GE.13-

Trade and Development Board Trade and Development Commission

Expert Meeting on Tourism’s Contribution to Sustainable Development

Geneva, 14–15 March 2013

Item 3 of the provisional agenda

Tourism’s contribution to sustainable development

Sustainable tourism: Contribution to economic growth and sustainable development

Issues note prepared by the UNCTAD secretariat

Executive summary

Many developing countries consider tourism to be important for economic progress

and poverty reduction. However, it is also clear that the link between tourism and economic

growth and poverty reduction is not automatic. It very much depends on whether tourism

generates employment opportunities, creates linkages – in particular with agriculture and

service-providing sectors – and stimulates the development of basic infrastructure through

the construction of roads, port and airport facilities and the provision of financial services

from which the economy as a whole can benefit. It also depends on whether the

development of tourism is guided by a national strategy comprising policy, regulatory and

institutional frameworks with sufficient incentives to stimulate the development of supply

capacity in national markets. Equally important is the extent to which the national strategy

limits financial leakages from the domestic economy, which appears to be a perennial

problem in many developing countries, and the efforts made to minimize the adverse

impact of tourism on the environment and on cultural heritage. While the role of tourism in

structural economic progress and sustainable development is not a new topic on the

international agenda, how to make tourism more sustainable and contribute to developing

countries’ sustainable development objectives is still a challenge that requires urgent

attention.

United Nations TD/B/C.I/EM.5/2

United Nations Conference on Trade and Development

Distr.: General

28 January 2013

Original: English

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Contents

Page

Introduction ............................................................................................................................. 3

I. The magnitude and relative importance of the tourism industry................................................. 3

A. The global perspective ..................................................................................................... 3

B. The national perspective .................................................................................................. 6

II. The potential role of tourism in economic growth and poverty reduction ................................... 7

A. Linkages .......................................................................................................................... 7

B. Poverty reduction............................................................................................................. 12

III. Concerns and risks associated with tourism .............................................................................. 12

A. Weak linkages means greater financial leakages ............................................................... 13

B. Sociocultural concerns ..................................................................................................... 14

C. Environmental damage and damage to cultural heritage .................................................... 14

IV. Towards sustainable tourism .................................................................................................... 15

A. A policy agenda towards sustainable tourism ................................................................... 16

B. Clustering ........................................................................................................................ 17

C. Linkages with local suppliers of goods and services ......................................................... 18

D. Skills and human resources development ......................................................................... 18

E. Access to finance and investment ..................................................................................... 18

F. Institutional framework and mainstreaming of tourism in national policies ....................... 19

G. Promotion and marketing ................................................................................................. 19

H. Protection and conservation of cultural heritage................................................................ 20

V. Conclusions ............................................................................................................................. 20

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Introduction

1. The development of the tourism sector involves diverse actors ranging from

governments – which influence its development through policy intervention, infrastructure

development and regulations – to key players in the private sector. These include the

numerous small and large, and local and foreign enterprises that provide supplies and

services such as hotels, restaurants, transport, local guides, and various leisure and

entertainment services. This diversity presents a dilemma. On the one hand, it shows that

unlike other sectors that are inherently enclaves, such as the extractive sector, tourism

creates linkages across sectors in the economy and, therefore, is more likely to contribute to

economic diversification. On the other hand, the diverse range of actors and activities in the

tourism sector adds to the challenge of creating a sustainable tourism sector, which requires

that each area or activity be sustainable. A range of policies and regulations, investments

and training are necessary to make all tourism-related activities sustainable and to

contribute to sustainable development.

2. The objective of this document is to identify the key issues that should be addressed

in considering the contributions of tourism to sustainable development. Chapter I will

review the magnitude and relative importance of the tourism sector from the global and

national perspective. Chapter II assesses the potential direct and indirect impacts of tourism

on local economies and its potential role in poverty reduction and inclusive growth. Chapter

III addresses the challenges posed by the tourism sector, specifically the potential damage

to the environment and cultural heritage. Chapter IV examines how the tourism sector

could be made more sustainable and how its contributions to sustainable development could

be enhanced.

I. The magnitude and relative importance of the tourism industry

A. The global perspective

3. With increasing globalization and disposable income, tourism1 has over the last few

decades become one of the largest and fastest growing industries. In 2011 the industry

generated an estimated 5 per cent of global gross domestic product (GDP) and between

6 and 7 per cent of the overall number of jobs worldwide.2 Demand is expected to be

sustained due to rising household incomes in emerging economies fuelling leisure activities

and growing international trade, which bolsters business travel. Given its size, the sector

bears considerable potential for economic growth, diversification and structural

transformation of economies.

4. International tourist arrivals have shown virtually uninterrupted growth, rising from

25 million in 1950 to 435 million in 1990, 675 million in 2000 and 940 million in 2010

(figure 1). In 2012 it is estimated that one billion tourists travelled internationally. Only in

2008–2009 did the number experience a significant setback. According to the UNWTO, the

1 A definition of tourism is contained in International Recommendations for Tourism Statistics 2008.

ST/ESA/STAT/SER.M/83/Rev.1. Department of Economic and Social Affairs Statistics Division.

United Nations publication. Sales No. E.08.XVII.28. United Nations, 2010. New York.

2 World Tourism Organization (UNWTO) (2012). UNWTO Tourism Highlights: 2012 Edition.

UNWTO. Madrid.

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tourism sector is among the first to show early recovery from the recent global financial and

economic crisis. With an estimated growth rate of 3–4 per cent in 2012, international tourist

arrivals have proved to be remarkably resilient, but sensitive, to economic instability. The

recovery is expected to endure over the longer term with 4 per cent annual growth in

international arrivals projected through 2020, when it should reach 1.6 billion – nearly 60

per cent above current levels. Europe, East Asia and the Pacific, and the Americas are

projected to be the top three receiving regions, followed by Africa, the Middle East and

South Asia.3

Figure 1

Inbound tourism, 1990–2011

0

200

400

600

800

1000

1200

1 9

9 0

1 9

9 2

1 9

9 4

1 9

9 6

1 9

9 8

2 0

0 0

2 0

0 2

2 0

0 4

2 0

0 6

2 0

0 8

2 0

1 0

International tourist arrivals (million)

International tourism receipts (billion dollars)

Source: UNWTO.

5. While Europe and North America remain the traditional destinations, the market

share of emerging economies increased considerably from 30 per cent in 1980 to 47 per

cent in 2010. With emerging economy destinations growing faster than advanced economy

destinations, the market share of the former will expand further (figure 2). As regards

source markets, generally about three quarters of all international tourists are from

developed countries.

3 Ibid.

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Figure 2

International tourist arrivals, 2006–2012, by type of economy

(Change, in percentage)

4.4

-0.3

-4.5

5.2 5.2

3.6

9.3

5.1

-3.1

8.2

4.9 4.6

-6

-4

-2

0

2

4

6

8

10

07/06 08/07 09/08 10/09 11/10 12/11

Year to date Advanced economies Emerging economies

Source: UNWTO.

6. Moreover, figures for 2008 indicate that about 51 per cent of all international tourist

arrivals are associated with leisure tourism; 15 per cent with business travel; 27 per cent

with other purposes, including family visits, religious pilgrimage, health and education; and

7 per cent are unspecified.4 Over half arrive at their destination by air transport (52 per

cent), the remainder by surface transport (48 per cent).

7. The number of international tourist arrivals – around one billion – is relatively small,

compared with the number of annual domestic arrivals, estimated to be nearly four billion.

