SPAIN: FROM ECONOMIC CRISES TO TOURISM

COMPETITIVENESS

José Francisco Perles-Ribes* (corresponding autor)

(jose.perles@ua.es)

Ana Belén Ramón-Rodríguez*

(anar@ua.es)

Antonio Rubia-Serrano**

(antonio.rubia@ua.es)

Luis Moreno-Izquierdo*

(luis.moreno@ua.es)

*Department of Applied Economic Analysis, University of Alicante

** Department of Financial Economics and Accounting, University of Alicante

Faculty of Economics and Business Sciences

University of Alicante

Campus San Vicente del Raspeig

03080 Alicante

Tel: 96 590 36 09

Fax: 96 590 93 22

Corresponding author details:

José Francisco Perles-Ribes (jose.perles@ua.es or jfperles@gmail.com)

Particular adress: Urb. Manzanera 13-R
03710 Calpe (Alicante)
Tlf: +34 635 617 159
SPAIN: FROM ECONOMIC CRISES TO TOURISM

COMPETITIVENESS

Abstract:

This paper considers the influence of economic crises on Spain’s tourism competitiveness. This

competitiveness is measured by its share in world tourism. Analysing a period of forty years, the

permanent effects of temporary or structural economic crises on competitiveness are observed.

Furthermore, it identifies the economic transmission mechanisms operating and links them to

the most relevant explanatory models of tourism destination competitiveness. The main

conclusion obtained is that the effects of shocks on competitiveness are not neutral and that the

negative effects are more persistent in highly intensive crises. This effect works through two

basic transmission mechanisms: the reduction of internal and external tourism demand and

falling investment.

Key words: Economic crisis, tourist destination competitiveness, permanent shocks, economics

transmission mechanisms.

1
1.-INTRODUCTION.

Spain is one of the world’s most popular tourism destinations. However the

evolutionary process leading to its position has not been linear but has experienced

peaks and troughs in parallel with the behaviour of the economy as a whole. At the

time of writing this document, Spain was beating records in terms of international

inbound tourism in a context of deep economic recession. However, the current

situation should not lead us to believe that Spanish tourism is not affected by economic

crises and recessions. On the contrary, a contemplation of the sector throughout history

reveals that crises usually have a negative impact on Spain’s tourism competitiveness

(see figure one). Depending on the intensity of the crisis, this impact can be reflected in

the country’s share in the global tourism market. The objective of this study is to

explain the mechanisms linking the economic crises with the competitiveness of tourism

destinations.

Figure one about here

2
2.-ECONOMIC CRISES AND TOURISM IN SPAIN: LITERATURE REVIEW.

Crises and their management constitute a popular topic for tourism researchers, and

many studies on the characteristics of crises and the action taken to overcome them have

been carried out (Henderson, 1999). Apart from their intensity or duration, a crucial

aspect of the effects of crises on tourism destination competitiveness resides in their

symmetrical or asymmetrical nature. In abstract terms, asymmetries will depend on the

geographical scope of the shocks – global or regional -, and whether they affect the

tourists’ countries of origin, the different competing destinations or both. Figure two

illustrates different types of crisis and the possible consequences that they have on

destinations. Within the context of a globalisation of the tourism sector, regional crises

are more likely to generate asymmetric effects than global crises. Similarly, due to the

higher number of parameters susceptible to being affected, those shocks that affect both

markets of origin and destination are most likely to generate asymmetric effects.

Figure two about here

The economic history of tourism between 1970 and the present day shows that all of the

types of crises considered have transpired. In Spain, at the very end of the 1970s,

Almagro (1979) experienced difficulties when adjusting univariate models of tourism

demand, attributing the atypical values which he observed in the volumes of inbound

and outbound tourists to the crises of the 1970s and the events of 1975. Sanuy (1983)

pointed out that not all Spanish regions have been affected equally by the crisis; and that

the crisis modifies the behaviour of demand, increasing the price sensitivity of tourists,

3
reducing long-distance trips and increasing “last-minute” reservations which constitute

some of the potential structural effects of crises on tourism.

The crisis of the late 1980s and early 1990s opened a debate regarding whether the sun

and beach mass tourism model had exhausted its potential with the emergence of a new

type of post-Fordist consumer. This phenomenon in Spain is described in Aguiló,

Alegre & Sard (2005). In summary, the opening-up process triggered by the fall of the

“iron curtain”, together with the emergence of new competitors and the reduction of

inbound tourists culminated in an exhaustion of Spain’s tourism model. Aware of this,

the government implemented programmes to adapt the tourism supply to the new

changes, including the Plan Marco de Competitividad del Turismo Español (Plan

Futures) [Framework Plan for Competitiveness in Spanish Tourism], with respect to

business and environmental aspects (Pellejero, 2004). Moreover, the 9/11 crisis exposed

a series of latent problems with respect to its international tourism industry, including

an international oligopoly in the wholesale travel agency industry, the singularity of the

passenger air transport sector, changes in tourism demand trends and other specific

structural problems regarding the Spanish supply (Cañada, 2004).

However, the crisis that has attracted most attention from tourism economists is,

without a doubt, the current global financial crisis, with studies carried out by

Papatheodorou, Roselló & Honggen (2010), Ritchie, Amaya and Frechling (2010),

Sheldon and Dwyer (2010), Smeral (2010) and Song & Shanshan (2010) among others.

These studies once again reveal the geographic and time asymmetries of the

consequences of the crisis. In Spain, this crisis has exposed the structural deficiencies of

the tourism development model. The poor results of 2009 are due to a higher number of

4
competitors and the tourism activities of emerging countries that constitute large

markets (Instituto de Estudios Turísticos IET, 2010). This trend was reversed in 2011

and 2012, although it is evident that the results are explained more by anomalous

circumstances affecting the competing destinations in North Africa than by any real

improvements in the competitive advantages of Spain as a tourism destination.

