Foreign tourism investment

Pergamon

Annals cffTourism Research, Vol. 21, No. 3, pp. 512-537, 1994 Copyright © 1994 Elsevier Science Ltd Printed in the USA. All rights reserved 0160-7383/94 $6.00 + .00

FOREIGN T O U R I S M I N V E S T M E N T Motivation and Impact Larry D w y e r University of Western Sydney, Australia Peter Forsyth Australian National University, Australia Abstract: Foreign investment has played an important role in the development of tourism worldwide, but analysis of its impacts has been neglected. This paper provides an overview of foreign investment in Australian tourism focusing on its levels and patterns. The various motives for foreign investment in tourism can be explained using the widely accepted Eclectic Paradigm of international production. The paper proceeds to clarify some of the impacts. After distinguishing between illusory and real impacts in Australia, the paper concludes with a discussion of the likely benefits and costs of additional foreign investment in tourism for both developed and developing nations. Keywords: foreign investment, benefit-cost analysis, international tourism, transnational corporations.

R~sum~: L'investissement ~tranger dans le tourisme: motivation et impact. L'investissement 6tranger a jou6 un r61e important dans le d6veloppement du tourisme dans le monde entier, mais on a n6glig6 la question des impacts. On pr6sente une vue d'ensemble de l'investissement 6tranger dans le tourisme australien, avec une attention particuli~re ~ ses niveaux et sch6mas habituels. Les diverses motivations de l'investissement 6tranger dans le tourisme sont expliqufes en utilisant le Paradigme Eclectique de la production internationale. On passe ensuite h u n 6claircissement de la question des impacts. Ayant distingu6 les impacts r6els des impacts illusoires en Australie, l'article se termine en discutant les cofits et b6n6fices probables de plus d'investissements fitrangers dams le tourisme pour les pays d6velopp6s ou en voie de d6veloppement. Mots-cl~s: investissement ~tranger, analyse des cofits et b6n6fices, tourisme international, socidt6s commerciales transnationales.

INTRODUCTION Foreign investment has played an important role in Australia's economic development. It remains crucially important at the present time. In the face of failure to reduce Australia's current account deficit, which fuels the foreign debt, the deficit must be financed by net capital inflow, either increased overseas borrowings or direct foreign investment (i.e., the acquisition by a firm of physical assets in the form of plant and equipment in another country). Although the activities of Multinational Corporations and the effects on "host countries" that Larry Dwyer is Head of the Division of Commerce, University of Western Sydney (Campbelltown NSW 2560, Australia). His current research interests include industry and innovation economics. Peter Forsyth is Senior Lecturer in Economics, Department of Economics, Australian National University. His current research interests include aviation economics and microeconomic reform. Both authors are standing consultants to the Australian government on tourism issues. 512

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receive inflows of capital and in "home countries" from which these flows are sourced have received considerable attention in the literature (Arndt 1977; Brash 1966; Caves 1982; Dunning 1988; G r a h a m and K r u g m a n 1989; MacDougall 1960; Parry 1983), there is still dispute regarding the nature and significance of the various impacts and the implications for policy. One Australian industry that has been the object of increasing amounts of foreign investment in recent years is tourism. Curiously, the impact of foreign investment in Australian tourism has only received detailed attention over the last two years (Dwyer, Findlay and Forsyth 1990; Forsyth and Dwyer 1991). These studies have served two useful purposes. In the first place, they have served to highlight certain popular misconceptions about the implications of foreign investment in tourism. In the second place, they have provided a framework of analysis capable of distinguishing between the real and illusory effects of foreign investment in tourism, which is capable in application of analyzing the relevant costs and benefits to Australia. The aim of this paper is manifold. One, it clarifies certain impacts of foreign investment in tourism and evaluates them in general terms for a developed economy such as Australia. Two, it provides an overview of foreign investment in Australian tourism focusing on the extent and patterns of such investment. Three, it sets down some motivations for foreign investment generally and in tourism in particular. Four, it discusses several impacts of foreign investment in tourism as compared to domestic investment. Five, it discusses certain problems relating to assessment of the relevant costs and benefits of foreign investment to the nation. Benefit-cost analysis can be used to evaluate specific tourism projects or simply as a framework of systematizing and comparing the different effects of foreign investment in tourism under different assumptions.

F O R E I G N T O U R I S M I N V E S T M E N T IN A U S T R A L I A There are several sources of data on foreign investment in Australia, generally, and in tourism, specifically. Official sources include Australian Bureau of Statistics, quarterly series on Foreign Investment in Australia; Australian Bureau of Statistics, irregular series on Foreign Ownership and Control in selected industries; and the Annual Reports of the Foreign Investment Review board. Notwithstanding the variety of data sources, there are major problems of availability and comparability of data, due to various classification problems involving the tourism industry, the irregular nature of different surveys, and the different purposes they are designed to serve. Since there is little information on actual investment in tourism, the extent and patterns of foreign investment are best examined using Foreign Investment Review Board data on expected investment. Foreign Investment Review Board statistics record the dollar amounts associated with expected expenditures on proposed acquisitions and new businesses submitted by foreign interests for examination under foreign investment policy, including known future development expen-

514

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INVESTMENT

T a b l e 1. F o r e i g n E x p e c t e d I n v e s t m e n t A s s o c i a t e d w i t h P r o p o s a l s b y I n d u s t r y ( 1 9 8 5 - 8 6 to 1 9 9 0 - 9 1 ; v a l u e o f e x p e c t e d i n v e s t m e n t i n A U S $ m i l l i o n ) Industry Sector Real Estate Tourism Finance and insurance Mineral Exp. and Develop. Sere. (excl. tourism) Manufacture Resource Processing Agriculture, Forestry, Fishing Total

Sector

1985-86

%

1986-87

%

1987-88

%

1988-89

%

1989-90

%

1990-91

%

1,927 440 2,776

20 4 28

5,193 1,553 1,125

28 8 6

9,713 2,091 1,862

39 8 7

14,766 4,997 1,216

46 16 4

10,490 3,892 409

44 16 2

5,650 1,860 740

28 9 4

566 2,186 1,570 263

6 22 16 3

2,436 4,085 3,877 3

13 22 21 --

2,619 2,972 5,222 133

11 12 21 1

2,157 2,645 4,354 1,625

7 8 14 5

2,700 2,648 3,085 577

11 11 13 2

5,440 2,270 3,130 870

27 11 15 4

87 9,818

1

192 18,464

2

1

290 20,240

2

237 24,849

1

263 32,023

--

306 24,105

Source: Calculated from data in Foreign Investment Review Board Reports 1985-86 to 1990-91. Tourism proposals are defined by reference to Australian Standards Industrial Classification Numbers 9138 (Entertainment; not elsewhere counted), 9141 (Parks and Zoological Gardens), 9144 (Sport and Recreation; not elsewhere counted), 9232 (Hotels, bars, etc.), 9233 (Accommodation), 9241 (Licensed Bowling Clubs), 9242 (Licensed Gold Clubs).

ditures. Table 1 shows foreign expected investment by industry sector for the years 1985-1986 to 1990-1991. The aggregate level of new tourism investment projects approved over the period 1985-1986 to 1990-1991 was $14.8 billion. Over the past two years, foreign-expected investment in tourism has comprised 16% of total foreign-expected investment in Australian industry, second only to real estate. In 1990-1991, the percentage fell to 9% rendering tourism the fifth most preferred sector for foreign investment proposals. Foreign-expected investment in tourism has declined each year since reaching a peak in 1988-1989. The major foreign investors in Australian tourism are indicated in Table 2. The largest foreign investor nation in Australian tourism is Japan. In 1989-1990 Japanese expected investment in tourism was around ten times as great as that of New Zealand (the next highest Expected Investment i n A u s t r a l i a n T o u r i s m I n d u s t r y b y Country of Investor 1986-87 to 1990-91 (value of expected tourism investment in AUS$miUion)

T a b l e 2.

