ECONOMIC ANALYSIS IN TOURISM INDUSTRY Dr Fred KU

ECONOMIC ANALYSIS IN TOURISM INDUSTRY Dr. Fred KU Department of Decision Sciences & Managerial Economics CUHK Business School June 2012

The macro side: CONTRIBUTIONS OF TOURISM TO THE ECONOMY

TOURISM IN HONG KONG Over the past three decades, Hong Kong has attracted numerous international tourists. World Economic Forum report (2007) HK ranked sixth in the world in terms of competitiveness as an international destination HK has the most attractive travel and tourism environment in Asia. 3

TOURISM IN HONG KONG International tourist arrivals in Hong Kong 6. 79 million in 1991 37. 77 million in 2011 an average annual growth rate of about 9%. By the end of 2011, the average occupancy rate of hotels was 89%, and the average length of overnight stays was 3. 6 nights. Total tourist expenditures accounted for around 10. 5% of Hong Kong’s gross domestic product (GDP) in 2008 (Hong Kong Tourism Board, 2008). 4

TOURISM IN HONG KONG The Individual Visit Scheme, which makes it easier for tourists from mainland China to visit Hong Kong, began in Jul 2003. According to the Hong Kong Tourism Board: These tourists accounted for more than 50% of those visiting in 2005, followed by Taiwan (9. 1%), Japan (5. 2%) and the U. S. (4. 9%). The mainland’s market share increased to around 67% in 2011. Mainland visitor accounted for more than 56% of visitor total spending in 2008. 5

TOURISM IN HONG KONG Tourism receipts grow faster than GDP Tourism 1974 1984 1994 2008 Annual Growth Tourism receipts (billion HK$) 2. 8 13. 8 64. 3 92. 0 159 13. . 5% GDP nominal (billion HK$) 46. 9 257. 5 1, 029. 8 1, 282. 0 1677 11. 8% Receipts / GDP 6. 0% 5. 4% 6. 2% 7. 2% 9. 5% Visitor arrivals (million) 1. 3 3. 3 9. 3 21. 8 29. 5 10. 2% Population (million) 4. 3 5. 4 6. 1 7. 0 7 1. 5% Visitor/population 30. 2 61. 1 152. 5 311. 4 421. 43 % % % Source: Hong Kong tourism board and the Hong Kong SAR Government's Census 6

TOURISM IN HONG KONG Price Level LRAS SRAS AD Real GDP 7

CONTRIBUTIONS OF TOURISM Inbound tourism has substantial direct effects on economic growth. Findings by Jin 2011: Increased tourism has raised the growth rate of the domestic economy in Hong Kong over short time horizons. Tourism growth leads to: GDP Capital (including tech & management skills) Employment 8

CONTRIBUTIONS OF TOURISM Data shows that tourism and capital are ‘complements in production’ Tourism and labor are ‘complements in production’ as well. Source: Jin 2011 9

The micro side: DEMAND IN TOURISM

THE TOURISM PRODUCT “The tourism “product” is not the tourist destination, but it is about experiences of that place and what happens there. ” Composite product involving transport, accommodation, catering, natural recourse, entertainment, and others. In short: satisfying trips. 12

ECONOMIC DETERMINANTS Economic Determinants of Demand: Price Income How to quantify the impacts of price and income on the demand for tourism? 13

ELASTICITY Basic idea: Elasticity measures how much one variable responds to changes in another variable. Price elasticity of demand measures how much Qd responds to a change in P. E. g. how much quantity demanded for your tutoring service will fall if you raise your price. 14

PRICE ELASTICITY OF DEMAND Loosely speaking, it measures the price-sensitivity of buyers’ demand. 15

PRICE ELASTICITY OF DEMAND Product Estimated demand elasticity DVDs (Amazon) -3. 10 Automobiles -1. 95 Coca-cola -1. 22 Restaurant Meals -0. 67 Beer -0. 23 Cigarettes -0. 25 Source: Mankiw 2012 16

PRICE ELASTICITY IN TOURISM A study conducted by Deloitte & Touche (1995) estimated that price elasticity in tourism in UK is as high as -2. 5. This estimate appears high compared with the study by Hiemstra and Ismail in the USA which calculated an average elasticity of 0. 44. Why such big difference? 17

PRICE ELASTICITY IN TOURISM One possible reason: the UK is more dependent on individual / family tourism than corporate travelers. The logic is similar to ‘luxury vs. necessity’. 18

SOME PRICE ELASTICITY IN TOURISM - HK Originating Country Price Elasticity Australia -0. 56 Japan -0. 50 Korea -0. 41 Singapore -0. 35 China (0. 37) U. K. (0. 07) U. S. -0. 11 Mean -0. 10 More elastic Less elastic Source: Song, Kim and Yang 2010 19

INCOME ELASTICITY Income elasticity of demand: measures the response of Qd to a change in consumer income § An increase in income causes an increase in demand for a normal good. § Hence, for normal goods, income elasticity > 0. § For inferior goods, income elasticity < 0. 20