In order to illustrate the effects of crises on tourism competitiveness in Spain, Table one

shows the variation average of the Spanish tourism market share in for growth and crisis

periods of the Spanish economy. It can be observed that the negative variations, both in

absolute and relative terms, in periods of crisis are higher than the positive values

recorded during economic growth periods. The evolution of tourism competitiveness in

Spain measured by its share in the global market is therefore characterised by its

structure, by an underlying declining trend which is explained by the natural emergence

of new competing destinations within a context of an accelerated globalisation of the

tourism sector and by the maturity of its main tourism product (sun and beach), in

accordance with the destination lifecycle model (Butler, 1980). This structural trend is

taking place alongside the circumstantial effects of cyclical variations in the Spanish

economy and crisis periods in both Spain and the principal markets of origin. This is

intensifying the natural loss of competitiveness of Spanish tourism, raising doubts

regarding reinvestment in the industry during times of economic growth.

Table one about here

5
3.-DETERMINANTS AND INDICATORS OF TOURISM COMPETITIVENESS:

MARKET SHARE AND COMPETITIVE SUCCESS.

Competitiveness is one of the most topical concepts of tourism economics. The

literature on the subject provides a wide range of economic and business determinants.

When they are related to economic evolution, these determinants constitute transmission

mechanisms between the economic climate and competitiveness. Similarly, the

literature also offers numerous arguments for using market share as an appropriate

indicator of revealed competitiveness. Applied to tourist destinations, competitiveness

seems to be linked to the capacity of a destination to provide goods and services that are

superior in aspects valued by tourists to those offered by competitor destinations

(Dwyer & Kim, 2003).

3.1.-Competitiveness Models and Transmission Mechanisms.

There are many explanatory models of tourist destination competitiveness (Buhalis,

2000; Crouch & Ritchie, 1999; Dwyer & Kim, 2003; Hassan, 2000; Heath, 2003; Poon,

1993; etc.). In general, these conceptual models are based on more or less common and

widely accepted definitions and consider different ranges of comparative and

competitive advantages. Their differences lie in the emphasis that they give to specific

aspects, such as sustainability (Crouch & Ritchie, 1999 or Hassan, 2000), adapting to

developing countries (Heath, 2003) or small islands (Craigwell, 2007), etc. Almost all

the models introduce economic and non-economic elements when explaining

competitiveness and almost all of them base their theoretical substance on the ideas of

6
Porter (1991).

Bearing in mind the wide range of theories, it is relatively simple to select a series of

elements to establish a connection between economic cycles and crises and the

competitiveness of tourism destinations. Table two describes the main determinants of

tourist destination competitiveness for the principle explanatory models and selects

(bold marked) the economic elements which, in our opinion, comprise the basis of the

mechanisms that will be explained below. It should be remembered that this study

explores economic elements, ignoring other determinants which, although fundamental

for the competitiveness of destinations, are not considered as economic or business

elements as they are not influenced by economic policy.

Table two about here

3.2.-Measures and Indicators of Tourism Competitiveness.

According to Omerzel & Mihalic (2008), there is no optimal and universal model of

competitiveness that can be applied to all destinations. Neither is there a generally

accepted measure of competitiveness. In this context Mazanec, Wöber & Zins (2007)

are right when they point out the need to take steps to transform purely defining models

and systems into truly explanatory models from an analytical point of view. Of the

existing definitions, the best suited for this study is that of D’Hauteserre (2000), who

defines the competitiveness of a tourism destination as its capacity to maintain its

position (market share) or improve it over time. According to this concept, one way to

determine the success of a destination is to analyse its direct performance in the markets

7
through a market share analysis.

However, the use of market share as an indicator of competitiveness is not exempt from

debate. Some authors such as D’Hauteserre (2000), Craigwell, Worrell & Smith (2006)

or Mazanec et al. (2007) regard this variable as a direct measurement of competitiveness

and incorporate it in their studies on its own or together with other elements constituting

latent variables. Other authors, however, e.g. Costa, Gomà & López (2006); Cracolici,

Nijkamp & Rietveld (2006); Crouch & Ritchie (1999); Dwyer, Forsyth & Dwyer (2010)

and Enright & Newton (2004) consider market share to be a measure of revealed

competitiveness or the final historical results of underlying competitive activity (in

prices, differentiation or other elements). All in all, the association between

competitiveness and market share is evident, which in our opinion justifies, together

with the availability of data existing for a relatively long period of time, the use of this

variable as an indicator of tourism competitiveness in Spain.

In any event, a reduction in market share does not necessarily imply a decrease in levels

of development or the health of a tourist destination (Vanhove, 2011). This is because

firstly, the progressive increase in market share of emerging destinations can be seen as

a natural phenomenon as many countries are increasing their levels of development, and

secondly, the growth of destinations is not unlimited and the territory has a maximum

reception capacity.

8
4.-TRANSMISSION MECHANISMS OF CRISES ON TOURISM

COMPETITIVENESS

This section explains the causes and mechanisms that relate economic cycles to the

competitiveness of tourist destinations. They are summarised in Figure three, which

distinguishes between transmission mechanisms which operate on the demand side and

those which operate on the supply side. The former affect the destination’s

competitiveness immediately and translate into a rapid reduction in the market share of

the destination if the deviation of tourists between competing destinations occurs during

the crisis. The reduction in demand can also indirectly affect competitiveness through

the potential impacts on the profitability of tourism companies, associated and auxiliary

sectors, the levels of rivalry and the negative effects on the government which will

collect less tax associated to tourism consumption and profits, lowering its capacity to

invest in generic and specific advanced factors for the sector. The latter have a delayed

effect on competitiveness in the medium and long term, reinforcing natural trends of

losses or gains in competitiveness depending on whether the destination is an emerging

market or a mature market such as Spain by reducing the capacity to create advanced

factors in crisis-hit destinations which will have a lower competitive position in the

medium and long term in comparison to other destinations unaffected by the crisis.