Domestic tourism is important for employment creation and domestic value chains,

especially in developed economies. However, the economic development potential of the

tourism sector is often associated with international tourism because of its capacity to

generate foreign exchange and provide opportunities for the transfer of capital and

knowledge.

8. International tourism is a key source of foreign exchange and thus a crucial

contributor to the balance of payments and to macroeconomic stability, especially in

developing countries. As shown in figure 1, tourism exports, measured by international

tourism receipts, reached a record of $1,030 billion in 2011, or approximately $1,000 per

international tourist. When the value of international passenger transport is added, the

overall income generated by inbound travel and tourism in 2011 exceeds $1.2 trillion.

4 UNWTO (2009). Tourism Highlights: 2009 Edition. UNWTO. Madrid.

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9. The tourism sector ranked fourth in global exports in 2011, accounting for 30 per

cent of the world’s exports of commercial services, or 6 per cent of total exports.5

10. Another striking feature of the tourism sector is that women make up between 60

and 70 per cent of the labour force, and half of the workers are aged 25 or younger.6 Entry

into the tourism workforce is also comparatively easy for migrant workers. For many

developing countries, tourism services provided by their nationals working abroad bring

significant remittance inflows. Countries hosting migrant workers also benefit from tourism

and travel services exports generated by the expenditure of migrant workers in their

economies.

11. Concerns about the employment pattern of the industry relate to the seasonality and

temporary nature of many jobs, together with the relative high share of unskilled and semi-

skilled employment opportunities, and in some cases poor employment conditions. Efforts

are being made by the International Labour Organization (ILO) and non-governmental

organizations (NGOs) to create awareness of poor working conditions and to sensitize

tourism employers and the relevant officials to the importance of encouraging decent work

and decent wages in the tourism sector.

12. ILO estimates that in terms of the sector’s employment-generating capacity, one job

in the core tourism industry creates about 1.5 additional or indirect jobs in tourism-related

economic activities. The majority of tourism-related businesses in developing countries,

particularly in least developed countries (LDCs), tend to be small, medium-sized and micro

enterprises, many of which are operating in the informal economy.

B. The national perspective

13. The global picture naturally hides important heterogeneities among countries. The

sector’s direct contribution to GDP, employment, income and foreign exchange earnings is

greatest in developing countries that are largely dependent on tourism, such as many small

island developing States. In absolute terms, however, the economic impact of tourism is

most significant in large and diversified economies such as the United States of America,

China, Japan, France, Brazil, Spain and Italy. UNWTO estimates that “in advanced,

diversified economies, the contribution of tourism to GDP ranges from approximately

2 per cent for countries where tourism is a comparatively small sector, to over 10 per cent

where tourism is an important pillar of the economy”.7

14. Over the last two decades, the sector grew considerably faster in developing

countries than in developed economies, due partly to increasing disposable income and the

fact that travel is now relatively less expensive and easier. Today, developing countries

account for over 45 per cent of world tourism arrivals and more than 35 per cent of

international tourism receipts. The growing trend in intraregional travel has also contributed

to the growth of the tourism sector in many developing countries.

15. According to World Travel & Tourism Council estimates, the top 10 countries with

the highest growth rates in travel and tourism in 2011 were all developing countries. These

include Uganda (17.2 per cent), Thailand (15.7 per cent), Uruguay (15.1 per cent), Hong

Kong, China (14.4 per cent), Namibia (13.4 per cent), Turkey (13.4 per cent), the Lao

5 See footnote 2.

6 Bolwell D and Weinz W (2008). Guide for social dialogue in the tourism industry. Sectoral Activities

Programme. Working Paper No. 265. International Labour Organization. Geneva. October.

7 See footnote 2.

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People’s Democratic Republic (12.2 per cent), Singapore (11.6 per cent), Tonga (11.5 per

cent) and Mali (10.7 per cent).

16. In terms of contributions to GDP and employment, the role of tourism is particularly

prominent in small island developing States, some of which are also LDCs. In some,

tourism accounts for over 25 per cent of GDP. Indeed, tourism is the No. 1 or No. 2 source

of export earnings in 20 of the world’s 49 LDCs. The sector is the principal source of

export earnings in 10 of these countries. Among developing countries as a whole, tourism

accounts for 12–15 per cent of total export receipts.

17. The tourism sector has gained considerable importance at the global and national

levels as a source of economic growth and employment. As a result, governments have

been paying increasing attention to the development of the sector with an expectation that it

will help generate employment and higher income, thereby contributing to poverty

reduction.

II. The potential role of tourism in economic growth and poverty reduction

18. The contribution of the tourism sector to economic growth, job creation, domestic

capacity-building and poverty reduction depends on the following factors:

(a) The extent to which the tourism sector is integrated into the national

economy through backward and forward linkages with other sectors and integration into

regional and global value chains;

(b) The extent to which revenue generated by tourism, including foreign

exchange, is used to finance infrastructure development, support local enterprises, in

particular small and medium-sized enterprises (SMEs), and to develop the skills and

institutions needed to create a vibrant local economy;

(c) The policies and strategies adopted by governments, and whether they

encourage increased domestic and foreign investment in tourism, transfer of technology and

know-how; promote labour-intensive activities; and target regions where the poor live and

work;

(d) National efforts to ensure that tourism activities are carried out sustainably

and meet economic, social and environmental objectives.

A. Linkages

19. A prominent feature of tourism is its potential to create backward and forward

linkages that are strong and diverse. Indeed, a study of the tourism sectors in India, Brazil

and Indonesia by Geloso et al. found that linkages (both backward and forward) were

particularly strong for the tourism sector relative to linkage strengths for most other sectors,

confirming tourism as a sector capable of stimulating broad-based economic activity.8 In

effect, strong linkages catalyse a multiplier effect that can generate broad-based economic

benefits at the national level as well as in situ employment opportunities and poverty

reduction at the local level.

8 Geloso Grosso M, Lesher M and Pinali E (2007). Services trade liberalization and tourism

development. OECD Trade Policy Working Paper No. 57. JT03235678. Organization for Economic

Cooperation and Development. Paris.

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20. As shown in figure 3, the tourism value chain can incorporate many sectors in an

economy. Its promotion will require the construction and operation of hotels, restaurants

and other tourism-related facilities through backwards linkages and the development of

basic infrastructure services, such as energy, telecommunications and environmental

services; agriculture, manufacturing and other support services. It can also create a wide

range of forward linkages with sectors supplying services consumed by tourists. These

include financial, telecommunications, retail, recreational, cultural, personal, hospitality,

security and health services. In addition, countries wishing to strengthen their tourism

sector will need to develop other tourism-supporting infrastructure such as airports, proper

roads, ports, hospitals and banks, which are essential for providing access to high-quality

services and creating a competitive tourism destination.

21. However, building linkages requires an effective national strategy comprising

targeted policies, regulatory and institutional frameworks, and sufficient incentives to

stimulate private investment and the development of domestic supply capacity. Having a

national strategy is critical, but active government involvement in the development of basic

infrastructure is equally important. Developing countries that have been most successful in

tourism development have been those that have designed a clear public- and private-sector

strategy for investment and the development of essential tourism-supporting infrastructure.

22. However, in many developing countries, tourism linkages remain weak and

underexploited. Consequently, most of the value added in the tourism sector tends to be

captured by foreign investors, international tour operators and foreign airline companies,

and only limited benefits flow to the poor. For example, Mitchell and Ashley suggest that at

best, between one fifth and one third of total tourist expenditures in the destination is

captured by the poor from direct earnings and supply chains.9 Hence the concern about

leakages as discussed below.

23. Therefore, in designing strategies for sustainable tourism, governments need to

assess and identify the potential linkages or tourism-related value chains in the economy.

