, then in a very real sense, the latter might be thought to be controlled by the former. Similarly, if an aluminium fabricating firm is totally dependent on a single bauxite producer for its raw materials, then it might be said to be controlled by that firm” (ibid. p. 6). One could give examples of asymmetric power from many other industries: large supermarkets imposing conditions on their suppliers, large state-owned companies buying crops from small farmers or oil or gas exporters dictating prices of their products (e.g.,
8 involve value-adding activities of either party in another country resulting from the transaction or control over production. They are conducted at arm’s length prices and not transfer prices, characteristic for transactions within a TNC system. Neither party in such a transaction is a subsidiary or a foreign affiliate of another party. The fact that TNCs engage in multitude of such and other transactions (e.g., alliances, partnerships) does not justify to consider these transactions as TNCs activities, same as, or similar to, FDI. The tourism literature, in distinction from TNCs literature, rarely, if at all, makes a fine distinction between TNCs value-adding activities in host countries and those of other large firms from developed countries, non-TNCs, selling or buying services across borders, without producing them in host countries. For example, according to the Encyclopedia of Tourism: “A multinational firm, also known as a multinational corporation, can be defined as a corporation which has expanded its businesses internationally. Such firms generally have subsidiaries strategically located around the world in areas where their businesses are concentrated” (Encyclopedia of Tourism, 2000, p. __). As a result, technical agreements and short- and long-term contracts, typical for arm’s length transactions become forms of TNCs involvement in host countries, alternative to involvement via FDI: “If foreign firms possess a high level of a bargaining power, they may not need to engage in direct investment to obtain advantageous relationships with the host country. Study of the tourism sector shows that the total ownership by multinationals of tourism enterprises located within developing countries is one end of a spectrum of relationships; other major forms are joint ventures involving joint ownership by domestic and foreign residents, industrial co-operation agreements such as management contracts or technical agreements, franchising, long-term contracts and short-term contracts” (Sinclair et. al, 1992, p. 47). The inclusion of cooperation agreements and short- and long-term contracts vastly broadens the population of foreign firms, considered TNCs, involved in tourism in general and in international tourism in developing countries. The result is that the role ascribed to TNCs in international tourism is described as “dominant” and the dependence of developing countries’ tourism on foreign ownership as “very high” or “even excessive”. Consequently, a general impression that emerges is that TNCs and FDI are more of a threat than an opportunity. The following citations reflect the spirit of the tourism literature, concerning the role and impact of TNCs:
“Economic power is increasingly concentrated in large multinational corporations, and the tourism industry has not been immune from this” (OMT, 2001, p. 64).
“Many analysts argue that tourism, driven by foreign private sector interests, is not an activity suited to poverty elimination. They argue that economic benefits are not maximized because of the high level of foreign ownership” (ibid. p. 60).
OPEC in 1973). But they arise in many circumstances and industries and are not necessarily typical only for FDI relationships.
9
“The shortage of domestic investment resources (in the poorest countries) leads to high dependence on foreign capital and foreign management” (ibid. p. 63).
“Many people hold the view that the major benefits of tourism accrue to large multinational companies and to the agents and operators in the metropolitan centers of the destination countries and in the originating countries” (ibid. p. 63).4
This description contrasts, as will be seen below, with generally low levels of FDI in tourism activities and the fact that tourism is one of the least globalized activities, dominated by local firms, typically SMEs. It also contrasts with efforts of many developing countries to attract FDI into tourism activities – if there is too much FDI why to attract more FDI? This is, of course, not to deny, that, apart from TNCs, large firms from tourism-generating developed countries also play significant roles in international tourism. Many of them by their mere size, market position or reasons of industry’s economics, have huge bargaining power vis a vis firms from developing countries and thus considerable impact on some aspects of international tourism. But they are more like traders and/or wholesalers and not foreign investors. Even if they engage in FDI, they typically do not do so in their core activities. But does this fine distinction between TNCs and service exporters, huge firms from developed countries, really matter, or it is simply an academic discussion without any practical implications for tourism development and policies of developing countries? For a number of reasons it does:
4
Conceptual clarity is important not only in academic but also in policyoriented analysis. Its lack leads often to a blurred picture of analyzed phenomena. In tourism quite often assertions of dominant positions of TNCs go hand in hand with data showing great roles of local SMEs as a dominant form of enterprise. This is further blurred by referring to tourism as “an industry”, while it consists of some dozen of key activities and tens of smaller related activities.
While it is true that “the alternative types of contractual agreements are associated with different costs and benefits to the developing country” it is not right to conclude that they “may be more or less appropriate to the (tourism) needs of countries with different degrees of development of the local tourism industry, different social and political contexts and different policy objectives” (Sinclair et al, 1992, p.47). Such general conclusion implies a possibility by a country of influencing a choice of the form of activity (ranging from “total” foreign ownership to a short-term contract) across the entire spectrum of tourism activities. But such a wide choice does not exist in individual activities. Individual tourism activities are organized differently: in some FDI
Although these citations come from the Background Note by the OMT/WTO secretariat, they should not be attributed to the secretariat. They are used here as an illustration of the views of others. The note itself is well balanced in showing the complexities of international tourism.
10 (and TNCs) plays a greater role, while others rely mainly on international trade and trade contracts and FDI is marginal or hardly existent. Consequently, while in some activities FDI is a policy option, in others it is not, as economics of the activity and strategies of firms dictate other forms of doing international business.
The impact of exporters and TNCs/FDI on host countries is different. FDI by definition implies a lasting interest and a long-term presence in a host country, while a trade contact, while it can last long, can be easily terminated. FDI brings assets and resources to a host country (such as capital, physical assets or intangible assets, such as knowledge), which it owns or controls. Exporter does not bring, control or own assets or resources in partner countries. It can, of course, have a strong influence over the terms of transaction with a partner country. Therefore, it is not proper conceptually to consider Ford’s exports of cars to Chile as a TNC activity only because Ford is a TNC, with foreign affiliates producing cars in Mexico. Ford’s impact on Chile and Mexico will be entirely different as will be policy implications. By the same token, selling international tour packages to tourists visiting country A by a tour operator is not a TNC activity, even though the operator is a TNC because it owns a hotel in country B.
Trade and FDI are dealt with different sets of policies. FDI policy covers issues such as the rules of entry and establishment of foreign firms, their operational conditions (some of which are general, but some specific or more important to foreign than domestic firms, e.g., profit repatriation, expropriation, settlement of disputes or employment of non-citizens) and treatment. These issues are not part of trade policy or are dealt with differently (settlement of disputes or treatment). Both policies rely on different legislation (in many developing countries FDI policy is stipulated by investment codes) and are implemented by different institutions. Promotion of exports and promotion of FDI are two distinct activities.
Many industries and activities require specific regulations, which apply differently to trade and FDI. For example, land or zoning policy affects FDI in mining or tourism, while it matters little for trade.
C. FDI in tourism activities Although sometimes referred to as the largest world “industry” or “sector”, tourism is in fact a set of many industries or activities and as such does not appear in national accounts as an industry. According to “Tourism Satellite Account: Recommended Methodological Framework” (TSA:RMF) developed by the WTO-OECD-Eurostat Inter-secretariat Working Group and endorsed by the Statistical Commission of the United Nations in 2000,
11 “tourism characteristic activities can be identified as those productive activities which produce a principal output which has been identified previously as characteristic of tourism. As the set of these activities does not comprise a single industry conforming to the definition of the 1993 System of National Accounts, the TSA:RMF defines tourism industries as all establishments whose principal productive activity is a tourism characteristic activity” (OMT, 2004, pp. 13-14). TSA:RMF lists twelve separate national accounts industries (all of which are service industries, out of which half are related to transportation) as tourism characteristic activities: 1) Hotels and similar; 2) Second home ownership; 3) Restaurants and similar; 4) Railway passenger transport services; 5) Road passenger transport services; 6) Water passenger transport services; 7) Air passenger transport services; 8) Passenger transport supporting services; 9) Passenger transport equipment rental; 10) Travel agencies and similar; 11) Cultural services; 12) Sporting and other recreational services (ibid., p. 14). Although in the era of globalization examples of TNCs and FDI could be found in most of these industries, except for hotels, restaurants and car rentals, none of the remaining industries is known for significant FDI or TNC activities. Neither are tour operators and international computer reservation systems, not included in the list, but considered to be among key enterprise actors in international tourism. This is evident from the data on the United States outward FDI stock (table 1). The United States is the largest home country for services FDI and, most likely, for FDI in tourism activities. At the same time it is the only country, which provides data disaggregated into a number of tourism-related activities, while other countries, at best, provide FDI data on hotels and restaurants, typically lumping them together as one item, and on transportation. In 2002, the outward stock of FDI in travel and tourism-related activities in the United States was $31 billion, or only less than 3% of the total stock in services. By comparison, the stock in electricity and telecommunications, two new FDI service industries, was $42 billion. Three activities accounted for 84% of the tourism total: food and drinking places (35%), accommodation (30%) and car rentals (19%). The small balance was accounted by several activities, each with minimal FDI stock: rail, water and air transportation, amusement and recreation services and performing arts and spectator sports. Two activities – travel arrangements and reservation services and scenic and sightseeing transportation – had in 2002 negative stock, signifying divestment, most likely through the sale of assets. Note that transportation services do not fully correspond to activities, classified above as tourism activities, as they cover both freight and passenger transportation, and the latter includes both travel (that is movement of persons not considered tourists but travelers, e.g., migrants, border workers, military and diplomatic personnel) and tourism (that is travel for leisure, business or other purposes “not related to the exercise of an activity remunerated from within the place visited”, OMT, 2004, p. 9). Thus the stock related to tourism activities is much smaller, although it is not known how much, than $31 billion.
12
Table I.1. US outward stock of FDI in tourism-related activities, 2002, millions of dollars Industry/activity
$ mln
Air transportation Water transportation a Scenic and sightseeing transportation Support activities to transportation Rail transportation
287 743 -3 532 1 465
Accommodation Restaurants and bars Travel arrangement and reservation services
9 542 10 867 -79
Car rental and leasing
5 937
Performing arts, spectator sports, etc. Museums, historical sites, etc. Amusement, gambling and other recreation
802 0 1 153
Total above Total outward stock Stock in services
31 264 1 520 965 1 044 894
Source: US Department of Commerce Notes: a Excluding petroleum tanker operations _____________________________________________________________ Many indications are that this pattern is also representative for other home countries, and thus, host countries – if there is small or no FDI by home countries, and no or few TNCs in transportation, tour operator and reservation services, there can not be significant FDI in these activities in host countries (table 2).
Table I.2. Globalization of tourism and travel related activities in selected OECD countries, 1997-1998 (Share of foreign affiliates in total national sales, %) Activity
Austria
Belgium
Finland
France Italy
3.8
13.3
10.8
6.3 14.8
1.6 1.8 14.7
8.2
2.8 3.4 2.8
Japan
Netherlands
Norway
Poland Portugal SwedenTurkey a
UK
8.1
7.4
14
5
10
5 5.2.. 11.6 0..
3.4
5.1 6
5.4 0.3 54.4 9.9
7.1 4.4 17.4 4
3.7 20 17
30.4 11.1
12.7 30.9
26.1 13.1
34.6 6.7
19.6 19.2
22.6 31.4 2.4 16.7
0.1
3.4
1.5 1.2 1.7.. 2.2
10.1 2.1
2.7
68.3
1.3
16.6
A. Inward FDI Hotels and restaurants Transport Land transport Water transport Air transport
..
Manufacturing Business services & real estate
.. 26.1 8.2
47.5 27.1
Hotels and restaurants
0.8
17.6..
Transport Land transport Water transport Air transport
0.7 0.8
3.8 0.8 27 0
14.3 12.8
1.4 1.2 4.4 0.9
4
18.9 10.2 11.5
0.1
1.6
6.. ..
A. Outward FDI
.. ..
13.1 4.3 18.4
8.8 11.1 10.8 0
1.5
9.6
Manufacturing
7.7
8.2
42.5
16.1
Business services & real estate
3.2
23.5
2.5
20.7
Notes: a 1994
Source: OECD, 2001
38.8
4
6.7
But even tourism activities with the largest FDI, such as hotels and restaurants, are among the least globalized. In OECD countries, which dominate both inbound and outbound international tourist traffic, the role of foreign affiliates in the provision of hotel and restaurant services is very low: in 11 (out of 16) countries it is below 10% (in terms of turnover), in four between 10% and 15% and only in one – Hungary -- it is higher, 25% (OECD, 2001, p. 42 and table 2). Contrary to common perceptions and claims, most tourism activities are a domain of local SMEs. For example, in hotels and other accommodation, restaurants and catering activities in 15 countries of the European Union, 95.5% of the enterprises are very small (0-9 employees). Half of employment in these activities is in very small businesses (1 to 9 employees) and 15% in one-person businesses. Only one tenth of employment is in large enterprises with more than 250 employees (Seaton and Alford, 2001, p. 99). In Europe, 70% of total tourist accommodation capacity is provided by SMEs. Estimates for developing countries put the comparable figure at 85% (OMT, 2001, p. 64). According to OMT, “SMEs are very important in the provision of restaurants and bars, handicrafts, the supply of furnishings and other consumables to hotels, the provision of transport, local tour operating, capital and attractions” (OMT, 2001, p. 65). Consequently, it seems that the following description of the role of TNCs in tourism, as compared to other industries, is quite accurate: “In the paradigm industries of cars, oil and finance one of the identifiers of globalization is locational, the corporate establishment of subsidiaries or satellite operations (productive, distributive or administrative) in countries outside the parent country, each of which may be supported by regional promotional activities. There is only a partial equivalence of this situation in tourism. At the top end of the market large hotel and restaurant organizations, operating as chains or franchises, may have a physical presence, through their product portfolios, in many countries, but the vast majority of them do not….. The story is similar in the travel agency sector, where there is unusual for many agents, except Thomas Cook, to have their own dedicated operations abroad, though there may be strong linkages in travel agency chains like British Travel International which now has fifty five partners in sixty seven countries and generated over $22 billion in 1997. Destinations agencies also have a limited presence internationally. The norm tends to be for the big countries to have satellite offices in a few, often capital, cities of high generating countries, and none elsewhere. International airlines also have a limited presence, usually confined to offices, in or near the main hub airports from which they operate. Finally, in the attraction sector there is little incidence of organizations with satellite outposts except in the case of the bigger themes parks, notably Disney. In summary, in tourism there is a quite small incidence of transnational operation at the locational level. Tourism is not another Shell, Esso, Sony, Laura Ashley, Benetton, Body Shop, except in important but limited parts of the hotel and restaurant sector” (Seaton and Alford, 2001, p. 99).
15 Figure 1 illustrates this for selected OECD countries. The shares of foreign affiliates in national sales in transport and hotel and restaurant industries are much, much lower than those in manufacturing and services sectors (with the latter generally lagging behind the former). With two exceptions, transportation lags in most countries far behind hotels and restaurants with respect to the shares of foreign affiliates in the supply of services. Basically these two activities are a domain of domestic enterprises.
70 60 50 40 30 20 10 0
Figure 1. Share of foreign affiliates in sales in selected OECD countries: manufacturing, services, hotels&restaurants and transport, 1997-1998, per cent
Mnfcng
Services
D. Why FDI in tourism activities is small? All 12 tourism activities are services, and production and consumption of most of them occurs simultaneously, in the same place. Except for international transportation services, most are non-tradable (that is, they are location bound) and for international sale they require travel of tourists to the country of sale. From the perspective of firms wishing to provide these services internationally, in countries other than their home country, this requires some form of presence abroad, often FDI. Since the opportunities for trade in tourism services are more limited than those in goods, it might be reasonably supposed that the relative involvement of TNCs in these services should be much greater. But in none of these activities this is the case, in distinction from such industries as an automobile industry, dominated by TNCs, or telecommunication industry, which in an increasing number of host countries has been privatized to FDI. It is so, because in most tourism-related activities, the competitive advantages of foreign TNCs seeking to establish a local presence are not as great as those of domestic companies, are insufficient to compensate for the additional costs of servicing the foreign market (Dunning, 1989, p. 39) or because country markets for some tourism-related services are too small.
16 One of the reasons for this is, that in spite of common perceptions shaped by the prominence and rapid growth of international tourism, tourism remains basically a domestic activity. According to the World Tourism Organization (WTO/OMT), only one in ten tourist movements is international. Expenditures by international tourists represent one tenth of travel and tourism demand (WT&TT, 2003, p. 8). Developing countries, except perhaps small island economies, are no exception to this trend: in eight large LDCs, domestic travel represents a larger component of total travel than international travel (OMT/UNCTAD, 2001, p. 52). Domestic travelers are often less demanding than international tourists from a developed country and can accept services provided by local companies, even though they are inferior (but cheaper) to services provided by international companies to up-market international tourists. Some types of travel will take place regardless of the quality of tourism services: examples include family and business travel. Another reason is that in some of tourism-related activities state-ownership of firms is still quite widespread, in spite of the recent trend towards liberalization and privatization, or foreign ownership in these activities is still restricted. These include in many countries railway and air transportation. Cultural establishments, historical sites and museums are typically operated locally, in many countries under government sponsorship and control. In market segments or tourism activities, where international companies play a role, such as higher categories of hotels, restaurants, car rentals, tour operators, airlines or international computer reservation systems, the nature of competitive advantages does not require these companies to undertake FDI (airlines, tour operators or computer reservation systems) or their assets and advantages can be protected by non-equity forms of FDI, typically management contracts and franchising agreements (hotels, restaurants and car rentals, table 3).
Table I.3. Illustrative OLI advantages relevant to FDI/TNCs in key tourist activities Industry/activity Ownership Internalization Location Organizational advantages advantages advantages forms Experience in Investment in Location-bound Vary, because Hotels
Restaurants and car rentals
Airlines
Tour operators/travel agencies
home countries in supplying upmarkets services Experience in training key personnel Quality control Referral systems (GDS) Economies of geographical specialization, access to inputs
Brand name, image of product (service) Reputation and experience Referral systems (GDS) Economies of scale and scope Tie-up deals with airlines and hotels Highly capitalintensive Government support measures and/or control over routes of foreign carriers
Reputation in providing satisfactory experience Economies of scope (travel portfolio offered) Bargaining power Quality of deals made with airlines, hotels, cruise companies etc.
Source: Dunning 1989, pp. 20 and 22-24.
hotels is capital intensive Quality control can be ensured through nonequity forms (management or franchising contract) Governments may prefer non-equity arrangements Referral systems can be centrally co-ordinated without equity control Franchising can protect quality
Essentially location-linking Need for local sales office , access to terminal and maintenance and support facilities Co-ordination of itineraries, packaging of services, need for quality control of ancillary services for tourists Economies of transaction costs from vertical integration
when selling a foreign service Exports through tourists/business people visiting home or host country
both equity and non-equity forms ensure protection of O-advantages
Location-bound Foreign earnings through tourists and business people visiting exporting countries
As with hotels
Logistical management Advantages of vertical integration Quality control
International services do not require FDI
Need for local tour agents and support facilities Customers initially originate from home Costs of supplying local facilities usually lower Fiscal incentives and infrastructure facilities
Large tour operators have local offices; others may use agents
18 In most of these activities, the provision of services entails in part the coincident consumption of goods (aircraft, car, computer and telecommunication equipment or physical amenities of a hotel), but these goods are not produced by these companies and can be easily available to any company which can afford to buy them (some of these activities are capital intensive). All these activities involve a strong human content and rely then on some kind of soft technology that is that embodied in knowledge, talents, expertise and motivation of employees. Examples include the design capabilities and flair of interior decorators and architects in the hotel industry, the expertise and professional experience of airline pilots, or the culinary skills of chefs (Dunning, 1989). As services, they are perishable or nearly perishable, have no storage value and their consumption is coincident with their production. Because of this their quality is more variable than goods. The ability to produce an acceptable service and ensure its consistent quality across locations is appealing to many customers, especially business customers. Sometimes the quality of the service is a reflection of a country’s stage of development, culture and attitude towards services. The success of some airlines and shipping companies rests on the quality and consistency of the personal services of their cabin, restaurant and a kitchen staff. Similarly the cleanliness and punctuality if internal transport services varies greatly as does the speed of service and manner of waiters in restaurants or receptionists in hotels. All of these affects fundamentally a consumer’s reaction to the provider of these services. Service firms which have the managerial and organizational ability to assemble and utilize these skills and talents and successfully coordinate their use across national boundaries (in different cultures and regulatory environments) are often at the top of their industries. Therefore, as in goods industries, the ability to create a successful brand image and the goodwill attached to it is one of the key ownership-specific assets of TNCs. Or in other words the capability of controlling quality and reducing buyer transaction costs by offering services from multiple locations. In many tourism related activities there are firms recognized for their particular trademarks and for the kind of markets they seek to serve. Since many of them are experience products, the availability of pre-purchase advice (travel agent about foreign tours) or the past experience of related services (e.g., hotel facilities) may guide consumer choice. The capability to acquire, produce, assemble, store, monitor, and disseminate data (and to do so at the least possible cost), is the key intangible asset or core competitive advantage of international computer reservation systems. It does not to be protected by FDI, as transactions are cross-border and barriers to entry high. Other competitive advantages of these firms are in many respects similar to those in manufacturing and they include economies of scope and scale and market access. In principle, there is no difference between the economies of plant scale and specialization enjoyed by firms in manufacturing and those in service industries, including in some tourism activities. The lower unit costs of providing air transportation services by a 747 jumbo jet compared with a 727, or accommodation by a 500-bed hotel are directly comparable with the economies of large scale production of cars or micro-chips. Similarly, large international hotel chains can profit from the global economies of
19 specialization of personnel and the economies of common governance arising from their ability to move people, resources, money and information between different parts of the same organization, and to take advantage of cross-border differential factors costs and environmental flexibility. Large service companies can gain from raising finance on favourable terms and buying goods and services at quantity discounts in exactly the same way as their manufacturing counterparts. Shipping, including cruise shipping, is another industry characterized by high fixed costs and relatively low marginal costs of operation. As regards market access the early venturing abroad of insurance, banking, or accounting companies was to supply migrating individuals or branch firms of TNCs with services they previously supplied to their parent companies. Once abroad they gained new markets and new clients. In tourism the situation is similar. United States and European hotel chains – first TNCs in this industry -- experienced at meeting the needs of domestic customers knew exactly what those same customers want when they go abroad, particularly to unfamiliar or uncongenial places. In the mass tourism business, hotels, airlines and tour operators frequently combine to ensure a ready-made market for each other’s services. By contrast, the routes of airlines (and hence their access to particular markets) are controlled by governments or international agencies (IATA). But the protection of key competitive assets – consistent quality across locations, reputation and brand name – does not always require FDI. Airlines operate between countries and they typically keep ticket offices and small ground personnel in foreign locations. Unless they would wish to service an internal market of a host country (which under present regulatory situation is not permitted in most countries) they do not need FDI. Same with reservation systems – they need only telecommunications connections to other countries. Tour operators, as will be seen later, operate through agents or local companies linked through contracts not involving FDI. In hotels, restaurants and car rental companies the situation is different. As noted earlier, they are location-bound and there is considerable equity FDI in all three industries. But at the same time, information, technology and operating methods transferred abroad can be often codified in such a way that a management contract or franchising agreement can fully protect the interests of the parent company with respect to the performance of the foreign affiliate. In hotel industry where control over the quality of services is important, the lack of suitably trained personnel in a host country might require a hotel chain to own a business-oriented local chain so it could manage a hotel exactly how it pleases. But in a country with a strong local industry the same objective can be achieved by a management contract. Although customers for these establishments are often from the investing countries, local knowledge of food and drink availability and preferences, materials for furnishings, décor and ancillary services can make a substantial local managerial input desirable. Especially newly established or smaller TNCs may wish to join forces with local partners or agents in a joint venture, to reduce a capital risk and buy complementary assets or advantages needed to exploit those of a foreign company. Trends in equity and non-equity forms of FDI in the hotel industry will be discussed below in greater detail.