Demand and supply sides are not independent; there is important interaction between

them with expectations being the main element connecting the two mechanisms. These

expectations either aggravate or moderate the above-mentioned effects and will be

examined in more detail below.

9
Figure three about here

4.1- Demand Mechanisms

Establishing the determinants and predicting the volume of demand has been one of the

main focuses of researchers in tourism economics for some time. In addition to the

many studies that have been carried out, there are also several reviews and compilations

regarding the determinants, functional forms and data used when analysing tourism

demand. Our perspective of how demand mechanisms operate is based on the reviews

of Crouch (1995), Li, Song & Witt (2005), Lim (1997), Witt &Witt (1995) and Song &

Li (2008).

4.1.1.-The Reduction in Disposable Income.

According to Lim (1997), tourism demand modelling is usually based on a function in

which the dependent variable is the demand of international tourism services between

an origin and a destination, and the explanatory variables are the level of income in the

country of origin; the transport costs between the origin and the destination; the relative

prices between the country of origin, the destination and competing destinations; the

exchange rate of the currencies; and a wide range of qualitative factors that affect the

destination. With respect to income (usually measured in real gross domestic product

(GDP) or real GDP per capita), in theory, it is expected that as income increases the

demand for luxury goods and services also increases. Furthermore, it can be expected

that tourism demand is not only influenced by current income but also its historical

10
evolution, given that changes in income may take some time to affect tourism demand

(Lim, 2007).

Some studies, e.g. Song, Witt & Jensen (2003), identify income as a principal

determinant of tourism demand. Not surprisingly, the omission of this highly relevant

variable of demand can be disastrous for research (see Witt & Witt, 1995 for their

criticism on this matter). The majority of studies analyse demand in terms of elasticities.

Income elasticity of demand varies both with the different origins and destinations

considered (Divisekera, 2003), and with the products and segments analysed. Moreover,

elasticity is influenced by the prevailing economic climate (see Durbarry & Sinclair,

2003; White, 1985). However, in general terms, tourism demand is usually

tremendously elastic, whereby disposable household income immediately affects

demand in this sector – see Crouch (1995), Li et al (2005), Smeral & Weber (2000) and

Smeral &Witt (1996) for income elasticities of greater than one in several cases. Under

these circumstances, it can be assumed that economic crises have a negative effect on

the competitiveness of destinations. However, the set of interactions that occur are more

complex than we would expect, and the final effect of the crises on the market shares

depends on whether these crises are symmetrical or asymmetrical.

In general, economic shocks reduce disposable household incomes. When a crisis is

asymmetric, and does not have an impact (or its effects are not sustained over time) in

all areas of the world in the same way, for the same length of time or in the same

intensity, there will be differentiated effects on tourism competitiveness. These effects,

aggravated by the income elasticity mentioned above, are manifested in rapid changes

11
in shares of the global market of the different destinations. With respect to crises such

as the current situation with a much more intense impact on the United States and

Europe than East Asia or parts of South America, from a theoretical point of view, it is

predicted that the market share of destinations in the US and Europe will fall rapidly

and those in the latter-mentioned regions will increase.

With respect to Spain, in the short term and only in terms of demand, three reactions

may be expected from European tourists who have experienced a reduction in their

disposable income. First, they may forego their holidays, staying in their place of origin

– highly probably, given that the profile of Spain’s tourism demand is one with a

medium-low income, and particularly if the reduction in income is also combined with

unemployment -. Second, they may prefer to substitute their previous trips to long-

distance destinations, choosing Spain as their destination over other competitors – this is

less likely as precisely the high income segments of demand are those that are less

affected by the crisis -. Or three, they may prefer to substitute their previous trips to

long distance destinations and those in the Spanish market with holidays in cheaper and

nearer destinations (Turkey, Morocco, etc.) – highly probable. The final result is

inconclusive, and will depend on the predominant effect, although it seems logical to

believe that Spain will experience a reduction in the level of its tourism demand. Apart

from these immediate effects on market share, there are other pernicious effects for the

competitiveness of destinations in the medium and long term caused by the fall in

demand due to the relationships between the different determinants of the diamond

model of competitive advantage.

12
4.1.2.-Evolution of Prices and Exchange Rates.

According to Lim (1997), relative prices are the second most common explanatory

variable in modelling the functions of tourism demand. As a proxy for relative prices,

many empirical studies use consumer price index (CPI) ratios between the origins and

destinations adjusted for the exchange rate between them. However, there are cases

where the two variables are introduced separately in the estimate (Lim, 1997). In the

same way as income, some writers, (e.g. Dwyer, 2001 or Edwards, 1995), consider

prices to be the key variable of competitiveness. In theory, it would be expected that a

decline in the price competitiveness of a destination is translated into a significant

reduction in its demand (Dwyer et al., 2010). Therefore, a crisis which causes an overall

increase in prices in the destination will ultimately affect its demand and, depending on

the price evolution experienced by its competitors, its global market share.

Crouch (1995), Durbarry & Sinclair (2003), Patsouratis, Frangouli & Anastasopoulos

(2005) and Witt & Witt (1995) among others, are some empirical studies that highlight

the negative price elasticity of demand. Buisán (1997), González & Moral (1995, 1996)

and Padilla (1988) reveal that price competitiveness with respect to both the outbound

markets and competitors, is the most relevant variable in explaining international

inbound demand to Spain. They also identify two stages in Spanish tourism price

evolution. The first stage lasted until the mid 1980s when the behaviour of prices

contributed positively to tourism demand; and the second stage, when Spain had joined

the European Common Market, and tourism demand was affected negatively by the

13
behaviour of prices, the appreciation of the peseta and the loss in popularity of Spain as

a tourist destination.