For example, agriculture is a key sector with strong backward linkages with tourism, as

hotels and restaurants need a steady and large supply of foods and beverages. According to

Telfer et al., about one third of all tourism expenditure is spent on food items.10 However,

supplying food and beverages for the tourism industry is generally demanding, in terms of

reliability, quantity and quality requirements (e.g. complying with health and phytosanitary

standards). A means to facilitate the integration of local producers into the value chain is

through direct contractual agreements between producers and hotels. Such contracts offer

producers an opportunity to pre-negotiate prices, plan production and enable them to invest

in better technologies due to more secure income. Many hotels also invest in the facilitation

of extension services and skills upgrading to contribute to product quality improvements.

While such initiatives benefit suppliers, they also allow hotels to exert influence over

production volumes, quality and variety. In addition, increased demand for agricultural

produce generates spillover effects to rural non-farming activities, such as stimulating the

development of the agroprocessing industry and boosting demand for rural transport,

storage and trading activities.

9 Mitchell J and Ashley C (2007). Can tourism offer pro-poor pathways to prosperity? Examining

evidence on the impact of tourism on poverty. Briefing Paper 22. Overseas Development Institute

(ODI). June. http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-

files/110.pdf.

10 Telfer DJ and Wall G (1996). Linkages between tourism and food production. Annals of Tourism

Research. 23(3):635–653.

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Figure 3

Tourism value chain

Travel

agencies

Regional transit

Taxis

Tour operators

Vehicle rental

Security and maintenance

services

Telecom services

Management and business services

Water travel (cruises)

Air transport

Travel goods (luggage, clothes)

Marketing

Booking systems

Financial services

Accommodation (hotels, resorts)

Hotel operation

Hotel construction

Consumer goods

Retail

Agricultural products and processed foods

Equipment

Catering services

Entertainment services

Events

Theme parks

Natural and cultural

destinations

Transport

Shopping

Accommodation and entertainment

Recreational, cultural and sporting activities

Organization of travel Marketing

Crafts and souvenirs

Real estate development

Engineering and architectural

services

Construction materials and

equipment

Tour operators

Source: ECLAC, on the basis of Gollub J, Hosier A and Woo G (2003). Using Cluster-Based

Economic Strategy to Minimize Tourism Leakages.

Note: The activities encased within the dotted lines are the core activities of the sector.

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24. Many developing countries, in particular LDCs, still encounter constraints in

sourcing agricultural products locally. Some of these constraints are well-known

(inadequate quality, reliability or delivery of supply) and can be exacerbated by poor

transport and a lack of communication and information between suppliers and purchasers.

The strategies to overcome these problems and the implementation challenges facing

developing countries as well as the role of international organizations in strengthening the

agriculture–tourism supply chain linkages need further attention. The box below offers an

example of a partnership that succeeded in integrating small holders into the tourism value

chain.

Gambia is Good

In the Gambia, tourism is an important source of income. Despite the interest in

sourcing locally, hotels and restaurants often import fruits and vegetables, as the local

supply tends be unreliable, of inconsistent quality and insufficient in peak periods. The

partnership Gambia is Good (GiG) was created with funding from the Business Linkages

Challenge Fund of the Department for International Development of the British

Government. This partnership is made up of Concern Universal, an international NGO, and

Haygrove Ltd., a leading British horticulture business, and local producers. It purchases

fresh horticulture produce from smallholder farmers and markets them to tourist hotels and

restaurants, thus replacing middlemen between growers and buyers. GiG provides

marketing support and production training, and facilitates input procurement. More

specifically, it translates the needs of hotels, restaurants and supermarkets into detailed

production plans for growers, negotiates fair prices, sets up a seed store and a produce

grading system, helps with irrigation systems and diversifying crops to enable year-round

production. As a result, produce is purchased from nearly 1,000 growers, 90 per cent of

which are women. The growers supply around 20 tons of produce per tourist season month

to more than 40 hotels and restaurants.

Source: UNCTAD, based on information available on the web.

25. The tourism sector’s potential to stimulate and facilitate growth and development in

the manufacturing, construction and transport sectors has also been the subject of much

debate. The sector’s direct effects on the demand for manufactured products, ranging from

simple products such as bed linens, towels, soap and furniture, to high-tech or capital-

intensive manufactured products that the construction and transport industries need in order

to provide high quality and competitive tourism service, could be substantial. The

expansion of the sector often boosts demand for the construction of tourism facilities such

as hotels, ports, roads, and modern airport facilities and the provision of vehicles and other

means of transport to tourist sites. This, in turn, generates multiplier effects along the value

chain and in sectors as diverse as mining, energy, water supply, and the manufacture of

products with higher knowledge content, such as inputs into the construction and transport

sectors. Further, the construction of transport infrastructure benefits not only tourism but

also facilitates trade. In countries where tourist sites are located in remote areas, the

construction of a transport network could have a beneficial impact on rural development.

However, given the low level of industrial development and the weak production structure

across sectors in many developing countries, in particular LDCs, linkages are generally the

weakest between tourism and key sectors such as agriculture, transport and manufacturing.

Therefore, a large part of the inputs needed to build the basic infrastructure and to promote

tourism is often imported.

26. To attract increasing number of tourists and remain competitive, the tourism sector

should have access to reliable and efficient utilities such as electricity, clean water and

modern sanitary services. These are, of course, utilities that countries should develop for

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the well-being of their population, regardless of concerns for tourism. However, policy

efforts to promote the tourism sector will give additional impetus to the development of

these essential services. Today’s tourism industry creates additional demand for

information and communications technologies (ICTs), providing another opportunity to

deepen linkages. A recent study by the Economic Commission for Latin America and the

Caribbean (ECLAC) states:

The availability of information and communications technologies … has

helped to make the tourism industry more productive and competitive and has made

tourist services, such as flight and hotel room reservations, more accessible to

potential travellers. Internet has radically changed the international tourism industry

by shortening the distance between providers of tourist services and their clients.

There are two main dimensions to this shift. First, all categories of firms, large and

small, from anywhere in the value chain, can now communicate directly with their

end customers. Second, whereas consumers used to be outside the value chain, they

are now at the heart of it. Just as suppliers can reach consumers directly, so clients

have direct access to the supply side.11

27. Moreover, the benefits of ICT infrastructure open up vast opportunities outside the

tourism sector. For instance, telecommunication links, such as mobile phone facilities and

Internet coverage benefit the poor because they provide or facilitate access to information

that is crucial for their livelihoods, for example, crop prices.

28. The sector also has the capacity to integrate a large number of local entrepreneurs

into its value chain, such as craftsmen/women or local guides. An important share of

tourism out-of-the pocket expenditure is spent on buying local crafts and art, and this

expenditure generally represents direct income to local communities. Moreover, the

exchange between tourists and local entrepreneurs contributes to the positive image of the

destination.

29. Beyond the more immediate benefits that tourism can generate, the industry offers

another valuable asset, that is, knowledge and technology transfer. In a dynamic industry

where client preferences tend to be diverse, acquiring certain intangible knowledge –

knowledge of customer’s needs, access to booking systems, brands and forms of business

organization – becomes key a competitive advantage and is crucial to capture global

demand. In this respect, transnational corporations (TNCs) play an important role in

facilitating knowledge transmission either through foreign direct investment (FDI) or other

non-equity modes of investment, such as licensing or franchising, which are common forms

of entry in the tourism industry.12 Attracting FDI remains a key requirement for the tourism

sector in developing countries where domestic resources are limited. Investment

requirements cover primary facilities such as hotels and recreational amenities, as well as

supportive physical infrastructure and basic services. However, FDI can also be a challenge

for countries that are trying to capture a greater share of tourism earnings. The issue of

leakages, discussed below, is a major concern for developing countries and could seriously

undermine the positive development impacts of tourism.