20 Although within the tour operator, airline and computer reservation industries FDI is rather an exception than a rule, there has been a trend to vertical integration in international tourism involving especially tour operators, airlines and hotels, partly involving companies from the same home country, but partly companies from different countries, based on ownership and thus producing diversified vertically integrated TNCs in tourism. This trend will also be discussed below. A final caveat needs to be made. In goods industries technological superiority in hard technologies backed by innovatory capacity and R&D effort is difficult or impossible to replicate. This creates a formidable barrier to entry in many high-tech manufacturing industries, keeping away from these industries firms from developing and many developed countries (e.g., advanced electronics, pharmaceuticals or automobiles). It is not so in tourism activities where competitive advantages are not so absolute and barriers to entry not so high especially in lower segments of these activities. Information and knowledge related to some tourism activities may be inexpensive or relatively easy to replicate (e.g., by a former manager in an international hotel chain or a talented chef) in one location or individual establishment. That’s why independent large and small local establishments (e.g., ethnic restaurants or family hotels) can flourish in the supply of specialty products and services along TNCs. Approximately 20% of hotels worldwide are branded (that is have an affiliation to a national or international chain) and 80% are independent (WTTC et al, 2002, p. 33). E. FDI implications of the international tourism product While the role of TNCs and FDI in tourism activities overall is not dominant and even significant, perhaps because domestic tourism dominates tourism activities worldwide, what is this role in the international segment of tourism in developing countries, the focus of this study? After all, it is international tourism, which more and more developing countries have sought to develop for the pursuit of foreign exchange earnings, employment and economic growth, and more recently, of broader economic and social benefits including local enterprise development, local linkages, greater participation of local population in benefits from tourism and poverty reduction. To establish this role it is useful to start from the characteristics of the key components of the tourism “product” and to examine how and by whom they are provided to international tourists. The complexity of tourism, mentioned earlier, is mirrored in the absence of a homogeneous product of tourism, which could match similar products of other industries (a car, a telephone call, a computer, a bank account or gasoline). “The tourism product consists of the principal assets that a country has to offer to tourists, combined with every aspect of the tourism experience, from the time the tourist decides to travel until his return home” (Christie and Crompton, 2001, p. 5). Key components of the international tourism product are (Christie and Crompton, 2001, p. 5 and Annex 1, p. 1):
Tourist assets of a destination country. Typical tourist assets include “sun, sea and sand”, reefs for snorkeling and diving, wildlife, mountains, rivers, lakes, forests and valleys for nature, scenic and adventure tourism and cultural and historical
21 assets (such as monuments, old cities, museums reflecting local or global heritage) as well as distinctive local customs and song, dance, art and handicraft. In the parlance of OLI paradigm, these are locational advantages of host countries – natural and cultural resources sought by international tourists and thus attracting TNCs wishing to capitalize on these resources5 and markets formed by visiting tourists. That is why in the classification of the types of FDI by the triad of TNCs motives (market-seeking, resource/asset-seeking and efficiency-seeking), FDI in tourism activities is often described as natural resource-seeking, similar to that in oil, gold and other minerals and raw materials: investors have to go to countries where resources are located. But the possession of natural resources is a necessary but not sufficient locational advantage (in the same manner as the possession of deposits of gold or cheap unskilled labour is not enough to attract FDI into gold mining or labour-intensive FDI into manufacturing).
International transportation services to deliver the tourist from the country of origin to the country of destination. These are mainly air transportation services and in some destinations cruise ships;
Transport services within the country of destination. Depending on a country (e.g., its size and the location of attractions) and the type of tourism it attracts, these may include simple transfers from airport to all-inclusive beach hotel and/or any types of internal transportation for excursions (bus, rail, taxi, car rentals and air transport);
Hotels and other tourist accommodation catering to international tourists of various categories;
Restaurants and food and beverage suppliers;
The services and activities of those who provide equipment to enjoy the tourist asset, as in diving and skiing, those who help the tourist to understand better surroundings, e.g., museums and those who provide entertainment to tourists through music, dance, festivals and casinos;
The services of other suppliers of goods and services such as handicrafts and duty-free shopping.
Which of the components of the tourism product are more and which are less important to international tourists, is difficult to say. It depends on the type of tourism (and there are tens of types of tourism) and the rarity of country’s attractions. There will always be tourists willing to visit rare or unique global attractions (such as Mount Everest, Luxor, Cusco, rivers disappearing in a desert or rare species) even though access may be difficult 5
It should be noted that a good part of tourist assets such as beaches, coral reefs or monuments are not productive factors but public goods and, hence, their “consumption” by one person does not preclude others from consumption. How they are priced or taxed determines countries’ benefits from tourism. How they are managed and maintained determines sustainability of tourism.
22 and costly and tourist amenities and services may not be of international quality. But in mass tourism, such as “sun, sea and sand” tourism, sought by many developing countries (with the hope that it can make for them an economic difference), where competition is fierce, to make a country attractive to both tourists and foreign investors, the entire tourist product, including its several components, has to be competitive. Mass tourism is a demand driven activity. In the buyer’s market, the preferences of consumers and the ability to satisfy them by the providers of tourism services determine the success or failure of tourist destinations. But, given the complexity of the tourism product, defining competitiveness in tourism is not so straightforward as in, for example, textile or car industry. “A tourist destination is competitive if it can provide products and services (“the tourist experience”) in a way that creates value for tourism” (Christie and Crompton, 2001, p. 7). Value is not just the price. It includes priced goods and services (relative to their quality), but also tourists’ experiences relating to anything tourists come across. Thus important is also the quality and accessibility of tourist assets and the way in which the natural and cultural assets are managed and conserved. Tourists must have easy access to financial, telecommunication and medical services. No less important is physical security of tourists and attitudes of officials (e.g., visa or customs officials) and local population to tourists (tourists are sometimes seen as rich exploiters of local assets and customs and, in turn, themselves suitable subjects to exploitation by some segments of local population). Consumers can purchase most of the key components of the end product in an allinclusive package tour (assembled by tour operators, acting as wholesalers and sold by travel agents, acting as retailers) or they can purchase selected elements. At an extreme, an individual tourist may purchase all or most components of the tourist product directly from their suppliers (airlines, hotels, car rental companies and restaurants). But even if the tourist product is sold as a package, no one supplier in the destination country controls all its components. Furthermore, intangible tourist experiences (their physical security, if they feel welcome or not in the country, experiences with visiting cultural or historical sites) are not determined by the enterprise sector but by government and its agencies and local population. If any key component of the tourist product is missing or not competitive in terms of not only prices and quality but also experiences, this may affect the competitiveness of the entire destination. In an extreme case of, for example, the lack of physical security, this may deteriorate or even destroy tourism in a destination (box 1).
Box I.1. Similar attractions, different outcomes As reported in a study on tourism in Africa, beach hotels in Mombasa, Kenya, offered at some point rooms for unprecedented prices of $5-10 per night and not many tourists were coming. Initially over-construction of hotels has created downward pressure on prices. Then ethnic upheavals erupted and European tour operators withdraw from the market. This led to bankruptcies and fire sales of hotels at rock bottom prices, putting additional pressure on room rates.
23
At the other end of the price spectrum, in a beach market not apparently dissimilar to Mombasa, luxury hotel rooms in Mauritius were commonplace at $1,500 a night in season. These two experiences illustrate two points. First, that tourism can deteriorate quickly, if an important element of the overall tourism product, in this case physical security, is missing. And second, similar natural attractions can be used to develop very different types of tourism. Source: Christie and Crompton, 2001.
What are the implications of the complexity of the tourism product for FDI?
Confronting the long list of the components of the tourism product with small or no FDI in most tourism activities, it is unlikely that TNCs can dominate the production of this product in tourist destinations in host developing countries and excessively own firms providing tourism services. FDI in equity and non-equity forms is likely in hotels, restaurants and car rental companies. The competitiveness of many, if not most components, depends on local enterprises and government.
In terms of value the situation can be different, as accommodation, meals in restaurants and car renting services (if included in the package) cost more to produce than most other typical services except for air transportation services. The latter can be the largest value item in the tourist package, if the destination is located far away from the countries of origin of tourists and if the bilateral air transportation market is small and lacks competition. The provision of these services typically does not involve FDI.
Normally, the contribution of TNCs to host countries’ export competitiveness is that TNCs bring, often in a single project, a package of resources and capabilities that many developing countries do not have. These include capital, technology, skills and access to markets and distribution channels. There are many examples of TNCs creating entire export industries: cars in Mexico, textiles in Lesotho or electronics in many countries in Asia, to name a few. In tourism, TNCs can contribute directly to the competitiveness of some components of the tourism product, in which FDI takes place, notably hotels, restaurants and car rentals. Large hotel chains can also facilitate linking up countries to international booking and transportation networks, shaping demand for international tourist destinations.
Vertically integrated TNCs, providing accommodation, transportation and tour operator services, can have, as will be seen below, additional impacts on tourism destinations in which they have undertaken FDI.
TNCs can also contribute to the competitiveness of services ancillary to tourism, including financial, telecommunications and electricity services, where FDI in
24 developing countries has grown very fast during the last 10-15 years (UNCTAD, 2004). But to attract TNCs, locational advantages have to be extended to the enabling policy framework for FDI, including economic, political and social stability, rules regarding entry, operations (among others taxes and trade policy), standards of treatment of foreign affiliates, investment promotion and, in general, low hassle costs of doing business (UNCTAD, 2003, p. 85). *
*
*
From the perspective of host developing countries among three activities with considerable FDI – hotels, restaurants and car rentals -- FDI in the first activity matters most, judging from the promotion efforts and incentives, which are directed to attracting large international hotel chains, or investment in hotels by tour operators, while paying less or no attention to other activities. The expectation is that the presence of an international hotel is critical (other things equal) to putting a country on a map of international tourism destinations and attracting international tourists. Once a critical mass of tourists is there, companies offering other services will follow, or these services will be provided by local companies. That is why the next section will have a closer look at FDI in hotels and restaurants (the data for which are typically reported together), including non-equity forms of FDI in international hotel chains. But international tourism is a complex set of activities and attracting international hotels is only part of the story. Other enterprise actors in international tourism are no less important in influencing the flow of tourists and conditions in which tourism takes place. They are, as mentioned earlier, tour operators, travel agents, airlines and international booking networks, or global distribution systems. Therefore, although there is not much FDI in these activities, they will also be briefly examined as to their functions in international tourism. An additional reason is a significant degree of vertical integration in international tourism, with large tour operators owning or controlling not only hotels (and thus deciding in which countries hotels are located) but also airlines, cruise-liners and travel agencies. And conversely, airlines can own hotels and tour operators.6 In fact, some of today’s largest hotel chains were set up by airlines.7 But the recent trend is more towards strategic alliances between airlines and hotels,8 although ownership-based links continue to exist, e.g., between JAL and Nikko Hotels and SAS and Rezidor SAS (with four brands, one of which is Radisson SAS). F. 6
TNCs and FDI in hotels and restaurants
For instance, Lufthansa owns 50% share in one of the largest European tour operators, Thomas Cook. British Airways owns a tour operator, British Airways Holidays, and a travel agency, British Airways Travel Shops Limited. 7 The most prominent example is Intercontinental Hotels set up by PanAm. Western International Hotels and Hilton used to be owned by United Airlines. 8 Air France, for example, has partnerships with Accor, Le Meridien and Disneyland Paris. KLM is linked through strategic alliance to Golden Tulip, which it previously owned.
25 Judging from the list of the world’s 15 largest hotel groups in 2002 (ranked by the number of hotel rooms), the United States is the largest home country of international hotels with 9 groups, with the United Kingdom and France next (each with two groups) and Germany and Spain each represented by one group (table 4).9 All groups operate internationally, in between 6 and 100 countries, but three of them (two from the US, including the largest one, Cendant, and one French group) focus on their home markets, with 10% or less hotels located abroad. This pattern has not changed much since the early 1990s, when the United States, United Kingdom and France were by far the leading home countries, accounting for 55% per cent of the non-home country rooms of 110 international hotel chains – chains with one or more hotels outside their home country (Contractor and Kundu, 2000, p. 297). Table I.4. Top world’s 15 hotel groups, ranked by hotel rooms, 2002 Ranking
Group
Home country
Number of rooms
Number of hotels
Share of hotels outside home country
Number of host countries with hotels
a,
Per cent
1
Cendant Corp.
United States
553 771
6 624
6
24
2
Six Continents Hotels
United Kingdom
507 091
3 234
N/A
100
3
Marriott International
United States
427 489
2 333
19
66
4
Accor
France
415 774
3 654
74
90
5
Choice Hotels International
United States
362 549
4 545
25
47
6
Hilton Hotels Corp.
United States
319 550
1 934
N/A
10
7
Best Western International
United States
312 207
4 109
43 b
79
8
Starwood Hotels & Resorts Worldwide Carlson Hospitality Worldwide Hilton Group plc
United States
225 737
751
34 b
78
United States
135 429
795
43 b,c
66
United Kingdom
94 058
385
80%
74
United States
91 657
214
>40%
39
12
Hyatt Hotels Corp./Hyatt International Sol Meliá SA
Spain
85 515
347
49%
30
13
TUI Group
Germany
75 397
284
>40%
29
14
Envergure/Société du Lourvre
France
69 077
940
6%
6
15
Wyndham Hotels Group
United States
62 262
242
11%
11
9 10 11
Source: Endo, 2004, based on MKG Consulting, 2002 (for rooms and hotels); annual reports and Websites of respective hotel groups. Notes: a Estimates based on annual reports and information provided by respective groups b Excluding Canada c Excluding the Country Inn Brand
9
It should be noted that well-known hotel brands are not necessarily owned or controlled by the groups carrying the same name. The UK Hilton Group owns the rights to the Hilton brand name throughout the world except for North America, where the brand is owned by the US group, Hilton hotels. The two groups are separate, though they have a marketing alliance to jointly promote the brand. Both groups also own other hotel brands.
26 Data on outward FDI stock for major home countries in the late 1990s and early 21st century, although combining hotels and restaurants, show the pattern corresponding to that based on the list of the largest hotel groups. The United Kingdom and the United States are by far dominant home countries, with the stock of, respectively, $27 and $20 billion. The United Kingdom overtook the United States as the largest home country only in 2002 (table 5). Next come Canada ($8 billion) and France ($4 billion).10 The stock of other home countries for which data are available is negligible, around or much below $0.2 billion (Austria, Denmark, Germany and the Netherlands). Noteworthy is small FDI by Germany, home to very large tour operators and one of the world’s largest countries of origin of international tourist. During the 1990s and into the 21st century, FDI stock of major home countries in hotels and restaurants grew in all major home countries but not as fast as in new dynamic services industries such as electricity or telecommunications (UNCTAD 2004), with the exception of the United States stock, which increased almost 16 times between 1990 and 2002, matching the growth rates of the dynamic service industries. Table I.5. Outward and inward FDI stock of selected OECD countries in hotels and restaurants, $mln Country Outward FDI Australia Austria Canada Denmark France Germany UK US
1990
1994
1998
1999
2000
2001
215 7 321
86
3 952 191 10 142 17 474
3 928 190 14 733 18 033
1 605 241 2 895 168 688 974 518
1 374 246 3 093 36 691 1 084
2002
71 26 1 291 110 2 553 143 1 316
4 870 6 559 6 971
Inward FDI Australia Austria Canada Denmark France Germany Portugal Turkey UK US
7 706
244
4 857
6 251 22 230
173 6 830 22 256
26 857 20 409
3 191
25 411
Source: UNCTAD FDI/TNC data base
10
In the United States more than a half of the stock is accounted for by restaurants. The share of restaurants is likely to be significant for France, known for its cuisine and restaurants abroad, but not in the United Kingdom.
27
In the United States around a half of the stock is accounted for by restaurants. The share of restaurants is likely to be significant in both France and the United Kingdom, judging from the list of the 15 world’s largest restaurant TNCs, ranked by the size of foreign assets (UNCTAD 2004, p. 324). United States TNCs dominate the list, with six of them present, and McDonald’s Corporation by far the largest restaurant TNC. United Kingdom is represented by three TNCs and France by two companies. The bulk of FDI stock in hotels and restaurants by major home countries is located in other developed countries. In the case of the European Union, at least 85%, with other EU countries and the United States accounting for 80% (in 1998). The picture is similar for the United States outward stock in hotels and restaurants: developed countries (excluding however France, Italy and Belgium for which the data is not disclosed and a number of smaller countries for which the data is not available) accounted for two thirds of the United States stock in 2002. With the data for missing developed countries the proportion of FDI stock in developed countries would be, most likely, close to that in the EU. Given that transition economies attracted considerable FDI into tourism during the 1990s, one could estimate that no more than some 10-12% of worldwide FDI stock in hotels and restaurants is located in developing countries. The United States is by far the largest host country for hotel and restaurant FDI, followed by the United Kingdom, Canada, Australia and Germany (table 5). In line with the overall FDI pattern, TNCs in the hotel industry have also gradually emerged from developing countries. In 1978, among 26 top hotel chains, only one (the Indian Oberoy Hotels) was from a developing country (Dunning and McQueen, 1981). By 1988-1990, of 273 hotel properties belonging to major hotel groups, 24 belonged to companies based in non-developed countries (Sinclair et.al., p. 50). By 2003, there were five hotel TNCs from developing countries (two each from Hong Kong, China and Singapore and one based in Bermuda) on the list of 15 world’s largest TNCs ranked by foreign assets (UNCTAD 2004, pp. 322-323). Another list, based on the number of hotel rooms in 2001, features some six TNCs from developing countries, all in the second half of the list of the largest 100 hotels (table 6). In addition to two TNCs from Hong Kong, China and Singapore, listed by WIR 2004, three are from South Africa and one from Mexico. The international presence of hotel TNCs from developing countries is much more limited than that of the TNCs from developed countries, as they have foreign affiliates in a couple of countries. Table I.6. Top 10 hotel groups from non-developed countries, ranked by hotel rooms, 2001 Place in global hotel ranking 2001
Group
Home economy
Number of rooms
Number of hotels
46
Shangri-La Hotels & Resorts
Hong Kong, China
19 658
38
58 63
Jin Jiang Group Southern Sun Hotel Interests
China South Africa
14 127 13 404
53 80
Share of hotels located outside home economya
94% (50%, excluding mainland China) 0 6%
Number of host economies
8
0 5 (of which 4 are under
28
21% 87%
16
12 153 12 130 10 500 10 436
67 (78) 38 (31) 127 47 56 42
the Holiday Inn brand) 3
N/A N/A 0 0
9 N/A 0 0
8 532
40
N/A
N/A
64
Group Posadas Management
Mexico
13 335
67
Raffles International
Singapore
12 841
73 74 86 87
Protea Hospitality Corp. Cubanacan SA Orbis Company Group Hotelero Gran Caribe, SA Sun International
South Africa Cuba Poland Cuba South Africa
96
Source: Endo, 2004, based on Hotels’ corporate 300 ranking, HOTELS magazine (www.hotelsmag.com) (for rooms and hotels); annual reports and Websites of respective groups. Note: a Estimates based on annual reports and information provided by respective groups.
G. Non-equity forms in international hotel chains FDI data underreport by far international activities of hotel chains (and restaurants), and consequently their role and impact in host countries including in developing countries. The reason is the common use of non-equity forms of FDI, not captured by FDI data – notably management contracts and franchising agreements – by firms in the hotel industry. This is due to several factors.
First, as mentioned before, competitive advantages of firms in the hotel industry consist of knowledge-based, intangible assets rather than tangible ones (SegalHorn, 2000, p. 323). The former include managerial and organizational expertise permitting, for example, consistency of high quality service across locations in host countries with different cultures, work habits, etc. Furthermore, these assets include brand names, access to, and use of, global reservation systems and scale advantages in purchasing hotel equipment and other goods and services for customers.
Second, the intangible assets can easily be separated from tangible and capitalintensive ones (such as real estate). More importantly they can be equally well protected and enhanced in non-equity based agreements as in equity basedoperations (Contractor and Kundu, 2000, p. 300). But the former permit also to separate the investment risk in capital-intensive hotel facilities (which can be high in certain countries) from management and control of operations.
Third, contracts are sufficient to ensure required physical assets such as design, style and layout of a hotel, the size and equipment of rooms as well as additional facilities such as swimming pools or parkings.
The fourth factor is a host country’s policy. For example, in the past many developing countries had a strong preference for the control of physical assets, including hotels, on their territory. They thus preferred a local ownership, sometimes in minority joint ventures with foreign investors, leading to the proliferation of non-equity forms. Nowadays, with liberalization of FDI policies
29 and intense competition for FDI, also in tourism industry, the preferences have changed. Many countries seek not only the presence, but also capital investment by international hotel chains. As a result, in a more liberal investment climate, companies have a greater choice of the modes of entry. Consequently, non-equity forms account for the large majority of international hotel chain operations. A (rare) comprehensive study of 34 hotel chains 11 revealed that in the early 1990s fully or partially-owned foreign affiliates accounted for only 36% per cent of properties located abroad, while non-equity modes accounted for the balance of 65%. Out of this 37% were under management contracts and the share of franchising arrangements was 28%. As regards the composition of the modes of operations by regions – North America, Europe and Asia – there was clear preference for management contracts across the three regions, with the shares of these contracts in all operations ranging from 37% in Europe to 42% in Asia. Equity ownership was the lowest (and franchising more frequent) in North America (21%) and the highest in Asia (45%), with franchising less common (Contractor and Kundu, 2000, p. 302). Note that the study did not find the preference for non-equity forms in more risky environments (developing countries) and for equity forms in less risky environments (developed countries): the incidence of non-equity form was much higher in North America (almost 80%) than in Asia (55%). The recent picture, based on 11 selected hotel chains in 2002, confirms the prevalence of non-equity forms (table 7). Based on various measures (hotels or rooms, total or only abroad), in ten of these hotels, owned operations accounted for between 0.4% of the total (Mariott) and 22-25% (Accor, Starwood and Societe du Louvre) and only in one, Wyndham for more than a half. Note a high incidence of a third non-equity form, leasing, in the operations of Accor (42%) and Sol Melia (24%). Note also that within the same chain there can be a variation of modes by hotel class. For example, in 2003, Accord group had a preference to manage upscale hotels (Sofitel chain, where management contracts account for almost half of the chain’s operations), lease economy class hotels (e.g., Ibis and four other brands with 50% share) and equally lease and manage mid-scale hotels (Novotel and two other brands). The highest share of owned hotels can be found in the economy class (29%) and the lowest in the mid-scale class (12%) (table 8). Table I.7. Modes of operations of selected hotel chains, 2002 Owned
Cendant Corp. Six Continents Hotels Mariott (excl. domestic rooms and hotels)
Accor Choice Hotels International 11
Leased --6% (of hotels as of 30 Sep. 2002) 0.4% (of 0.9% of rooms (+1.2% “international” rooms timeshare); 0.6% as of 31 Dec, (+2% timeshare) of 2003);0.4% of hotels “international” hotels) 22% (of rooms as at 31 42% Dec. 2002) ---
Managed -9% 52% of rooms; 37% of hotels
Franchised 100% 85% 45% of rooms; 61% of hotels
17%
19%
N/A
(96% of revenue comes from United
34 chains were part of the total of 110 chains with hotels abroad. They owned or controlled 1,131 hotels abroad located in 112 countries, accounting for 60% of foreign rooms of the total. The home country composition of the sample corresponded to that of the total, with three quarters of hotels originating in developed and the balance in developing countries.
30
Hilton Hotels Corp.