During periods of crisis tourists are highly price sensitive. Therefore, neither increasing

prices nor forcing their control (action taken through price wars with no improvements

in the efficiency of tourism companies), will favour competitiveness. During an

asymmetrical shock, such as the present situation, three differentiated scenarios can be

defined. Firstly, with respect to destinations within crisis-stricken areas; if there is an

overall price increase in all the destinations – stagflation - , the increased sensitivity of

clients to price will induce them to choose cheaper alternatives. This will lead to a

reduction in the market shares of the more expensive crisis-hit destinations and increase

those of cheaper destinations whether they are affected by the crisis or not. These results

will be more or less pronounced depending on which destinations increase their market

shares (whether they are among the most expensive or cheapest destinations), and which

lose market share, as the degree of asymmetry of the crisis is such that the prices in

some of the affected destinations increase while in others they decrease. Finally, if

prices stagnate or deflation occurs in the area hit by the crisis, and in the unaffected area

prices continue to experience normal growth rates, the impact on market shares will

once again depend on the final price differentials between the destinations of the two

areas. The region affected by the crisis may attract tourists from the unaffected area who

are drawn by the low prices.

Similarly to income, apart from these short-term effects on demand flows caused by

price variations, there are other medium and long term effects on competitiveness when

14
price wars arise from the crisis which are not justified with improvements in efficiency

in the tourism companies and which sacrifice business profitability. This has a harmful

effect on the creation of factors as in the case of income. The impact of price variations

on competitiveness can be managed through economic policy measures, at least

temporarily, by alterations in the exchange rate of the different currencies. However,

this is impossible when a destination forms part of a fixed exchange rate commitment or

a single currency, as in the case of Spain since 1999.

4.1.3.-Expectations and other elements.

Expectations aggravate or mitigate the effects mentioned above and are the connecting

link between demand and supply mechanisms. On the demand side, expectations during

recessions are associated to unemployment and adverse psychological effects caused by

the continual negative news reported by the media, leading to a contraction of tourism

demand in those countries affected by the crisis. Therefore, negative expectations in

both countries of outbound tourism and in the destination, paralysing domestic tourism,

are harmful for the competitiveness of the destination, and depending on their intensity

may generate reductions in its global market share.

There are other elements, such as travel costs, tourism marketing budgets or internal

demand, which can aggravate or mitigate the above-mentioned effects. All of these

elements, which are modified during periods of recession, can act as transmission

mechanisms of competitiveness. However, they do not fall within the scope of this

study, although they are no less relevant for tourism competitiveness.

15
4.2- Supply Mechanisms

Supply mechanisms describe the effect that shocks have on investment and may be

derived in three different ways: an increase in input costs associated with many

economic crises; credit crunches in the case of financial shocks; and a reduction in the

usual business confidence during periods of recession. The joint action of these

elements alters business and government investment in the domestic economy and

foreign direct investment (FDI) from abroad, modifying the relative working capital

composition of tourism products in the different destinations. This affects their

competitiveness in the medium and long term. These mechanisms have become more

prominent since the 1990s, with increased globalisation and the gradual deregulation of

goods, services and capital markets, including tourism.

The causes and determinants of investment as a whole and of FDI in more specific

terms, like demand, are widely discussed in economic literature, which also includes

many reviews. This study has taken into account the contributions of Dwyer and Forsth

(1994), Dwyer et al (2010), Endo (2006), Fontagné and Pajot (1997), Hill and

Jongwanich (2009) among others. Domestic investment, both corporate and

governmental, increases during growth periods of the cycle and decreases during

periods of crisis. Therefore, the effects of this mechanism are not generated because

investment is higher in absolute terms during periods of crisis than during economic

growth periods, but because in comparative terms, those destinations unaffected by the

crises can invest relatively more, experiencing less variability in investment than crisis-

hit destinations.

16
During an asymmetric shock, international investment flows, both in the form of FDI

and in the form of portfolio investment, will seek opportunities in destinations

unaffected by the crisis. Some investment is even made in unaffected areas by the crisis-

stricken destinations; see Levy-Yeyati, Panizza & Stein (2003). In this respect, the

investment flows generated in periods of crisis are less relevant than the influence that

shocks have on investment decisions, as in the case of the internationalisation of the

Spanish hotel industry during the Spanish tourism crisis from the mid to late 1980s.

(Ramón, 2002). There may be a delay in the materialisation of opportunities detected

during periods of crisis which take shape in the subsequent growth phase, although the

important point is that the decision will have been made during the recession. One final

element to be considered resides, as in the case of demand, in the regional nature of

many crises. In this case, apart from the potential flow of investment between affected

destinations towards those that have not been hit by the crisis, there are also investment

flows between blocks of unaffected countries. This situation is currently visible, for

example, between emerging countries and is sufficient to alter the distribution of market

shares of the different destinations in the medium term, depending on how they have

been affected by the crisis.

Despite the complexity of the mechanisms described, the end result on competitiveness

is less ambiguous than that observed in the case of demand, given that the majority of

effects indicate a greater loss of competitiveness of destinations affected by crises than

those which are not. The following section analyses how supply mechanisms work with

an emphasis on their influence on FDI.

17
4.2.1.-Increase in Input Costs

As previously mentioned with respect to prices, experience shows that many economic

shocks go hand in hand with cost increases (energy, raw materials etc.), which affect

profitability and reduce profit margins and the capacity to invest in creating competitive

factors. This was the case of the energy crises of the 1970s, the crisis at the beginning of

the 1990s and the initial phases of the current global financial crisis. When increases in

operating costs cannot be transferred to clients without reducing demand, there is a fall

in corporate profitability which threatens the viability of tourism companies and

associated and auxiliary companies. This induces companies in the affected destination

to diversify risks in other markets, possibly fostering a flow of investment from crisis-

hit destinations towards unaffected destinations. If this fall in profitability caused by

increased costs is combined with a stagnation of demand generated by the recession, it

is likely that international financial investors will cease to invest in affected

destinations, favouring those experiencing growth.