11 ECLAC (2009). Foreign Direct Investment in Latin America and the Caribbean 2008. United Nations

publication. Sales No. E.09.II.G.24. Santiago.

12 UNCTAD (2007, 2012). World Investment Report 2007: Transnational Corporations, Extractive

Industries and Development. United Nations publication. Sales No. E.07.II.D.9. New York and

Geneva. World Investment Report 2012: Towards a New Generation of Investment Policies. United

Nations publication. Sales No. E.12.II.D.3. New York and Geneva.

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B. Poverty reduction

30. Tourism, on its own, may not be the answer to the elimination of poverty, but it can

make a significant contribution. The impact of tourism on poverty reduction, however,

depends on a number of factors. It depends, for example, on the type of tourism, in

particular, whether it is large-scale tourism or specialized or exclusive tourism. The former

is highly likely to generate more employment, including for semi-skilled workers, and to

provide opportunities for direct sales of goods and services to visitors by the poor or small

enterprises. However, large-scale tourism could pose its own problems in terms of pressure

on domestic resources, the environment and the preservation of cultural heritage; therefore,

it requires a strategy to mitigate any possible negative impacts.

31. The poverty reduction impact of tourism also depends on the level of out-of-pocket

expenditure that occurs or is encouraged in a destination. This matters because a much

higher proportion of discretionary spending usually reaches the poor (often through the

informal economy) than of big-ticket items such as accommodation, tour operators and

international travel. An ODI study shows that 25–50 per cent of tourist spending reaches

the poor from expenditure in restaurants (especially where supplies are purchased locally),

shopping (particularly handicrafts) and local transport and excursions.13

32. As noted above, the linkage with local food production and supply also matters. The

agricultural supply chain for the tourist sector often sustains more poor households than

jobs in hotels and restaurants. Similarly, the wage level determines the pro-poor impact of

tourism; the higher it is, the more it can reduce poverty, as long as the poor have access to

jobs. Investment in infrastructure, utility services, transport network and so on, stimulated

by tourism, could also benefit the poor locally either directly or through support of other

sectors.

33. Thus, the pro-poor impact of tourism development is not only or not predominantly

a matter of size (i.e. tourist arrivals and tourism growth rate), but depends on how the poor

are integrated in, or can become part of, the tourism value chain.

34. Employment generation is key to poverty reduction. As a highly labour-intensive

activity, the tourism economy tends to create a high proportion of employment and career

opportunities for low-skilled and semi-skilled workers, particularly for poor, female and

younger workers. It can be a major source of employment for many workers who have

become unemployed during the financial crisis or are joining the workforce.

III. Concerns and risks associated with tourism

35. In developing their tourism sectors, countries, in particular low-income developing

countries, face a wide range of challenges and constraints. Some are related to external

factors over which national stakeholders or governments have no control. For instance,

tourism volumes are sensitive to prevailing global and regional economic conditions (i.e.

periods of growth and recession) and to adverse events such as natural disasters, pandemics,

political unrest and terrorism. These factors can significantly influence tourists’ travel

decisions. Beyond these, however, there are also challenges stemming from national

policies or a lack thereof. They include a lack of capacity or failure to stimulate linkages,

which could lead to financial leakages, sociocultural tensions and environmental damage

resulting from tourism-related activities.

13 ODI (2007). Assessing how tourism revenues reach the poor. Briefing Paper 21. ODI. London. June.

http://www.sarpn.org/documents/d0002767/ODI_tourism_briefing-paper_Jun2007.pdf.

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A. Weak linkages means greater financial leakages

36. Tourism pumps vast amounts of income into the local economy and to the

international economy as well. How to capture a greater share of this income is a perpetual

challenge facing most poor economies that rely on tourism for their development. The share

that is not retained in the local economy – the leakage – limits the multiplier effects and

thus reduces the sector’s positive economic impact and development potential. Leakage

occurs when there is a need to procure tourism-related goods and services from abroad. It

can take the form of profits and revenue paid abroad to international tour operators, the cost

of imported goods and services, or interest payments on debt. The average leakage for most

developing countries is between 40 and 50 per cent of gross tourism earnings and between

10 and 20 per cent for developed and more diversified developing countries.

37. In developing countries with limited economic diversification, in particular low-

income countries, leakage remains a daunting challenge. Some studies have shown that at

best between one fifth and one third of total tourist expenditures in the destination is

captured by the poor from direct earnings and supply chains. While the capture of even

these small percentages of tourism expenditures may have positive pro-poor impacts and is

preferable to no tourism at all, emphasis should be placed on reducing leakage so that

benefits can be increased. The point here, however, is not to suggest that all goods and

services should be sourced domestically;14 rather it is a question of minimizing leakages by

strengthening local linkages and improving the tourism value chain, notably by building

domestic capacity, and by fostering linkages between foreign investors and domestic firms.

The degree of leakage may be associated with the level of development. Geloso et al. note

that “in the early stages of development, as infrastructure and service investment takes

place, leakages are likely to be high. Thereafter, they may diminish in parallel with the

country’s rising ability to meet its investment, services and goods needs domestically, and

by developing appropriate policies to strengthen local capacities”.15

38. The presence of transnational corporations (TNCs) in the tourism sector, together

with the influx of FDI, leads to financial leakages. While such FDI provides important

amounts of capital, TNCs repatriate profits, tend to be vertically integrated with suppliers

outside the local economy and often bring in highly skilled international staff that take up

the managerial positions. This raises concerns because it could hamper the potential for

capital accumulation, integration with local suppliers, transfer of technology and

knowledge, and the ability of local staff to upgrade their skills and take up higher value

added jobs. According to a recent UNCTAD publication, “in many cases, the main benefit

to be expected from investment in tourism is not in the size of the capital investment but in

the impacts on training, the upgrading of management processes and links to international

value chains”.16

39. The solution to the leakage problem is to promote strong linkages between tourism

and the other sectors discussed above. As noted previously, building linkages requires

ensuring an effective national strategy.

40. It is also important to address anticompetitive business practices that constrain the

development of the tourism sector by increasing the costs of doing business in the country

and compromising the quality of local goods and services. The absence of competitive

14 If there is a lack of competitive advantage, international supply is more efficient (e.g. brands

benefiting from international reputation, such as champagne).

15 See footnote 8.

16 UNCTAD (2010). Promoting foreign investment in tourism. Investment Advisory Series. Series A,

No. 5. UNCTAD/DIAE/PCB/2009/16. New York and Geneva.

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14

markets can greatly hinder the development of linkages to the tourism sector. For instance,

the presence of monopolies in the telecommunications or energy sector can result in high

prices, poor quality and erratic delivery. Lack of competition in the financial services sector

leads to costly credit that raises investment costs for local tourism service providers. The

absence of a competitive airline sector or domestic transport sector raises air fares and

domestic travel costs. Constraints related to anticompetitive practices should be addressed

through competition laws and a competition policy framework with collaboration between

the competition authority, the State and the economic sectors to promote competition.

B. Sociocultural concerns

41. Tourism brings populations with different values, cultures, income levels and

lifestyles in contact with each other. While this exchange can be very valuable in several

regards, it can also lead to friction or threaten established values and cultures. Some

observers even argue that it may lead to cultural degradation or disruption for communities,

in particular women and vulnerable indigenous people, in the destination country, as well as

resentment and ultimately rejection of foreign tourists by local residents.

