UNCTAD Investment Trends: Shortage of Capital Is a Major Obstacle for Tourism Development, and Many Countries-Especially in the Developing World-Increasingly Look to Foreign Investors to Provide Capital That Will Help Develop Their Tourism Industries

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EXCERPT FROM 'Promoting Foreign Investment in Tourism; UNCTAD Investment Advisory Series 2010

Attracting foreign direct investment (FDI) in the tourism sector is often difficult, and there is growing demand for support in this area among investment promotion agencies (IPAs).

Trends in tourism FDI

While data indicate that there has not been much FDI in tourism so far, they also show that tourism FDI is growing in many countries. However, tourism-related FDI is largely concentrated in a few activities, such as accommodation, restaurants and car rentals. There is little FDI in high-profile activities, such as tour operations, reservation systems and airlines (see box).

Although tourism FDI is largely concentrated in developed countries, tourism-related FDI in developing countries is growing markedly. Furthermore, global data on greenfield (undeveloped site) investments in foreign hotels indicate that there is some reorientation of tourism FDI towards developing countries. It is likely that tourism transnational corporations (TNCs) will continue to expand their activities in both absolute and relative terms throughout the developing world.

Investors from developing countries tend to invest locally, and evidence confirms that as with FDI in general--there is a trend towards more South-South mergers and acquisitions. The greater role of TNCs from the South will also have implications for global competition. Part of the rise of tourism TNCs from developing countries can be explained by large and growing numbers of tourists from places such as Brazil, China, Malaysia and the Russian Federation, and from the Arab states of the Persian Gulf.

Vertical integration

Vertical integration is an increasingly common practice in tourism, with hotel groups such as Sol Melia and Club Med investing in distribution networks (tour operators and travel agencies). Vertically integrated companies are united through a hierarchy with a common owner. Usually each member of the hierarchy produces a different product or service, and these products combine to satisfy a common need. Tour operators own travel agents, airlines (or aircraft) and hotels. Airlines can also own tour operators, travel agents and hotels.

Many large tour operators are vertically integrated through ownership or alliances with hotels, airlines or reservation systems. Thus, if they are interested in a particular country, they are able not only to provide a supply of tourists, but also other services, such as accommodation and transportation. Vertical integration allows tour operators to control various links in the distribution chain, including the fleet of planes, and a network of agencies, cruise lines and/or hotels. However, vertical integration has also been criticized for reducing developing countries' benefits from tourism, since the large operators not the countries capture the commissions. …