In the short and medium term, as investment flows foster the movement of tourists from

one destination to another (an effect described in Dywer & Forsyth, 1994), the market

share of the destinations will change, whereby those of unaffected destinations will

increase to the detriment of the crisis-stricken destinations. In the long term, the lower

relative levels of investment in creating factors in the crisis-hit areas compared to those

of destinations unaffected by the crisis will enhance the competitiveness of the latter

18
and reduce that of the former. Therefore, the effects which were initially considered as

being temporary will persist over time.

4.2.2.-Credit Squeezes for Corporations, Households and Governments

A second element derived from crises which can potentially affect the competitiveness

of tourist destinations are the credit crunches associated to many of them. Economic or

financial shocks usually derive increased capital costs and financial restrictions for

corporations, households and governments. This alters investment patterns which can

modify the medium-term competitiveness of tourist destinations. Investment in tourism

is particularly sensitive to the prevailing tourism situation and that of the economy as a

whole. A stable economic environment stimulates investment, particularly in projects

with long or very long returns related to the increase in production capacity of the

company. On the contrary, uncertainty and economic downturns tend to reduce this type

of investment and replace it with a simple renewal of the most obsolete assets.

The increase in interest rates increases financial costs for corporations and governments

and has a negative impact on tourism and non-tourism investment projects, and is

detrimental to other more attractive financial alternatives. With respect to the corporate

sector, if companies cannot reinvest their declining profits in creating factors, they will

have no incentive to seek external financing to do so, as the little money available will

be lent with an interest rate that will render the projects unfeasible. In short, less

available and more costly credit reduces investment by all economic agents in advanced

factors, with a negative impact on competitiveness of crisis-hit destinations in the

19
medium and long term. When this availability is asymmetric, the effects on

competitiveness will be differential between destinations and will be reflected in their

shares of the world tourism market.

4.2.3.-Loss of Business Confidence

A loss of business confidence is the equivalent on the supply side of expectations on the

demand side. When a loss in confidence is coupled with negative demand expectations

the effects of the crisis on competitiveness are multiplied. When there is no business

confidence there is no investment and it is difficult for private companies to create

advanced factors. The concurrence of the negative effects of expectations on

competitiveness is highly visible in the present financial crisis, where the levels of both

business and consumer confidence are very low. As in the case of demand, the authors

of this study acknowledge the existence of other elements that may influence

competitiveness. The most relevant is the response of government authorities to the

crisis which will depend on the situation of public finances and the economic policies

implemented. Tourism investment programmes could play a predominant role in this

response. However, due to limited space, this study will not address these effects in

detail.

20
4.3-FDI and tourism competitiveness

The main effects of these supply mechanisms on the competitiveness of destinations

operate through FDI. Over the last few decades there has been unprecedented growth in

FDI and international trade, carried out mainly by transnational companies, whereby the

service sector and the tourism industry within it constitute a principal engine of this

growth (Economic Commission for Latin America ECLAC, 2003).

According to Endo (2006), the apparent demand of FDI for tourism is high. Today,

capturing investment for tourism is one of the main activities of investment promotion

agencies (IPA's) in developing countries. With respect to supply, the majority of FDI

comes from more developed countries. The results reveal positive relationships between

FDI and competitiveness in the industrial case of Fontagné & Pajot (1997), and

although Dwyer & Forsth (1994) express reservations in the case of tourism (leakages)

there are no reasons to believe that the situation in the tourism sector is any different.

It is evident that not all FDI in tourism has the same effect on the productive fabric and

growth of the recipient countries (Alfaro, 2003), however its transforming potential and

influence on competitiveness is more prominent in smaller countries. Therefore, Moore

& Craigwell (2008) find a bilateral relationship between tourism demand flows and FDI

inflows to small islands. The higher levels of tourism activity stimulate larger FDI

inflows and through the provision of infrastructure in accommodation and attractions,

FDI facilitates the boom and development of tourism.

21
Logic tells us that in the race to capture international funds for investment, unaffected

destinations are those which benefit during periods of crisis. However, empirical

evidence reveals that even crisis-stricken countries or destinations may receive an

inflow of international capital in the form of FDI. This, together with the regional nature

of investment in tourism, clearly favours emerging destinations as opposed to the more

mature markets in their efforts to increase their competitiveness (Stern, 1993). Hill &

Jongwanich (2009) point out that, paradoxically, FDI inflows can increase during periods

of crisis, although with a flight of capital in the short term. This can be explained by the

different reasons behind the two types of investment. In the case of Thailand, these

authors observe that during the Asian crisis inflows and outflows of FDI behaved

differently. Inflows grew strongly and outflows dropped sharply, leading to an

improvement in Thailand’s competitiveness in the medium and long term.

With respect to the current crisis, United Nations Conference on Trade and

Development UNCTAD (2009) indicates that 2008 marked the end of a growth period

in world FDI between 2003 and 2007 and confirmed its asymmetry, as it has had a

greater impact on developed countries (which have suffered sharp declines in FDI) than

on developing countries. It also reveals that in the current crisis the impact experienced

by different countries has depended on their different degrees of international openness.

Finally, it emphasises the relevance of the supply channels described, pointing out that

the reduction in access to credit, negative outlooks and risk aversion have been the main

causes of the decline in global FDI flows, highlighting the strength of emerging

economies as new sources of FDI.

22
5.-EMPIRICAL FINDINGS: SPAIN’S TOURISM COMPETITIVENESS IN TIMES

OF CRISIS.