Country ofInvestor Japan Asean Hong Kong EC (inc. UK) NZ World Other Australia Total

1986-87

%

1987-88

%

1988-89

%

1989-90

%

1990-91

%

1,153 12

74 -

27 69 122 166 1,553

2 4 8 11

1,385 40 0 81 81 144 309 2,091

66 2 -4 4 7 15

3,516 390 392 84 84 286 270 4,997

70 8 8 2 2 6 5

2,659 162 131 54 265 163 458 3,892

68 4 3 1 7 5 12

1,242 76 139 3 188 211 1 1,860

67 4 7 2 10 10 --

Source: Calculated from data in Foreign Investment Review Board Reports 1987-88 and 1990-91. The expenditure identified as originating from Australia represents the contributions of Australian controlled companies and Australian residents to the total expenditure associated with foreign proposals in which they are in partnership with foreign interests but does not generally include the contributions attributable to minority Australian shareholders in companies with majority or controlling foreign shareholders. The Association of South East Asian Nations (ASEAN) comprises Malaysia, Indonesia, Singapore, Thailand, Philippines and Brunei.

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foreign investor nation) and six times as great in 1990-1991. While Japanese expected investment in all sectors of Australian industry represented 25% of the total expected foreign investment in the same period, Japanese investment in tourism represented 67 % of total expected investment from all countries in the tourism sector. It must be emphasized that expected levels of investment generally exceed actual levels by a substantial margin. To assess the size of this gap for tourism, the Foreign Investment Review Board, in 1990, surveyed the largest of the tourism proposals approved in 1986-1987 to ascertain how much of the expected investment had been realized. It appears that around 70% of the expected tourism investment for 1986-1987 will eventually be realized (FIRB 1991:16). Despite some recent studies (DASETT and Andersen 1991 ; Queensland Treasury 1991), the level of foreign ownership in Australian tourism remains uncertain. The proportion of foreign ownership of the stock of accommodation is presently 15.5 %, concentrated in first class hotels and resorts. There is scant information regarding levels of foreign ownership in other tourism sectors such as attractions, coach and boat operations, duty-free stores, and restaurants. While Australianowned firms account for less than 40 % of sales in the duty-free sector, the extent of foreign ownership in the other sectors appears to be low (Forsyth and Dwyer 1991b). Given the projected increases in visitor numbers to Australia, further investment in tourism facilities is warranted. The supply of the facilities will need to increase both to accommodate the increased visitor numbers and to provide various types of services such as attractions, restaurants, coach and boat services, shops, and so on. Foreign investment is likely to play a continuing role in the provision of tourism infrastructure in Australia, although precisely to what extent remains uncertain. The likely impacts of such investment will need to be identified and assessed. M O T I V A T I O N S FOR FOREIGN T O U R I S M I N V E S T M E N T In analyzing the motivation for, and impacts of, foreign investment, most attention has been given to the product market side rather than the financial side. Thus, the ways in which foreign investment changes the product sold, the technology used, and its marketing has been the primary focus (Caves 1982). More recently, some attention has been given to the financial side (Graham and Krugman 1989); foreign investment may be motivated by greater availability of equity capital in one country than another, and the contribution of foreign investment may include covering the cost of capital to the host country. The capital market side is potentially quite relevant to foreign investment in various industries, including tourism. Even in an environment of a free world capital market, there are different types of capital and these will not all be in perfectly elastic supply in a country. A country, or its investors, may be able to obtain loan finance for investment in its tourism industry quite readily. However, this would involve it bearing all the risks of the investments (i.e., holding all the equity). The willingness of investors to commit equity funds to projects will depend

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on the nature and size of the country's capital market, what other projects are going ahead, and investors attitudes to risk. In short, a country will have limited equity funds available, and investment might be attracted into tourism only if it yields a high rate of return. Overseas investors may be prepared to accept a lower rate of return for the class of investment, and thus allowing foreign investment will result in increased overall investment. In fact, there are two related inputs that may come with tourism i n v e s t m e n t - e q u i t y capital and entrepreneurship. Equity capital involves risk taking and provision of funds, and foreign shareholders could provide this to domestic companies. Direct foreign investment involves m o r e - - i t involves the foreign investor being the principal equity holder in the project, and it implies the power to manage the project, or, at least, select the managers or operators of the project. Both of these inputs will be in limited supply in any country, and it may gain by importing them, through allowing direct foreign investment. This is true of developed countries, but it is especially true of less-developed and Eastern European countries where equity capital may be scarce and entrepreneurial ability at a premium. The various motives for foreign investment in tourism can be explained in large part using a widely accepted paradigm of international production: for example, the eclectic paradigm (Dunning 1988; Itaki 1991). The framework seems general enough to include financial considerations. The usefulness of the paradigm in explaining foreign investment in services, as well as manufacturing, has recently been discussed (United Nations 1989). In earlier research, the theory has been used to explain the reasons for, and patterns of foreign involvement in, the international hotel industry (Dunning and M c Q u e e n 1982). The eclectic paradigm asserts that the extent, pattern, and growth of value-adding activities undertaken by transnational corporations (TNCs) outside their home countries are dependent on the value of and interaction between three main variables. The first one is ownership. In order for foreign firms to compete with domestic firms in the host country, they must possess certain advantages specific to the nature and/or nationality of their ownership. These advantages must suffice to compensate for the costs of setting up and operating a foreign value-adding operation in addition to those faced by the domestic firms. The T N C s might have exclusive and privileged access to specific technological, managerial, financial, or marketing assets, or possess better organizational capabilities to successfully integrate separate value-adding activities which draw on such assets. Owner-specific advantages of foreign investors in tourism might include an established international reputation in providing tourism services, better knowledge of, and favored access to, international tourism markets; greater availability of equity finance of the type appropriate to the tourism industry; a lack of entrepreneurship in the host country, reflected in an unwillingness to take risks as principal of a tourism facility; and deficiencies in the host country's capital market as it affects tourism. As will be seen, many of these factors influence foreign investment in Australian tourism. The second variable is location. The advantages of location are the

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benefits of value-adding activities that combine ownership-specific advantages with immediate factor endowments in a foreign country. Location-specific advantages of foreign investment in tourism might include particular countries and sites within countries, input prices, quality and productivity, international transport costs, infrastructure provisions, and investment incentives (disincentives) of the host country government. Major strengths of Australian tourism, in addition to its political stability and liberal policies towards foreign investors, relate to the nature of its tourism product (novelty of the destination, unique landscapes, flora and fauna, scenic environmental features, well developed tourism infrastructure, etc.) and market potential in the context of global and regional (Asia-Pacific) tourism (Grey, Edelmann and Dwyer 1991). The size and growth potential of markets are significant in influencing the nature of and siting of tourism facilities, as is a firm's strategy to geographically diversify operations for the purpose of reducing risks. Specific advantages of location accrue to domestic as well as foreign investors, of course. Since the Australian government's policy regarding foreign investment does not discriminate in favor of foreign compared to domestic investment, locationspecific advantages do not in themselves explain the incidence of foreign relative to domestic ownership of Australian tourism. Instead, they are a motive for investment by foreigners in Australia rather than elsewhere, especially when involvements in different locations may be mutually exclusive. The third variables are market internalization advantages. These refer to the advantages of controlling and coordinating ownership and location-specific advantages with a T N C hierarchy rather than selling the right to use those advantages to domestic firms in the host country. The utilization of these advantages depends primarily on the relative costs of equity and non-equity forms of managing interrelated economic activities. The benefits to the firm of better planning, coordination, and opportunities to increase profits must be weighed against communication and control difficulties (Buckley 1987). Thus, on the one hand, it may be easier for a tour wholesaler to control the character of the tourism product, including security of supply, price, and quality, if it takes equity in the industry of the tourism destination country. If it tries to control product quality when independent firms produce its inputs (e.g., transport and accommodation), it incurs costs of negotiation, quality monitoring, and risks of inappropriate price and quality levels. On the other hand, minority joint ventures or non-equity agreements may sometimes be preferred. In the accommodation sector, for example, international hotel chains exact rigid management standards over the hotels that bear their names regardless of their ownership. Contract-based control, as opposed to equity-based control, is prevalent in the hotel sector internationally due to the coincidence of interests of management and owners (Dunning and McQueen 1982). The interrelations of these ownership, location, and internalization advantages, and the response to them by firms, varies according to industry, countries of origin and destination of investment, and firmspecific characteristics. They also vary over time as changes in technology and the entrepreneurial and economic environment affect the corn-