Best Western International Starwood
3% of the Hilton brand (joint ventures only) --
--
22% (of hotels as of 31 Dec. 2002)
Carlson Hospitality
Sol Meliá Société du Lourvre Wyndham
0.4% of the Hilton brand
N/A
N/A
13% (of rooms as of 31 Dec. 2002) 25% (of hotels as of 31 December 2002) 55% (of hotels as of 31 Dec. 2002)
29%
States franchises) 24% of the Hilton 73% of the Hilton brand, including brand partially owned hotels 100% (?) “a membership association of independently owned and operated hotels” 37% (including 41% unconsolidated joint venture hotels) N/A 75-80% of the Radisson brand (which has more than 450 properties in 61 countries) 49% 9%
N/A
40%
35%
18%
12%
15%
Source: Endo, 2004 Table I.8. Accor’s modes of operations by type of hotels, 2003 Owned Upscale (7% of total rooms) Mid-scale (38% of total rooms) Economy (55% of total rooms)
Leased 16% 12% 29%
29% 36% 49%
Managed 48% 32% 4%
Franchised 7% 20% 18%
Source: Accor’s Website (Accor.com/finance). Are the modes of operations of hotels from developing countries similar to those of hotel TNCs from developed countries? The answer appears to be yes, although examples can be found with a strong preference for FDI (Endo, 2004, p. 13). A case in point is ShangriLa, one of the largest developing country chains, based in Hong Kong, China. Of its 34 hotels located abroad, the company has 100% ownership in 8 hotels (3 in China, 3 in the Philippines and 2 in Singapore); 50-97% equity interests in 17 hotels (9 in China, 4 in Malaysia, 1 in Myanmar, 1 in Thailand and 2 in Fiji); 20-49% in 7 hotels (3 in China,12 2 in Malaysia, 1 in Singapore and 1 in Indonesia); and 10% in 1 hotel in Indonesia. But in the case of Mexico’s Posadas, out of 9 hotels that the group opened in 2001-2002, 6 hotels have been leased and 3 managed. Raffles International,13 a Singapore based chain, with 50% of hotels located in the Triad (largely due to the acquisition of Swissôtel Hotels and Resorts in May 2001) operates via both FDI and/or management contracts via affiliated hotel management companies, judging from the parent company’s list of affiliates. A large hotel group from South Africa, Protea, operates hotels mostly under management and franchise agreements (as well as several joint ventures).14 H. International hotels in developing countries
12
Including one hotel in Shanghai, Portman Ritz-Carlton, which is 30% owned but not managed by the Group. 13 Raffles International Limited is a hotel management affiliate of Raffles Holding Limited, which is owned by CapitaLand Limited, Singapore [the 3rd largest real estate TNC in the world in 2002]. 14 One of the four operational divisions of Protea Hospitality Corporation is called Protea Properties. These are properties owned or leased by Protea Hospitality Corporations and have management agreements with Protea Hotels. Therefore, the existence of equity investment is likely.
31 What part of worldwide FDI stock in hotels is located in developing countries? As noted earlier, no more than one tenth of equity FDI (including both hotels and restaurants). In which developing countries is this stock located? How does this translate into the shares of TNCs in the local hotel industry of individual countries: in a large country large stock can produce small role and, conversely, small stock in a small country can translate into the dominance of TNCs. What is the frequency of non-equity-forms? What is then the role of international hotels in developing countries – is the picture similar to that in developed countries, where locally-owned SMEs dominate the hotel industry? Given the scarcity of data none of these questions is easy to answer. Some elements of the overall picture can be, however, figured out:
Which are the largest host developing countries is impossible to say, as the data on FDI stock in hotels and restaurants, partly based on approvals, are available only for 18 countries (table 9). Among these countries Indonesia attracted the largest stock ($11 billion in 1997, but this is based on approvals and the actual stock is, most likely, much smaller), followed by Hong Kong, China (almost $6 billion in 2001), Viet Nam (over $3 billion in 1996, based on approvals) and the Republic of Korea (nearly $2 billion in 2002) – all Asian countries. Brazil and Mexico attracted considerable FDI stock from the United States (over $700 million each in 2002), indicating that they are among large host countries in Latin America. In the Dominican Republic, one of the most successful countries, as regards international tourism in the Caribbean, the stock is modest, some $200 million in 2002. But the Dominican Republic is a small country, so perhaps small stock translates into considerable shares of foreign companies. Noteworthy is increased stock of FDI in Cambodia, which emerged from the years of civil war, and a small stock in China, by far the largest host developing country to overall FDI (over $400 million in 2000).
Table I.9. Inward stock of FDI in selected developing countries in hotels and restaurants, $mln Country Brazil Cambodia Colombia Chile China Dominican Rep. HK, China Macau, China Paraguay Peru Philippines Rep.Korea Based on approvals Indonesia
1990
3
1995
2000
364
316 268 66 32 432 74 6 102
11
246
10
11 26
1 158
1 561
24 58 2 1 725
1997
1999
10 948
2001
2002
272
287
51 155 5 700 132 28
196
2 1 738
3 1 736
2001
2002
32 Lao Myanmar Nepal Taiwan. Pr. Of China Vietnam
607 1 060 50 170 3 244
Source: UNCTAD FDI/TNC data base
15
A review of the presence of the largest 22 hotel groups (accounting for 75% of the hotels of the largest 100 groups and 53% of their rooms) in developing countries gives a further idea about key locations of international hotels in developing countries in both equity and non-equity forms. Taking as a cut–off point the presence of at least 3 groups in a developing country in 2001, 54 countries made it to the list. Asia leads with 24 countries, followed by Latin America and the Caribbean with 20 countries and Africa with ten countries, most of which in the bottom part of the list. Using this criterion, Mexico appears to be the largest host country, with 18 groups present, followed by Brazil (15 groups) China, Turkey, Indonesia, Singapore and Thailand (with 14 groups each) and Malaysia, Egypt and Thailand (13 groups each). Among small developing countries the large presence of international groups can be found in the Dominican Republic (11), Oman (10), Costa Rica and Ecuador (9 in each).15
All indications are that the prevalence of non-equity forms in the international hotel industry in developing countries is as high or even higher as was indicated earlier for the largest hotel chains. In Africa, the most common form of involvement of international hotel chains in the 1990s was the management contract to reduce risk (Brown, 2000). According to one study, in Kenya, about 70-80% of major hotels located in the coastline, Nairobi and the National Parks and Reserves had foreign capital; however, less than 20% were fully owned by foreigners (Christie and Crompton, 2001). In Egypt, the majority of 92 four and five star hotels are operated by international hotel chains, typically under management agreements with domestic or foreign owners, mainly from other Arab countries. In Cancun, Mexico most hotels are locally-owned, but many upscale hotels are operated under franchising agreements with international chains.
The importance of non-equity forms can also be traced from the perspective of hotels operating in developing countries. For example, Accor, with the largest network of hotels in developing countries, uses most often management contracts, under which it manages a hotel under own brand name for an owner, who can have access to Accor’s booking systems, marketing and expert skills for a fee. In the case of Sol Melia, a large Spanish chain with a strong presence in developing countries, in particular in Latin America, management contracts account for almost half of its portfolio.
UNCTAD FDI/TNC data base
33
Cendant, the world’s largest hotel group, based in the United States (table 7), comprising nine hotel brands and over 6500 hotel properties, operates only through franchising agreements. Consequently all its brands in developing countries are franchised. They are located in the following developing countries: Argentina, China, Colombia, Dominican Republic, Ecuador, Egypt, India, Jordan, Malta, Mexico, the Netherlands Antilles, Oman, Philippines, Venezuela, United Arab Emirates, South Africa and Uruguay (Endo, 2004).
What is then the role of international hotel chains in the hotel industry of developing countries? A stylized picture that emerges from a number of countries is as follows:
This role is large and sometimes dominant in the upscale range of the industry, in four and five star hotels but these are often located in business centers and capitals rather than in tourist areas. In many, perhaps in most, cases these hotels are operated through management contracts or franchising agreements, while their ownership is local (e.g., Mexico, South Africa, Mauritius and Maldives) and/or hotels are owned by investors from other countries of the region (e.g., Egypt with a large share of Arab properties and Nepal with Indian investments). The larger the country and/or the higher the level of its development, the higher is the likelihood that domestic investors with sufficient capital will be present to invest in the hotel industry.
Yet in large and small tourism countries, large international hotels typically coexist with sometimes a large number of locally-owned and -operated smaller size hotels. Cancun, Zanzibar, Indonesia, Costa Rica, Jamaica, India and Singapore are examples. The situation resembles that in developed countries, where, as noted earlier, hotels are predominantly locally-owned and operated. In large developing countries such as Indonesia and India, this may be due to the fact that domestic tourism dominates the market.
But there are many exceptions among developing countries, many of which lack both capital and expertise to develop tourism with local resources. Botswana is one of them, with hotels and lodges in its main tourist attraction, Okawango Delta, owned and operated almost entirely by foreign investors, though these investors are not large transnational hotel chains. Similar is the situation in Zambia.
63% of the hotels offer in the Caribbean is said to be foreign-owned (Ehrnström, 2004, p.2), but there can be big differences among countries. In Costa Rica and Jamaica, as mentioned above, local operations are considerable. In the Dominican Republic, only 28% of hotels are foreign owned, but they account for a much higher share of hotel rooms, a half of them, and total investment in the hotel industry (60%, ibid., p. 22).
In a number of developing countries, the role of South-South FDI, often from the same region can be visible and considerable. A number of hotels in the Caribbean
34 are affiliated with regional TNCs such as Grupo Posadas (Mexico), Blue Tree Hotels (Brazil) and Superclubs and Sandals (both Jamaica, ibid., p. 13). Sun International (South Africa) owns and/or operates hotels in many capital cities of neighbouring countries, e.g., Botswana and Lesotho. In Cambodia major hotel investments involve South-South FDI: hotels Cambodiana, Le Royal and Micasa (all Singapore), Intercontinental Phnom Penh (joint venture with Thailand) and Sunway Phnom Penh (joint venture with Malaysia).
Ownership of hotels may change over time. A case in point is Thailand, where many hotels were locally-owned few decades ago, but recently (before Tsunami) they have been increasingly bought by foreign investors due to liberalization of FDI entry coupled with the Asian financial crisis. Tsunami might have reinforced this trend.
It should be noted, however, that, overall, international hotel chains operate predominantly in developed countries and have relatively few properties in developing countries and these are frequently located in capitals and other major business centers (Christie, 2001, Annex 1, p. 5).
Whatever is the share of international hotel chains in a country’s hotel industry – small or large – the presence of at least some of them, as mentioned earlier, is critical to put a country on a worldwide tourism map. Therefore developing countries trying to develop international tourism actively seek the presence of these chains. The chains attract a critical mass of international tourists and other tourists relying on less expensive locallyowned hotels may follow. The chains have also access to international tour operators, another critical factor, perhaps even more critical than hotels, in international tourism. Theories analyzing life cycles of tourist destinations (e.g., Butler, 1980) have pointed out since a long time that while drifters or backpackers might discover destinations (e.g., Goa, Bali or Morocco in the 1970s), the real economic impact comes from capturing the attention of international hotels and/or being included into mainstream tour operators programmes as will be seen in the next section. I. The role of non-FDI activities of tour operators, airlines and global distribution systems As already mentioned, tour operators, airlines and international reservation systems known also as global distribution systems are, along with hotels, key enterprise actors in international tourism, including in developing countries. They influence strongly visitor flows to developing countries, and thus the type, size and impact of tourism in a particular country or region. But they undertake little FDI, if at all, in their main areas of activities, which are more of a trade type than FDI type. Many of them are TNCs by virtue of investing abroad in tourism activities other than their own, giving rise to vertically integrated tourism TNCs. Tour operators own travel agents, airlines (or aircraft) and hotels. Airlines can own tour operators, travel agents and hotels. But to the extent that this takes place in the same home country, it does not make these companies TNCs. A case in point is British Airlines owning British Airways Holidays and British Airways
35 Travel Shops Limited, all British companies. They are TNCs mainly through hotel ownership or control abroad. There is also some FDI in the airline industry and in airports, but rarely in developing countries and rarely motivated by international tourism considerations. 1. Tour operators
Tour operators create so-called “package tours” by combining two or more components of the tourism product (e.g. transport, accommodation, catering, entertainment, sightseeing) and selling them to final consumers, tourists, through travel agencies or directly. The sale takes place in the country of origin of tourists. They do not produce tourism services (unless they own a hotel, aircraft or airline) but act as distributors or wholesalers of these services. Services are produced by airlines, hotels, local transportation and tourist service companies (sometimes called incoming tour operators) and local guides, which tour operators contract ahead of time. Tour operators may have a limited number of staff in some countries receiving their clients. Tour operators main impact is that they are instrumental in sending large numbers of tourists to tourist destinations worldwide, ensuring the volume of tourist traffic, which could not be achieved through individual visitors. Tour operators “decide which end product to market to separate segments of potential demand based on the quality and competitiveness of the product, the evidence of market acceptability through the positive or negative reactions of returning tourists and the margins the distributors receive from selling a particular end product” (Christie, 2001, Annex 1, p. 1). The tour operators’ markup on their packages is between 15% and 35%, but the industry is very competitive and, after deducting operating costs and overheads, profits margins are said to be often very low, 1% to 2% of turnover (WTTC et al, 2002, p. 23). The largest and most influential operators are based in tourism-generating developed countries including, in order of size of the outbound tourist traffic, the United States, Germany, Japan and the United Kingdom. Europe as a whole generates the largest number of international tourists, accounting for approximately 60% of worldwide travel and 12.5% of arrivals in developing countries (WTO/OMT 2001, 2003). The role of tour operators in generating outbound flow of international tourists is particularly important in Japan and Europe and smaller in the United States. In Japan, according to JTB, 85% of Japanese tourists buy organized package tours sold by tour operators. In the United Kingdom, for example, 54% of all outbound tourism was arranged by tour operators and 59% sold through travel agents in 2000 (Key Note, 2001). One-third of travel to developing countries (out of a total of 4 million United Kingdom tourists) was booked through tour operators in the same year (Mintel, 2001). The industry consists of a very small number of large tour operators and a large number of very small specialized firms. In Europe, there are five large outbound companies and some 4995 small companies employing 5 to 100 people, often catering to special interests or low volume destinations (WTTC et al, 2002, p. 23). In the United Kingdom, for example, four tour operators (TUI UK, MyTravel, Thomas Cook and First Choice)
36 account for over 75% of all outbound package tours, while another 1,500 operators account for the balance of 25%. In Germany, TUI, C & N and Rewe controlled over 80% of the market in 2001 (Haedrich et al 2002). Similarly, in Japan, a small number of large outbound agents, i.e. the traditional mega-wholesalers, such as JTB, Kinki Nippon Tourist (KNT) and Nippon Ryoko (NTA) dominate the industry, accounting for more than 60% of the market share (OMT/WTO, 2002). In the United States, however, the number of major tour operators is much greater, around 40 firms, whose market share is estimated at around 30% (UNCTAD, 1999). In addition, two-thirds of travel agents in the United States are independent without any association with tour operators or airlines (as opposed to one-third in the United Kingdom), but there are exceptions (box 2). This leads to a distinct difference between Europe and the United States in how tourism products are sold and distributed. In Europe, where distribution channels are typically vertically integrated, with large tour operators often owning travel agencies, 60% of packages are sold via these channels. The most important distribution channels in the United States are computer reservation systems. Box I.2. Vertical integration in the United States tourism The most notable exception is Cendant, one of the largest hotel groups, mentioned earlier. The company offers a wide range of integrated services, from travel distribution services, hospitality, to car rental services in its vertically integrated network, created in a series of acquisitions. The last acquisition was that of Budget car rental company in 2002, adding a new brand to already owned Avis. The car rental division includes also fleet management and fuel card services. The travel distribution segment consists of GDS (Galileo International), hospitality and leisure services (Trust International, WizCom, THOR), retail travel services (Cheap Tickets, Lodging.com, Cendant Travel, Trilegiant), online corporate services (Travelport) and airline services (Shepherd Systems). Another exception is Carlson Companies, owning more than 1700 hotels, resorts, restaurants and cruise ships, as well as travel agencies, Carlson Wagonlit Travel, a 50/50% joint venture with Accor. Table 10 includes the profile of the largest European tour operators, vertically integrated into other tourism activities, throwing some light on their TNCs and FDI activities, although many details are missing for a complete picture. All are TNCs by virtue of owning outbound tour operating divisions in other tourist generating countries, the great majority of them other developed countries and countries in Central and Eastern Europe. Only one, Thomas Cook of Germany, has such divisions in two developing countries, Egypt and India. Furthermore, they own many tour operators and great numbers of travel agencies, most likely, in their own countries and other outbound developed countries. All own aircraft, most likely, in their own countries to transport tourists to destinations, not a TNC activity, but international trade in transport services (only owning an airline in another country would make them TNCs in this respect). Cruise ships, if not owned by a foreign affiliate located in another country, but by a division at headquarters, are, as aircraft, for the provision of international transport and tourism services and do not represent FDI. The tour operators also own hotels and resorts, and to the extent that these
37 are located in other countries, this is FDI and a TNC activity. Each of them features many destinations in developing countries in their portfolio. But there are no indications of FDI in these countries, except for perhaps hotel and resort properties. There are also incoming agencies in receiving countries. But outbound tour operators very rarely own inbound tour operators. 99% of the latter are local independent businesses, including in developing countries, where competition among inbound operators to represent tour operators is very intensive (WTTC et al, 2002, p. 23). Table I.10. The largest European tour operators Company Country of registered ownership Annual turnover Employees Customers Out-bound tour operating divisions in the following countries
TUI AG (2001) Germany
Thomas Cook AG Germany
MyTravel PLC UK
Rewe Germany
First Choice UK
23.8 billion €
8 billion €
8.2 billion € (UK only)
3.9 billion €
3.8 billion €
70,000 22 million 15 European countries
27,968 15 million UK/Ireland, Northern Europe, Germany, Austria, Switzerland, North America
5,900
14,000 5 million France, Spain, Italy, Portugal, Germany, Belgium, The Netherlands, Austria, Switzerland, UK, Ireland, Canada
Selected destinations in developing countries in 2002/3 featured by tour operators belonging to the group
Barbados, Botswana, Cambodia, China, Cook Islands, Cuba, Dominican Republic, Egypt, French Polynesia, Gambia, India, Indonesia, Jamaica, Kenya, Malaysia, Maldives, Mauritius, Mexico, Morocco, Myanmar, Namibia, Nepal, Reunion, Samoa, Seychelles, South Africa, Sri Lanka, St. Lucia, Tanzania, Thailand, Tunisia, Zambia, Zimbabwe
27,000 13 million Germany, UK, Ireland, France, Benelux, Austria, Hungary, Poland, Slovakia, Slovenia, Egypt, India, Canada Barbados, China, Costa Rica, Cuba, Dominican Republic, Egypt, India, Indonesia, Kenya, Malaysia, Maldives, Mauritius, Mexico, Morocco, Nepal, Peru, South Africa, Sri Lanka, St. Lucia, Seychelles, Thailand, Tunisia, UAE, Vietnam, Zanzibar,
Antigua, Barbados, Brazil, Cambodia, China, Costa Rica, Cuba, Dominican Republic, Egypt, Gambia, India, Indonesia, Jamaica, Kenya, Malaysia, Maldives, Mauritius, Mexico, Morocco, Myanmar, Oceania, St. Lucia, Seychelles, South Africa, Sri Lanka, Tanzania, Thailand, Tobago, Tunisia, UAE, Vietnam
Egypt, Bulgaria, Dominican Republic, Jamaica, Kenya, Cuba, Maldives, Morocco, Mexico, South Africa, Tunisia, Thailand, Turkey, Antigua, Argentine, Aruba, Bahamas, Barbados, Brazil, Chile, Cook Islands, Costa Rica, Curacao, Fiji, Polynesia, Grenada, Guadeloupe, India, Indonesia, Cambodia, Lao, Malaysia, Oman, Puerto Rico, Namibia, Zambia, Seychelles, Sri Lanka, St. Lucia, Tobago, Tonga, Venezuela, Vietnam
Barbados, Belize, Bhutan, Bolivia, Borneo, Botswana, Brazil, Cambodia, China, Costa Rica, Cuba, Dominican Republic, Egypt, Equator, Eritrea, Ethiopia, Ghana, Guatemala, India, Indonesia, Iran, Jamaica, Jordan, Kenya, Ladakh, Madagascar, Malawi, Malaysia, Maldives, Mali, Mexico, Morocco, Mozambique, Namibia, Nepal, Pakistan, Peru, South Africa, Sri Lanka, Sudan, Syria, Tanzania, Thailand, Tibet, Tunisia, Zimbabwe 28 tour operators
Germany, USA, Italy, UK
Ownership of: Tour operators
81 tour operators
33 tour operators
39 tour operators
7 in Germany, elsewhere
Travel agents
3,700 travel agents
3,600 travel agents
2,001 travel agents
818 travel agencies
Aviation
88 aircraft
87 aircraft
49 aircraft
Other
40% share in LTU (25 aircraft resort properties incoming agencies
32 incoming agencies 150,000 beds in 287 hotels business travel division
76,000 beds incoming agencies
4 cruise ships 125 resort properties incoming agencies
4
300 agents plus 37 Hypermarkets (UK only) 26 aircraft
joint venture with Royal Caribbean Cruise Lines 1,200 yachts incoming agencies
38 Source: Meyer, 2004, p. 7, based on company websites.
For any tourism destination it is impossible to ignore the potential that tour operators based in generating countries offer. This is especially true for many developing countries, which lack resources for international marketing campaigns and have to rely on tour operators for the inflow of tourists and marketing. Therefore tour operators and travel agencies are targeted by countries. But it is a different type of targeting than targeting of foreign investors, one of the key functions of FDI promotion. It involves paid familiarization trips to the destination, bonus trips for successful marketing of the country, paid conferences in selected regions and ultimately incentives to bring tourists to the destination16 (Christie, 2001, Annex 1, p.6). Key influences of tour operators on tourism in developing countries include (Meyer 2004):17
Image creation and access to consumers. Mainstream tour operators have direct access to a large number of customers. Travel products are highly marketingintensive and tour operators provide the images, information and options upon which customer awareness, demand, and buying behaviour are based, frequently with limited input by host countries. Destinations are put on the map and sold by tour operators in generating countries.
Volume and type of tourism. With many destinations offering a similar product, e.g. 3S, and being marketed in a similar way, price is a major decision making factor for tourists. The major benefit provided by mainstream tour operators to developing countries is that they can significantly increase the volume of tourist arrivals, leading to employment generation, export earnings and economic development. High volumes are, however, achieved by providing low cost holidays through economies of scale, bulk-buying, and low input prices, putting downward pressure on prices and profits of airlines and hotels. Price-sensitive mass tourism catering to low spending tourists is characterized by smaller yield per visitor than specialized tourism catering to richer tourists.
Switching destinations. Because mainstream operators sell a product, rather than a destination, destinations offering similar attractions become interchangeable,
16
As part of the government's effort to do away with the concept of a "tourist season" and attract visitors year-round, Greece announced a programme of subsidies to major tour operators bringing travelers to Greece. A subsidy of 40 euros per tourist was to be given to tour operators who bring visitors to Greece by charter plane on organised tours only, in the months of March and November, in an effort as to boost arrivals beyond the traditional May-October season. The scheme, which started in 2002, also designed to stimulate "pre-Olympics" tourist traffic, was to run for over three years. A major portion of the subsidies was expected to go to tour operators in the UK and Germany, Greece's two biggest sources of tourists. 17
To quote one source on the role of tour operators, “(T)the competitive advantage of the tour wholesalers lies in their doubly strategic position between all principal suppliers and between suppliers and consumers. Their power derives from the enormous volumes they can command, their pivotal familiarity with diverse market segments, and the capacity to shift tourism flows from one destination to another” (Britton 1991:457).
39 like commodities. This means that operators can easily react to consumer demand and switch to destinations that offer more favourable terms, e.g. higher quality product at lower price, owing, for example, to a favourable exchange rate.
Vertical integration. Many large tour operators are vertically integrated, as noted earlier, through ownership or alliances, with hotels, airlines or reservation systems. Thus if they are interested in a particular country, they can not only provide a supply of tourists, but also other services such as accommodation and transportation. Investing in hotels in a country makes them less prone to treat this country as an interchangeable destination. But vertical integration is claimed to reduce developing countries’ benefits from tourism, as commissions are captured by a vertically integrated firm.