This section will carry out an empirical analysis of the afore-mentioned effects, using

the time framework of 1970-2010, a period in which the country reached its tourism

maturity and when the decreasing trend in Spain’s market share in international tourism

began. There are forty one annual observations available, constituting a small sample

size. Table three lists the variables considered, the source used and the observations

pertaining to each case. The methodology applied is the estimation of models through

least square linear regression (OLS).

Table three about here

5.1.-Effects of Economic Crises on Spain’s Tourism Competitiveness

Table four presents the results of different regressions of Spain’s market share with

respect to representative variables of the economic cycle and crises. In the first model

(model one) the market share taken in logarithms is regressed against a time trend, a

quadratic trend and the logarithmic difference of Spain’s GDP and dummy variables for

the crises considered. In model one all the coefficients have the expected signs. The

coefficient associated to the trend reflects the declining direction of market share which

is also directly affected by the economic situation (positive coefficient of GDP) and

negatively by the economic crises. A lag of between one and three years has been

23
considered with three years required to render the dummy of the global financial crisis

of 2008 significant. The diagnostic model finds that the error term is serially correlated

(also true in models two and five). This required the consideration of standard

deviations consistent with this result.

The rest of the models incorporate a lag of the dependent variable in order to eliminate

this correlation. The incorporation of the lag variable and the disregard of

heterokedastic and autorcorrelation consistent errors (HAC) reduced the number of

significant parameters in the models. Model two is a dynamic model which introduces a

lag of the dependent variable, eliminates static model trends and maintains the variables

associated to the crisis. The result obtained is that the lag of the dependent variable

absorbs the explanatory capacity of the economic situation. However, a negative and

significant sign is observed for the crises of 73 and 79 and the current crisis of 2008.

Model three is a combination of static and dynamic specification with a satisfactory

econometric adjustment (R-squared adjusted by 0.76), but there is no reference made to

the effects of the crisis. Therefore, model four introduces dummies that control the

effect of the crisis. This model is estimated with standard OLS and HAC consistent

errors (model five). With these deviations both the economic situation and the other

variables associated to crises become significant.

Table four about here

24
5.2.-Modelling Competitive Transmission Mechanisms.

Table five presents three models that attempt to show the influence of the channels

analysed (demand and investment) on Spain’s tourism market share. Given that the

results of the analyses have revealed a very low correlation between FDI and the

representative variables of tourism investment that are normally used in the literature

(evolution of the number of hotels or hotel beds), models have been estimated which,

together with FDI, incorporate these variables for the Spanish case. However, all the

models obtained with these hotel variables have generated poor results which can be

attributed to either errors in measuring the hotel variables or the poor quality of these

variables as proxies of tourism investment in the case of Spain. Finally, the variation in

the apparent consumption of cement was chosen as an approximate variable of tourism

investment, considering that this variable represents the magnitude of Spain’s

residential tourism phenomenon.

Table five about here

In model six market share is regressed against a linear and quadratic trend and the

representative variables of tourism investment and demand. In order to avoid problems

of endogeneity with the dependent variable and to capture more details of tourism

demand, Spain’s tourism income was used as the international demand variable as

opposed to the number of visitors. With respect to investment, inflows and outflows of

FDI in Spain have been taken. In model six, all the coefficients have the expected sign

and are significant (except the FDI outflows). In model seven the income variable has a

25
lag of one period and the variation in cement consumption is added also with a lag of

one period. In this model, as in the previous one, all the coefficients have the expected

sign. The FDI inflow variable is significant on the third lag, while the FDI outflow

variable is not significant with any reasonable lag. Finally, model eight, is presented

simply to illustrate the negative effects that the growth of competitors (Turkey has been

taken as the most representative example), have on Spain’s share of the tourism market.

5.3.-Transmission Channels and Economic Crisis.

In order to complete the analysis, the effects of crises on demand and Spanish FDI are

evaluated. Three models (see table six) in which representative variables of the channels

are estimated against the economic evolution and characteristic dummies of the

different crises. Model nine explains the variation of demand using the variation in the

number of visitors as a dependent variable. This is a model without a constant. The

introduction of a constant renders the influence of GDP on tourism demand negative,

contradicting economic theory and a large part of the empirical literature on tourism

demand. In this model the positive coefficient associated to the current economic crisis

is striking, however, this can be explained by the effects caused by the Arab Spring,

given the lags adopted for each variable. Model ten is similar to the previous model but

uses income from tourism in real terms as a dependent variable. Finally, model eleven,

also without a constant (here the constant is insignificant in all the models estimated),

shows that the inflow of FDI is directly affected by economic evolution.

Table six about here

26
6.-CONCLUSIONS

Spain is one of the world’s leading tourism destinations. Its evolution has experienced

peaks and troughs in line with the overall evolution of the economy. The literature on

tourism competitiveness supports the decision to use market share as an appropriate

indicator of revealed competitiveness which also enables demand and supply

transmission mechanisms to be established between the economic situation and

competitiveness. A sufficient historical perspective of the crises in Spain reveals that

they usually give rise to structural effects which are reflected in competitiveness with

varying degrees of delay. In addition to the intensity or duration of the shocks, a crucial

aspect of their effects on destination competitiveness is whether they are symmetrical or

asymmetrical.

It can be observed that Spanish tourism competitiveness, measured by its share in the

world market, is characterised by a declining trend which is explained by the natural

emergence of new competing destinations and by the maturity of the Spain’s principal

tourism product. During crisis periods, the cyclical oscillations of the Spanish economy

and those of the main outbound markets have given rise to a loss in Spain’s domestic

tourism competitiveness, reinforcing the negative structural trend described. This also

has a negative effect on reinvestment possibilities during periods of economic growth.