518

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petitive position of firms and the location of their value-adding activities (United Nations 1989). The framework may usefully be employed to undertake a more detailed analysis of the motives for foreign investment in tourism than has been attempted here. O n one view, the analysis of tourism in general and foreign investment in particular, would be facilitated by the adoption of an economic transactions analysis that resolves the purchase of tourism services down to the fundamental unit, the transaction (Buckley 1987). For present purposes, an understanding of the rationale for foreign investment in general enables a better appreciation of its various impacts when directed toward the tourism industry. Before providing a general assessment of the net benefits to Australia of foreign investment in its tourism industry, attention must be paid to clarifying certain impacts of that investment. Five issues should be discussed: the effect of foreign investment on industry structure; the impacts of foreign investment on tourism flows; the impact of repatriation of profits by foreign owners; the additional leakages of foreign exchange due to foreign ownership of tourism facilities; and financial considerations which influence the nature and scope of other impacts. I M P A C T S OF F O R E I G N T O U R I S M I N V E S T M E N T

Industry Structure: Vertical Integration and Diversification The main types of relationships between firms in world tourism include vertical integration, horizontal integration, and diversification as well as commercial arrangements between firms having no common ownership. In general, ownership of facilities is irrelevant to the types of commercial arrangements made. There are reasons to believe, however, that the exchange of services through the market is likely to involve higher costs (relative to total costs of production and transactions) than that of goods. These reasons, reflecting the larger h u m a n element of "customer tailoring" in the case of services and the associated likelihood of greater variations in quality (United Nations 1989) provide a rationale for equity investment rather than cooperative arrangements in the case of the foreign investor in tourism. Since markets for tourism services tend to be highly segmented, equity investment also provides better opportunities for price discrimination. Figure 1 depicts some (not all) relationships between firms in Austra-

l Tour

Wholesalers/Retailers

I Inbound Tour I ~ I

Operators

iintAi ernat ional i]~ ~ ~~ ~ 1~ rlines

i-~ ~

Attractions

Figure 1. Examples of Linkages Between Firms in Australian Tourism

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lian tourism. The links represent ownership or commercial agreements (Forsyth and Dwyer 1991). Vertical integration is present when a firm owns a product at one stage of production and is also a producer at another stage. For example, a firm may mine the ore, which it then converts to steel. Vertical integration involves "internalization," the transformation of "normal" external markets into internal markets and arms length transactions into internal organizational decisions (Buckley 1987). A vertically integrated tourism firm may involve a tour wholesaler owning a hotel or a hotel owning a laundry. Previous research confirms that vertical integration involving ownership of airlines has enabled European tour operators to sell single packages to customers, thereby consolidating the transactions that an independent tourist would make separately. A major benefit to the tourist is the reduction in uncertainty regarding aspects of the total tourism experience (Dunning and M c Q u e e n 1982). Vertical integration often leads to economies in operation and marketing. It can do this through cutting down on transaction costs between firms, through lessening double handling, through resolution of conflicts of interest that develop with different firms and through better quality control of the final product. Thus, it may be efficient for tour wholesalers/retailers to operate their own inbound tour companies. Airlines can benefit from setting up their own tour companies. Duty-free shops will set up contracts with suppliers and scale economies may result (e.g., bulk buying at discount prices). Secure and privileged access to inputs, distribution outlets, and markets afford many firms a competitive advantage over rivals. Where market power exists at one stage, it is possible for a vertically integrated firm to extend it to a lower stage. Thus, an overseas-based tour wholesaler may monopolize certain hotels. The source of any extra profits is in restrictions at the sales level rather than due to the vertical integration of the industry. In such cases, the main losers are likely to be foreign tourists who pay excessive prices rather than domestic suppliers. Vertical ownership is not very common in Australian tourism, and, where it does exist, it appears to be fragmented, involving different owners and different types of tourism facilities. The main examples of vertical integration are between tour wholesalers, duty free shops, and their suppliers. Diversification is present where a firm owns several producers of different products that may or may not be related. Diversification exists in tourism when a firm owns a hotel, a cruise operation, a golf course, and an attraction, for example. There may be contractual arrangements between these, rather than ownership (e.g., a hotel may promote or recommend a cruise). However, it is possible that there are no relationships of any kind between the different products-- a hotel need have no specific connections to bus or cruise operators and tourists can simply choose which tourism products they wish to buy. The complementarity of many services helps to explain diversification trends in various industries. In tourism, hotels, airlines, and tour operators frequently combine to ensure each other of a ready-made market for

520

FOREIGN INVESTMENT

each others services. These trends should accelerate with the growth of transnational computer-communication systems. The distinction between vertical integration and diversification is important because it determines the strength of the relationship between the various products. W h e n there is vertical integration, the firm producing the final product can determine where the inputs are to come from and it can insist on using its own inputs. Thus, aluminum Firm A can insist on using its own bauxite and not Firm B's--there is little that any purchaser of a l u m i n u m from Firm A can do about this. Similarly a tour company can insist that anyone purchasing one of its tours stays in its hotels or fly its airline--it simply refuses to sell packages that use other hotels or airlines. Such a strategy, in refusing certain business, is unlikely to maximize revenues, however. With diversification, the linkages are much weaker. If one buys bread at a supermarket, one does not have to purchase the butter there as well, though often it will be convenient to do so. A patron of a resort hotel that operates a cruise operation can choose to take that cruise or one operated by a competitor. Diversification can result in economies of scope or economies gained when a firm sells a range of related products, resulting in lower priced tourism services, but is unlikely to offer firms much opportunity to exercise market power. The convenience of "one-stop shopping" explains why a hypermart sells food, clothing, and electrical goods. Similar economies may be present in the tourism area--it may be efficient for a firm to link accommodation, transport, and attractions together. To date, there is very little evidence of such economies since most of the important links can be achieved through contracts rather than ownership. Most of the complaints about foreign ownership of Australian tourism involve complaints about lost business. Thus, duty-free shops complain of losing out to international chains, inbound tour operators complain of losses to tour wholesalers, and independent cruise operators complain of loss of business to more diversified operators. These loses would be real if the independent suppliers had invested with the expectation of future sales and now were left with excess capacity. They would also be real if the suppliers had possessed some market power and were earning above normal profit. As against this, it must be realized that business losses that occur when one firm buys another are not undesirable overall, since the new supplier may be a lower cost seller than the old. Further, those firms that are integrating or diversifying do so for their own advantage. They may make higher profits through better integrated operations or economies of scope, or they m a y be less reliant on a supplier that has been exercizing market power. If such changes in firm structure take place within Australia, the gains may well exceed the losses, although the gainers may be foreigners and the losers, Australian. Any losses to the nation are yet to be established. Horizontal integration is present when a firm owns several producers of the same service in the same market. For example, a firm may own two or more hotels or attractions in a particular tourism region. Horizontal integration can also be achieved by different but affiliated firms owning