Changes in travel habits. Tour operators, adjusting their offer to changing demand and tourist preferences, have been criticized for reducing benefits from tourism to developing countries. The shift from individual travel to group travel and tour packages is claimed by hotels in developing countries (e.g., in the Caribbean) to have resulted in lower rates per room. Smaller hotels are adversely affected by group travel, because of the unwillingness of tour operators to disperse a large group of tourists among a number of small hotels, often of varying quality. Another consequence of group travel is reduced availability of airline seats to individuals, often clients of small hotels. And the trend to allinclusive vacation in large hotels or resorts is perceived to reduce linkages to the local economy and population. But on the other hand this type of vacation attracts often higher income tourists and generates repeat business.
All destinations in developing countries are featured by intermediaries through which marketing and booking are facilitated. The main tourist receiving developing countries in terms of volume of arrivals are in particular mainstream destinations for tour operators, be it in North Africa, the Caribbean, Mexico or South East Asia. The increased demand from European tourists for Thailand, the Dominican Republic and Mexico are classical examples of how arrivals increased in the past few decades due to mainstream/low-cost tour operators adopting these destinations. They have become competitive destinations owing also to charter airlines selling seats often at less than half the price offered by scheduled airlines. In fact, several developing countries discourage independent, non tour-operator based, travel. A case in point is the Maldives, often cited as the success story in terms of elevating itself out of LDC status and today having to import 50% of its tourism workforce from neighbouring countries (Lyon 1997). Bhutan has banned non-tour operator based travel outright. Efforts to attract tourist to Southern Africa, similarly, are focused on organised international mass tourism (Baskin 1995). Botswana has explicit government policy catering to high-end organised tourism and discouraging backpackers and independent travelers. Other examples of a key role of tour operators are:
40
Spain grew up as a known tourist destination relying initially on tour-operators, after the Government opened up Spain to mass international tourism in the 1970s. German mass tourism to Majorca was triggered by cheap charters organised by Neckermann and TUI. While the Balearic Islands were the poorest province in Spain in 1950, by 2000 it was among the richest, almost entirely due to organized tourism (WTTC et al, 2002, p. 24).
Cancun in Mexico had a local population of 600 before tourism arrived. It is now a source of income for 600,000 owing to organized tourism from North and South America and Europe.
A relative newcomer, Turkey, is highly reliant on West European tour-operators. Malta, similarly, was highly dependent on tour operators in the 1980s and 1990s, in particular British tour operators generating over 50% of arrivals. In order to discourage tour-operators from decreasing volume and switching to other destinations, they were given financial support to maintaining competitive prices, joint advertising and forward buying rates, until this was phased out in the mid 1990s.
In Tunisia from the 1960s on, the government directed its efforts to attracting western package tourists (approximately 80% of arrivals to Tunisia are package tourists), with a strong state involvement in tourism facilities and strict restrictions on the repatriation of profits overseas. The policy was modified in the mid 1980s and attempts were made to encourage foreign investment. Investment in the hotel sector, fuelled by tour operator led charter tourism, increased drastically between 1977 and 1992.
In 2003 the TUI Group has unveiled a plan to consolidate its 35-year presence in Morocco. The Group, which has become an important actor in Moroccan tourism, intends to develop its hotel network in the country by building three hotels of a total accommodation capacity of 2,000 beds. The group equally intends to open new hotels in Marrakech and Agadir over the next two years. It plans to increase flights to Morocco from Germany, France and Belgium. The Government plans to attract 10 million tourists by 2010, and is exploring with TUI a partnership that would increase futher direct flights between Moroccan cities and foreign markets.
The impact of tour operators on tourist arrivals works also in the opposite direction, making destinations highly dependent on tour operators’ reactions to, for example, travel warnings and decisions to pull out. There are many examples of tour operators withdrawing from a country in response to warnings (prompted of course by crises, wars or tensions) resulting in the drastic reduction of tourism.18 18
One refers to Gambia, where by the end of the 1980s tourism contributed 12% to GDP and became a principal source of foreign exchange earnings. After the coupe d’etat in 1994 the British foreign office issued a travel warning which resulted in tour-operators pulling out of Gambia. Air charter arrivals dropped in one year from 45,733 to 8,363. Job losses in hotels and restaurants were around 10,000. Overall tourism
41
2. Airlines
Airlines are an integral part of the tourism industry (WTTC et al., 2002), linking tourist demand with supply of tourism services in destination country. By some estimates, 3040% of all international tourist arrivals globally are by air (Page 1999; Vellas and Becherel 1995). Most developing countries rely on air transport for the growth of tourism industry. In island countries it is not uncommon to receive over 90% of all arrivals by air. In LDCs, during the period of 1995-1999, countries with high growth in air travel are also those with rapidly growing tourism (e.g. Cape Verde, Guinea, Lao People’s Democratic Republic, Madagascar, Myanmar and Uganda). In the case of Bangladesh and Ethiopia, total air travel increased as a result of the tourism growth in neighbouring countries, by serving as a regional hub for air transport to those destinations (Díaz Benavides and PrézDucy, 2001). The key global air traffic routes are between developed countries with the transatlantic route between Europe and the United States making up for about a quarter of all global air traffic. While a number of developing countries have their own airlines, the great majority has to rely on major international airlines for tourist arrivals. For developing countries, which are often excluded from the regular international flights served by major airlines, charter flights can be an alternative to ensure an adequate and frequent supply of air traffic at competitive prices. The operation of charter services is highly dependent on volumes carried to a destination and charter services are only viable when a critical mass of tourists is reached (normally a minimum of 400,000 passengers per year, Meyer, 2004, p. 20). Charter services are thus only likely to be operated to destinations with high tourism demand. The traditional charter destinations are the Caribbean, Mexico, North Africa, Thailand, Kenya, Maldives and Seychelles. New charter routes have been opened to destinations in Asia (in particular China) and Africa (e.g. South Africa). As in other tourist activities, developing countries face many constraints in the international air transportation markets, affecting the competitiveness of their tourism product. Air transportation, as noted earlier, is often the largest component, in value, of the tourism product. With few exceptions of Asian countries, such as Singapore or Thailand, national airlines of developing countries are weak and have small fleets. Their routes, traffic, landing and other rights are still typically set in bilateral air service agreements negotiated between governments. The bargaining power of their governments to open new routes, secure favourable schedules and convenient take off and landing slots in terms of location and landing, is weak. Most developing countries are still reluctant to enter open sky agreements. In countries relying on major international airlines for tourist arrivals, traffic can be monopolized by one airline (on the basis of an air service agreement) setting unreasonably high airfares reducing tourist demand in the home country of the airline (while airfares to other similar destinations can be much cheaper). contracted by 60% and the economy shrank by 6.2% (Thompson, O’Hare and Evans, 1995). Current examples of contention include Indonesia, East African States and Tunisia. EU legislation that requires European tour operators to assume responsibility for the quality of the tourism product has made the operators more sensitive to security issues in destinations.
42 Charter airlines, a cheaper alternative to scheduled airlines, will not serve a destination until it becomes profitable, reaching certain volume of potential tourists. In addition, the quality of airport infrastructure, high landing fees and other charges can make airlines hesitant to service a country. Charter airlines in Europe are often operated by tour operators (from the same country), thus giving them additional power to control the direction of tourist traffic, airline seat availability, and prices of the two largest components of the tourism product – airfare and accommodation – and consequently the price of almost the entire tourism product. But these are neither FDI nor TNC issues. As noted earlier, FDI in air transportation is very small and it still rather an exception than a rule. 3. Global distribution systems (GDSs) Global information and distribution systems are a key network in the international tourism infrastructure, bringing buyers and suppliers of tourism products into direct contact. They include global distribution systems and increasingly Internet. They not only facilitate transactions in tourism services but also provide information on prices, services and destinations, making an international tourism market more transparent. Tourists can now determine the price and availability of services of their preferred destinations and compare them with other destinations in minutes from computer terminals. They can now take a virtual tour of a hotel or a resort as well as natural attractions. Information technology has reduced the cost of booking for airlines, increased the productivity of travel agents and facilitated direct access of tourism service suppliers (e.g., hotels) to customers. Computer reservation systems (CRSs) were developed by large airlines in the 1970s to process flight reservations. Later they have been transformed into global distribution systems (GDS) for many tourist services and information (issuance of tickets, marketing or sale of products and services, as well as land services e.g. package tours, hotels and vehicle rentals). By linking to each other through strategic alliances and partnerships, they became to know as global distribution systems (GDSs) (UNCTAD 1998). Connection to a global network is crucial for reaching a larger market, bypassing intermediaries. For an individual service supplier (e.g a hotel) it is an alternative way to be selected by travel agents or individual bookers in generating countries to using tour operators. CRS and GDS have become the backbone of world information networks for tourism, making them a convenient and trusted “one-stop” point of call for intermediaries and consumers in generating countries, one that is necessary for suppliers of tourist services to reach wider markets. The advantages of using computer reservation systems are that unlike many other tourism-related services, a physical presence is not required, as they supply services on a cross-border basis. After a number of M&As, four major GDS companies have emerged: Amadeus and Galileo (Europe), and Sabre and WorldSpan (United States) (WTO/OMT, 2002). While Amadeus and WorldSpan are still majority-owned by airlines, Sabre became a separate legal entity of AMR (parent company of American Airlines) and Galileo belongs to Cendant since 2001. GDS charge non-ownig companies a fee for booking services. Nowadays not only airlines but also tour operators, travel agents, car rental companies are
43 linked to GDSs. For example, in 2002, Galileo had links to 116 countries, served travel agents in 45000 locations and supplied information on 500 airlines, 227 hotel companies, 33 car rental companies and 368 tour operators worldwide (Meyer, 2004, p. 18). GDSs can provide a barrier to market entry for suppliers of tourism products not linked to the GDS-owning air companies, especially for developing countries the majority of which have not been involved in the development of GDSs (East Asian countries’ involvement in the development of Abacus is an exception). While a number of airlines from developing countries do subscribe to GDSs, participation of other tourist service suppliers, in particular SMEs, is often non-existing. In general, countries not yet seen as attractive tourist destinations, or whose tourism sector is underdeveloped (particularly in Africa and South Asia), tend to be extremely poorly represented in GDS. This implies that access to information on their tourism products is not directly available and they are highly dependent on intermediaries, notably tour operators. But with the Internet this is changing. First, new actors, virtual travel agents have emerged and GDSs responded by introducing multi-channel distribution strategies through linking to these agents and thus allowing consumers direct access to a CRS or GDS. E.g. Sabre has introduced Travelocity; Galileo has acquired Trip Com; Amadeus has stakes in Opodo and E-travel. In addition, new actors with a background in communication services have entered the scene. Microsoft has, for example, created Expedia. Expedia and Travelocity are today the largest online travel agents covering more than 50% of the online market. The new virtual agents use existing platforms of GDSs (i.e. Expedia is connected to Wordspan, Travelocity to Sabre). These agents therefore continue the role of the traditional travel agents, rather than substituting GDSs. Second, with the advent of the Internet the access to GDS and tour operators is not the only way to access tourist markets and facilitate tourism trade. This opens up significant opportunities for developing countries. Tourism services suppliers in developing countries, which used to deal with intermediaries, are increasingly reaching consumers in generating countries directly, reducing or even cutting out the reliance on (and costs of) intermediaries. Individual service providers try to bypass GDSs by creating their own portals that are not connected to a GDS. Today, more travel products are sold over the Internet than any other product, although online travel sales are still a very small share of the total travel market (1.2% in 2000),19 but they is growing very rapidly (for example, around 2000, it was expected to increase by 80% annually, Marcussen 2001). Nearly 37 million of America’s more than 162 million active internet users have already purchased travel online. In 2001 online travel bookings exceeded $23 billion and were expected to reach $63 billion by 2005. The value of online travel bookings in the UK was approximately £455m in 2000 (Marcussen 2001).
19
60% of these sales were for air travel, 18% for package tours, 17% for hotels and 5% for other services.
44
Chapter II. THE IMPACT OF FDI IN THE HOTEL INDUSTRY Introduction Tourism growth in developing countries dates back to the decades after the World War Two. Although the development paradigm of that time strongly favoured industrialization – to get away from over-dependence on commodities – a growing number of developing countries began to see in international tourism a source of much needed foreign exchange, jobs and economic growth. With growing affluence of Western societies the demand for international tourism was increasing very fast (the growth continues until today), developing countries had strong comparative advantages in tourism and the production of tourism services did not seem to have high barriers to entry. For small countries with few resources and capabilities tourism became the development strategy. For larger countries it was an additional source of economic diversification and a way to develop backward regions with few other resources than natural beauty and favourable climate. In many developing countries the growth of tourism was impressive in terms of tourist arrivals, foreign exchange revenues and jobs. In some, tourism became for some time an engine of growth. But in unprepared traditional societies, tourism, more often than not developed without any vision, led also to drastic social and cultural changes: traditional and original local culture or rituals became “commoditised” and sometimes destroyed, families broke up, local social structures collapsed, and crime, unknown before, occurred and quickly spread, to name a few changes. In addition, the physical landscape changed and the massive inflow of tourists put strain on resources, including natural resources, the basis of tourism “comparative advantages”, raising questions about sustainability of tourism. Local populations in tourist regions were often unable to cope with drastic changes and migrated to urban centers or became even poorer. For some, these changes were an inevitable price for modernization of traditional societies: after all industrialization and urbanization, which resulted in greater affluence and progress of societies, were not free of all these problems. For others, they were symptomatic of failed development strategies promoted by unscrupulous centers of local power and benefiting them, local elites and transnational corporations (see Harrison, 1992a, for an excellent analysis of social consequences of tourism). For them, on the top of social, cultural and environmental damage, much heralded economic benefits of tourism proved to be doubtful. Foreign exchange revenues were not so great on the net basis because of “leakages” – expenses on imported goods and services and payments to foreign factors of production and tax evasion. Jobs were low-skilled and low-paid and of a servant type. Many tourism centers developed as enclaves with little or no interaction with the local economy. Local entrepreneurship was often suppressed. These issues aroused a lot of passion in the tourism literature of the 1980s and 1990s and have not yet altogether disappeared. Divisions concerning perceptions and interpretations of tourism run deep not only among academics but also those directly affected (box II.1).
45 Box II.1. Tourism: is it worth paying the price? This text, reproduced from Harrison (1992), describing the experience with tourism of Boracay, a tiny island in the Philippines, illustrates well costs and benefits of tourism, differences in local perceptions as well as the relevance of theoretical debates about tourism. It is based on Smith, (1988). “The islanders subsisted on farming and fishing until Boracay was “discovered” by international tourists in the 1980s. The result was an intense pressure on the island's infrastructure, and the need for electricity, a central water supply and a system of sewage disposal soon became apparent. With the invasion of “drifter” tourists, middle-class and family-oriented tourists declined in number, but the amount of garbage and other forms of pollution increased. With electricity came neon lights and discotheques; villagers sold souvenirs and rented out cottages and land values increased. astronomically. And despite the reservations of older and more conservative islanders, young people nearly idolized the tourists for whom most of the working class …were willing to work literally day and night … for the sake of the money. (Smith, 1988, pp. 12-13). Furthermore, drunkenness, narcotics and prostitution were imported into the island by the tourists, who also proceeded to deplete coral resources already damaged by the islanders' fishing practices (Smith, 1988. pp. 7 and 17). At the time of Smith's paper, the government was having to decide if it could provide funds (and how to obtain them) for such necessities as a sewage treatment plant, a modern water supply and a garbage disposal system, as well as access piers and first-aid services. At first sight, what happened to the island should occur only in a horror story. However, towards the end of the paper, Smith remarks: -~ “Yet the people of Boracay, like all rural Filipinos, would enjoy having the infrastructure that is needed to support tourism, because it would make their lives easier, pleasanter and safer. And they certainly want the income generated by tourism, in the form of cash with which to buy goods and services including better education for their children. They appreciate the employment that is enabling their young people to stay on the island, or to return home to Boracay from the squalor of big cities, and be with their families. In the eyes of most villagers, tourism has been very positive - and the sins of the “drifter” tourists can be temporarily' overlooked in the face of their largesse” (Smith, 1988, pp. 15-16). Boracay was undoubtedly being “modernized” in the sense of being incorporated more closely into the world economic system, with the expansion of the cash economy and wage labour and the introduction of Western norms and values. But was it “development'? And who is the judge?
What is the situation today? In spite of mixed experiences, many disappointments and criticism from many quarters, more countries than ever before, including developing countries, have put tourism development on their policy agenda. As a result, countries are increasingly competing for international tourists. Competition is particularly intensive among destinations, which have been unable to improve and differentiate their tourism offer, and thus offer similar attractions, sold, as noted earlier, as “commodities”. It is so, because tourism now, as before, offers many potential benefits to countries: it is an export activity for which worldwide demand continues to grow very rapidly. Barriers to entry are generally low, lower than in many other export industries, and, as a result, “income can flow quickly if the tourism development strategy and associated marketing is sound” (WTO/OMT, 2001, p. 60). Tourism stimulates infrastructure development and, through its long value added chain, provides potential opportunities for local companies, small and large. Furthermore, countries simply do not have much choice. Many have few
46 other export alternatives and for most tourism as a source of export revenues is already there: for 83% of developing countries tourism is among top 5 export industries and for one third it is the largest export (ibid.). But many things have changed, among others, in response to the criticism of tourism. The objectives of tourism development have been expanded to include environmental protection, poverty reduction, preservation of cultural and historical resources, local enterprise development and benefiting local populations. Within countries and internationally, there is greater dialogue and consultation among all stakeholders of tourism development. Large companies, key actors in international tourism, have become stakeholders in, and promoters of, responsible and sustainable tourism. Governments of an increasing number of developing countries have learnt from their past mistakes and, more importantly, have acquired capabilities and skills, often assisted by international organizations, donor governments and NGOs, to deal with problems of tourism and to address critical issues through policy measures. Technological developments, in many other industries leaving developing countries behind, in tourism created new opportunities for developing countries. *
*
*
As noted in chapter I, key players influencing international tourism in developing countries include tour operators, airlines, global distribution systems and hotels. But the first three operate in developing countries through trade rather than FDI. When they undertake FDI in developing countries, it is rarely in their core activities and more often in the accommodation sector. As a result, FDI in tourism is concentrated in the hotel industry. Therefore the focus of this chapter is on the impact of FDI -- in both equity and non-equity forms – and TNCs in this industry. The chapter analyses in which areas and in what ways can TNCs assist or hamper developing countries in achieving their objectives in the accommodation sector and in tourism in general, focusing on the following areas: capital, investment, knowledge, linkages and leakages, environment and domestic enterprise development. A. Capital and investment Sufficient accommodation base is a necessary pre-condition of any tourism development. The lack of hotel rooms of acceptable quality is a constraint to tourism development in many countries, notably in African countries. In countries at the initial stage of mass tourism development, without prior accommodation base (as was the case with many countries, now known destinations for mass tourism and with little or no domestic tourism), this required building of tens or hundreds of hotels in a relatively short period of time not only to cater for the desired number of tourists (typically high to make an economic difference for a country), but, more importantly, to reach the critical mass of tourists, necessary for airlines to establish connections and for tour operators to invest in promoting the destination.20 As one study noted, “although this is often viewed as a 20
For example, the number of rooms in a new Mexican destination, Riviera Maya, quadrupled between 1997 and 2003, from some 5,000 to nearly 20,000. In the relatively new destination in the Caribbean, the
47 chicken and egg situation, hotels are a key factor in this equation” (Christie, 2001, p. 26). A threshold volume of hotel rooms and visitors is also required to justify large investments in infrastructure: airports, roads, power, waste treatment, water supply, landfills, etc.21 Small, family-owned hotels can be built and run at a relatively low cost. The owners often view such hotels as a means to support their own living and contribute family labour to their operations without proper accounting for either costs or profits. The larger the hotel and more luxurious, the more expensive it is to build and operate. Thus developing a resort or a country as a mass tourist destination becomes a very costly, capital-intensive activity, requiring billions of dollars in investment in accommodation (box II.2). Box II.2. The cost of building a hotel According to industry estimates, in the early 2000s in the Caribbean to build one hotel room cost on average between $60,000 in the Dominican Republic and $70,000 in Riviera Maya, Mexico. The cost of a room in larger more luxurious hotels with, say, 1’000 rooms, could easily reach $100,000 (Spence, 2001). Thus building of 15,000 rooms in the Riviera Maya between 1997 and 2003 required investment of over $1 billion. Developing the Dominican Republic as a mass tourism destination with some 50,000 hotel rooms incurred investment expenses of $3 billion. Applying today’s investment cost in the Dominican Republic to the room stock in the Caribbean it must have cost $15 billions to provide the supply of some 250,000 rooms in 2000 (ECLAC, 2003, p. 16). The role of TNCs as providers of capital and investment for the accommodation sector in developing countries has been determined by the interplay of many factors. Key among them are: the level of development and the size of the host country; the type of tourism countries wished to develop as well as the speed of developing tourist destinations and consequently, government policies; the availability of local capital and expertise; and TNC strategies concerning in particular forms of involvement in host countries. From the onset of tourism development the role of TNCs as providers of capital differed widely among countries and over time. A number of large and/or more developed countries were developing tourism using mainly domestic resources. Prior to the 1980s, India, Mexico and the Republic of Korea were examples of countries which not only adopted a policy of doing without transnational equity investment in the hotel sector but also have attempted to do without the managerial expertise of TNCs. The Indian Government, for example, did not normally permit management contracts between Indian Dominican Republic, the number of rooms increased from 3,800 in 1980 to 24,000 in 1992 and nearly 50,000 in 1999 (Spencer, 2001; and ECLAC, 2003, p. 16). 21 Therefore, many countries went for a concentrated and planned resort development rather than dispersed developments throughout a country, less successful commercially and more difficult with respect to protecting the environment.
48 hotels and TNCs, but allowed only franchising and marketing agreements. In the Republic of Korea, the majority of agreements concluded with TNCs were of this latter kind. In Indonesia, the Philippines, Taiwan Province of China and Thailand, there was a distinct trend away from equity involvements of TNCs and medium-term to long-term management contracts towards ad hoc technical service agreements and associations with referral or reservation chains (UNCTC, 1982, p. 84). At the same time during the 1960s and particularly the 1970s, the emergence of new business centers throughout the world, especially in several Middle Eastern countries and in South-East Asia, resulted in an enormous hotel boom. For example in Asia, Singapore and Hong Kong, China extended their traditional entrepot trade role into finance, commerce and other services, and newly industrialized economies, such as the Philippines, the Republic of Korea, Taiwan Province and Thailand were expanding rapidly, competing to become the leading commercial and financial centres of the region. This boom, mainly in business and/or conference traffic, created a gap which the TNCs were particularly suited to fill in view of their long experience in catering for similar traffic in other parts of the world and in development of sophisticated reservation systems. In addition, the sheer scale and pace of hotel development in many of these regions has been such as to exclude the possibility of such development being carried out by domestic firms alone. That is also why later on, when a number of larger countries, such as Egypt, Mexico, Tunisia, Morocco or Thailand embarked on massive holiday tourism development through building resorts in new destinations, they have relied on both domestic and regional capital and that supplied by TNCs. Even if often a TNC involvement, as noted in chapter I, was in non-equity forms, it helped mobilize capital from other sources. As noted in the UNCTC study, “if local hotel accommodation is insufficient to cater for the desired number of tourists, and if local capital is not available, foreign capital (either public or private) will almost certainly be provided on condition that a competent transnational corporation is brought in to design and manage the hotel” (UNCTC, 1982, p. 62). Often, the provision of foreign capital has been made conditional on the engagement of a TNC in non-equity forms. As holiday tourism spread to countries, and areas of countries, which had little or no domestic tourism and capital and where there was little or no tourist infrastructure and expertise, these countries turned to TNCs as providers of both capital and expertise in building and managing hotels. Judging from the shares of TNCs in the countries hotel industries (chapter I), this was the case with small often island countries (e.g., in the Caribbean) and the least developed countries (e.g. in Africa). But again even among these countries there are big differences as regards the role of foreign capital in hotel development, with a number of countries which developed the accommodation sector using mainly local (or regional) capital and expertise. In Africa, a case in point is Mauritius (box II.3). In the Caribbean, where the average role of foreign hotels is among the highest in developing countries, there are big differences between countries. In the Bahamas, one large foreign-owned hotels with 2,500 rooms (which is the same number as the total number of rooms in two small countries, St. Christopher and Nevis and Guyana)
49 coexists with a small number of locally-owned hotels and villas. But in Belize, which emphasizes eco-tourism, the average size of hotel is no more than ten rooms, with the total of 4,000 rooms spread between 400 hotel and lodging facilities (Dunlop, 2003, p. 2). It should be noted that in countries, which have relied more on FDI, TNCs are often from the region rather than from developed countries (chapter I). A case in point is the expansion of the Caribbean brand TNCs (box II.4). Box II.3. Hotels in Mauritius: mainly local but increasingly foreign Mauritius is considered a success story in developing international tourism. Although essentially a 3S destination (with 90% located on the beach or close to the beach), Mauritius has developed niche tourism, catering to the needs of high-income tourists, mainly from Europe (as noted in chapter I, it is not uncommon in a luxury hotel to charge $1,500 per suite per night in high season). The accommodation base, consisting of 90 hotels with some 7,300 rooms (in 1998) has been built using mainly local resources. At present, only 20% of the hotel capacity is entirely owned by foreign investors. Mauritian businessmen, including those in sugar and textile industries, invested in hotels from the outset. Government policy, requiring local control of equity of hotels with less than 100 rooms, helped to develop local SMEs. But in distinction from many other countries, local presence is also significant in large luxury hotels. The initial investors in hotels now own a local chain, Beachcombers, including among its properties a “Leading Hotel of the World”. The only five star business hotel in Port Louis is wholly locally owned (and managed). But most big hotels have some expatriates at top management levels. The expansion plans of the accommodation base (by 3,200 hotel rooms between 1999 and 2002) approved by the Government in 1999 predicted a number of new hotels built by foreign chains, including Hilton, Oberoi and Sun International. Source: Christie and Crompton, 2001.