42. A recent report by the United Nations Environment Programme (UNEP) states:

There are examples of communities overrun by large numbers of visitors,

commercialization of traditions and threats to cultural survival from unplanned and

unmanaged tourism. Tourism destinations are occasionally built by outsiders

(usually with government approval) in areas that indigenous or traditional

communities consider to be theirs, and where the development was neither desired

nor locally validated…these situations could lead to conflicts that make cooperation

and mutual benefits nearly impossible to achieve, and instil animosities that

negatively affect the local communities and the tourism destination. In countries

where resources are limited and communities are vulnerable to external shocks, the

cultural issues could overlap or even be aggravated by environmental concerns and

problems related to access to water, coastal resources and wildlife”.17

C. Environmental damage and damage to cultural heritage

43. Possibly the most pressing negative impact of tourism is the one it exerts on the

environment. As it is energy- and water-consuming, produces large amounts of waste and

affects cultural heritage by attracting large crowds of people to these sites, tourism can

cause considerable environmental and cultural heritage damage.

44. The aforementioned UNEP study warns that “the sector’s growing consumption of

energy, especially in travel and accommodation, and its dependence on fossil fuels has

important implications for global GHG [greenhouse gas] emissions and climate change as

well as for future business growth.” Factors contributing to the increasing energy

consumption are the growing number of international and domestic tourist arrivals, a

preference for energy-intense transportation and a trend to travel further and over shorter

periods of time. UNEP estimates that tourism creates about 5 per cent of total GHG

emission, primarily from tourist transport (75 per cent) and accommodation (21 per cent).

45. In many tourist destinations, water is an increasingly scarce resource. While water

use by tourism is far less than that of agriculture, for instance, in some areas it can be the

17 UNEP (2011). Towards a Green Economy: Pathways to Sustainable Development and Poverty

Eradication – A Synthesis for Policy Makers. UNEP. www.unep.org/greeneconomy.

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main factor in water consumption. There are various examples where such a situation has

led to water inequity between tourists and neighbouring communities jeopardizing

subsistence needs of local communities. Gössling and Hall reckon that luxury resorts on an

East African island use up to 2,000 litres of water per tourist per day, almost 70 times more

than the average daily domestic consumption of local people.18

46. The production of waste and waste management systems, or the lack thereof, is

another factor that negatively affects the environment. First, tourism generates a

comparatively high level of waste. Second, wastewater management is often dismal, with

hotels discharging untreated sewage directly into the sea. It is estimated that in the

European Mediterranean only 30 per cent of municipal wastewater from coastal towns

receives any treatment before discharge.19

47. The impact of tourism on biodiversity has already been immense. There are many

examples where large-scale tourism has had detrimental effects on biodiversity, including

coral reefs, coastal wetland, rainforests, arid and semi-arid ecosystems and mountainous

areas.20 According to UNEP, “Failure to incorporate biodiversity concerns in destination

planning and investment will have detrimental effects on the natural environment, increase

conflict with local communities, and lead to reduced value-creation potential for both the

destination and investors (notably as interest in nature-based tourism is growing rapidly

around the world).”21 Nonetheless, it should also be mentioned that in several countries

tourism has heightened the awareness about the value and need to protect biodiversity.

IV. Towards sustainable tourism

48. The previous two chapters discussed the dilemma of tourism development: on the

one hand, the tourism industry provides many opportunities for backward and forward

economic linkages, foreign exchange earnings, economic diversification, increased income,

employment and poverty reduction. On the other, tourism could pose threats to the

preservation of culture and environmental resources, which are vital amenities for attracting

tourists. Can these two contrasting dynamics be reconciled? In other words, can the sector

be made sustainable so it contributes to economic development, employment and poverty

reduction without destroying culture and damaging the environment? There is a growing

consensus that sustainable tourism is possible. However, it requires a strategy that takes

into account economic, environmental, social and cultural factors. According to UNWTO,

such a strategy should ensure the following:22

(a) Make optimal use of environmental resources that constitute a key element in

tourism development, while, at the same time, maintaining ecological balances and helping

to conserve natural heritage and biodiversity;

(b) Respect the sociocultural authenticity of host communities, conserve their

built and living cultural heritage and traditional values, and contribute to intercultural

understanding and tolerance;

18 Gössling S and Hall C M, eds. (2006). Tourism and Global Environmental Change: Ecological,

Social and Political Interrelationships. Routledge. London.

19 See footnote 17.

20 UNWTO (2010). Tourism and Biodiversity: Achieving Common Goals towards Sustainability.

UNWTO. Madrid.

21 See footnote 17.

22 Sustainable tourism has been defined by several institutions and authors. While the proposed

definitions differ in their focus or level of detail, they share the view that the concept includes

economic, environmental, social and cultural considerations.

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(c) Ensure viable, long-term economic operations, providing socioeconomic

benefits to all stakeholders that are fairly distributed, including stable employment and

income-earning opportunities and social services to host communities, and contributing to

poverty alleviation.

49. In light of the potential negative effects of tourism, the need for promoting

sustainable tourism to ensure future gains and to minimize the possible negative impact on

the environment and cultures has acquired renewed urgency. This, in turn, has heightened

the awareness of policymakers, tourists and tourism business operators about the need and

value of conserving unique natural, social and cultural assets of destinations. Tourists are

becoming more demanding of the environmental quality of destinations. Similarly, tourist

destinations have incentives to conserve and improve the environment, not only for their

own sake, but also for creating value.23 Indeed, sustainability and creating pro-poor and

environmentally conscious tourism business have become important marketing tools and

could also provide tourism service providers with a competitive edge.

A. A policy agenda towards sustainable tourism

50. There are a variety of ways that governments and private-sector operators can make

tourism more sustainable. As noted, long-term prospects for sectoral growth depend on

building adequate infrastructure and supply chains, and strengthened policies and

institutions to ensure that tourism activities are carried out sustainably, meeting economic,

social and environmental objectives. As the sector matures, planning at the national level,

environmental regulations and cultural preservation initiatives will also become

increasingly important. In the short term, however, some of the main requirements for

implementing sustainable tourism would include the following:

(a) Creating awareness of how environmental damage can reduce the

attractiveness of destinations;

(b) Promoting knowledge of principles and methods of environmental

management, including energy and water conservation strategies;

(c) Providing tourism firms with access to market information and financial

resources;

(d) Enhancing coordination between government departments dealing with

tourism and the environment and private investors in the tourism sector;

(e) Upgrading infrastructure in isolated tourism sites where private-sector

investment is unlikely to go.

51. Efforts are under way at the national and international levels to implement some of

these basic requirements or principles. At the international level, on the initiative of

UNWTO, the United Nations Steering Committee on Tourism for Development was set up,

bringing together the tourism-specific experiences and expertise of nine international

agencies and programmes.24 The Steering Committee’s main objective is to generate

synergies for a more coordinated, effective and efficient delivery of tourism-related

technical assistance to developing countries.

23 See footnote 16.

24 International Labour Organization, International Trade Centre, UNCTAD, United Nations

Development Programme, UNEP, United Nations Educational, Scientific and Cultural Organization,

United Nations Industrial Development Organization, UNWTO, World Trade Organization

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17

52. Another initiative that also extends to the private sector is the Global Sustainable

Tourism Council. It has identified a set of indicators to track and monitor tourism

operations and management of hotels and tour operators and destinations to evaluate their

sustainability. Indicators are identified for four areas, namely sustainable management, and

socioeconomic, cultural and environmental impacts (including consumption of resources,

pollution reduction and conservation of biodiversity and landscapes). This framework aims

to foster increased knowledge and understanding of sustainable tourism practices, to

promote the adoption of universal sustainable tourism principles and to build demand for

sustainable travel.