The analyses carried out for the Spanish case do not constitute a simple theoretical

divagation but are supported by the limited data available. Therefore, this study

advances the understanding of interactions between economic cycles and

competitiveness, and can advise tourism agents of the effects that crises (often of an

exogenous nature) may have on destinations and tourism companies.

27
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 Figure 1: Spain’s market share of the international tourism sector.
Spain’s Market Share. Tena (2005)

Spain’s Market share. WTO

Author’s own elaboration. Source: Tena (2005) and World Travel Organization WTO (2011).
Figure 2: Symmetrical and asymmetrical crises, potential effects on tourism
destinations.

Global crisis Regional crisis

Origin

Growth Crisis Growth Crisis

Growth Reduction in Growth Reduction in

international international
demand demand
Destination
Crisis Reduction in Reduction in Crisis Reduction in Reduction in
domestic international domestic international
demand demand demand demand

Decline in Reduction in Decline in Reduction in

investment domestic investment domestic
demand demand

Decline in Decline in
investment investment
Author’s own elaboration.
 INVESTMENT CHANNEL DEMAND CHANNEL

INTERNATIONAL ECONOMIC CRISIS

PRICE TENSIONS
LOSS OF BUSINESS INCREASE IN FALL IN DISPOSABLE
CREDIT CRUNCH
CONFIDENCE HOUSEHOLD INCOME IN
INPUT COSTS
DOMESTIC AND
“PRICE WARS” PRICE TRANSFERS OUTBOUND MARKETS

INCREASED FALL IN INVESTMENT FALL IN BUSINESS

INVESTMENT IN INCREASED DEMAND
LEVELS PROFITABILITY REDUCTION IN
COMPETING MARKETS IN COMPETING
DEMAND LEVELS MARKETS

STAGNATION AND CLOSURE OF BUSINESSES CLOSURE OF BUSINESSES IN

DETERIORATION OF IN ASSOCIATED AND TOURISM SECTOR.
FACTORS AUXILIARY SECTORS REDUCTION IN RIVALRY

INCREASE IN DEMAND
IN COMPETING
MARKETS
LOSS IN COMPETITIVENESS OF SPANISH DESTINATIONS AND INCREASE IN
COMPETITIVENESS OF COMPETING DESTINATIONS

ACCELERATED LOSS OF SPAIN’S MARKET SHARE

Figure 3: Transmission mechanisms between crises and tourism competitiveness.
Table 1: Variation in Spain’s share of the tourism market during periods of crisis and
economic expansion
Mean inter-
Mean annual
absolute variation
Crisis periods values rates Observations
Period 1973-1976 -0.90 -6.10 FIRST OIL CRISIS
Period 1979-1980 -1.15 -8.61 SECOND OIL CRISIS
Period 1989-1991 -0.60 -4.86 FIRST GULF WAR
Period 2001-2002 0.25 2.31 DOT.COM CRISIS AND 9/11.
Period 2004-2005 -0.20 -1.60 2004 MADRID TRAIN BOMBINGS
Period 2007-2010 -0.35 -3.25 GLOBAL FINANCIAL CRISIS:

Growth periods
Period1981-1988 0.14 1.25
Period 1992-1999 0.02 0.35
Period 2000-2006 0.04 0.46
Author’s own elaboration. Source Tena (2005) and National Bureau of Economic Research NBER
(2012).
 Table 2: Economic determinants of competitiveness. Different models
Porter (1991) Crouch-Ritchie (1999) Dwyer and Kim (2003)
Basic factors
Advanced factors
-Infrastructure
-Qualified workforce
-Technology
Conditions of demand
-Volume of demand
-Level of understanding and exigency
Related and supporting sectors
-Related companies: tourist attractions,
restaurants, etc.
-Auxiliary companies: retail outlets,
services, etc.
Structure, strategy and rivalry of
firms.
-Independent nature
-Level of rivalry
-Commitment to the area
Government
-Investment in providing factors
-Tourism promotion
Circumstances
-Economic crisis
-Non-economic crisis
Author’s own elaboration based on Porter (1991), Croutch and Ritchie (1999), Dwyer and Kim (2003)
Nucleus of resources and Provision of resources
attraction elements Created resources
Auxiliary factors and -Tourism infrastructure
resources -Special events
-Infrastructure -Range of available activities
-Accessibility -Entertainment
-Accommodation -Shopping
-Auxiliary resources: Auxiliary factors and
financial institutions, human resources
capital and knowledge -General infrastructure
-Management -Quality of service
Management of the -Accessibility
destination. -Accommodation
-Marketing -Market links
-Financing and risk capital Management of the
-Organisation destination.
-Human Resources -Organisation of the
-IT/research system management of the destination
-Quality of service -Strategic marketing
-Management of tourists -Tourism policy, planning and
-Control or protection of development
resources -Development of human
Tourism policy, planning resources
and development -Environmental management
Competitive Localisation conditions
Microenvironment. -Localisation
Macro-environment -Competitive microenvironment
Determinants that increase -Competitive macro-
and improve environment
competitiveness Health and safety
-Pricing competitiveness
Demand conditions.
Preferences of the tourists
-Recognition of the destination
-Image of the destination
 Table 3: Empirical analyses, variables used and sources.
Mechanism / Variable Variable Source Observations
Dependent variable Spain’s international Tena (2005) based on Estimated visitors for
tourism market share IET (Institute of Spain / global tourists
(Ln) Tourism Studies) data estimated by the WTO
Independent variables
Domestic economic Real GDP of Spain Organisation for Base year 2005
cycle (ld_PIBSPA) (logarithmic difference) Economic Co-operation
and Development
(OECD)
Economic cycle of Real GDP of the UK Organisation for Base year 2005 is
outbound markets (logarithmic difference) Economic Co-operation taken to represent
(ld_PIBUK) and Development outbound tourist
(OECD) markets
Trend (time) Linear trend
Quadratic trend (timesq) Quadratic trend
First oil crisis Dummy 1 if t=1973,1974,1975 and 0 otherwise
Second oil crisis Dummy 1 if t=1978, 1979,1980,1981 and 0 otherwise
(crisis79)
Crisis at the beginning Dummy 1 if t=1990,1991,1992, 1993 and 0 otherwise
of the 1990s (crisis93)
Crisis at the beginning Dummy 1 if t=2001 and 0 otherwise
of the 2000s,
technological bubble
9/11 (crisis2001)
Global Financial Crisis Dummy 1 if t=2007,2008, 2009 and 0 otherwise
(crisis2008)
Demand Mechanism
Income from tourism in Bank of Spain
Spain in real terms
(ITRESP)
Spain’s competitiveness Real effective exchange Organisation for
index rate Economic Co-operation
and Development
(OECD)
Supply Mechanism
Hotel beds in Spain Hotel beds in Spain General Secretariat of Break in the series in
(Ld_Camasespana) (logarithmic difference) Tourism and the Spanish 1999
National Statistics
Institute (INE)
Inflow of FDI into Spain Inflows of FDI in United Nations
(Ld_FDIinesp) nominal US dollars Conference on Trade
and Development
(UNCTAD)
Outflow of FDI from Outflows of FDI from United Nations
Spain (Ld_FDIoutesp) Spain in nominal US Conference on Trade
dollars and Development
(UNCTAD)
Author’s own elaboration. Visitors (overnight visitors and excursionist). Tourist (overnight visitors).
 Table 4: OLS Estimations. Dependent variable: l_CMERLIBTEN