Box II.4. Caribbean brand hotel TNCs Caribbean brand TNC hotel chains – Sandals and Superclubs -- were initiated in Jamaica in the 1980s and surged in popularity in the 1990s expanding all over the Caribbean. They started buying closed properties, refurbishing them and turning into luxurious uniquely Caribbean resorts. Capitalizing on a growing demand for all-inclusive vacation packages, they appealed to special segments of the market offering packages to “adults only”, couples only” as well as families, advertising safe, no hassle vacation with romance and fun. Packages include all elements of the vacation for one pre-paid price. The brands have been successful in reinventing themselves and competing successfully for new and repeat customers. While initially expanding in Jamaica, by the late 1990s, Sandals and Superclubs had properties in Antigua, Bahamas, Barbados, Brazil, Dominican Republic, St. Lucia and Turks and Caicos. Source: ECLAC, 2003, p. 24.
50 Data on FDI inflows into hotels and restaurants industries available for a number of countries on the balance of payments basis and for some others on an approval basis22 for various periods between 1987 and 2002 throw some additional light on the role of TNCs as providers of capital for hotel accommodation and restaurants and on the countries which used TNCs as a source of capital (table II.1). Some conclusions can be drawn from this table:
22
In spite of the widespread use of non-equity forms by TNCs in hotel and restaurant industries, TNCs are also providers of capital for investment in these industries. FDI inflows into large countries such as China, Mexico, Indonesia and Vietnam (the latter two on the approval basis) can reach over extended periods hundreds of millions of dollars annually. In smaller countries they can be sustained at the level of tens of millions of dollars annually. Note that, as mentioned earlier, FDI in non-equity forms can also be instrumental in facilitating inflows of foreign investment capital into host developing countries. This indirect impact is not reflected in table II.1.
Countries relying on tourism for a significant part of their export revenues (that is countries where travel represents around or more than 17% of total exports)23 use FDI in equity forms in varying degrees. On the one end there is the Dominican Republic with annual inflows of $165 million during 1995-2002 and on the other there is Mauritius with only $4 million of inflows during 1990-2002. Judging by the ratio of annual FDI inflows for the periods in the table to the value of travel exports in 2000, among countries with data based on approvals Myanmar, Lao, Indonesia and Cambodia have the highest intensity of FDI inflows per one dollar of exports (respectively 54, 45, 26 and 17 cents). Among countries with actual FDI data the highest “FDI intensity” has Honduras (12 cents of inflows per one dollar of exports) followed by the Dominican Republic (6), Costa Rica (5) and Mexico (4). In tourism countries such as Mauritius, Morocco and Tunisia these ratios are small (table II.1). Note that the ratios are based on recent inflows. Some countries could have used more FDI in the past.
Inflows into hotels and restaurants as a share of total FDI inflows into countries are quite high in Honduras and the Dominican Republic (respectively 24% and 22%). In other countries they are not as important as contributors to total flows, accounting for as little as 0.6% of the total in Chile, 2.3% in Mexico and 5.4% in Tunisia.
Data on an approval basis should be interpreted with caution. Typically only a part of approved investments turns into FDI inflows. For total FDI, it can be as little as 40% in the case of Indonesia and 6070% in China or the Republic of Korea. For other countries in the table these percentages are not known. 23 These are Dominican Republic (32% in 2000), Lao (23%), Mauritius (21%), Morocco and Tunisia (20%) and Cambodia and Costa Rica (17%) (UNCTAD FDI/TNC data base).
51 Table II.1. FDI inflows into hotels and restaurants in selected coutries, various periods, dollars Country
FDI inflows, $mln Period Annual average Period total
A. Actual inflows Brazil Chile China Costa Rica b Dominican R. Honduras Mauritius Mexico Morocco b R. of Korea Tunisia
97 24 588 60 165 32 4 321 22 86 26
484 1996-2002 a 260 1991-2001 1 176 1999-2000 714 1992-2002 1 320 1995-2002 322 1993-2002 53 1990-2002 2 890 1994-2002 152 1997-2002 1 468 1987-2002 315 1991-2002
Travel exports GDP total Per capita Ratio of FDI $ mln $ bln dollars to travel 2000 2000 2000 exports 1 810 819 16 231 1 302 2 860 260 542 8 294 2 039 6 834 1 682
595 70 1 080 16 20 6 4 574 33 457 19
3 494 4 638 862 1 116 2 349 924 3 773 5 811 1 116 9 782 2 058
0.5 3 3.6 4.6 5.7 12.3 0.7 3.9 1.1 1.3 1.5
304 4 974 114 162 158 7 3 741
3 153 2
243 723 324
5 4 309 31 75
239 794 13 946 401 988
17.4 25.6 44.7 54.3 3.2
B. Approvals Cambodia Indonesia Lao Myanmar Nepal Papua Taiwan P/Ch Vietnam Philippines b
53 1 275 51 88 5 16 24 405 59
477 1994-2002 17 848 1989-2002 614 1992-2002 1 060 1989-2000 62 1987-1998 94 1993-1998 170 1993-1999 3 237 1989-1996 473 1989-1996
2 134
0.6 2.8
Source: UNCTAD FDI/TNC data base a 1996, 1998, 1999, 2001 and 2002 b Travel agencies and tour operators
B. Knowledge Transnational hotels both through their operations and linkages with the local economy may transfer skills, knowledge of products and techniques of production. It can be knowledge how to build a luxury hotel catering to high income tourists. Such a hotel, as noted in a UNESCO study, “as a luxury, sophisticated and highly standardized consumer product, …. bears little relationship to the production capacities of developing countries. Everything depends on a country’s level of development, but, as a general rule, the construction of high-rise buildings with elevators, air conditioning, telephone and electronic facilities, etc., can not be based on local means of production” (Ascher, 1985, p. 45). A hotel TNC can build such hotel, providing both capital and knowledge how to build it, or can only provide knowledge.
52
The provision of knowledge can be further extended, or limited, to managing the hotel at the required level of quality and efficiency. Management of a large high-class hotel with complex equipment and facilities (such as restaurants, conference facilities and shops, water and sewer treatment plants), large staff with variety of skills and relations with local community and political establishment is a complex task requiring specialized knowledge. Good hotel managers are scarce and whatever their training, require considerable job experience before becoming effective. As Mark Twain noted, “all saints can work miracles, but few could manage a hotel” (Christie, 2003, p. 28). And finally, a well-run hotel requires variety of skills at various levels. As has been noted in a literature survey on tourism and development, “one of the more unexpected results to have emerged from empirical studies is the relatively skill-intensive nature of tourism employment” (Sinclair, 1998, p. 30). In one example, the tourism labour force in the Philippines consisted of 32% of semi-skilled workers, 32% skilled and 14% of supervisors, compared with only 16% unskilled. Consequently, contrary to common perceptions, tourism development involves considerable costs, related not only to the provision and maintenance of infrastructure (much of which is specific to tourism rather than of general use), but also to considerable investment in human capital (ibid., p. 2). This is why countries unwilling or unable to carry this cost have resorted to FDI in equity or non-equity forms. Therefore the transfer of knowledge is considered a key contribution of TNCs to developing countries’ tourism be it in tourism literature or developing countries themselves. “The overall outcome (of FDI) depends on, in part, the degree to which foreign participants transfer their specialist knowledge to domestic firms” (ibid., p. 21). In the UNCTC study, the transfer of knowledge and skills was considered by the developing countries surveyed the most important contribution of FDI in the hotel sector, although its significance varied by countries. For example it was of smaller significance in India, where the domestic chain, Oberoi, competed with hotel chains based in developed countries not only in India but also internationally (UNCTC, 1982, p. 57). The main channels of knowledge transfer are staff training programmes such as on-thejob training, films, lectures, courses at headquarters and instruction manuals. Almost all TNC hotels have elaborate training programmes for their staff. For example, Hilton arranges specialized seminars in various parts of the world to bring hotel management in a particular region up to date on new techniques, methods and procedures in all phases of hotel operations, marketing and sales. The gain to the host country is not only that the hotel is run efficiently but also that these skills may spread to local part of tourism industry through the mobility of managers and labour. All field studies demonstrated that this was an important factor in the development of the indigenous hotels, particularly in high class hotels where almost all senior staff personnel, except in the case of Spain, had received training and gained experience with TNC hotels (UNCTC, 1982, p. 57). An issue of concern for developing countries was often the reluctance of TNCs to employ local managers and senior staff. There are indications that this pattern is changing,
53 although much depends on the availability of trained local managers. For example, UNCTC noted this trend in Spain and Singapore, both countries investing in education and developing local capabilities. Most TNCs regard reputation of their brand name as one of their most valuable ownership advantages and therefore control of management is for them key instrument of maintaining high standards of service and quality. But in the case of franchising agreements this is done differently: through the terms of the contract, regular inspections, or presence of resident representatives. The importance of the contribution of knowledge and skills by TNCs remains valid also today. The shortage of skills is common in many countries because of the lack of training and human resource development policies and practices or because of the rapid expansion of international tourism and a growing need to improve competitiveness of many destinations. As noted in the ECLAC report “the Caribbean tourism industry continues to be plagued by poor, or non-existent human resource policies and practices. People are the basis for delivering tourism and hospitality products and as such the large majority of the regions problems, and its inability to compete globally, can be traced to deficiencies in this area” (ECLAC, 2003, p. 46. In Mauritius, skill shortages at the entry level were eased with the establishment a few years ago of the Hotel Training School. But skills shortage at middle and higher management levels continues to be pervasive and “hotels already pouch from one another” (Christie, 2003, annex 4, p. 36). In China, which is experiencing A hotel construction boom in high-class accommodation, related to the Olympic games in 2008, the lack of qualified managers poses a serious constraint not only to local but also to foreign hotel groups (box II.5). ________________________________________________________________________ Box II.5. Coping with management skills constraint on China’s hotel boom China’s economic dynamism has prompted an unprecedented hotel boom. Local and foreign hotel groups are planning to build thousands if not tens of thousands of new properties in the next decade. Many of them, in a high class category, will have to be opened during the next two-three years before the Olympic Games in 2008. Tens if not hundreds of thousand qualified managers will be needed. This puts an enormous pressure on the region’s educational establishments for hotel industry, such as the School of Hotel and Tourism Management at the Hong Kong Polytechnic University. They are unable to meet the demand. Thus training enough staff in mere months “to live and breathe industry standards” remains a Herculean task. So hotel operators are doing what they can to quickly create legions of managers:
One solution is to ask educational establishments to put together short-term management programmes, as has been done by Hong Kong Polytechnic for several hospitality groups operating in China. The Polytechnic has also designed a master’s degree curriculum for staff members of the Garden Hotel in Guangzhou, a favorite hotel of local and foreign businessmen. Another strategy is to use a chain’s existing executive training programmes and expose students to international work experience. Starwood, for example, which plans to add 15 hotels in China by 2008 (in addition to existing 19), will increase the number of enrollees from mainland China in its “Leadership University”. The chain has already sent 17 Chinese employees to live, work and study at its luxury hotels in Singapore, its regional headquarters. Many more managers are expected to follow. Shangri-La, a Hong Kong (China)-based TNC, has decided to build a hotel school from scratch. Its Shangri-La Academy, located close to Beijing, was inaugurated last December. The Shangri-La group is already the largest operator of luxury hotels in China, with 40 hotels. Within five years it plans to open 41 new hotels, which will require doubling its workforce.
54 Source: “In China, a rush to train 5-star staff for luxury hotels”, in International Herald Tribune, Friday, 8 July, 2005, p. 18.
________________________________________________________________________ C. Linkages and leakages 1. General discussion International tourism has been widely seen as an export industry that is relatively easily to develop within a short time, generating export revenues, jobs and government income from taxes. Developing countries have strong comparative advantages in tourism. In addition, a number of tourism activities are not as capital- and technology-intensive as export manufacturing industries. There are indeed examples of many developing countries in the past and now, which have been able to expand travel exports very rapidly. The recent one is the Dominican Republic, which has increased export revenues from tourism from less than $500 million in 1985 to $2.8 billion in 2001 (UNCTAD, 2003b, p. 232). Tourism is the only services sector in which developing countries as a group have a positive trade balance (Gollub et al., 2003, p. 2). One of the greatest expectations related to tourism-based economic development has been that, in distinction from, for example, natural resources-based development, economic benefits from tourism would spread to other industries – agriculture, construction, infrastructure, manufacturing -- through linkages and multiplier effects. After all, almost all countries have at least some construction industry and raw materials needed to build hotels and infrastructure (e.g., roads). Most countries produce food and beverages, key items on tourists’ spending list. Many produce furniture, fixtures and other items necessary to equip and run a hotel. Services used by tourists, e.g., transportation, financial and medical services, are location bound and have to be provided by firms within a destination country. And a few developing countries which had national airlines could gain additional export revenues from trade in international transportation passenger services. Indeed, value chain in tourism is extensive providing potential for the local value chain development (figure II.1). At the same time it is not possible for any country to produce all tourism services and goods locally. Therefore tourism, apart from bringing export revenues, gives also rise to imports of goods and services, which are demanded by tourists but can not be produced locally or are available locally but are not competitive. It can also give rise to imports of factors of production – capital, capital goods, expertise, knowledge, know-how and skilled and unskilled labour. In an increasingly open environment for trade and factor movements, the configuration of country’s export revenues and expenses on imports of goods, services and factors of production is increasingly determined by comparative advantages in tradable services and goods and competitive advantages of firms in non-tradable services. In the tourism literature, country’s foreign exchange expenses related to tourism are termed “leakages”. If “in excess of specific levels”, these expenses “can significantly
55 Figure II. 1. Value chain in tourism
Source: Gollub et al. (2003).
56 neutralize the positive financial effects of international tourism, particularly in LDCs” (Perez-Ducy de Cuello, 2001, p. 123). Leakages are typically classified into three not very precisely defined categories:
Internal leakages are expenses on imported tourism-related goods (including also capital goods needed to produce tourism services) and some services (although it is not clear which services) and remuneration of foreign capital and labour. They are called “internal” because they originate in the destination country (Perez-Ducy de Cuello, 2001, p. 124 and Gollub et. al., 2003, p. 25).
External leakages refer to expenditures that “originate outside of the tourism destination and its linked domestic industries” and “are not accounted for domestically”. These are related to the role of tour operators or cruise ship companies as intermediaries putting together a package of tourism services and selling them to tourists in the country of origin. They also relate to services of foreign airlines bringing tourists to the country of destination. Thus it is said that much of these expenses never reach the destination country thus representing a considerable source of leakage and reduced benefits from tourism. In a widely cited example of South Africa in 1992, tour operators received 50-55% of prearranged tourism booking prices. Sometimes repatriation of profits of foreign investors and interest and amortization of foreign debt are also considered external leakages (Gollub et.al., 2003, p. 24), producing an overlap with the first category.
Invisible leakages are related to tax avoidance, informal currency exchange transactions and off-shore investment and capital flight. They also include losses of export revenues due to the depreciation of the destination’s attraction to tourists resulting from resources depletion and damage (for example to coral reefs, beaches, wildlife or historical attractions).
As already mentioned, it is often claimed in the tourism literature that leakages are increased with the involvement of TNCs in tourism activities in host developing countries. While there can be some merit to this claim, often the impact of FDI on leakages is exaggerated. Rarely, if at all, this impact is set against the impact of other non-FDI alternatives and compared with the impact of domestic enterprises. Rarely, if at all, the question is asked how would a country’s tourism look like in terms of export revenues and jobs in the absence of FDI, that is costs of FDI are rarely set against benefits of FDI. One reason why FDI in, let’s say hotel industry, may produce higher leakages than a domestic alternative is that the FDI project will generate profit repatriation in foreign exchange: unless the investing firm expects to earn over the life of the project a larger sum than it puts in (discounted at the market rate of interest), the investment is not profitable and is not worth undertaking (UNCTAD, 1999a, p. 166). But domestic hotels may also incur foreign exchange costs and produce leakages, if projects are financed by international loans (and large projects often are). While in the FDI project profits are
57 repatriated (they are often re-invested) only when a project yields return, bank loan has to be repaid with fixed interest regardless of the performance of the project. Furthermore, one should ask the question, whether the hotel base would have been built in many countries (at equivalent levels of efficiency) in the absence of FDI. As noted above, many small countries with small savings, the lack of domestic investors ready to take the risk, and skills to build and run large hotels and no access to international credit had no domestic alternatives. But also in large countries FDI proved to be a useful complement to domestic investment allowing to create more rapidly a critical mass of accommodation necessary for airlines to send charter flights and tour operators to put a new destination in their portfolio. In both cases potential leakages of FDI profits would have to be set against gains from increased export revenues. External leakages – the difference between the package price tourists pay to tour operators in the generating country and what the destination country receives – are estimated to be above 50% for developing countries (Perez-Ducy de Cuello, 2001, p. 125). But most of them are related to the nature of the international tourism industry, the role of intermediaries and comparative advantages in trade in transportation and other services (e.g., insurance services) rather than to FDI. Approximately 40% of the total holiday costs in developing countries are paid for airfares and 10% goes to tour operators and/or travel agencies (Meyer, 2004, p. 26). The share of airfares in “leakages” is high because many tourism destinations in developing countries are located very far from generating countries and in most cases the routes are served by generating countries’ airlines, often cheap charter airlines, because many developing countries do not have their own international airlines. But this has nothing to do with FDI, as airline transportation is a trade issue, determined by countries’ comparative advantages, regulations and the bargaining power of governments. Leakages to intermediaries, traders in tourist packages, have to be put in the right perspective. The fact that full packages are paid for in the destination country does not mean, of course, that the total revenue is kept by a tour operator. The tour operator typically retains 10% of the package price for its services, while the balance is paid to the providers of tourist goods and services, constituting the package. Some of these providers are international (e.g., airlines, insurance companies or computer reservation systems) and many are providers – foreign or local – in the destination country. If a tour operators owns a hotel in the destination country, it still has to pay for accommodation and food services of this hotel. It can however retain a profit from hotel operations. So leakages are really mark ups and commissions of intermediaries put on base prices offered by the providers of services and profits of intermediaries in the case they own facilities in the destination country. Theoretically they can be avoided by direct sales or bookings made by tourism establishments in the destination country. Typically these leakages are higher in the initial phase of tourism development, but as the destination recognition grows, “productivity increases due to service experience and quality improves due to upgrading, external leakage should gradually decrease” (Perez-Ducy de Cuello, 2001, p. 128). As regards internal leakages, there is little indication that these are strongly related to the degree of foreign ownership of, or non-equity forms of FDI in, tourism facilities, that is,
58 as shown in chapter I, mainly in hotels, restaurants and car rentals, although with varying degrees of FDI among developing countries. Key factors determining these leakages are (Perez-Ducy de Cuello, 2001, p. 127 and Christie, 2001, p. 16):
The stage of development of the tourism industry. Leakages are highest during the nascent stage of tourism when the accommodation base is built, triggering imports of capital goods, materials and equipment. Then they fall, to rise again when loan grace periods expire and/or profits occur and are repatriated. They may also increase with rising marketing costs, and upgrading of products and services. As the destination matures they decrease again with the growing share of direct commercialization and less reliance on expatriates as locally trained personnel assumes more positions.
Local supply capacity. This depends on the level of development of local industries that could supply services, materials and other inputs at the constructions stage and during operation of tourism facilities. Much depends on entrepreneurial response and human resources base able to compete effectively with imported goods and services. In the Dominican Republic, leakage decreased from 19% in 1991 to 13% as the local industry became increasingly interested in servicing the tourism market.
Type of tourism. High-income luxury tourism produces higher leakages than low-income tourism but it also generates higher income and export revenues. Mass tourism generates higher leakages than ecological or adventure tourism, utilizing more local resources as part of the experience. All inclusive vacation are said to produce more leakages than individual tours. But at the same time they bring many other benefits to destination countries.24
It is estimated that internal leakages range between 40 to 50% of gross tourism earnings in small (often island) countries and between 10 to 20% in larger and more developed countries (Meyer, 2004, p. 26; Gollub, 2003, p. 25). This pattern coincides with a generally higher presence of hotel TNCs in smaller countries (e.g., in the Caribbean) and much smaller presence in larger countries (such as Mexico). But it would be wrong to conclude that countries with more FDI experience higher leakages. It is rather that they were able to develop tourism, using FDI, on a much larger scale than possible with limited and often absent local resources and capabilities. Higher imports of goods and services for tourism than in larger and more developed countries reflect primarily their limited local supply capacity, lower level of development and the lack of local skills and expertise. In general, when compared with other sectors, including manufacturing and agriculture, leakages in tourism are low, resulting in net income and foreign exchange surpluses from tourism in developing countries.25 Seen from this perspective, tourism 24
In the Dominican Republic, all inclusive vacation attracted considerable numbers of tourists, contributing considerably to employment, paying higher than average wage levels and creating extensive linkages to the local economy (Meyer, 2004, p. 26). 25 In Thailand an increase of final demand in the heavy industry by $1 generated $1.1 of imports, in agriculture $0.6 and in hotels only $0.35 (ESCAP, 1991). In Malaysia, all primary sectors except
59 based development has not been such bad policy option as it is sometimes portrayed in the tourism literature. Even in LDCs “comparatively low leakage confirms tourism as a choice sector of development for which LDCs posses comparative advantages and unique opportunities in many areas and who are even less endowed than more developed countries to control leakages in other sectors demanding higher technological, capital and workforce training requirements” (Perez-Ducy de Cuello, 2001, p. 124). 2. Evidence on transnational hotels Few studies of transnational hotels in developing countries generally confirm the above conclusions: key factors determining linkages and leakages are local supply capacity and availability of local skills and expertise. Moreover, no distinct differences have been found between the sourcing behaviour of transnational vs. domestic hotels or between transnational hotels based in developed and developing countries. The UNCTC study, for example, concluded: “It would appear that many allegations regarding the costs of transnational associated hotels have been exaggerated or, at least, misdirected. For example, allegations that the high import content of transnational hotels have more to do with the product they produce – and demand for this product – that is luxury of first class hotel accommodation than with any specific practices of transnational corporations per se” (UNCTC, 1982, p. 59). According to the study, the direct foreign exchange costs associated with the operations of hotel TNCs depend on a number of factors. First is the form of engagement. If it is equity FDI and thus foreign ownership, the greater the equity the higher is the likelihood of greater repatriation of dividends. But, as noted earlier, dividends are repatriated only when profit is achieved, in distinction to financing via loans, where interest has to be paid regardless of the profitability of the project. Nonequity forms of foreign engagement do not involve repatriation of profits which go to local owners but fees for services rendered by an associated international chain. In a franchising agreement fees are usually calculated as a proportion of the value of gross sales, with, for example, a minimum fee based on an occupancy rate of 55% and a maximum fee on a 90% occupancy rate. The amount and form of management fees vary considerably in management contracts. They may be based on a flat rate not linked to profitability, may be entirely linked to profit or both. In 10 TNCs surveyed in the UNCTC study, management fees were lower in developed than in developing countries. There were great variations in actual fees paid because most were at least partly dependent on profitability: from 4 to 11% of gross revenue (UNCTC, 1982, p. 56). The extent of repatriation of profits and fees depends also on the possibilities of re-investment in host country. Of eight hotels in Singapore examined in the study, two reinvested all profits in the hotel, one in a new hotel in Singapore and two partly repatriated profits to the parent company. The remaining three hotels were under the management contract and profits went to their owners. Second is how a hotel is built. If by a TNCs from the initial planning stage, additional foreign exchange costs may be generated by over-specification or excessive use of agriculture recorded trade deficits, while tourism avhieved net foreign exchange revenues of M$2.4 billion, in spite of 30% level of leakages (ESCAP, 1991a).