53. It is expected that rising environmental awareness will lead to greater demand for

sustainable destinations and this, in turn, will create incentives for transforming the sector

towards greater sustainability. Several governments, international organizations, consumer

groups and environmental organizations have already demanded that environmental quality

and sustainability of raw materials be an integral part of public policy and corporate

priorities.

54. Greater awareness of climate change and its negative impact has further impelled the

willingness to invest in more environmentally friendly products and services. However,

increasing climate-change awareness could be a double-edged sword. It will, on the one

hand, encourage the development of new low-carbon tourism products. On the other hand,

it could negatively affect tourist flows to certain destinations, if, for example, carbon taxes

are raised on long-haul flights and this results in higher flight prices.

55. With regard to public policy, it is necessary to design and implement taxation and

subsidy policies that encourage investment in sustainable tourism activities and discourage

unsustainable tourism. When governments invest in, inter alia, protected areas, cultural

assets, water and waste managements, this sends a signal to private investors and works as

an incentive to take investment decisions towards greener outcomes.

56. Promoting sustainable tourism is far-reaching and involves broad actions, ranging

from the adaptation of new technologies and practices to obtain efficiency improvements in

energy, water and waste systems, to the implementation of policies to restore biodiversity.

This can lead, among others, to energy-efficiency gains in transport and accommodation,

fewer health risks or the upgrading of the attractiveness of a destination. To enable

stakeholders to move towards more sustainable tourism, there are many elements that are

required or must be considered. They may include:

(a) Clustering;

(b) Linkages with local suppliers of goods and services;

(c) Skills and human resources development;

(d) Access to finance and investment;

(e) Institutional framework and mainstreaming of tourism in national policies;

(f) Promotion and marketing;

(g) Protection and conservation of cultural heritage.

B. Clustering

57. The quality of the environment is not only a crucial concern of local communities

but the most valuable asset of tourist destinations that compete on the grounds of natural

beauty and attractions. There is thus a mutual interest of governments, companies and

community organizations to protect and conserve the environment. By clustering,

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18

stakeholders can advocate more effectively for sound environmental management (e.g.

design and enforce regulation), benefit from economies of scale (e.g. cost sharing of

upgrading a road), and extend the benefits to communities (e.g. putting in place a waste

management system). This strengthens the competitive position for the entire cluster.

C. Linkages with local suppliers of goods and services

58. As discussed in chapter II, tourism has considerable potential to create strong

backward and forward linkages in the national economy. To ensure the sustainability of

tourism operations, sustainability policies cannot be limited to tourism itself, but must

encompass sustainability considerations at all levels that are linked with the industry. In

agriculture, for instance, this could mean that policies should encourage the use of irrigation

systems with adequate drainage or practices that avoid long-term damage to soil quality.

Strong linkages that generate employment, income and facilitate skills upgrading will

contribute to viable long-term economic operations and poverty reduction.

59. An increasing number of developing countries have established dedicated tourism

linkages programmes setting out actions that are needed to amplify links, for example in

India or Jamaica. Similar programmes are required to strengthen linkages in LDCs and

small island developing States. Some actions proposed by UNCTAD to catalyse the

development of local supply chains include the following:

(a) Strengthening productivity of the agricultural sector and its linkages to

tourism;

(b) Providing small-scale businesses with start-up grants, education and training,

and low-interest loans to stimulate SME development;

(c) Introducing incentive measures to encourage hotels and restaurants to source

inputs locally;

(d) Relaxing zoning and licensing requirements so that small-scale businesses

can participate in the downstream tourism value chain.

D. Skills and human resources development

60. Although tourism employs a comparatively high share of un- and semi-skilled

workers, it also needs professionals with specific skills. There is an increasing need for

specialized training to expand tourism markets, including management and leadership

training, information technology and foreign languages. To adopt more environmentally

friendly technologies and manage tourist facilities in ways that comply with sustainability

standards, it is necessary that the skills base be compatible with sustainability objectives.

This calls for investment in human resources development so that people can acquire those

skills, and in addition, engage in higher value added activities.

E. Access to finance and investment

61. The quality of tourism infrastructure is highly dependent on access to finance to

undertake public and private investments. In many developing countries, access to credit is

extremely costly, and public spending for building and upgrading infrastructure is often

very limited. Policies should thus facilitate access to credit, especially for SMEs, given that

they are the backbone of the tourism industry. This requires that banks rethink how they

evaluate environmentally sound investments. While such investments have a cost, their

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19

payback periods can be relatively short and lead to cost savings that make them financially

viable and attractive.

62. Moreover, policies should encourage domestic investment alongside foreign capital

involvement (TNCs/FDI, development assistance and triangular cooperation). As argued

above, the benefit of foreign investment goes much further than the capital injection.

Importantly, some national experiences have shown that governments can negotiate with

TNCs the terms of involvement in their economies and thus align TNCs with national

policies, and for instance, engage investors in helping to finance infrastructure and operate

services.25 Moreover, by sharing information and coordinating negotiations with foreign

investors and tour operators, domestic tourism firms can secure higher volumes and

margins for nationally produced tourism goods and services.

F. Institutional framework and mainstreaming of tourism in national

policies

63. As a highly interconnected industry, maximizing the potential of tourism requires

coherent and comprehensive policy frameworks. Such policy frameworks need to ensure

that sustainable tourism is integrated into the country’s overall economic, social and

environmental policies. Integrating multiple policy areas and actors requires a high degree

of institutional capacity. It also calls for strong tourism agencies that are capable of

coordinating with other governmental agencies and stakeholders, such as local authorities,

the private sector and NGOs. This is a challenge, given that the industry is fragmented with

many enterprises, particularly of small, medium-sized and micro enterprises.

64. It can be helpful for policymakers and businesses to have guidelines that suggest

actions on how they can contribute to sustainable tourism. UNCTAD proposed a series of

guidelines for economic, social and environmental considerations that can strengthen the

positive impacts of tourism:26

(a) Economic guidelines – Assess economic impacts before developing tourism,

maximize local economic benefits by fostering linkages and reducing leakages, ensure that

communities are involved in and benefit from tourism, assist with local marketing and

product development, and promote equitable business and pay fair prices;

(b) Social guidelines – Involve local communities in planning and decision-

making, assess the social impacts of tourism activities, respect social and cultural diversity,

and be sensitive to the host culture;

(c) Environmental guidelines – Reduce negative environmental impacts when

developing tourism, use natural resources in a sustainable way and maintain biodiversity.

G. Promotion and marketing

65. Promotion and marketing of tourism destinations require a coordinated approach

developed jointly with the private sector. Investment promotion agencies can play an

important role in reaching out to foreign investors, guiding them towards sustainable

development, and targeting foreign investors in economically, socially and environmentally

sustainable projects.

25 For further information, see UNCTAD (2012). Investment Policy Framework for Sustainable

Development. UNCTAD/DIAE/PCB/2012/5. United Nations. New York and Geneva.

http://unctad.org/en/PublicationsLibrary/webdiaepcb2012d6_en.pdf.

26 See footnote 16.

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66. At the firm level, several major hotel groups have already adopted charters on

sustainable tourism and environmental protection, and use them as promotion- and quality-

control tools.

H. Protection and conservation of cultural heritage

67. Cultural heritage is one of the main drivers of tourism, but large crowds of visitors

can pose a serious risk to the conservation of these sites. In developing cultural heritage

sites, it is essential to create partnerships with local communities to enable the assessment

and management of the impacts of tourism on their communities.