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tourism facilities or where firms under different ownership have contracts, commercial arrangements, or understandings aimed at increasing joint profits. It appears that horizontal integration is low in most sectors of Australian tourism excepting the duty-free sector and the accommodation sector. There is a fairly high degree of horizontal integration in the duty-free sector at a national but not at a local level. Restrictions on competition within the sector arise from agreements forged between tour wholesalers and the major chains, rather than due to any high concentration of ownership within particular tourist regions. While in some regions there is some degree of horizontal integration in the accommodation sector, there is a low level of foreign ownership in the sector overall. In any case, operational control over these businesses is likely to be with management rather than with the owner. Even where a number of hotels are owned by the one foreign firm, the facilities may be managed by different hotel chains. Table 3 presents a list of suggested or probable concentration levels in different sectors of Australian tourism (Dwyer and Forsyth 1991b). (A similar exercise could be undertaken to determine concentration levels within the tourism industry in other countries.) Pending further research, the information in Table 3 is qualitative rather than quantitative. Where there is a good deal of competition and entry is fairly easy, moves to horizontally integrate are probably of little concern. Thus, if a firm owning one hotel in an area takes over another, it is unlikely that market concentration will be significantly increased. Where there are few operators (e.g., domestic airlines and reef cruises), mergers can significantly increase concentration and promote monopoly behavior. This is most likely where entry into the market is difficult, such as in international aviation. Horizontal integration, or merging of independent sellers, is recognized as a problem generally, not just in tourism. As suggested by the estimated and current potential concentration ratios as set out in Table 3, horizontal integration does not appear to be a problem in Australian Table 3. Estimated Current and Potential Market Concentration in Tourism

Product Tour Wholesalers Inbound Tour Operators International A i r l i n e s Domestic Airlines Hotels Attractions Shops Duty-Free S h o p s Coach Operators Cruise Operators

Current Concentration

Possibilities for Significant Increases

Oligopoly Competitive Monopoly/Oligopoly Oligopoly Competitive Competitive Competitive Oligopoly/Competitive Competitive Oligopoly/Competitive

Possible Slight Some Slight Slight Slight Slight Possible Slight Possible

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FOREIGN INVESTMENT

tourism at this time. If problems of market power arise in the future, they are best analyzed and addressed specifically rather than indirectly through restrictions on foreign investment. Space restrictions preclude further analysis of the impacts of foreign investment on tourism industry structure. A starting point for more detailed treatment of the issues could involve case studies of the effects of ownership-specific, location-specific, and market-internalization advantages of T N C s on tourism industry concentration levels, and the extent to which these advantages interact to promote horizontally, vertically, or diversified investments on the one hand or cooperative arrangements on the other.

Does Foreign Investment Increase Tourism? Foreign investment is directed towards the supply of tourism serv i c e s - it does not of itself imply increased inbound or domestic tourism numbers. Foreign investment will only increase visitor numbers to Australia if it somehow increases the attractiveness of the Australian tourism product. At best, foreign investment can only indirectly influence visitor numbers. It can do so through marketing, product quality, or through price.

Marketing. and promotion effects. Foreign investment may result in greater or superior promotional effort in the home country of the investor, leading to higher visitor numbers from that country. Compared to Australian investors, the foreign investor may have better knowledge of the home country's travel market and be better placed to market Australia more effectively in that market. To the extent that foreigners do possess superior information about customer needs in origin countries, it is of minor relevance to the issue of whether foreign investment per se increases visitor flows to Australia. Both domestic and foreign owners of higher standard facilities seek to market those facilities in countries that generate tourists. A domestically owned facility has the same incentive to market itself overseas as a foreign owned facility. Domestic firms can, and do, enter contractual management arrangements with international hotel chains. Granted that, in some cases, the reputation of multinational tourism corporations (e. g., Club Med) could generate inbound tourism; a study undertaken by the authors reveals that Australian owned facilities in general do not consider that they are disadvantaged relative to foreign owned facilities in overseas markets (Forsyth and Dwyer 1991b). This is not surprising since many foreign investors have minimal or no involvement with tourism in their home country. Moreover, since it is management rather than ownership that is important in determining a facility's day to day operations, as well as its long-term production and marketing strategy ( M c O u e e n 1989), the overseas markets targeted by managers of tourism facilities based in Australia may bear no correspondence with the nationality of the owners.

Product and quality effects. It is an accepted view that control of the transactions flow enables tourism multinationals to monitor and control the

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quality of the services they provide. Thus, tour operators can give quality guarantees to the tourist, thereby reducing the perceived risks of default, unsatisfactory service, or other transactional uncertainties (Buckley 1987). However, foreign investment per se appears not to have altered the types of products offered to tourists in a way. which changes tourism flows to Australia. Australian owners of tourism plants have just as much incentive as do foreign owners to determine visitor needs and to cater for those needs. M a n y high standard accommodations in Australian tourism were originally constructed and operated by domestic investors prior to sale to foreigners. The internationalization of the accommodation sector in Australia, in particular, is due primarily to the operations of management companies rather than owners of facilities. M a n y domestically owned and foreign owned hotels are operated by international chains which provide "experience" rather than "inspection" products (United Nations 1989). Overall, the link between foreign investment and increased inbound tourism, through the nature of the tourism product, is quite tenuous. Price effects. Foreign investment will lead to an increase in tourism if it results in reduced prices paid by tourists. In Europe, in the context of mass market tourism, intense competition has reduced profit margins of suppliers of tourism services and consumers have benefited from lower prices. In respect of the accommodation sector, for example, there is some evidence that the growing size of international hotel chains enables economies of scale associated with spreading fixed costs over a greater n u m b e r of hotel guests, obtaining finance and purchasing inputs on the most favorable terms, and enabling greater functional specialization of staff (McQueen 1989). The opportunities for achieving such savings are less in Australia, given its smaller market size. Moreover, most of the prices paid by tourism facilities for inputs will be the same regardless of who owns them. Since foreign owners are unlikely to have access to cheaper inputs, there seems to be little scope for foreign rather than domestic owners to reduce prices as a result of lower costs. The exception to this lies on the financing side. If foreign investors are prepared to accept a lower expected rate of return for a given profile of returns and level of risk, they force prices down in those sectors of the industry that are competitive. As compared to a situation where there is no foreign investment, there will be a greater expansion of capacity and, to fill it, rates will fall. This applies in both the short term and the long term. In the former, foreign investors may have more liquidity and be more willing than Australian investors to incur losses through the operation of facilities during a slump. Over the longer term, the greater expansion of tourism facilities resulting from the foreign investment added to domestic investment, would generate lower yields and prices for tourism services. Perhaps the most that can be said is that if foreign investors are willing to accept lower real returns for their investments (and it appears that they. are), substantial foreign investment in the industry will result in some increase in visitor numbers. Foreign investment does not appear to be associated with much

524

FOREIGN INVESTMENT

change in the nature or quality of tourism services, nor the effectiveness of their marketing. If it is to have an effect, it must work through price via a willingness of firms to accept lower rates of return in a competitive industry. Foreign investment that adds to domestic investment may result in lower prices as a result of increased competition. Increased numbers of inbound and domestic tourists are likely to result from lower priced tourism services in Australia. However, granted the level of capital intensity of the industry and the reduction in rates of return associated with the foreign investment, it is not likely that the fall in prices nor the impact on tourism flows will be large.