60 imported materials where local substitutes are available. The field studies undertaken for the UNCTC study showed that architects and designers employed by TNCs tended to obtain materials from local sources whenever they were available (UNCTC, 1982, p. 54). The construction costs accounted typically for 60-70% of the total costs and most of these appeared to be incurred in developing host countries. Specialists fees were not that high as proportion of total costs and thus the possibility of foreign exchange savings lied in furnishings, fixtures and equipment, but no data was provided on their origin. Third, the proportion of expatriates, who transfer part of their salaries abroad. At the time of the UNCTC study the general pattern in developing countries appeared to be that during the initial years of hotel’s operations the senior management and professional positions were held by expatriates, while the rest were filled by locally trained personnel. With time some of the senior posts may be filled by nationals of the host country trained by TNCs: expatriates are very expensive and nowadays “few hotels are sufficiently profitable to carry expatriate salaries” (Christie, 2001, p. 22). The UNCTC study found that in surveyed hotels in developing countries some 7% of employees were foreign nationals (who accounted however for 23% of the wage bill) compared to 52% in developed countries (with 54% of the wage bill). In one hotel in Kenya, 5% of out of the total of 15% of hotel’s foreign exchange expenditure (measured as % total guests expenditure) could be attributed to transnational management. A recent study noted that “the perception of foreign-dominated management of hotels (in developing countries) is questionable today” (Christie, 2001, p. 22). In the Caribbean, where this allegation is occasionally made, management (as well as ownership!) is predominantly local or regional for all ranges of accommodation and services. Insufficient research has been done on this issue in Africa, but in one example of Cote d’Ivoire, tourism services are dominated by nationals and citizens, the latter being Ivorian immigrants who returned to the country. Fourth, TNC hotels may increase the import content of current purchases because purchases may be directed through their own central purchasing units. Centralized purchasing may make it possible to obtain supplies of superior quality and lower price, not only because of the economies of scale associated with bulk buying but also because the wholesaler may be eliminated and the market internalized within the corporation. Internalization of the market may also generate savings through improved flows of information. The UNCTC field studies suggested that, in general, transnational hotels obtained current purchases, particularly foodstuffs, locally whenever there was an adequate and assured supply of the correct quality at a competitive price. Thus, for example, in Mexico and Spain, the field studies showed that almost all current purchases were locally obtained. A recent study on food procurement in Cancun, Mexico, has confirmed these conclusions, not finding any differences in the purchasing practices between foreign and local hotels and restaurants (box II.6). Estimates of the import content of food and beverages, for a sample of TNCs in Brazil, Colombia, Malaysia, Sri Lanka, Venezuela and Zaire, were also obtained in the UNCTC study. With the exception of Zaire, approximately one third of food was imported and 20 to 30% of beverages. In the case of Zaire, the import content was much higher (95% and 66%, respectively). For a small island economy, such as Singapore, the proportions were estimated to be 80% or
61 more. The sample of hotels studied and the field study reports showed that a generally small proportion (10% to 20%) of current purchases, and a rather higher proportion (20% to 60%) of capital good were obtained through the central purchasing departments of the foreign associated company. In some cases of transnational-associated hotels in India and the Republic of Korea, no centralized purchases were made, and in only one case (a small island economy) were centralized current and capital purchases relatively high (43% and 62%, respectively). Foreign exchange costs of TNCs activities must be set against the increased foreign currency earnings which result from their operations. As noted earlier, hotel TNCs were instrumental in promoting new destinations through investment and advertising. Hotels owned by tour operators increase the latter’s interest in, and commitment to, the host country. ________________________________________________________________________ Box II.6. Food production linkages in Cancun Cancun, Mexico, located in the most remote region of the tropical forest enclave Quanta Roo on the Yuacatan Pennisula was in the 1960s a small village populated by a handful of fishermen, subsistence farmers and small-scale coconut producers. It was developed by the Mexican government into a mega resort. By the 1990s, exceeding planners’ expectations, it became Mexico’s leading tourist destination, attracting more than 3 million tourists annually. At the same time it has evolved from an exclusive high-end elite resort into a mass-tourism 3S destination catering for middle-class tourists, predominantly from the United States, visiting Cancun on package tours. As noted in chapter I, accommodation in Cancun is provided mostly by Mexican-owned hotels, although many of them are linked through franchising agreements to foreign chains. A study of food purchasing practices of 60 Cancun hotels (both foreign and domestic), accounting for 66% of the hotel rooms in 1997 has found a very high level of linkages to Mexican agriculture and, thus, a very small level of import leakages (Torres 2003). In all but one (meat) of 8 food categories purchased by these hotels, the share of foreign sources of supply was equal or below 7%. In seafood it was below 3% and in fruits and vegetables, foreign supply hardly existed (box table). Box table. Origin of food purchased by hotels in Cancun, Mexico, 1997 (% of total purchases) Mexican sources Product
Quintana Roo
Yucatan
Sub-total
Foreign
Unknown
Mexico
sources
sources
Total
Other states
Fruits
4.5
20.1
68.1
92.7
0.7
6.6
100
Vegetables
3.4
22.8
68.1
94.3
0.4
5.3
100
Meats
1
20
48
69
25
6
100
Poultry
9
64
17
90
5
5
100
35.3
40
17.4
92.7
2.8
4.5
100
Dairy products
0
8
70
78
7
15
100
Commodity foods a
0
4.7
80.6
85.3
6.6
8.1
100
Packaged food b
2
2
84.2
88.2
6
5.8
100
Seafood
Source: Torres (2003), p. 551.
62 Note: Based on the survey of 60 hotels in Cancun out of the total of 125 hotels, accounting for 66% of Cancun hotel rooms. The distribution of the sample by hotel category corresponded to the distribution of total rooms, with 95% in high categories (so called Gran Turismo and five- and four-stars categories), and the balance in lower categories. Half of franchised hotels were Mexican and half foreign, while 87% of all surveyed hotes were Mexican-owned. This suggests that a significant part of Mexican hotels were foreign franchises. a Rice, wheat, sugar, salt, oil, flour and other bulk products. b Canned, jarred, bottled or wrapped products (e.g., pickles and ketchup). The study did not find any differences in sourcing policies between foreign- and domestically-operated and –owned hotels. Much higher than average imports of meat were caused by the demand from tourists rather than hotel sourcing practices: “most meat imports are beef prime cuts demanded by tourists who prefer the grain-fed flavour of US beef over less expensive pasture fed Mexican cattle” (p. 552). Higher than average (but rather low in relative terms) imports of commodities and packaged foods resulted from their nonavailability in Mexico. Cancun demonstrates great progress in the indigenization of not only accommodation supply but also in developing strong linkages with the national agricultural sector. “As transportation and communication links with the interior of Mexico have improved over time, Cancun has been able to achieve significant reductions in foreign imports” (p. 552). Factors which contributed to strong national linkages, apart from transportation, included the availability of high quality domestic products at competitive prices and the transition of tourism in Cancun towards mass discount tourism which forced hotels and restaurants to lower prices. Peso devaluations helped in this rendering imported products expensive. However, most benefits from expanded linkages to agriculture went to producers and intermediaries in other regions. According to the study, local producers from Quintana Roo region appeared to have benefited little, judging from their low shares (except for seafood) in the total supply of food items to Cancun hotels (box table).26 The reasons had nothing to do with ownership of hotel operations and had all to do with the failure to develop local capabilities and competitiveness. Key among them were: a) insufficient production to supply large hotels on a regular basis; b) migration of labour from agriculture to tourism offering in Cancun at the time of the study two times higher wages; c) inconsistent and/or poor quality of local agricultural production; d) high prices of local production because of unorganized, small scale and individual production; e) failure to develop local agro-industrial processing facilities; and finally, according to the study, a policy failure: “The primary reason why links failed to materialize in the state is that concrete development interventions, appropriate to the local social and environmental context, and backed by real investments, were not incorporated into the tourism development process. Without articulating a concrete strategy for integrated regional development, Cancun planners’ hoped somehow, local farmers would rise to the occasion and begin producing for tourism. Absent the necessary investment, technical assistance, training, farmer organisation, market access and support programmes, ths proved to be an impossible feat for the impoverished subsistence farmers of Quintana Roo” (p. 563).
________________________________________________________________________
26
The table is based on percentage shares in the second half of the 1990s, when Cancun turned into a huge tourist centre, having been in the past a small fishing village. It does not provide absolute figures on the increases of demand from local sources that must have been significant, given that the number of tourists increased from close to zero to three millions annually. In other words, the study does not address the question of what would be the capacity of the small village to supply the area of 600,000 inhabitants of Cancun in 2004.
63 D. Environment Tourism depends more than any other industry on the natural (and socio-cultural) environment. If poorly planned, unregulated and not supported by adequate infrastructure, by bringing crowds of tourists to unprepared destinations, “tourism contains seeds of its own destruction. Tourism can kill tourism, destroying the very environmental attractions which visitors come … to experience” (Plog, 1974). Water and noise pollution, fresh water shortages, excessive waste, ecological disruption, land degradation, beach and coastal erosion, destruction of coral reefs are examples of negative environmental externalities resulting from poorly managed tourism. In the initial stage of tourism development, tourism planners, as the world in general, did not pay much attention to environmental issues. During the 1990s, the environmental movement in the world and the understanding of the consequences of the degradation and pollution of nature-based assets in tourism have gathered momentum. Efforts by groups that have been critically looking at the impacts of tourism have resulted in rethinking the tourism development model. This resulted in several declarations and documents providing guidelines and frameworks for environmentally responsible tourism such as Berlin Declaration of 1997 on Biodiversity and Tourism, WTO-OMT Manila declaration on the social impact of tourism, the United Nations Environment Programme guidelines for sustainable tourism, the WTO-OMT Global Code of Ethics for Tourism. More and more countries have embraced best practices in physical planning for tourism, by adopting, for example the concept of carrying capacities (i.e., restricting transport and accommodation capacities to avoid overcrowding) and requiring environmental impact assessments before developing tourism facilities. Monitoring systems of environmental changes have also improved. New types of environmentally-friendly tourism, such as eco-tourism or sustainable tourism, have emerged, becoming in many destinations a main selling point of the tourism product. Key actors in the international tourism industry have not only embraced the new concepts but in many respects they have become active promoters of these concepts. Government declarations have been supplemented by private sector instruments. Notable among them is Green Globe, established in 1994 by WTTC, a global coalition of tourism industry CEOs. Green Globe is a worldwide environmental management and awareness programme for tourism. Together with ISO’s environmental standards, it is a principal tool for ensuring that hotels introduce environmental systems into their operations. The International Hotels Environment Initiative is a global non-profit network of hotel companies promoting environmental progress in the hotel sector (more on these initiatives, see Christie, 2003, annex 2, pp. 10-12). Most key transnational hotel chains are members of this initiative. Consequently, tour operators, both mainstream and niche operators, and transnational hotels have in recent years done a considerable amount of work on mitigating environmental impacts and including environment as a key part of their strategies. It seems that all tour operators have taken the word “sustainable” on board to sell their products (Meyer, 2004, p.30). One manifestation of these strategies is the emergence of
64 products that are sold as environmentally sustainable. Another is the adoption of environmental codes of conduct and incentive and technical assistance programmes to hotels and tourist destinations aimed at adopting measures mitigating and reducing negative impacts of tourism on natural resources. Some, such as TUI or British Airways Holidays, have implemented extensive programmes aimed at helping destinations improve their environmental performance and raising the environmental awareness of tourists they send to destinations (Christie, 2003, annex 2, pp. 8-10). The tourism literature has paid considerable and increasing attention to the environmental impact of tourism (Sinclair, 1998, pp. 34-38). But in distinction from other impacts (such as leakages), environmental impacts are rather not attributed to differences in the ownership and control – foreign vs. domestic – of tourism facilities in host countries. Indeed, environmental problems have occurred, to various degrees, in destinations relying little or much on FDI. Thus, key factors determining the extent of these problems include the type of tourism, physical planning and management, the capacity and quality of infrastructure, regulations and their monitoring and the environmental awareness of all stakeholders – governments, populations including local communities and the private sector. Here are some examples:
Botswana is a country with relatively high reliance on FDI in the accommodation sector for tourism in the Okavango Delta – a rare inland wetland area with a river disappearing in a desert (see box II.7). So far the impact of tourism on the wetland itself has not been significant. Environmental problems include the creation of illegal roads by tourist vehicles and noise pollution disturbing wildlife. Intense tourists’ traffic generates an increasing volume of waste difficult to handle and the proliferation of tourist camps using septic tanks for waste water collection poses a threat to ground water.
Mauritius, a country with relatively low reliance on FDI, has not escaped environmental problems. Large hotels and numerous private accommodations have been built close to the beach in spite of setback regulations, posing a threat of beach erosion and endangering coral reefs and seagrass bed, increased by the lack of awareness of environmental good practices by hotels and tourists. Many lagoons are thought to be dead as a result of dumping of solid waste and sewage by sugar refining and textile industries. Hotels operate sewage treatment plants but there is no municipal recycling of waste. A private firms specializes in recycling but not for the public sector. The “greening” of hotels, that is meeting Green Globe and ISO 14000 standards is slow, when compared to Jamaica and other Caribbean islands (Christie, 2003, annex 4, pp. 35-36).
A study on tourism on the east coast of Zanzibar, Tanzania, has found that rapid tourism development has put pressure on freshwater resources leading to symptoms of overuse (Goessling, 2001). The study has warned that, if water management is not considerably improved, overexploitation of water resources can result in the lowering of groundwater table, land subsidence, deteriorating
65 water quality and saltwater intrusion (ibid., p. 179). Tourism in the area would then become unsustainable and living conditions of local population would further deteriorate. The accommodation in the area consists of 58 hotels and guesthouses (out of which 28 were examined in the study) located in 22 villages. Guesthouses are mainly local while many hotels and resorts are international, with up to 400 beds (ibid., p. 183). The study did not make a distinction of the examined facilities by their ownership. It has found, however, considerable differences in water use by the size and category of the facility (these go often together – luxury hotels are typically large). Thus, the demand for water per tourist was much higher in hotels than in guesthouses, nearly four times higher. In resort hotels with extensive gardens and swimming pools the use of water was the highest. ____________________________________________________________________ Box II.7. Botswana: pluses and minuses of niche tourism in Okavango Delta Botswana has successfully developed tourism, including in its greatest attraction – Okavango Delta – using extensively FDI in hotel accommodation and other services. By 2000, some 54% out of 162 tourism enterprises in the area (including not only accommodation services but also transportation services and local safari and tour operators) were foreign-owned, 41% were joint ventures and 18% locally-owned (Mbaiwa, 2005). Botswana is the only LDC that has graduated from the group of the poorest countries to become the middle-income economy. Its success has been due, among others, to the wise exploitation of its main resource, diamonds, in a joint venture between the Government and a TNC. In distinction from many African countries, Botswana has not experimented with the nationalization of natural resources and has never been excessively indebted. Given over-dependence on diamonds, successive governments of Botswana have sought to diversify the economy into other activities. Tourism has proven to be the greatest success in this regard, while efforts to develop other sectors – notably manufacturing, non-diamond mining and agriculture – have brought mixed results. Hardly existent at independence, tourism became by 2000 the second largest industry in Botswana, accounting for some 5% GDP and employment. It also became the second largest source of government revenue after diamonds. The Okavango Delta region with Maun international airport – an inland wetland with rich wildlife habitat – in North Western part of Botswana, far from the capital, Gabarone, is an internationally known tourist attraction. Tourism activities include game viewing (and photographing) by foot, from airplanes, cars and canoes, bird watching and safari hunting. The area attracts some 50,000 tourists annually, double the level from the second half of the 1990s. Most are international tourists from developed countries, but also from South Africa and other African countries and South America. The latter three accounted for 40% of tourists during 1999-2001, while visitors from Botswana for 15%. The area is limited geographically and is very fragile ecologically. Therefore the Government decided to develop high-cost, low-volume tourism using permanent accommodation instead of tourism based on casual campers. The policy was implemented through high fees for the use of public facilities (e.g., entry fees in natural reserves), targeted marketing and the development of high-quality, high-price accommodation facilities.27 Furthermore, in line with traditional Botswana’s policy, tourism development was opened to FDI. This type of facilities is costly to build and require knowledge, experience, marketing and management skills to run. Given the shortage of capital and skills (including entrepreneurial skills) in Botswana (UNCTAD, 2003a), there was in fact, no domestic alternative to tourism development on such a scale. FDI, providing accommodation and other services (such as banking services in Maun – all banks in Botswana are foreign) has been instrumental in Botswana’s diversification towards tourism, not only in
27
A charge of $400 per night is not uncommon and a 1-hour flight over the delta costs some $220.
66 Okavango Delta but also in other regions, including in Gabarone, the capital of Botswana. 28 Botswana’s efforts to attract FDI into export-oriented activities and develop other sources of diversification have been less successful (UNCTAD, 2003a). Yet, as is often the case with international tourism (see box II.1), tourism in Okavango Delta is subject to varying assessments and perceptions, especially as regards its impact on the region. Apart from employment and income in the accommodation sector, local communities were allocated land, permitting community-based tourism initiatives, such as joint ventures with tour operators in hunting and photographic tourism activities. But in general, community based projects, supported by the Government failed to meet expectations – reinvestment of tourism revenues into others sustainable local tourism projects -- because of the lack of skills, entrepreneurship and information, limiting local benefits (Mbaiwa, 2003, p. 452). 29 The growth of tourism has resulted in the establishment of tourism-associated businesses, especially in Maun, the point of departure to Okavango Delta. As a result of tourism the region became better connected to the rest of the country: new roads were built, the telecommunication, postal and electricity services have improved and many new services have arrived (e.g., financial services) benefiting local population, although more in Maun than in villages in the Delta. However, most products used by tourists, including food, are imported from neighboring countries and some are brought from other parts of Botswana. But this is the situation in the entire Botswana, which has weak agriculture and manufacturing. Overall, it was estimated that in 1997 out of each tourist dollar some 30% was spent in Botswana on local goods, salaries, taxes and other activities (BTDP, 1999). Tourism is a source of local employment, but mainly in low skilled and low paying jobs. Only few citizens of Botswana are employed as professional guides, assistant managers or managers. Expatriates hold most skilled jobs. Although the percentage of foreigners in tourism employment is small (around 4% in hotels), they account for much higher share of the wage bill. Tourism began to have some negative environmental impacts difficult to be monitored because of the intensive tourist traffic during the peak months of tourist arrivals. One is the creation of illegal roads by tourist vehicles in some sensitive areas and noise pollution from airplanes, boats (there are some 23 privately owned airstrips in and around the Delta, some 45 small engine aircraft and 32 power boats) and cars, disturbing wildlife species, nesting birds and fish. Animals (hippos and crocodiles) move to undisturbed areas and bird population is reduced because of breaking eggs. The high volume of tourists generates the amount of waste more and more difficult to handle while the proliferation of tourists camps using septic tanks for wastewater collection is likely to increase potential for ground-water pollution. On the other hand negative impacts on wetlands have been found to be small (Mbaiwa 2003, pp. 460-463). Income poverty in the Northwest region of Botswana, of which the Okavango Delta is a part, was reduced from 85% of the local population in 1985 to 24% in 1994 – a much better result than for the entire Botswana with figures, respectively, 59% and 47%. But the data for the region was inflated by more prosperous parts of the region, such as Maun, and rural poverty in small remote villages is still widespread (and according to some sources has increased) in spite of government’s Community-Based Natural Resources Management Programme. 30 The programme, according to some sources, has not produced expected results because of the lack of skills and understanding of the programme, and consequently, failure by local people to re-invest income derived from the programme. Another reason for poverty is a cattle disease in 1995 which resulted in killing of over 300,000 cattle. Cash compensation received from the
28
Gabarone receives the largest share of foreign visitors into Botswana – 45% in 2000 (Mbaiwa, 2003). But visitors to Gabarone are, most likely, mostly business visitors. All banks and most hotels in Gabarone are foreign (South African). Visitors to Okavango Delta accounted for 22% of all visitors, but most likely, for higher share of receipts, given the nature of tourism in the region. 29 For example, an elephant sold to a tour operator by local communities for $8,000, is resold to a hunter for $80,000. 30 Among other reasons the programme was introduced to promote rural development through the involvement of local communities to reduce resentment and alienation with foreign investors.
67 Government was spent on current needs and as a result 8 years after the disease “the rural communities whose livelihoods relied on livestock production, find themselves trapped in poverty”. In spite of the success of tourism development in economic terms there is considerable dissatisfaction with tourism, especially among local population, leading often to suspicion and mistrust between tour operators and local communities and a perception of racism of the former by the latter (ibid., p. 459). “Interviews with the local people …. indicate that there is a general assumption that that the delta has been taken from them by government and given to foreign tour operators” (ibid., p. 458).
___________________________________________________________________ E. Domestic enterprise development The development of domestic enterprises is an important objective of most developing countries. Tourism offers great potential in this respect, greater than many other industries. As mentioned in chapter I, much of this potential has indeed materialized, including in the accommodation sector, the focus of this chapter. In spite of the fact that this is the sector where most FDI is concentrated among tourism activities, some 85% of total tourist accommodation capacity in developing countries is provided by SMEs, predominantly local firms (WTO/OMT, 2001, p. 64). In addition, more developing countries have been successful in generating TNCs in the hotel industry than in other industries. Moreover, while in other industries TNCs originate in newly industrialized countries such as East Asian countries or Mexico, in the hotel industry also less developed countries such as Jamaica or Thailand have been able to generate TNCs. As is evident from previous considerations, FDI complements domestic investment and brings resources that are lacking in host developing countries. Crowding out of domestic firms, an often raised negative aspect of FDI in general, is rarely reported in the tourism literature.31 Let’s then discuss factors determining or facilitating domestic enterprise development in the hotel industry in the context of FDI. Domestic enterprise development is closely related to “infant industry” considerations. These considerations look differently in the hotel industry than in manufacturing industries. In the latter, trade protection was in the past a key tool to protect infant industries. When trade protection is abolished consumers benefit from cheaper imports and greater product variety, but domestic production and employment can be lost. But accommodation services are not tradable, therefore trade protection has never been a policy option in promoting local enterprises. As regards the protection of infant industry from FDI, in manufacturing the issues are different than in the case of trade. Without such protection, domestic production, employment and consumer benefits are not lost and there can be additional efficiency and technological benefits, while there can also be less indigenous entrepreneurial development. The risks of generally restricting FDI (and trade) to promote local enterprises have generally increased over time. For one thing, if policy makers did not do this efficiently and flexibly, they often propped up uneconomic local firms for long periods, at heavy cost to domestic consumers and economic growth. 31
In a review article on tourism and development, only one example of crowding out is cited: in the 1960s and 1970s local were forced out of business in Tahiti (Sinclair, 1998, p. 21).