SOME ESTIMATED INCOME ELASTICITIES Goods or Services Income Elasticity Automobiles 2. 46 Furniture 1. 48 Restaurant meals 1. 40 Water 1. 02 Gasoline and oil 0. 48 Electricity 0. 20 Public Transport -0. 36 Source: Mankiw 2012 21

INCOME ELASTICITY IN TOURISM Witt, Brooke, and Buckley (1995) For Americans, most foreign holidays, except travel to Canada and Italy, are luxuries with high income elasticities of demand. Australian Tourism Marketing Expenditure Elasticity Estimates (2006) Most income elasticities of international tourism to Australia are high (>1). International tourism is a luxury item. Highly influenced by the tourist origin country’s economic growth cyclical pattern. 22

INCOME ELASTICITY IN TOURISM – HK Originating Country Income Elasticity China 1. 89 Japan 1. 35 Korea 1. 35 U. K. 2. 08 U. S. 1. 19 Australia 1. 35 Taiwan 0. 62 Singapore 1. 01 Philippines 0. 48 Mean 1. 32 Less elastic Source: Song, Kim and Yang 2010 23

DEMAND ELASTICITIES IN INTERNATIONAL TOURISM Income Price Exchang Transport Marketin e Rates Costs g 　 　 　 Elasticities vary by countries. Region OF ORIGIN 　 　 N. Europe S. Europe/Mediterranean 2. 06 -0. 37 -1. 57 -0. 86 0. 31 1. 67 -0. 54 -1. 41 -1. 3 0. 23 N. America 1. 74 -0. 58 -1. 51 -1. 52 0. 59 Oceania 2. 55 -0. 73 - -1. 46 0. 2 Latin America 0. 28 -0. 84 - -1. 26 0. 61 Asia(developing) - Asia(developed) Middle East 4. 45 - -0. 74 - -0. 51 - -0. 62 - 0. 28 - International travel is a luxury (for most countries). Generally sensitive to transport cost and currency exchange rates, but not very sensitive to destination prices OF DESTINATION N. Europe S. Europe/Mediterranean 1. 79 -1. 73 -0. 44 -1. 54 - 2. 34 -0. 64 -1. 34 0. 11 N. America 2. 06 -1. 42 -1. 54 -1. 89 - Oceania 3. 35 -0. 74 - -0. 98 0. 23 Latin America 1. 76 -0. 58 - -1. 28 0. 67 Asia(developing) 4. 1 -0. 56 Asia(developed) 1. 17 -1. 18 - Middle East 2. 47 -0. 24 - 0. 27 0. 39 Not very responsive to promotional or marketing expenditures of tourist offices -0. 44 -1. 61 - 0. 16 Source: Crouch 1995 24

The micro side: EXTERNALITIES IN TOURISM

EXTERNALITIES Externalities – the uncompensated impact of one person’s actions on the well-being of a bystander. Classic examples: Pollution Secondhand smoking Education Knowledge spillover 26

POSITIVE EXTERNALITIES IN TOURISM More jobs in service sector More jobs in infrastructure Environmental benefits Countries can use tourism as a reason to conserve the environment. E. g. , national parks, heritage sites 27

NEGATIVE EXTERNALITIES IN TOURISM Worsened inequalities in the country Usually only those who speak foreign languages and live near tourist sites can benefit Environmental negatives Air travel producing more greenhouse gases Vehicle travel impacting wildlife and the ecosystem Higher local prices Case of HK? Crime! 28

NEGATIVE EXTERNALITIES - CRIME Empirical research: Campaniello (2011): 1990 Football World Cup in Italy led to a significant increase in property crimes Biagi and Detotto (2012): Positive relationship between tourism and pick-pocketing at cities level, Why does crime increase with the presence of visitors? Tourists carry valuable objects The attitude of holidaymakers is more imprudent Tourists are ‘safer’ target – rarely report crime to police 29

The micro side: TOURISM TAX

TOURISM TAX- TAX ON ‘OUTSIDERS’? Tourist taxes have become an important source of revenue for many tourist destinations. Taxes on accommodation are upheld by their proponents as a way of shifting the local tax burden on to non-residents. However, the travel industry claims that these levies do significant damage to their level of competitiveness. 31

IMPACTS OF ROOM TAXES The average rate of total room taxes of the US is 9. 8% The room taxes result in a 5% drop in room rented. The impacts are more than proportionately larger for the higher rate properties, as shown by the higher elasticity. 32

THE SHORT-TERM PRICE EFFECT OF A TOURIST TAX What’s the impact of a tourist tax in Spain? Consider tourists from four nationalities (United Kingdom, Germany, France and the Netherlands). 1€ (euro) tax on tourism will lead to a drop in the demand for tourism for the four nationalities of 117, 660 tourists. a figure that represents 1. 44% of the year 2000’s tourist arrivals for the said four nationalities in Spain. 33

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