Repatriation of Profits When a tourism facility is foreign owned, a proportion of its sales will go towards profits, which will be repatriated to the owners. It might be thought that such profits are a "leakage" from the host economy due to the foreign investment and that the net benefits to the nation from tourism are correspondingly reduced. This view rests on a misconception, however. The profits are not "lost" to Australia in any meaningful sense. Foreign investment may either replace or add to domestic investment. Consider the former situation. Suppose a foreign firm purchases a tourism facility (e.g., a hotel) from an Australian owner. The purchase price will reflect the present value of the expected future profits from the facility, and the rights to these profits are transferred to the new owner. The domestic seller does not lose nor does the nation. The capital received from the sale of the facility can be invested elsewhere in Australia or overseas and will generate at least as large a stream of profits (if not, then presumably the sale would not have taken place). Alternatively, the money from the sale can be used to repay debts, thereby reducing Australia's borrowings from abroad, and reducing interest repayments on its foreign debt. Consider now the case where foreign investment adds to total investment in Australian tourism. Contrary to one view (Bull 1990), the above analysis applies to this case also. In circumstances where the foreign investor develops a facility rather than purchasing an existing asset, the investor must pay suppliers (mainly domestic suppliers) for all of the inputs used in the development. That is to say, the investor must pay for the profits. Further, there is a saving in capital outlay by domestic investors who can invest funds elsewhere or use them to reduce debt. If profits paid overseas are thought of as a "leakage" from the economy, then the initial payment for the facility should be thought of as an "injection" that would not have occurred except for the foreign investment. Over the longer term, there is no overall leakage. In the case where foreign investment adds to domestic investment, this may not lead to an increase in aggregate investment in the economy, since tourism expansion will tend to crowd out other export industries (Forsyth and Dwyer 1991 a). Assuming that total investment does increase, additional profits will be paid overseas from the tourism industry. However, such profits cannot be considered as "lost" to the Australian economy since, in the absence of the foreign investment,

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they would not exist. Nor would the additional revenue accruing to suppliers of goods and services to the foreign investors, or the increased company tax revenue to the Government, exist if the foreign investment had not taken place. Australia also gains if the additional investment supports increased inbound tourist flows leading to additional tourism contribution to national output.

Purchases and "Leakages" The impact of tourism on the economy and the benefits accruing to the nation are not so much dependent on ownership of tourism facilities as on the sources of the inputs used to produce goods and services that satisfy tourists needs. Thus, benefits to Australia from foreign tourism investment depends on how foreign owned facilities source their i~puts as compared to domestically owned facilities. To a large extent, this will depend on the sophistication of the nation's manufacturing sector. While the high import content of goods used to satisfy tourist needs is recognized for lesser developed economies (Dwyer 1989a, 1989b), it is the country's profile of production, rather than ownership of tourism facilities, which determines the degree of import penetration. Foreign ownership does not imply greater use of foreign sourced inputs. The inputs into the capital investment could be supplied domestically or imported. W h e n the foreign investor purchases an existing asset, unless that asset was expressly developed for on-sale and intentionally incorporates imported inputs, the source of inputs will be the same as for foreign and domestic investors. If a domestic or foreign investor develops a tourism facility, there is always scope to use imported rather than domestically sourced inputs. Such decisions will always be made with respect to differences in costs, quality, availability of materials, and development time. While some inputs must be purchased overseas regardless of ownership (e.g., aircraft, coach chassis) m a n y inputs are not tradeable (e.g., concrete, bricks, windows). Overall, assuming similarities in the types of development, there are unlikely to be major differences between domestic and foreign-owned developments in respect of inputs into facilities. There are also unlikely to be substantial differences between foreign and domestically owned firms with respect to employment, although differences might exist in the proportion of foreign citizens in managerial positions. A survey of selected tourism operators in Cairns, Gold Coast, and Sydney revealed that except for the duty free sector, the proportion of employees who are citizens of foreign countries is very low. For example, in the case of 14 foreign-owned hotels, only 98 of 5,479 employees were foreign citizens (Forsyth and Dwyer 1991b). These jobs (many of which would not exist in the absence of the foreign investment) were evenly divided between management and other staff. Where imported labor serves to enhance the quality of Australian tourism experience, including customer service, there are wider benefits to the country by way of tourism's contribution to Gross Domestic Product and foreign exchange earnings. The major reason for imported labor is to maintain quality in the provision of tourism services.

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In the duty free sector, for example, it is important for sales to Japanese tourists that staff speak Japanese. Thus, one finds that a large proportion of staff in the duty-free sector are Japanese nationals on working holidays. It needs to be pointed out that these employees pay Australian income tax and meet their living expenses within Australia, injecting expenditure into the economy. A survey of hotels in Australia reveals that there is little or no difference in the types of intermediate goods and services purchased by foreign owned compared to domestically owned firms. Both foreign owned and domestically owned hotels stock imported products in the bar areas, gift shop, etc., but this choice reflects visitor preferences. While the purchases of international hotels m a n y have a higher import content than hotels catering for the domestic travel market, this relates to the nature of tourism demand rather than ownership of facilities (Forsyth and Dwyer 1991b). It can be noted also that Australia gains tariff revenue from imported products, partly offsetting any additional leakages overseas. In order to determine whether there are any differences between foreign owned and domestically owned facilities in respect of tourist expenditure retained in Australia, the disbursement of pre-paid and optional expenditure on a package tour covering Sydney and the Gold Coast were analyzed. Utilizing the results of a previous study conducted by ID Tours, Australia, the authors studied the possible differences between foreign and domestically owned facilities in respect of outflows of money from Australia from spending by a representative Japanese tourist on a package tour with a prepaid component of $3,095 and additional purchases of $1,355. Estimates of leakages from direct tourist expenditure given present levels of foreign ownership in Australian tourism is set out in Table 4. A detailed discussion of assumptions underlying the figures contained in Table 4 appears in Forsyth and Dwyer (1991a). O n the assumptions made about levels of foreign ownership in different sectors of the Australian tourism industry, out of a total tourist expenditure of $4,450 for the selected package, gross revenue accruing to foreign owners of facilities is around $1,964 or 44 % of total expenditure on the package. Assuming a similar level of overseas marketing for domestic and foreign owned firms and a similar level of import content for the intermediate products purchased regardless of nationality of ownership, the amount of additional outflows overseas from foreign owned tourism facilities will roughly equal repatriated profits after tax. In Table 4 post and pre-tax profits are equated, and it is assumed that all post-tax profits are repatriated. Outflows resulting from foreign ownership amount to $1,121 or 25% of the total expenditure on the package. A certain proportion of expenditure on the package will be retained overseas at the point of sale regardless of the extent of foreign ownership of Australia's tourism facilities. Regarding international air fares, bilateral air services agreements determine capacity and traffic. O n the Japan-Australia route, for example, since Qantas is allocated around 50% of overall traffic, only half of international air fare expenditure is taken to be retained overseas. Pre-paid components retained overseas

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Table 4. Estimates of Leakages from Direct Tourist Expenditure (foreign vs. domestically owned facilities; in AUS$ million)

Category of Expenditure

Prepaid $

Additional Purchases $

Assumed Proportion Foreign Ownership %

Revenue Accruing to Foreign Owners $

Estimated Additional Leakage Overseas

$

Air Transport

International carriers Domestic carriers Accommodation

1,570 325 368

50 -80

785 -294

-

-

785 43

Restaurants Excursions

162

150

Coaches Admission fees Guides Shopping Operators Ground operators Wholesalers

211 27 160

75 5 29 1,045

50 31 -50

143 10 -523

83 31 189 20 3,095 1,355 - 4,450 - -

100

-209

189

1,964

1,121

Total Less leakages at point of sale ($785 + $189) % leakages from tourist expenditure within Australia (147 + 3476)