68 For another with rapid technological progress, the danger of technological lags is much greater now than two or three decades ago, if TNCs are kept out of sophisticated activities: many technologies cannot be obtained through other ways than FDI. Consequently, in manufacturing and many services “only a few countries have built impressive domestic capabilities and world-class innovative systems while restricting the access of TNCs. Many others have restricted foreign entry, but have not succeeded in promoting competitive domestic enterprises in high technology manufacturing industries” (UNCTAD, 1999, p. 321). But in the hotel industry the policy of fostering domestic vis-à-vis foreign firms is in many respect easier and less risky than in manufacturing. Although innovation matters in this industry (see the box on Jamaican TNCs), it is not based on a costly R&D effort and technological progress has not been so fast. Consequently, as noted earlier, competitive advantages of TNCs in the hotel industry are not as complex or specialized as in many manufacturing industries dominated by TNCs, which are able to sustain their advantages over long term by undertaking R&D. Therefore, as noted in the UNCTC study, TNCs may provide significant net benefits in the initial stage of development of tourism in developing countries, especially those with limited capabilities and capital, but over time some of these benefits may decrease. The extent to which this happens depends on the type of tourism a country wants to develop, the size and level of development of the country and government policy. If the country wishes to concentrate on low-volume, high income tourism and if it is a small economy at a relatively early stage of development, the net advantages of TNC hotels may persist over a long time. The advantages of TNCs in lower income, mass market tourism are more transitory, thus providing a scope for domestic enterprises to step in. Another factor facilitating domestic enterprise development is that the TNC advantages are not equally pronounced in all areas of their operations, and the possibility of unbundling of the package of resources transferred by TNCs is easier and more real than in many other industries. In many large middle-income developing countries, such as Mexico, Brazil or Middle-East countries, local capital can easily be found for hotel investment. Moreover, much of the knowledge and information needed for hotel construction and operations can be obtained through routes other than FDI. There is a well organized international market in hotel development consultants, management, professional and technical staff and in finance capital for hotel construction. Furthermore, apart from equity investment and management contracts, there is a choice of arrangements in the hotel industry, which permit unbundling of resources, depending on the availability of local resources and expertise. A leasing agreement permits local ownership of a hotel, while marketing (and managing) accommodation under the trade mark of a TNCs. A lessee pays the owner part of hotel’s profits (usually 60 to 80%) after deducting the expenses incurred in the operations. Losses are carried by the tenant TNC. Technical service agreements, where international consultants, including TNCs, provide various services or knowledge (of, for example, market research, marketing or managerial systems) for a fee is a very flexible arrangement, permitting to acquire the
69 elements of a package not available locally. Thus the agreement may cover market surveys and feasibility studies on the type of hotel and facilities needed. It may concern architecture and general outline for the construction of the hotel and its furnishings and fittings, advice on the choice of architects and engineers and personnel, staff training, financial or operational management planning and control systems (for example, food and beverage control), security, etc. A turnkey agreement is another possibility. A foreign firm is responsible for the hotel project and hands over a fully operational hotel to the owners, who pay for the construction and equipment. The franchising agreement is a less “intrusive” form of FDI than equity FDI and management contracts, for those who wish to benefit from a foreign brand and marketing aspects of TNC operations (such as access to worldwide sales and reservation systems as well as marketing campaigns) but prefer to provide their own management. Which form is best for a host country, including for domestic enterprise development, depends on a number of factors. One factor is the type of tourism that the host country desires and is able to develop - that is, 3S tourism; low-volume, high-income tourism; special-interest tourism etc. Another is the supply of domestic capital for hotel construction, equipment and operation. A further factor is complementary resources, both of lower skills and of higher catering and managerial skills. Finally, another factor is knowledge of the markets in the main tourism-generating countries and the ability and willingness to undertake independent marketing effort. Each option for tourism development, including with and without TNCs, has its own set of benefits and costs (including risks) in terms of leaving more or less room for developing successful local operations. In the hotel industry flexible foreign entry policies are possible and are less risky than in manufacturing industries. Many countries have applied restrictions on foreign entry but limited them to smaller hotels (e.g., of up to 100 rooms), thus facilitating local enterprise development while not giving up benefits from FDI in the hotel segment where competitive advantages of TNCs are more pronounced. Past experiences of developing countries, which initially relied on TNCs, indeed show that TNC advantages can diminish once the host country has acquired experience and has reached a certain educational level and locally owned and operated hotels can operate successfully achieving performance results comparable to those of TNC hotels. Cases in point are Tunisia and Spain (UNCTC, 1982, p. 53) and more recently, Jamaica, which not only reduced the reliance on TNCs but generated successful TNCs expanding in the Caribbean region. At the same time, the ownership advantages of TNCs may persist in the luxury and first-class hotels, as exemplified by Europe, where TNC hotels exhibited substantially higher average level of value-added than locally owned hotels (UNCTC, 1982). And, as noted above, a number of countries which had sufficient capital and expertise in hotel operations, such as Mexico, Brazil or India, opted for nurturing own enterprises which turned into TNCs, and relying on franchising and marketing agreements for access
70 to brand names and marketing expertise. Mauritius has successfully developed niche high-value tourism with a minimal involvement of TNCs. Thus in the hotel industry, the chances of reducing the role of TNCs do exist and are greater than in many other industries. Countries wishing to do so need to carefully synchronize the development of tourism with training programmes and the acquisition of decision-making power. Full decision-making authority can be achieved only if there are local facilities for training management-level personnel and if that personnel has had adequate experience in internationally oriented hotels. An integrated development programme in training and tourism (especially with regard to hotels) must have high priority, because unless rapid growth in the industry is accompanied by indigenization of decision making, transnational corporations will necessarily continue to play an important role. The most pressing need seems to be for the training of the middle and upper echelons of management and administration, although, as has been suggested, the necessary expertise to run an internationally oriented hotel successfully can only come from experience of working in such a hotel. In this respect, TNCs can and often do play an important role, both by providing training for 1oca1 management and professiona1 staff at varying grades and by recruiting indigenous personnel to management positions. The UNCTC study noted that already back in the 1980s some TNCs were fu1ly aware of the needs and aspirations of host countries in this direction, while others were still somewhat ethnocentric in their approach. However, an encouraging feature of the international hotel sector was that it was growing so rapidly that the opportunities for recruitment of personnel from host countries to middle or senior management and professional positions were in genera1 promising. It seems that this trend continues until today, especially in countries, which have invested in educational programmes for the hotel industry. One reason why local SMEs can co-exist with TNCs is that while TNCs may offer a host country particular advantages over smaller indigenous competitors, there are some tourists and business visitors who prefer the kind of ambience which the smaller and less formal, locally owned and managed hotels may offer. The case studies undertaken for the UNCTC report indicated that this was particularly likely in countries which were geographically and culturally different from the major tourist-generating countries - and within these countries, in cities and beach resort areas. Countries as diverse as Brazil, Fiji, Greece, India, Japan, Kenya, Mexico, the Republic of Korea, Senegal and Thailand had enormous regional advantages which could be best exploited by small or mediumsized locally owned and run hotels. Tourists visiting such hotels were attracted by the local scenery, history and culture, as reflected in museums, temples, pyramids, castles, palaces and so on, as well as the way ordinary people live, the local food and drink, and decor. Thus, “although construction of large hotels may be the quickest way of satisfying a rapidly rising demand for accommodation, Governments should also consider supporting the development of a small hotel sector and ensuring that it offers acceptable amenities, standards and terms. Such accommodation, complemented by a large hotel sector, seems to be an essential ingredient of government policy. Attention to improving training facilities relevant to small-scale accommodation is also needed” (UNCTC, 1982,
71 p. 85).32 In the past this was done with success in Barbados, Greece, Ireland and Portugal. There is no reason why, over time, it cannot be done in the newly developing tourist lust regions. Although these words were written more than two decades ago, they have not lost anything from their validity until today. Chapter III. A CASE STUDY: THE ROLE OF FOREIGN DIRECT IVESTMENT IN TANZANIA’S TOURISM A. HISTORICAL BACKGROUND The United Republic of Tanzania, a least developed country, is a union of Tanganyika (referred to as the mainland) and the islands of Zanzibar, Pemba and others (referred to as Zanzibar). Tourism is not a union matter. Zanzibar and the mainland have separate tourism policies and institutions, although they are often sold as destinations in a single package. Therefore, tourism will be examined separately for both parts of the Union, whenever possible. After the independence in the 1960s, Tanzania was for more than two decades a socialist economy based to a large extent on the principle of self-reliance, with a high level of government ownership of enterprises and control of resources (Wade et.al., 1999, p. 94). By the mid-1980s, Tanzania began the transition to a market-based economy. But it took time to dismantle old institutions and mechanisms and create new ones. Only in the second half of the 1990s did market economy reforms reach critical mass (UNCTAD, 2002, pp. 27-28). During the socialist years, tourism was not the priority sector for Tanzania’s development. It did not fit into the strategy of self-reliance as an activity that would promote dependency on the outside world (Wade, ibid. p. 94). As a result, the mainland Government did not invest much in tourism infrastructure and controlled tourism via the Tanzania Tourism Corporation (TTC), which built, owned and managed hotels. Under this policy there was no room for private, including foreign, investment in tourism. Yet, given unique tourist attractions of mainland Tanzania (wildlife), some of which border those of Kenya, tourism grew during the 1960s and 1970s, mainly as an “add-on” to Kenyan destinations. Tourist arrivals to the mainland peaked in 1973, reaching 250,000, declining afterwards (to a low of 50,000 in 1983) due to the economic crisis, the closure of the Tanzania/Kenya border (in 1977) and the war with Uganda. The development of tourism in Zanzibar began only in the first half of the 1990s, when market-based reforms were taking hold. The shift towards the market-based economy has changed the environment for tourism development. Tourism moved up on government’s list of priority sectors in both mainland and Zanzibar. Private, including foreign, investment was not only allowed, but actively encouraged and promoted. Mainland Government started withdrawing from 32
In some of the countries visited in connection with the UNCTC report, for instance, Fiji, Seychelles and parts of the Bahamas, Governments were well aware of such a need.
72 owning tourism properties and created institutions for market-based tourism (such as Tanzania Tourist Board on the mainland responsible, along with the Tourism Division of the Ministry of Natural Resources and Tourism, for the development and marketing of tourism). On the mainland, the TTCs was replaced in 1992 with Tanzania Hotels Investment Corporation (TAHI), a parastatal, responsible for maintaining state ownership in certain hotels. But since 1992, hotels have been required to operate on a commercial basis, with own boards of directors, as limited liability companies. In the second half of the 1990s, the Government was considering moving to minority shareholder status within the corporation. At the same time TAHI has entered into joint ventures with private investors in some of its properties. Private investors, including foreign ones, started investing in restaurants, hotels, travel agencies and tour operators. These investments are supported by investment promotion agencies – Tanzania Investment Centre (TIC) on the mainland and Zanzibar Investment Promotion Agency (ZIPA) on Zanzibar. Associations of private companies were formed in main segments of tourism in both the mainland and Zanzibar. B. TOURISM PROFILE 1. Tourism assets Tanzania has a variety of tourism assets, some of them world class. Wildlife in national parks is Tanzania’s most attractive asset and has the highest scarcity value. National parks are located in different areas of the mainland. The Northern Circuit bordering Kenya includes best known national parks (such as Serengeti and Lake Manyara), Lake Victoria and Africa’s highest mountain – Kilimanjaro. Less attended by tourists and less developed are Selous Game Reserve and Ruaha national park in the South (Southern Circuit) and a number of smaller parks and reserves in the West. Additional attractions include the sandy beaches north and south of Dar es Salaam and on Zanzibar Islands. Beach assets face intensive competition from similar destinations worldwide. But resort vacations in a number of resort areas are combined with a safari holiday, extending tourists’ visits and adding value to the package. The mainland coast is still relatively underdeveloped and Zanzibar is the main destination for beach tourism in Tanzania, featuring both as a single destination and as an add-on to the wildlife safaris. Zanzibar islands have also world-class marine assets (allowing excellent deep-see fishing), less developed than similar assets in other parts of the world. Zanzibar’s Stone Town is a historical attraction in its own right. Six destinations within Tanzania are World Heritage Sites: four national parks and game reserves and two historical sites, including Stone Town and historical ruins on the mainland. Only three African countries have more such sites (MIGA, 2002, p. 4). Tanzania is also endowed with rich culture and crafts from its more than 126 tribes.
73 2. Seasonality Offering the variety of tourism assets on its large territory, Tanzania avoids large seasonal fluctuations of tourist arrivals, plaguing many tourism destinations relying only on, for example, beach tourism. The tourist season in Tanzania is quite long and some activities (game viewing, bird watching) offer differing attractions with changing seasons. The Northern Circuit has potential for almost year-round tourism, especially if infrastructure improves. The Southern Circuit has more varying seasonal temperatures than the Northern one, but again attractions are different in each season. The hunting season runs from July to December. Overall arrivals into mainland Tanzania are distributed pretty evenly among the four quarters of the year. In 2003, they were from the first through the fourth quarter, respectively, 23%, 21%, 39% and 27% of the annual tourist arrivals (figure 1). Seasonality on Zanzibar, relying on beach tourism, is greater than on the mainland: in 2003, quarterly shares in arrivals were 18%, 11%, 38% and 33% (figure 2). Monthly fluctuations were even greater, with August accounting for 15% of annual arrivals and May for only 3%. On the mainland the difference between the peak months for arrivals (August) and the low month (May) was much smaller, respectively, 11% and 6% (figure 2). Figure III.1. Quarterly seasonality of tourism in Tanzania, 2003 M a i n l a n d , t o u r i st a r r i v a l s b y q u a t e r s, 2 0 0 3 , %
Za nz i ba r , a r r i v a l s by qua r t e r , 2 0 0 3
1st QT R 1st QT R 4t h QT R
18%
23%
27%
4t h QT R 33%
2nd QT R 11%
2nd QT R 21% 3r d QT R 29%
3r d QT R 38%
Source: Ministry of Natural Resources and Tourism, 2005, p. 10; and Zanzibar Commission for Tourism.
74 Figure III.2. Monthly seasonality of tourism in Tanzania, 2003 Mainland, arrivals by m onth, 2003
ec D
ov N
ct O
Se pt
Au gu st
Ju ly
Ju ne
M ay
Ap ri l
M ar ch
Fe br
Ja n
70000 60000 50000 40000 30000 20000 10000 0
Zanzibar, arrivals by m onth, 2003 12000 10000 8000 6000 4000 2000
ec D
ov N
ct O
Se pt
Au gu st
Ju ly
Ju ne
M ay
Ap ri l
M ar ch
Fe br
Ja n
0
Source: Same as figure 1.
3. Tourists by the country of origin Out of 576 thousands visitors to mainland Tanzania in 2003, 59% arrived on holiday, 23 % for business and the balance for other reasons (MNRT, 2005, p. 12). By the region of origin, Africans represented the highest percentage of arrivals in 2003 – 47% (out of which 21% came from Kenya). The breakdown by the purpose of visit and the country of origin is not available, but it is widely assumed that visiting friends and relatives is the dominant motive among this group. (At the same time UNCTAD survey of hotels in tourism destinations has found a growing and sometimes quite significant number of African tourists in these hotels – see below). Europe is the second source of visitors to Tanzania, accounting for 33% of total arrivals in 2003, with Americas coming next – close to 9% in 2003 (most of which from the United States and Canada). Given different motives of African visitors, these are, most likely, the largest sources of holiday visits (figure 3). By individual non-African countries, the largest contingent of tourists arrived in 2003 from the UK (44,000), US (36,000), Italy (25,000), France and India (22,000 each), Germany (19,000) and the Netherlands (15,000).
75 Figure III.3. Tourist arrivals by region, 2003 M a i nl a nd, a r r i v a l s by r e gi on of or i gi n of
Za nz i ba r , a r r i v a l s by r e gi on, 2 0 0 3
t o u r i st s, 2 0 0 3 , % A si a 12%
Ot her 9%
A mer i c as
E ur ope
9%
33%
A f r i ca 10%
Nor t h A mer i ca 6%
E ur ope 75% A f r i ca 46%
Source: Same as figure 1.
The composition of tourist arrivals to Zanzibar by the country of origin is much different from that to the mainland. Tourists come mainly from Europe (three quarters in 2003), with Italy by far the largest source country, accounting for 27% of total arrivals. The share of visitors from Africa is one tenth, those from North America 6% and the rest of the world 9% (figure 3). Total arrivals to Zanzibar were 68,347 in 2003 (or 12% of arrivals to the mainland) and 92,161 in 2004 (source: The Zanzibar Commission on Tourism). 4. Arrivals by the mode of transportation The composition of tourist arrivals to the mainland by the mode of transportation has shifted from road to air transportation. In the first half of the 1990s most tourists accessed Tanzania by road from Kenya (66%) and 12% from Zambia. Only 18% arrived by air: 10% at Dar Es Salaam and 8% at Kilimanjaro International (KIA) airports (Wade, 2001, p. 98). In 2003, 56% of the arrivals were by air and 37% by road (figure 4).33 The shift was due to the introduction of daily flights by KLM between the Netherlands and Kilimanjaro and Dar Es Salaam since 2001 and the increased frequency and capacity of flights from and to London by British Airways as well as improved access from the Middle and Far East. An Open Skies Policy agreement concluded with the United States should facilitate more international traffic to and from Tanzania by global airlines. Leasing of KIA to a private operator has improved its efficiency. Apart from international airlines operating intercontinental routes, a national flag carrier, Air Tanzania Corporation (ATC), provides scheduled services in the domestic and regional markets. In addition, since the liberalization of air transportation, two private airlines have entered scheduled services – Precision Air and Eagle Air, both operating small aircraft with capacity not exceeding 50 seats (ATC operates two Boeings 737).
33
It is estimated that 40% of all tourists arrive to Tanzania via Nairobi, from where they continue to Tanzanian destinations by regional flights or road.
76 There are also some 25 small operators in Tanzania offering services between domestic tourist destinations (MIGA, 2002, pp. 101-102). Tourists travel to Zanzibar by plane (around 60%) and by boat (40%) from the mainland. Plane arrivals are also mainly from the mainland. The exception are direct charter flights from Italy. The British Airways and Swiss Airline flights to Dar Es Salaam have immediate onward connections to Zanzibar with local carriers. A large number of European tourists access Zanzibar via Nairobi with Kenya Airways. Zanzibar airport is in rather bad condition and it has become a bottleneck in further growth of tourism into Zanzibar. The runway needs to be extended and resurfaced and airport buildings and installations need major refurbishing and modernization.34 As regards sea access, although the transfer between Dar Es Salaam and Zanzibar has improved with the introduction of hydrofoil service, the Zanzibar harbour is in dire condition. That is why cruise ship numbers have not been increasing during the past couple of years (CHL, 2003, pp. 101-102). Figure III.4. Arrivals by the mode of transportation, 2003 M a i n l a n d , t o u r i st a r r i v a l s b y m o d e o f
Z a n z i b a r , a r r i v a l s b y m o d e o f t r a n sp o r t , 2 0 0 3
t r a n sp o r t , 2 0 0 3
Rai l 3%
Sea 42%
Road 37% Ai r
Ai r
56%
58%
Sea 4%
Source: Same as figure 1.
5. Types of tourism As already mentioned, safari tourism (often combined with beach vacation) is the main type of tourism on the mainland, while beach tourism (plus eventually a visit to the historical Stone Town) dominates in Zanzibar. Until not long ago, “most visitors to Tanzania game parks are likely to have visited Kenya first, largely because it is cheaper and more accessible by air” (MIGA, 2002, p. 4). Although the country continues to feature in the brochures of tour operators in combination with tour packages to Kenya and other eastern and southern African countries, it is increasingly recognized as an independent safari destination. In distinction from Kenya, considered the “mass-tourism destination”, Tanzania caters to higher income tourists. It is so because in terms of 34
In spite of almost $2 million of annual government income from the airport (from departure taxes and landing fees and rents), no improvements or proper maintenance and repairs have been undertaken during the past decade.
77 quality, quantity, diversity and visibility, wildlife in Tanzania’s National Parks is considered superior to that in competing destinations” (ibid., p. 4). In addition, mass tourism is not desired because of the fragility of natural assets and internal transport limitations. Consequently Tanzania targets low volume, high yield tourism and receives higher average expenditure per tourist than other destinations in Africa: close to $1,000 (around the mid-1990s), compared to $677 in Kenya, $430 in East Africa and $374 in South Africa (Wade, 2001, p. 97). By 2003, the expenditure in Tanzania increased to some $1,300 per tourist (MNRT, 2005, p. 21). The average expenditure per tourist per day is similar in the mainland and in Zanzibar for package vacation and not much different (in favour of the mainland) for non-package vacation (BOT, 2004, pp. 106 and 122). But total expenditure in the mainland is higher than in Zanzibar, because the average length of stay is longer in the former (10 days in 2003) than in the latter (6 days). Market surveys undertaken at various times give an idea about the demand for various types of tourism in Tanzania. One survey undertaken around the mid-1990s showed that European tourists visit Tanzania for safari – 85%, but 35% out of them combined safari and beach. Only 15% came on beach vacation only. North American tourists exhibited higher demand for wildlife safaris (Wade, 2001, p. 99). Another survey of tour operators undertaken in 2001 showed that for 83% of the European tour operators and for 80% of the United States ones “wildlife, safari and bush experience” was the main motivation for holidays in Tanzania. The combination of safari and beach vacation was favoured by 17% of European and 12% of the US operators surveyed (Murphy and Henegan, 2002). C. THE GROWTH AND ECONOMIC SIGNIFICANCE OF TOURISM Once tourism was promoted to a priority sector in both the mainland and Zanzibar, its growth has been impressive and it has advanced rapidly to one of the key sectors of both economies with great potential for further growth. Tourist arrivals to the mainland increased nearly four times between 1990 and 2003 (from 153,000 to 576,198). Those to Zanzibar more than doubled between 1990 and 2000 (from 42,141 to 97,165) and then declined to 68,365 in 2003 to partly recover to 92,161 in 2004 (figure 5). The decline was caused by unrest surrounding 2000 elections and political problems in later years which resulted in negative travel advisories against Zanzibar from November 2002 to February 2003.
78 Figure III.5. Tourist arrivals to Tanzania, 1985-2003 Mainland, tourist arrivals, 1985-2003 700000 600000 500000 400000 300000 200000 100000 0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
15
16
17
18
18
19
Zanzibar, tourist arrivals, 1985-2004 120000 100000 80000 60000 40000 20000 0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
19
20
Source: Same as in figure 1.