68. Tourism development can contribute to raising awareness of natural and cultural

heritage and to more resources being allocated to the protection and conservation of that

heritage. It can even contribute to the continuation, rejuvenation and enhancement of

traditions. However, local communities can be negatively affected by the sector. When

projects still move ahead, it is important to consider economic measures to compensate and

offset unavoidable impacts.

V. Conclusions

69. Tourism has the potential to contribute to economic growth and poverty reduction,

in particular in low-income developing countries. The sector’s capacity to generate

employment and income owing to its backward and forward linkages makes it important for

economic diversification and economic growth. At the same time, however, the negative

impact it can inflict on the environment and culture cannot be overlooked. To ensure that

tourism provides employment and income opportunities in the long run and contributes to

sustainable development, its operations, including the activities that are linked with it, must

be sustainable. As argued in this issues note, this calls for ambitious strategies and policy

agendas.

70. In this context, the expert meeting provides an opportunity to address the key issues

regarding the contribution of tourism to economic growth and sustainable development.

The key questions are as follows:

(a) What are the specific features of tourism that lend themselves to domestic

capacity-building and economic development, and are particularly relevant to poverty

reduction?

(b) What are the negative aspects of tourism that require policymakers to pay

extra attention in formulating policies and strategies for tourism development?

(c) How can governments attract adequate levels of investment to build supply

capacities, develop effective linkages between tourism and various other sectors, and, at the

same time, address economic leakage and anticompetitive practices in the tourism industry?

(d) Given that tourism-related activities rely on the development of

infrastructure, preservation of the environment and cultural heritage sites, supply of energy

and water, and other factors, how can tourism as an economic activity be made sustainable?

(e) What are the policies and strategies that governments need to pursue to

promote sustainable tourism and to ensure that tourism contributes to sustainable

development?

Annals of Tourism Research, Vol. 39, No. 3, pp. 1653–1682, 2012 0160-7383/$ - see front matter � 2012 Elsevier Ltd. All rights reserved.

Printed in Great Britain

http://dx.doi.org/10.1016/j.annals.2012.05.023 www.elsevier.com/locate/atoures

Review Article

TOURISM ECONOMICS RESEARCH: A REVIEW AND ASSESSMENT

Haiyan Song The Hong Kong Polytechnic University, Hong Kong

Larry Dwyer University of New South Wales, Australia

Gang Li ZhengCao

University of Surrey, United Kingdom

Abstract: This paper aims to provide the most up-to-date survey of tourism economics research and to summarise the key trends in its recent development. Particular attention is paid to the research progress made over the last decade in respect of approaches, methodo- logical innovations, emerging topics, research gaps, and directions for future research. Remarkable but unbalanced developments have been observed across different sub-research areas in tourism economics. While neoclassical economics has contributed the most to the development of tourism economics, alternative schools of thought in economics have also emerged in advancing our understanding of tourism from different perspectives. As tourism studies are multi- and inter-disciplinary, integrating economics with other social sci- ence disciplines will further contribute to knowledge creation in tourism studies. Keywords: tourism economics, research integration, demand, supply, impact, econometric model. � 2012 Elsevier Ltd. All rights reserved.

INTRODUCTION

Tourism, despite the ongoing debates about its definition over the past decades, is commonly recognised as a human activity that defines the demand for and supply of its products and the usage of resources that may result in either positive or negative socioeconomic consequences at both national and international level. The signifi- cance of the economic approach and perspective to understanding this human activity is widely known. As far as both its demand and supply are concerned, tourism has distinct characteristics which set it apart

Haiyan Song, PhD, (<[email protected]>) is chair professor of tourism in the School of Hotel and Tourism Management, Hong Kong Polytechnic University. Larry Dwyer, PhD, is professor of travel and tourism economics, School of Marketing, University of New South Wales, NSW, Australia. Gang Li, PhD, is Reader in economics, School of Hospitality and Tourism Management, University of Surrey, UK. Zheng Cao is a PhD candidate in the School of Hospitality and Tourism Management, University of Surrey, UK.

1653

1654 H. Song et al./Annals of Tourism Research 39 (2012) 1653–1682

from other economic activities (Stabler, Papatheodorou, & Sinclair, 2010). Studying the characteristics of tourism from the economic per- spective is a relatively new area of research pioneered by Guthrie (1961), Gerakis (1965), and Gray (1966). Propelled by the tremendous evolution of tourism as an economic activity over the past 50 years, there has also been a remarkable growth, in terms of number of pub- lications, in tourism economics research. This trend has been even more pronounced since the 1990s with the establishment of Tourism Economics, a scientific journal devoted entirely to the publications of re- search outputs in this field. More recently, the publication of key texts on the economics of tourism, such as Dwyer, Forsyth, and Dwyer (2010), Stabler et al. (2010), and Tribe (2011), has marked the matu- rity of tourism economics as a field of study comprising comprehensive bodies of knowledge and theoretical foundations in the context of tourism.

The dynamics of tourism, as an activity and as an industry, call for continuous efforts in seeking new approaches, tools, and perspectives in order to acquire new knowledge and a greater understanding of the discipline. Therefore, it is both necessary and useful to comprehen- sively review the development of the research field in terms of where we were, where we are, and where we should be. Very few such endeav- ours have been made in this regard. Eadington and Redman’s (1991) work represents the earliest attempt to provide an overview of the developments in tourism economics. Key research areas identified in his review include demand elasticities and their modelling techniques, market structure and ownership, economic impacts, and policies. His recommendations for further research were in such directions as in- ter-sectoral linkages, the integration of economic models and statistical techniques for demand analysis, and the development of national and regional input-output (I-O) models for economic impact assessment. Sinclair (1998) surveys the literature over a period of two decades, highlighting some new developments, such as the system-of-equation approach to demand analysis and computable general equilibrium (CGE) modelling for economic impact assessment. These develop- ments echo Eadington and Redman’s (1991) earlier recommenda- tions. Tremblay (1998) focuses his review on different perspectives on industrial organisation and recommends institutional and network approaches. In addition, Sinclair (1998) directs scholars’ attention to the environmental issues related to sustainable tourism development. She highlights the fact that impact analysis was limited to the use of I-O tables, with CGE models receiving little attention, and the neglect of taxation and regulatory policy in relation to environmental issues. In another review, Sinclair, Blake, and Sugiyarto (2003) argue that re- search in tourism economics has been dominated by demand analysis, while little attention has been paid to the determinants of tourism sup- ply, including different forms of tourism business integration. More re- cently, Dwyer, Forsyth, and Papatheodorou (2011) have provided an overview of the state of research and the key developments in tourism economics, including perspectives on the implications for research of the recent global financial crisis. In their reviews, Li, Song, and Witt

H. Song et al./Annals of Tourism Research 39 (2012) 1653–1682 1655

(2005) and Song and Li (2008) mainly concentrate on the methodo- logical developments in tourism demand studies.

This paper aims to provide the most up-to-date survey of tourism eco- nomics research, highlighting recent developments and likely future directions. Drawing on the latest publications up to the end of 2011, mainly from key tourism journals such as Annals of Tourism Research, Tourism Economics, Tourism Management, and the Journal of Travel Re- search, this review tracks the historical developments in each of the key research areas, paying particular attention to the research progress made over the last decade in terms of economic approaches, method- ological innovations, emerging topics, and directions for future research.

DEMAND

Demand analysis has the longest history in tourism economics re- search and has undergone remarkable developments in terms of diver- sity of interests, depth of theoretical foundations, and advances in research methods (Li et al., 2005). Its dominant position, noted by Sin- clair et al. (2003), is still observable in the latest developments in tour- ism economics. Based on the latest empirical evidence, the following section focuses on the issues in demand analysis that have emerged since the publication of previous review (e.g., Li et al., 2005; Song & Li, 2008).