97_.44 3,476

21 2 78

974 147

4%

Sources: ID Tours (1990); ABS (1988); Forsyth and Dwyer (1991). Estimates relate to one selected Japanese package tour of Sydney and the Gold Coast.

at the point of sale thus include the international airfare component ($785) and that retained by overseas-based tour wholesalers ($189). A more realistic estimate of outflows would exclude these two amounts from the calculation. With outflows now approximating $147 (i.e., $1,121 less $785 less $189) and remaining package expenditure of $3,476 (i.e., $4,450 less $785 less $189) the proportion of additional outflows is around 4 percent. This sort of analysis was also employed to estimate the maximum additional outflow that could occur if the expenditure was allocated exclusively to foreign owned firms. The analysis reveals that if the Australian tourism industry were completely foreign owned and integrated, and where all after tax profits are repatriated, an additional 31 cents in every tourism dollar would flow offshore. Excluding amounts retained overseas at the point of sale, namely international airfares and earnings of foreign based tour wholesalers, only an extra 10 cents of each additional dollar spent would flow overseas. The above estimates reflect the making of certain assumptions that may be called into question. However, the assumptions may be defensible (Forsyth and Dwyer 1991a). If the orders of magnitude of the estimates are reasonably accurate, one gains a fresh perspective on the extent of flows overseas as a result of foreign investment m tourism in a developed country such as Australia. Claims that the benefits from

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FOREIGN INVESTMENT

tourism "leak away" from Australia if facilities are foreign owned (Bull 1990) take no account of the fact that, regardless of ownership, the bulk of expenses incurred by tourism operations accrue as revenue to local producers of goods and services.

Supply of Funds The financial side of investment may be an important determinant of the overall level of investment and tourism and the benefits derived from them. Some types of capital may be more readily supplied overseas and foreign firms may wish to diversify their portfolios by investing in tourism in another country. As suggested above, foreign investment in tourism is not likely to result in major changes on the product market side, though it could have an impact through the financing side. Here it is assumed that foreign investment results in an increased supply of equity capital. As a result, it leads to increased total investment in the industry, and increased tourism (through lower prices made possible by the lower cost of capital). This may be domestic or foreign tourism, as shown in Figure 2. Without foreign investment, the supply of equity funds is shown as SD and the demand for them is D (for simplicity assume no loan funds are used). Equilibrium is at C --the cost of capital is rl, and investment equals x~. The foreign supply of equity funds is shown as SF--when foreign investment is present, the overall supply of funds shifts to S. The new equilibrium is E, with a lower cost of capital r2 and greater level of investment, x2. Local suppliers of equity will lose--this surplus will fall from A C rl to A B r2. They will be crowded out by foreign investors, and reduce the investment from Oxl to OxD. Consumers will

Cost o f Capital

r1 1:

$

r2

A

0

x~

x I

x 2

EQIn'I'Y CAPITAL Figure 2. Tourism Equity Capital: Supply and Demand

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529

gain; prices will be sufficient to yield returns on capital of r2, not r~. Owners of the resources used by the tourism industry will gain, as the expansion of the industry will gain from the higher prices for these resources occasioned by the expansion of tourism. If all tourists are foreign, and if the original owners of the resources used in tourism are foreign, the country as a whole would lose from the foreign investment. More likely, at least some of the tourism resources would be domestically owned, and the balance could go either way. Where there are domestic tourists as well, some of the gains in lower tourism prices will accrue to residents of the host country: on balance the country could gain or lose. For countries such as Australia, France, or the United States, with substantial domestic use of their tourism industries, the losses faced by investors are likely to be made up by gains enjoyed by domestic tourists. However, for small countries that rely heavily on foreign tourism and have limited supplies of local equity, foreign investment could impose a net cost, especially if a high proportion of the resources used in tourism (e.g., land near beaches) is foreign owned. This needs to be compared to the other gains achieved from increased tourism expenditure.

Financing Investment in Australian Tourism One popular misconception concerning financing of tourism projects in Australia is that foreign investors have access to loan funds at lower interest rates than do Australian investors. However, foreign investors do not have any advantages over domestic investors in this respect. There are several considerations that bear on this proposition. While nominal interest rates are lower overseas than in Australia, an overseas investor borrowing in some foreign currency must consider the possible exchange rate risks. Interest rates are lower in countries whose currencies are expected to appreciate. The advantages from low interest rates tend to be negated by the effects of a depreciation in the currency of high interest countries. It should also be recognized that domestic as well as foreign investors can borrow in any foreign currency and thereby have access to lower nominal interest rates. However, they must bear the risk that the capital value of those borrowings will increase as a result of exchange rate movements. Even if a country has a high real interest rate, as does Australia, there may be no advantage to borrowing overseas because the exchange rate may fall more rapidly than the inflation rate would suggest (for example, because of deteriorating terms of trade). Sometimes foreign investors obtain funds from related companies at what appear to be very low costs. However, the cheap rates are more apparent than real since certain obligations may be imposed on the borrowing firm. Also, it is really the group as a whole which is investing. Regardless of rates of interest charged in intrafirm transactions, the opportunity costs of finance to the group equals the market rate. In recent years, covering both high and low prices for tourism facilities in Australia, there appear to have been few domestic investors even as joint ventures with foreigners. There are several possible rea-

530

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sons why foreign investors are more willing to invest in tourism projects than domestic investors. These reasons include greater availability of equity finance of the type appropriate to the industry; greater financial diversification by foreign as compared to domestic investors; a lack of entrepreneurship in Australia (i.e., an unwillingness to take risks as principal of a tourism investment); differences in evaluation of prospects of investment; taxation differences between Australia and overseas countries; deficiencies in the Australian capital market as it affects tourism. It is likely that similar reasons obtain in other tourism destination countries to explain the scale of foreign investment. If any of the first three reasons hold, the foreign investment is filling a gap and Australia unambiguously gains from it. With respect to the first reason, tourism projects require long-term equity, which may not be in adequate supply in Australia. It appears that the capital structure of tourism in Australia may be such as to result in reduced investment in this sector. It is difficult to make equity investments in Australian tourism, for example, through shares in a company. This restricts the investment avenues available to institutions with funds to invest. In addition, lending to and monitoring performance in the industry is difficult granted the current information base. Given existing shortages of long-term equity for investment in tourism, Australia can gain if foreign investors are prepared to supply it. Effectively, Australia "imports" a service (long-term equity holding) from a cheaper source overseas. As for the second reason, part of the motivation for foreign investment in Australian tourism may lie with the need to diversify portfolios. Foreign companies may wish to diversify operations for risk reasons. Thus, a hotel company may invest in Australia as well as several locations overseas. Regarding the third reason, it appears that what is in limited supply in Australia is not so much capital per se, but a particular type of entrepreneurship or willingness to own and control tourism assets (Forsyth and Dwyer 1991b). Australia gains if foreign investors are prepared to supply this service. If there are differences in evaluation of prospects, the country gains if Australians are correct and foreign investors are excessively optimistic. It is possible that the prices being paid, while below the replacement costs of assets, represent more than fair prices given the prospects of the industry. If the expectations of foreign investors are more accurate it could be the case that Australians are selling valuable assets at bargain prices. If they are getting it wrong, Australia may not lose from foreign investment, but it would not gain from the tourism industry as much as it could. The same would be true if foreign investment were motivated by tax considerations; the implications depend on what distortions are present. For example, where double tax agreements do not exist, profits from tourism investments may be taxed twice, and thus investment would be discouraged. Alternatively, where countries treat income from abroad more favorably for tax purposes, a stimulus will be given to tourism (and other) investment. Australia has double tax agreements with most of its sources of direct foreign investment, and taxation considerations are unlikely to be a major motivation for tourism investment. There appear to be some deficiencies in the Australian capital mar-