Even more impressive was the increase of export revenues from tourism: more than eleven times on the mainland between 1990 and 2003, from $65 million to $731 million (figure 6). Time series data on Zanzibar’s revenues do not exist. Estimates put Zanzibar’s tourism export earnings during 2001-2003 at between $63 million and $81 million annually (BOT, 2004, p. xi). Figure III.6. Mainland, tourism export revenues, $ mln, 1985-2003 800 700 600 500 400 300 200 100 0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
79
The rapid growth of tourism must have resulted in its increasing importance in the economy: in GDP, employment, exports, investment, government revenues, etc. Except for exports it is not possible to trace the growth of other tourism indicators, because, as mentioned in the general chapters, tourism is not a national accounts industry, and countries, including Tanzania, do not collect national accounts data on tourism. But some estimates on recent significance of tourism in these activities do exist. Owing to rapid growth, tourism became the largest foreign exchange earner on the mainland by the end of the 1990s, increasing its share in the total exports of goods and services from 25% in 1995 to some 40% in 1998/99 (CHL, 2002, p. 7), based on balance of payments data compiled by the Bank of Tanzania (the data are different from export data compiled by MNRC, although show a similar trend). Although by 2004/05, travel receipts remained the largest and growing export item, their share of exports fell to some 28% because of the very rapid growth of gold exports (hardly existent in the second half of the 1990s)35 and crop exports in this year, both owing to the increased prices of commodities (BOT, 2005, pp. 6-7). In the early 21st century the contribution of tourism to output was estimated at 16% of GDP (up from 7.5% in 1995) (CHL, 2002, p. 7). In 1995, tourism supported directly some 25,000 jobs. The number has increased to 29,000 jobs in 2000 (MIGA, 2002). In Zanzibar, the contribution of tourism to GDP is estimated at 13% (CHL, 2003, p. 73). The same source, using a different methodology than the source given above, estimated foreign exchange revenues from tourism in 2001 at $55 million. Tourism is by far the largest exports item and its estimated net contribution to trade balance was $46 million in 2001 (ibid. p. 76). Furthermore, it is estimated that tourism employs directly some 5,800 persons (out of which 4,400 or 76% in the accommodation sector), while the total employment – direct and indirect – is estimated at 37,200 persons, or 9% of total employment (ibid., p.78). Tourism generated in 2001/02 close to 20% of Government revenues. Both Zanzibar and the mainland plan further rapid expansion of tourism. Zanzibar Vision 2020 includes the following targets for the role of tourism in 2020: the share in GDP – 21%; foreign exchange earnings -- $133 million; employment – 48,000; international tourist arrivals – 180,000 persons. As stated by the Minister for Natural Resources and Tourism in 2003, the mainland’s target is one million arrivals by the year 2010, a double the level of 2000 (Megwi, 2003, p. 1).
35
During 2004/05 gold exports generated $655 million, while travel receipts on the balance of payments basis were $668 million (BOT, 2005, p.7). In 1994, exports of minerals (including gold) were only $30 million (BOT, 2003, p.129).
80
D. THE ROLE AND IMPACT OF FDI IN TOURISM 1. FDI in Tanzania Tanzania’s efforts to increase the role of foreign direct investment (FDI) in its economic development and in tourism date back to 1985 when the country decided to initiate the process of transition from socialist to a market-based economy. But only in the second half of the 1990s when the economic situation improved, the privatization programme took hold, market-oriented reforms reached critical mass and sound foundations for an enabling framework for FDI was put in place, did foreign investors respond. During 1995-2000 Tanzania received $261 million of FDI annually, compared with less than $2 million during 1986-1990 and $47 million during 1991-1995. Inflows further increased to $474 per year during 2001-2004. Inward FDI stock in Tanzania increased from $390 million in 1990 to $3 billion in 2000 and $5.2 billion in 2004 (UNCTAD, 2005, p. 309). Figure III.7. Mainland Tanzania, average annual FDI inflows, $ mln, 1991-1995, 1996-2000 and 2001-2004
500 450 400 350 300 250 200 150 100 50 0 1991-1995
1996-2000
2001-2004
Source: UNCTAD, 2005 and World Investment Reports, various issues.
Much, if not most, of new FDI went into mining, and especially into gold mining, which, opened to FDI in the second half of the 1990s, attracted several large FDI projects. The 1999 census of FDI conducted by the BOT and TIC gives an idea about the sectoral and industry distribution of FDI stock, valued at $2,154 million (BOT, 2001, pp. 19 and 70). Mining accounted for 40% of the stock and manufacturing for 22%. Of the tourism activities, only the share of accommodation is available -- 13%, or $280 million of the stock. Most of this stock, three quarters, consists of equity and almost one fifth are longterm loans by parents to affiliates. 2. The role of foreign enterprises in Tanzania’s tourism Neither the mainland nor Zanzibar collect in a systematic manner the data on foreign vs. domestic enterprises. Information on this role (as well as the impact) has been inferred during the UNCTAD mission from unpublished data, interviews with tourism professionals, government officials and bits and pieces of information from other sources.
81 As mentioned in general chapters, tourism is a collection of many activities and involves enterprises from a number of different industries: hotels and guest houses, air, sea and ground transportation, tour operators and travel agencies, guides, car rentals, retail shops catering to tourists are key among them. Some of these activities are reserved for nationals and therefore there are no foreign firms operating in these activities. Reserved activities on the mainland relevant for tourism include transportation by taxi, retail and wholesale trading services as well as small travel agents and tour operators. In the latter case the threshold for reservation is based on the number of vehicle fleet. In Zanzibar, travel agency and tour operator activities, ground transportation and small hotels are reserved for nationals. Retail trade is not, but so called curio shops selling local craft and gifts for tourist are predominantly locally owned. a. Mainland One of the key preconditions of the growth of tourism is the expansion of the accommodation base. It is also the area of tourism where FDI is relatively large (given the capital intensity of hotel accommodation, especially large luxury hotels) and more common then in other activities, as noted in general chapters. Mainland’s accommodation base rapidly expanded: between 1995 and 2003 by 60% in terms of hotel numbers (to 335 hotels in 2003) and by 56% in terms of the number of beds (to 18,945 beds in 2003, MNRT, 2005, p.21). There are no data on the share of FDI/TNCs in the accommodation base but some general observations can be made, based on UNCTAD interviews. There is no domination of this base by TNCs, but most lodges in national parks are foreign. The share of FDI/TNCs increases for higher class hotels. Lower class hotels are dominated by local firms. Large international chains are visible in Dar Es Salaam, but they are almost absent in tourist areas. Exceptions are Serena’s chain lodges in national parks. Branded international hotels are often linked to parent companies by non-equity agreements and owned by local or international investors from developing countries. For example, Holiday Inn in Dar Es Salaam (DES) is owned by Star Sun chain from South Africa (60% of equity) with the participation of investors from Mauritius. It is operated under franchising agreement with Holiday Inn. The newly renovated (practically newly built on the basis of the old structure, at the cost of $35 million) five star Kilimanjaro Kempinski Hotel in DES is operated under the management contract by Kempinski chain (Switzerland), but 100% owned by an investor from Dubai (Zamani Kempinski Resort in Zanzibar is built under the identical arrangement). Data on accommodation investment projects (both new and expansionary projects) registered with the TIC36 from 2002 through September 2004 confirm a significant but not dominating role of FDI in the expansion of the accommodation base on the mainland. During this period 128 projects (hotels, lodges, resorts and camping projects) worth $200
36
Investors register projects with TIC if they want to receive a Certificate of Incentives. There is however a minimum threshold for a project to qualify for the certificate: $300,000 for foreign investors (including joint ventures) and $100,000 for local investors (UNCTAD, 2002, p.31).
82 million were registered with the TIC.37 32 projects were fully foreign (25%), 49 fully local (38%) and 47 joint ventures (37%). But in terms of the value of investments the share of foreign projects and joint ventures was much higher, respectively, 40% and 41% (leaving the 18% share for local projects). If capital contributions of foreign investors to joint ventures is added to the value of foreign projects, the share of foreign investors in financing the expansion or rehabilitation of the accommodation base on the mainland during 2002-2004 (until September) increases to 64% (tables 1 and 2). Table III.1. Mainland, registered investment projects in accommodation, by ownership, 2002-IX.2004, number and value, $ mln Ownership
Number
Project value, $mln Foreign Local Foreign 32 80.4 Local 49 35.7 Joint venture 47 48.4 35.6 Total 128 128.8 71.3 Source: Tanzania Investment Centre
Total 80.4 35.7 84 200.1
Note: Projects value have been converted from TSch into dollars using end of the year 2004 exchange rate of $1=1,043 TSch. Table III.2. Mainland, registered investment projects in accommodation, by type, 2002-IX.2004, number and value, $ mln Type
Number
Contribution of capital, $ mln Foreign Local Hotels 75 92.5 50.2 Lodges 24 19.3 7.7 Resorts 10 1.6 3.7 Camps 19 15.3 9.8 Total 128 128.7 71.4 Source: Tanzania Investment Centre
Total 142.7 27 5.4 25.1 200.2
As of 30 June 2005, there were 179 tour operators licensed on the mainland, most of them in Arusha (128), close to the Northern Circuit national parks and 43 travel agencies (most of them, 36, in DES).38 There is no doubt that the great majority of them are locally owned, although their share in the industry business is not as high, because most of them are smaller than foreign firms. One industry source gave the following estimates: 10% of travel agencies are foreign-owned but their share of business is 30%. For foreign tour operators, these estimated shares were, respectively, 30% and 40%.
37
Data on the value of the projects are given in Tanzanian Schillings. They were converted into dollars using end of the year 2004 exchange rate: $1=1,043 TSch. 38 Source: Ministry of Natural Resources and Tourism, Tourist Agents Licensing Authority, Licensed Tourist Agents 2005.
83 Out of 75 projects undertaken by tour operators during 2002-IX.2004, registered with TIC, valued at $59 millions, 18 were foreign, 26 local and 31 joint ventures. But in terms of value foreign investors contributed 60% of the capital to foreign and joint venture projects. The pattern was similar in the case of 20 restaurant and fast food projects ($13,4 million), where foreign investors accounted for 73% of the value of investments (tables 3 and 4). Table III.3. Mainland, registered investment projects in tour operations, by ownership, 2002-IX.2004, number and value, $ mln Ownership
Number
Foreign 18 Local 26 Joint venture 31 Total 75 Source: Tanzania Investment Centre
Project value, $mln Foreign Local 22.5 16.1 12.9 7.5 35.6 23.6
Total 22.5 16.1 20.4 59
Note: Projects value have been converted from TSch into dollars using end of the year 2004 exchange rate of $1=1,043 TSch. Table III.4. Mainland, registered investment projects in restaurants, by ownership, 2002-IX.2004, number and value, $ mln Ownership
Number
Foreign 8 Local 6 Joint venture 6 Total 20 Source: Tanzania Investment Centre
Project value, $mln Foreign Local 7.4 1.9 2.4 1.7 9.9 3.6
Total 7.4 1.9 4.1 13.4
Note: Projects value have been converted from TSch into dollars using end of the year 2004 exchange rate of $1=1,043 TSch.
Both regional Tanzanian airlines, Air Tanzania (ATC) and Precision Air are now joint ventures with foreign investors. ATC, established in 1977, was not profitable most of the time, except in 1983 (due to the sale of two old aircraft) and in the early and mid-1990s. But profits were too small to finance the expansion programme (MIGA, 2002, p. 98). Consequently, the expansion strategy was revised and operations streamlined. Performance has improved in terms of profitability. Now ATC is a joint venture between the Government (51%) and South African Airlines. Precision Air, established in 1993 by a Tanzanian investor, has now 49% equity stake by Kenya Airways, one of the most successful African airlines. Association with Kenya Airways (KA) is a strategic
84 investment, giving Precision Air, apart from the infusion of fresh capital, access to KA’s network of regional connections. b. Zanzibar As Zanzibar has few resources other than tourism assets, tourism plays much greater role in investment in general and in FDI than on the mainland. As of 30 June 2005, out of $188 million of investment projects, based on actual capital,39 both local and foreign, facilitated and approved by Zanzibar Investment Promotion Agency (ZIPA), tourismrelated projects accounted for 55% of the actual invested capital (52 % was in the accommodation sector). The country of origin data are available only for the numbers of projects – 247 in total in tourism. 87 were domestic projects and the balance foreign: 109 by investors from developed countries, 48 from developing countries and 3 from transition economies. The largest home countries for tourism investment in Zanzibar by the number of projects are: Italy (32), United Kingdom (31), Germany and South Africa (12 projects each), Kenya (10), the Netherlands and Oman (9 each). The accommodation sector dominates tourism investment in both the number of projects and value. According to the Zanzibar Commission for tourism, by 2005, there were 228 hotels and guest houses on Zanzibar islands, with 4483 rooms and 9169 beds (some of these hotels are still under construction). Smaller units – both hotels and guesthouses – are local, while the largest ones with high standard are mainly foreign. In common opinion, foreign investors have been instrumental in raising the standards of accommodation in Zanzibar and thus contributing to attracting a growing contingent of high-income tourists. According to the Zanzibar Association of Tourist Investors “ten years back there was no quality accommodation in Zanzibar” (source: UNCTAD interview). By 2005, there were 10 five star and 12 four star hotels in Zanzibar, based on the indicative classification of the Tourism Commission.40 They accounted for some 40% of room and bed capacity. Most of them are foreign. All 159 tour operation firms (in 2005) are locally-owned and -operated, as this is a reserved activity. But most out of 41 licensed diving companies are foreign. 3. The operations and impact of foreign hotels As already noted, foreign investors have played significant roles in increasing the accommodation capacity and improving standards of accommodation on both the mainland and in Zanzibar. Without FDI, the receiving capacity of international tourists would much more limited than it is today. To learn more about the activities and the 39
The value of proposed capital for these projects was much higher -- $818 million. There is no official classification of hotel standards either on the mainland or in Zanzibar. According to high class hotels, this creates confusion among tourists and leads to overcharging in lower class hotels. Moreover, it is unlikely that all high class hotels would receive the same rating under the international system of classification. 40
85 impact of these hotels, UNCTAD conducted a survey of seven high-class foreign hotels: two in Dar Es Salaam, two in tourist areas on the mainland and three in Zanzibar. a. Profile of surveyed hotels The survey first, exhibited various types of foreign investors. As already noted, even if they carry international branded names, the ownership can often be local (as was the case with a hotel in a national park) or a foreign investor can originate from a developing country. Often foreign investor can be an individual, a family, or a small company from a developing or a developed country (this was also the case with a number of hotels surveyed in Kenya). In two cases, foreign investors rehabilitated the existing structures – one a historical heritage building and another, a former run down state-owned hotel with long tradition, closed for several years for the lack of interest by local investors. Managers of both hotels asserted that it would be much cheaper to build new hotels from scratch. All hotels had relatively high occupancy rates, between 60% and 80% of bed capacity, but not all of them were profitable, because they started operations relatively recently or were new. The newest one, only beginning operations expected first profits after 10 years. All cater mostly to international tourists, although some rely partly on local business and government clientele, organizing, among others, conferences. Some noted an increasing inflow of regional tourists, notably from Kenya. The average length of stay differed greatly: for town and transit hotels for safari tourists, it was 1-2.5, days and for beach hotels, it was longer, 5-7 days. Bookings in holiday hotels are made mainly via foreign tour operators (in some also by local agents) and in town hotels by businesses or government agencies. All hotels have very few bookings via internet. b. Linkages As regards sourcing of goods and services, determining the level of linkages, there are distinct differences between the mainland and Zanzibar, with the level of linkages higher on the mainland, which has much more diversified economy than that in Zanzibar. On the mainland, 60%-70% of food and most non-alcoholic beverages comes from local sources, while spirits are mostly imported. Cleaning chemicals, cosmetics, etc. are imported, as there is no production in Tanzania. During construction and refurbishing, non-skilled and semi-skilled workers were local (some three quarters of the total), while skilled workers (architects, engineers and interior decorators) were foreigners. Cement was purchased locally. Equipment (furniture, TV sets, refrigerators and small items like plates table clothes, etc) was almost all imported, partly from other developing countries (South Africa, Vietnam, Thailand). Two hotels are part of international chains. The chains do not have a central procurement policy, but have purchasing units. One chain’s unit is in Europe and another one’s in Tanzania and, a regional one, in Kenya. According to the hotel associated with the former, whatever they get via this unit, it is cheaper than from other known sources. As regards the latter,
86 “whatever they [purchasing unit in Tanzania] can obtain locally, they buy locally. What they cannot, it goes via Nairobi”. Zanzibar hardly has any manufacturing, so whatever hotels, need has to be brought from the mainland or imported from abroad. While in one hotel most imports of equipment were from Europe, in two other they came mostly from developing countries – South Africa, India, China, the Republic of Korea and Kenya. But a number of items were sourced locally. During the construction phase, in two hotels all construction workers were local while in one they were from the mainland. Skilled workers were from Europe or developing countries (Bahrain and Kuwait). In two hotels wood for construction came from Zanzibar and in one furniture was made in Zanzibar and partly imported from India. Some food and beverage items are also purchased locally. They include seafood, fruits and vegetables (but one hotel brings them from the mainland) and bottled water. c. Employment and skills Six surveyed hotels employ some 1,180 full time persons (out of which some 88, or 7.4% of the total, in high-skill positions), 114 in the smallest hotel in a national park and 375 in the largest town hotel. The hotels employ some 43 expatriates,41 4.2 % of the total employment, but 50% of high-skill employees. All general managers are expatriates, three of them Kenyans, graduates from the Utalli College in Nairobi. A number of other expatriates come often from other developing countries: Kenya, India or South Africa. All general managers were unanimous in that they would like to reduce expatriate employment because it is very costly42 and that the only reason for employing expatriates is the lack of skilled local managers. All surveyed hotels claim that they pay higher salaries: “better than national average or industry average”; “a bit better than average”; “above the Government requirement, more than on the mainland’s coast”; “15-20% higher than industry average”; “highest in town, 20% to 50%”. Chain hotels seem to have more leeway in salary policy. In addition to higher salaries, all hotels provide extensive benefits to their staff. These commonly include free on-duty meals, free transportation to and from work, uniforms, housing allowance (15% of the salary), free medical service on premises (including sometimes for family members).Two hotels in Zanzibar located in rural areas on the coast have own accommodation for staff. Additional benefits in some hotels are: covering hospital expenses for staff and family members and loans in the case of emergencies. One hotel estimates additional benefits at 20% of salaries. Another one pays its employees $100150 “service allowance” per month. All hotels provide intensive training to staff at all levels. To all of them training is a must, given the relatively low level of local skills. Forms of training include on-the-job training, courses with trainers brought in from outside (often from the Utali College) and training in other units of the chain in the case of chain hotels. In a newly opened hotel intensive 41
One town hotel with three restaurants, two of them international, employs in addition 7 expatriate cooks. In addition to high salaries and benefits, a work permit and visa per expatriate cost $700 in Zanzibar. A GM license on the mainland costs $3,000. 42
87 training started six months before the opening. Two hotels put the numbers on their training expenses: 2-3% of annual sales and $60,000 last year. d. Environment Two out of three hotels surveyed in Zanzibar are members of Green Globe 21 and one has an ISO 14000 certificate. At least two non-member hotels said that they follow sound environmental practices and they did not see the need for the membership or the certificate. Environmental practices of hotels located in tourist areas include: water treatment plants, daily garbage pick-up by a private company, the use of biodegradable chemicals and the recycling of liquid waste. e. Local initiatives All holiday hotels surrounded by villages or located in small towns undertake a variety of initiatives for local communities. They take a variety of forms: support to schools (one hotel built a school and a mosque) and children, water pipes to villages, donations to local charities and projects (e.g., gender projects, a football team, or a sport ground for children) or road repairing. Hotels in Zanzibar built and equipped a police station. Initiatives of town hotels take a form of support to national or city projects. f. Negotiations and contracts Four hotels revealed some terms of negotiations and contracts with tour operators and three terms of agreements with international chains. Contracts with tour operators are signed more than a year before the season. Hotels reserve a certain number of rooms for tour operators. Risks of not filling the rooms are handled through so called release dates. If the tour operator does not confirm contracted arrivals by a certain date, the hotel has the right to sell the reserved rooms. Typically the release date is 30 days in high season and 7 days in low season. Modalities of negotiations differ from hotel to hotel:
One independent hotel dealing with large European tour operators has an agent in the United Kingdom, who negotiates on its behalf. According to the GM of the hotel, tour operators’ and agent’s margins can take up to 50% of the price of a hotel room. According to another hotel, part of the chain, tour operators pass tourists on to local ground handlers in Dar Es Salaam. Contracts with tour operators are concluded by a national chain’s office in Tanzania or a regional office in Kenya. Out of $100 of the room price, some $20 go to tour operators in tourists’ home countries and $10 to Tanzanian intermediaries. Thus $65 reach the hotel. One independent hotel dealing with large European tour operators estimates tour operators’ mark ups at 20-30% cent of the room’s reception price,
88 depending on the volume of bookings. Another one, part of the chain, estimates the mark ups at 20%, adding that large tour operators are responsible, pay better and on time. Pressure on rates comes from competitors more than from tour operators. Management contracts have the following terms:
One, concluded for 20 years has both renegotiation and termination clauses (both for a reason). The general manager represents the chain rather than the investor. Fee formula is mixed. Part is a percentage of profits and part is fixed as a percentage of sales (remuneration for management and marketing services).
The duration of another contract is ten years. The contract does not have a renegotiation clause. There is a 0.5-1 year termination clause, but a reason (not specified) must be given. The contract includes a provision for staff training. Fee formula is mixed: 2% of sales and 8% of net profits. Fee is payable in US dollars.
g. Problems When asked about biggest problems, one Zanzibar hotel responded: “Getting established was very complicated. Operations are easier”. All hotels in Zanzibar underlined an urgent need to improve infrastructure: airstrip is run down causing several airlines to cancel connections with Zanzibar on big aircraft; and there are no tarred roads to many resorts of international standing. There is a huge skill shortage, also for simple jobs and it is very difficult to bring skilled workers from the mainland. Staff is often unreliable. Any technical failure produces a big problems. Spare parts have to be brought from the mainland and often from South Africa. Power supply is unreliable and all hotels have their own generators. A number of hotels are surrounded by illegal shanty towns, causing security problems for tourists and harassment by illegal beach vendors. At the same time all hotels stressed that tourists’ demand for Zanzibar is high and if these problems are dealt with, Zanzibar has great potential for further tourism growth. A tourist hotel on the mainland reported the following problems: unstable power supply (operating own generator is expensive), the necessity to service technical problems (e.g., freezers’ failures) from Nairobi, the lack of skilled manpower and the lack of official classification of hotel standards. E. FDI POLICY IN TOURISM FDI policy is part of a general FDI policy. As mentioned earlier, not only tourism but also FDI are not a union matter. Both the mainland and Zanzibar have own legislations governing investment and separate investment promotion agencies, TIC and ZIPA. But their FDI policies are largely similar. They rest on four pillars: openness to, and
89 encouragement of, FDI; reservation of some tourism activities to local firms; incentives to large projects; and investment promotion. With the shift towards the market economy Tanzania has liberalized its FDI policy and now has an open investment environment with adequate standards of investor treatment and protection (UNCTAD, 2002, p. 29). Within the liberal FDI regime, some activities, as mentioned earlier, are reserved for national firms. On the mainland, car hire and travel agency licenses can be issued only to Tanzanian nationals. In addition travel agencies must employ at least two Tanzanian nationals holding certificates in tourism (ibid., p. 47). In Zanzibar, reserved activities include travel agencies, tour operators, ground transportation and small accommodation. The entry requirement for foreign hotels is $4 million of investment. On the basis of Tanzania Investment Act 1997, the mainland treats foreign investors on a par with domestic investors. The provisions of the Act apply to both local and foreign investors without distinction. The important qualification is, however, that the benefits and protection provided by the Act require different minimum levels of investment for foreign investors ($300,000) and local investors ($100,000). On the completion of the registration process with TIC, tourism investors meeting minimum requirements receive the Certificate of Incentives, which gives them access to certain rights (rather than privileges) such as investment guarantees, access to land, the right to transfer funds abroad and employ up to five expatriates (more than five require justification). Incentives include tax relief, zero per cent duty and VAT on imported capital goods and materials (e.g., building materials and cutlery in the case of hotels or photographic equipment and vehicles in the case of tour operators) for any investment, including refurbishments. In addition, there is a tax holiday until the recovery of capital, which can be written off at the rates of 50% in the first year of operations, and then 25% in the second and third years. In Zanzibar, with the New Investment Policy enacted in 2001, investment policy has been streamlined. It is now the responsibility of ZIPA instead of three institutions. Investment incentives include duty and VAT free imports during the construction or refurbishing of hotels. During operations -- a tax holiday on corporate income tax up to 3-5 years. Losses can be carried on indefinitely. ZIPA’s investment promotion activities include the dissemination of information about investment opportunities through internet, embassies and the publication of brochures, promotional missions abroad as well as after care services to investors. Similar promotional activities are conducted by TIC, including after care services on request.
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