(1) (2) (3) (4) (5)

const 2.820** 0.4980** 1.338** 1.596** 1.596**
(0.06233) (0.1736) (0.3495) (0.3747) (0.2650)
time -0.02980** -0.009750** -0.01734** -0.01734**
(0.005630) (0.004043) (0.006007) (0.003936)
timesq 0.0004749** 0.0001464* 0.0002742** 0.0002742**
(0.0001155) (8.184e-05) (0.0001148) (8.094e-05)
ld_PIBSPA85 0.9642** 0.2933 0.9926** 0.4848 0.4848*
(0.3563) (0.3285) (0.4364) (0.4712) (0.2706)
crisis73(-1) -0.1611** -0.05657* -0.1375** -0.1375**
(0.03147) (0.02972) (0.04052) (0.02009)
crisis79 -0.05135 0.01739 -0.03647 -0.03647
(0.03927) (0.02178) (0.03318) (0.02687)
crisis93(-1) -0.05770** -0.02986* -0.04026 -0.04026*
(0.02542) (0.01592) (0.02999) (0.02017)
crisis2008(-3) -0.1028** -0.06058** -0.07828 -0.07828**
(0.02388) (0.01494) (0.05531) (0.02013)
l_CMERLIBTE(-1) 0.7923** 0.4927** 0.4378** 0.4378**
(0.07229) (0.1304) (0.1327) (0.09548)
n 38 38 40 38 38
Adjusted R2 0.7379 0.7346 0.7697 0.8029 0.8029
lnL 60.8 59.94 61.14 66.85 66,85
Author’s own elaboration. Standard deviations in brackets: Models (1), (2) and (5) HAC deviations.
Models (3) and (4) OLS standard deviations. * indicates a 10% significance level ** indicates a 5%
significance level.
 Table 5: Determinant of competitiveness. OLS estimations
Dependent variable: l_CMERLIBTEN
(6) (7) (8)
Const 2.731** 2.707** 2.674**
(0.04907) (0.05197) (0.05140)
Time -0.02447** -0.02294** -0.01266**
(0.006154) (0.006008) (0.005359)
Timesq 0.0004090** 0.0003767** 0.0001392
(0.0001349) (0.0001290) (0.0001183)
ld_FDIinfes_1 0.06711**
(0.01729)
ld_ITRESP 0.3407**
(0.1331)
ld_FDIoutes_2 -0.02958 -0.01781
(0.02270) (0.02339)
ld_FDIinfes_3 0.05712*
(0.02926)
ld_ITRESP_1 0.3066**
(0.1023)
ld_cemento_1 0.2699**
(0.1030)
ld_CAMASTUR_3 -0.4478*
(0.2527)
N 38 37 37
Adjusted R2 0.6185 0.5903 0.5288
lnL 52.44 55.19 50.84
Author’s own elaboration. Standard deviations in brackets, HAC deviations.* indicates a 10%
significance level ** indicates a 5% significance level.
 Table 6: Transmission channels.
OLS estimates, using observations in period 1973-2010*

Dependent Variable Model 9 Model 10 Model 11

ld_VISITSPALIBT ld_ITRESP ld_FDIinfespun
ld_PIBSPA85_1 1.08593 0.998248 4.71601
(0.00007) (0.00567) (0.02138)
ld_tce_1 -0.34251 -0.791841
(0.00206) (0.00206)
crisis_1 -0.0830118 -0.138815 -0.14478
(0.04889) (<0.00001) (0.29447)
crisis79_1 0.000961401 0.0237663 0.0617341
(0.97393) (0.46192) (0.00395)
crisis93_1 0.00652068 0.0299322 -0.162057
(0.32626) (0.00017) (0.01549)
crisis2008_1 -0.329841
(0.43677)
crisis2008_3 0.0609507 0.0578868
(<0.00001) (0.00008)
Adjusted R-squared 0.244671 0.373312 0.036665
Durbin-Watson 1.717862 1.573871 2.672654
Author’s own elaboration.
*HAC deviations with bandwidth 2 (Bartlett Kernel), p-value in parentheses, Model 11 using
observations in period 1972-2010 (T = 39)