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ket as it affects tourism. The rapid growth of tourism, at a time when the capital market in Australia was experiencing a major shakeout, may well have resulted in a less than adequate capital structure of the industry. This results in less Australian investment in the industry because the capital structure is not capable of facilitating it. Institutions and individuals who wish to invest may not be able to do so in a way that meets their requirements. There are two major ways in which this has happened. The first difficulty arises because of the lack of appropriate structures for equity investment in projects in the industry. There are few public companies or trusts with investments in the industry. While an individual or institution can invest in the mining, manufacturing, or retail industry, it is more difficult to invest in tourism, because the companies are not there. The groups that have equity capital are individuals and institutions that generally require tradeable investments, such as shares, in small amounts. It is unlikely that the industry will attract much in the way of funds from institutions such as superannuation funds until there are investment vehicles that are attractive to them. The second difficulty arises because of deficiencies in the assessment and monitoring of projects. W h e n capital is made available, either in loan or equity form, the lender always takes a risk. The lender, therefore, requires an accurate assessment of project risk prior to lending and must monitor project performance after supplying project finance. It appears, however, that there is limited ability to do this for investments in Australian tourism (Dwyer and Forsyth 1991b). Banks and similar intermediaries, as the primary lenders, have limited ability to assess and monitor proposals. Banks have experienced major problems in loan evaluation in all sectors, partly because of the post-deregulation boom in lending. The situation in the tourism industry has been exacerbated by its rapid growth and lenders unfamiliarity with it. They have not been able to draw on independent studies with much confidence since the quality of these studies has varied significantly. The net result is that lenders are currently very cautious with tourism investments. They are likely to be cautious when more reliable assessment of projects and information about the prospects of the industry are readily available. These deficiencies may not be experienced to the same extent in other countries, resulting in a greater willingness by foreign investors to supply capital to Australian tourism. The Japanese system of main banks and interlocking companies is recognized as a good system for monitoring the performance of investments. Lenders may be more willing to supply funds to the tourism industry if they have better monitoring and greater scope to address problems as they occur. Suppose that foreign investors have easier access to funds than do domestic investors and are more willing to wait for returns. This will have implications for the flow of tourists. In the short term there is a situation of excess supply in the industry and low (negative) returns. Foreign investors are buying assets and appear more willing to keep them operating. This puts downward pressure on tourism prices and makes Australia a more competitive destination. Owners of tourism assets may more actively promote their

532

FOREIGN INVESTMENT

products both in Australia and elsewhere. Overall more foreign tourists are attracted and the slump in domestic tourism is lessened, compared to what otherwise would be the case. Returns to foreign and domestic investors are lower than they would be. As a result of greater tourism flows, higher levels of employment and purchases of inputs from other businesses would be recorded. In the long run, foreign investors may be more willing to value equity investments in the tourism industry than domestic investors. To an extent, foreign investment will crowd out domestic investment which is deterred by lower expected returns. (Figure 2) Thus, the effect of allowing foreign investment is to increase the total amount of investment, but by an amount well short of the actual foreign investment which takes place. It also forces down prices and leads to a greater flow of tourism within, and to, Australia. ASSESSING BENEFITS AND COSTS The sources of benefits and costs of foreign tourism investment to the host developed country can be grouped under three categories. direct externalities. These are effects that foreign investment brings which would not have been present otherwise. Thus, where technology transfer leads to improved production of local firms or marketing techniques used by the foreign investors leads to better marketing by local firms, externalities would be present. Other externalities might involve increased variety of services available to a locality and adverse environmental impacts resulting from larger scale projects financed by foreign investors. Such externalities are, on balance, unlikely to be large. The positive and negative externalities in terms of technology transfer and marketing are unlikely to be large - any externalities are more likely to be associated with management of facilities whether foreign or domestically owned. Effects Through Additional Tourism. Foreign investment can lead to changed expenditure on goods and services in the economy, through increasing visitor flows and expenditures. Foreign investment will increase the supply of equity capital, and through this, it will result in a lower cost of capital. If the industry is moderately competitive, as it is in Australia, this will result in lower prices. This will attract more tourists. Granted that leakages into imports are not very different from those encountered with domestic investments, additional tourism will translate into additional expenditure; thus, there will be an impact on the composition of activity in the economy. Four types of effects resulting from the increased tourist expenditure are likely to yield positive net benefits to the host economy. • Terms of trade effects. M a n y tourism resources, such as beaches and historic sites, are in inelastic supply. When demand for them increases, their price is bid up, and tourists, both foreign and domestic, pay more to use them. O n balance, the host country will gain from selling its tourism services at a higher price. This effectively amounts to a terms of trade improvement, the size of which depends on supply elasticities in the industry.

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533

• Labor market effects. Additional tourism expenditure could result in increased employment, if it occurs in a region with unemployment, or in an underemployed economy. In such a case, the wage paid would exceed the supply price (the so-called "shadow wage") of labor. In principal, this could be true of other factors. • Foreign exchange effects. Increased foreign tourism expenditure can lead to a net gain in foreign exchange, depending on the source of inputs (whether local or imported) used to supply the tourists. While some would argue that this would lead to a desirable impact on a country's current account balance, this will only be true if there are fixed exchange rates, or the exchange mechanism is not working appropriately. However, apart from this, it is possible that the shadow price of foreign exchange differs from the market exchange rate. This would be true if there were distortionary trade taxes, such as tariffs or export taxes. Even in developed countries, such distortions exist, though in some less developed countries considerable reliance is put on trade taxes. If, for example, tariffs are used, additional earnings of foreign exchange will be valued at more than their market value, since additional imports made possible will be valued by consumers at more than the cost to buy them (the government receives the tariff revenues). • Effects of distortions. Changed expenditure can mean benefits and costs for the host economy if prices do not equal costs or prices change as a result of the expenditure. It is possible that the prices paid for some tourism inputs do not reflect their opportunity costs to the economy because of the presence of market power. Some suppliers may provide goods and services at prices above marginal cost; thus, they will profit from increased tourism expenditure. Much the same arises when goods and services bought (directly or indirectly) by tourists are taxed or subsidized. The government and the economy gain if prices are above costs. Furthermore, government revenue may be valued at more than its face value, if, as a result of extra revenue, distortionary taxes elsewhere can be reduced. While all of these effects are likely to be present for a developed country, to a greater or lesser degree their overall impact depends on the extent to which growth of the tourism industry is at the expense of contraction of other industries and the extent to which it represents additional output. O n one estimate (Forsyth and Dwyer 199 la), the net benefit is around 5 % of additional tourism expenditure. • Impacts on prices and surpluses. Foreign investment can affect the profits enjoyed by local firms, by providing more competition or possibly replacing them. Where some domestic investors earn lower profits, this will be a cost to the economy. O n the other hand, domestic tourists will pay lower prices for tourism services, and they will gain. The evidence for Australia suggests that foreign investment has not been associated with any substantial effects on industry structure through vertical integration or monopolization of markets. O n balance, the associated costs and benefits could be positive or negative but are likely to be small relative to any increased tourism expenditure.

534

FOREIGN INVESTMENT

For Australia, the balance of effects of foreign investment in tourism is likely to be positive. The expenditure effect is positive, and if the impact on surpluses is negative, it is unlikely to be large, given that the majority of tourists within Australia are domestic, and would gain from lower prices. In an economy that is not subject to major distortions, it is not surprising that the effect of a change, such as extra expenditure or investment, is not a major gain or loss. Some qualifications can be made. O n e is that foreign investment leads to less control (by the host country) of its tourism industry. If governments do wish to intervene in the operation of the industry, it is still easy for them to do so, since few of the likely policy instruments would work through ownership. Another is that the country's equity in the tourism industry is being reduced through foreign investment. This means that residents are bearing fewer of the risks associated with the industry, fewer of the gains, and fewer of the losses. W h e n performance of the industry is good (a boom when profits are high), the local share of the gain is smaller--the converse is true when performance is poor. Furthermore, unexpected gains and losses accrue partly to the foreign investors. This is something that is relevant when changes in policy are considered. Thus, if a government liberalizes its international aviation policy, and this leads to a tourism boom, some of the gains from this policy accrue to the foreign investors (likewise, they share any unexpected losses due to policy changes). The discussion so far has been in reference to the benefits and costs of foreign investment in the context of a developed country. The approach can be applied to other cases; however, several of the impacts will be quantitatively different. Consider the case of investment in a less developed country, one which, perhaps, is just building up its tourism industry. The impact that comes through the capital market side is likely to be greater than in the developed country case. The local capital market is likely to be thin, and the availability of equity capital for tourism will be very limited. This will means a large drop in the effective cost of capital, which will mean a greater drop in returns for the few local investors. The impact on tourism prices, and availability of facilities, will be large, and so will be the effect on the flows of tourists and their expenditures. Foreign investment may be essential for the industry to develop. The proportion of expenditures that are met by local supply will be less, especially so if the country is small; thus, the net impact of an increase in tourism expenditure on the local economy will be less. The benefits and costs from a given net increase in expenditure will be greater than in a developed economy, because the distortions are likely to be greater. In particular, the favorable impact on the labor market would be greater if underemployment is present. Unless distortions are such as to result in net costs arising from additional tourism result (for example, if goods and services bought by tourists are heavily subsidized), or foreign investment is associated with increase in market power which adversely affects the local economy, the net contribution of foreign investment is likely to be positive. The effect on tourism flows and net expenditure will be greater; and

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535

the net benefits will be greater. However, most of the impacts analyzed here will vary considerably from case to case, so it is inappropriate to generalize too widely. CONCLUSIONS Foreign Investment in tourism is often viewed in strong terms. Some see it as disadvantageous to a country, resulting in a loss of profits that could have been kept at home, and also a reduction in local sourcing of inputs. Others see it as advantageous, as being essential to the development of the industry, bringing in benefits equated to the increases in gross tourism expenditure. The reality is less dramatic than either of these extremes. Since the motives for foreign investment can influence its impacts, this issue was addressed briefly, prior to an attempted classification of certain of the impacts of foreign investment in tourism. It was argued that the various motives for foreign investment in tourism can be explained in terms of the widely accepted eclectic paradigm, provided that financial considerations were given sufficient attention. The eclectic model was originally proposed to explain T N C trade in goods rather than services; more detailed research into the motives for foreign investment in tourism, and the rationale for alternative forms of involvement, seem warranted to fully assess the paradigm's relevance to the global tourist industry. Certain of the impacts of foreign investment in tourism were discussed based on the Australian experience. The discussion focused on impacts which have either been relatively neglected in the literature (e.g., financial aspects) or about which there is some confusion (e.g., the issue of leakages). Classification of the impacts of foreign investment in tourism is a necessary preliminary to assessment of the relevant costs and benefits. Sources of benefits and costs of foreign investment in tourism include direct externalities, indirect impacts on tourist expenditure, and impacts of prices and surpluses. The main gains from foreign investment come from its impact on total foreign tourism flows and expenditure, and from the various surplus gains and losses (in profit, consumers surplus) that come about as a result of the price changes that such investment can lead to. Circumstances differ between countries, and the relative importance of the effects differ. It is possible to conceive of circumstances under which foreign investment could be disadvantageous for the host country (for example, few domestic tourists, but substantial local investment in the industry that contracts when foreign investment comes in). However, the assessment of the effects for a developed country such as Australia is that foreign investment is likely to produce a net gain, though not necessarily one which is large relative to the size of the investment or change in tourism expenditure. For a less developed country, the effect of foreign investment is probably positive, though this need not always be the case. It is likely that the various effects, and the consequent net benefits or costs are relatively larger for developed

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FOREIGN INVESTMENT

countries, and these benefits and costs are more conditional upon the c i r c u m s t a n c e s o f t h e case. [ ] [ ] REFERENCES Arndt, Heinz W. 1977 Foreign Investment in Niewenhuysen, In Australian Economic Policy, J. P. Drake and P. J. Drake eds., pp. 132-145. Melbourne: Melbourne University Press. Australian Bureau of Statistics 1988 Hotels and Bars and Accommodation Industries Australia 1986-87 Cat. No. 8656.0. Canberra: Australian Bureau of Statistics. Brash, Donald T. 1966 American Investment in Australian Industry. Canberra: Australian National University Press. Buckley, Peter J. 1987 T o u r i s m - A n Economic Transactions Analysis. Tourism Management 8: 190-194. Bull, Adrian 1990 Australian Tourism Effects of Foreign Investment. Tourism Management 11: 325-331. Caves, Robert 1982 Multinational Enterprise and Economic Analysis. Cambridge: Cambridge University Press. Dasett, Boma, and Arthur Andersen 1991 Australian Tourism Investment Overview (April). Dunning, John 1988 The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies 19:481-496. Dunning, John, and Matthew McQueen 1982 The Eclectic Theory of the Multinational Enterprise and the International Hotel Industry. In New Theories of the Multinational Enterprise, A. M. Rugman, ed., pp. 79-106. London: Croom Helm. Dwyer, Larry, Christopher Findlay, and Peter Forsyth 1990 Foreign Investment in Australian Tourism. BTR Occasional Paper No. 6, Canberra: Bureau of Tourism Research. Forsyth, Peter, and Larry Dwyer 1991a Measuring the Benefits and Costs of Foreign Tourism. Centre for Economic Policy Research Discussion Paper No. 248. Australian National University, Canberra. 1991b Impacts of Foreign Investment in Australian Tourism. BTR Occasional Paper No. 10. Canberra: Bureau of Tourism Research. Graham, Edward, and Paul Krugman 1989 Foreign Direct Investment in The United States. Washington DC: Institute for International Economics. Grey, Peter, Klaus Edelmann, and Larry Dwyer 1991 Tourism in Australia: Challenges and Opportunities. A CEDA Study. Melbourne: Longmans Cheshire. ID Tours South Pacific 1990 Working Paper on Japanese Vertical Integration. Sydney: Australian Tourism Industry Association. Itaki, M. 1991 A Critical Assessment of the Eclectic Theory of the Multinational Enterprise. Journal of International Business Studies 22:256-308. MacDougall, Gordon D. A. 1960 The Benefits and Costs of Private Investment from Abroad: A Theoretical Approach. Economic Record 36:13-35. McQueen, Matthew 1989 Multinationals in Tourism. In Tourism Marketing and Management Handbook, S. Witt and L. Moutinho, pp. 529-532. New York: Prentice-Hall.

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Queensland Treasury 1991 Foreign Ownership within the Queensland Tourism Industry. Brisbane: Foreign Investment Secretariat. United Nations 1989 Foreign Direct Investment and Transnational Corporations in Services. New York: Untied Nations Center on Transnational Corporations. Submitted 20January 1992 Resubmitted 6 October 1992 Resubmitted 24 March 1993 Accepted 10 April 1993 Refereed anonymously Coordinating Editor: PaulineJ. Sheldon