Demand and its Determinants

The theoretical argument of tourism demand under neoclassical economic theory usually assumes a multi-stage budgeting process. Two pillars of the assumption are the composite commodity theorem and the separability of preferences. The composite commodity theo- rem states that various commodities can be aggregated to broad bun- dles of products, provided that prices within a bundle move in parallel. The separability of preferences means preferences within one bundle can be described independently of those in another one (Smeral & Weber, 2000). In the tourism context, such a multi-stage process implies that a typical tourist will firstly allocate the total budget over several time periods, then separate the goods into leisure goods and other consumption goods, and further choose among domestic trips, international travels and other activities within the leisure goods bundle. In the last stage, the destination country/region is deter- mined. It is also noted by Smeral and Weber (2000) that the decision at each stage can be thought of as corresponding to a utility maximiza- tion problem of its own, where the income effect and price effect are implicated in empirical models.

Tourism demand is predominantly measured by the number of arriv- als and the level of tourist expenditure (receipts), along with their vari- ations, in per capita terms (Song, Li, Witt, & Fei, 2010; Song, Witt, & Li,

1656 H. Song et al./Annals of Tourism Research 39 (2012) 1653–1682

2009). One alternative measure, the number of tourist nights (length of stay), has appeared in recent studies. For example, Gokovali, Bahar, and Kozak (2007), Martinez-Garcia and Raya (2008), and Barros and Machado (2010) adopt survival analysis (duration model) based on Lancaster’s characteristics framework to examine the determinants of this measure.

According to the demand theory, the pivotal factors shaping a tour- ist’s budget line are the income of the consumer and the price of the tourism product/service. Specifically, in empirical tourism demand studies, the income of origin country/region, the own price of a desti- nation, and the substitute prices of alternative destinations are the most commonly considered determinants (Song, Witt, & Li, 2009). De- mand elasticities are thus of particular significance, and these have been one of the focuses of the published studies on demand analysis. The latest development is to construct confidence intervals for demand elasticity estimates using the bias-corrected bootstrap method (Song, Kim, & Yang, 2010). This method overcomes the limitation of the tra- ditional point estimates, which neglect the degree of variability and are thus less informative.

An additional variable that affects tourists’ decisions (though not linked to the budget line) is the marketing expenditure of the tourism product/service provider (at both destination level and firm level). However, the difficulty in accessing the relevant marketing data hin- ders its application in most empirical studies (Kulendran & Dwyer, 2009; Zhang, Kulendran, & Song, 2010). The magnitude of the effect of marketing expenditure has been found to be as low as several hundredths.

Beyond the neoclassical theory, Lancaster’s (1966) characteristics framework explores the individual’s consumption of specific fea- tures/attributes, through which he/she attains satisfaction and utility. Applications of the hedonic pricing approach in the context of tourism demand mainly focus on the prices of tour packages (e.g., Aguilo, Alegre, & Riera, 2001; Chen & Rothschild, 2010; Papatheodorou, 2002; Sinclair, Clewer, & Pack, 1990; Thrane, 2005). The public good components (e.g., cultural legacy, public safety, and public infrastruc- ture) embedded in tourism products have been considered in recent studies (e.g., Rigall-I-Torrent & Fluvia, 2007, 2011). The difficulties faced in using this approach include the selection of the appropriate explanatory variables and the potential multicollinearity problem among the variables (Chen & Rothschild, 2010; Sinclair et al., 1990).

Methodological Developments

Since the 1990s, demand modelling studies have shifted from the use of static regression models to a range of sophisticated dynamic specifi- cations. Dynamics in tourism demand are often accounted for by re- peat visits, word-of-mouth recommendations, time lags in implementing a decision, information asymmetry, supply rigidities, and long-term adjustments (Morley, 2009). A recent development in

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dynamic modelling is the integration of the time-varying-parameter (TVP) technique and the causal structural time series model (Song, Li, Witt, & Athanasopoulos, 2011), which combines the technical advantages of both methods and shows superior forecasting perfor- mance. Recently, a new cointegration-error correction method—the bound test of Pesaran, Shin, and Smith (2001)—has been applied to tourism (e.g., Halicioglu, 2010; Song, Lin, Witt, & Zhang, 2011). This is a test to detect the long-run co-integration relationship among vari- ables in a demand model. Its advantage lies in its ability to accommo- date variables with different integration orders.

Developments in system-of-equations approaches, such as the vector autoregressive model (VAR) and the almost ideal demand system (AIDS), have expanded the dimensions of investigations. These ap- proaches overcome the limitations of the single-equation methods by bringing solid theoretical foundations to tourism demand modelling and forecasting exercises. The AIDS model, designed to analyse the interdependence of budget allocations and different consumer goods/services, has received much attention over the past decade. The dynamic forms of AIDS, coupled with the error correction mechanism and TVP technique, represent the latest development of system-of-equation methods. Their applications shed new light on the substitution and complementary effects between destinations (e.g., Cortes-Jimenez, Durbarry, & Pulina, 2009; Li, Song, & Witt, 2006) or between consumption categories (Wu, Li, & Song, 2011, 2012) and destination competitiveness (Mangion, Durbarry, & Sinclair, 2005). VAR models have received relatively little attention in tourism until recently (e.g., Seetanah & Khadaroo, 2009; Song & Witt, 2006; Torraleja, Vazquez, & Franco, 2009). Panel data analysis techniques have not been widely applied in tourism demand research with only a few exceptions (e.g., Garin-Munoz, 2009; Ledesma-Rodriguez, Navarro-Ibanez, & Perez-Rodriguez, 2001; Naude & Saayman, 2005; Seetaram, 2010). Future studies should pay more attention to the dynamic version of panel data analysis and to more advanced estimation methods such as the fully modified Ordinary Least Square estimator (Pedroni, 2004).

In addition to selecting the best specified models for modelling and forecasting tourism demand, identifying the key economic determi- nants of tourism demand, calculating the demand elasticities, and eval- uating the forecasting performance of the demand models are the key research tasks in tourism demand studies. The conclusion based on the empirical evidence is that no single model can consistently outperform others on all occasions (Song & Li, 2008). Recent literature thus sug- gests combining the forecasts from different models with a view to improving forecasting accuracy (Shen, Li, & Song, 2011; Wong, Song, Witt, & Wu, 2007): Shen, Li, and Song (2011) use six linear combina- tion methods; Cang (2011) introduces the nonlinear alternatives; and Chan, Witt, Lee, and Song (2010) employ programming approaches to determine the weights of combination. These empirical studies gener- ally provide favourable evidence of forecast combination. In addition, Coshall and Charlesworth (2011) argue that many forecasting

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scenarios involve more than a single goal and advocate the use of goal programming, which can accommodate multiple criteria decision making.

The growth cycle of tourism demand Butler (1980) has received increasing research attention. One of its methodological developments is to employ Markov regime switching models to test the tourism lifecy- cle concept. According to this concept, a destination goes through six key stages: exploration, involvement, development, consolidation, stag- nation, and decline and/or rejuvenation. The three-stage Markov- switching process is particularly in line with the lifecycle concept, as it allows for a period of decline, slow growth, and rapid growth. In addi- tion, it implicitly allows for rejuvenation. This approach is applied by Moore and Whitehall (2005) to the context of inbound tourism in Barbados. Empirical evidence suggests that the lifecycle concept pro- vides an adequate explanation of the growth stages for each market.

Interdependence and Interrelation

Associated with globalization, market interdependence has become an emerging topic in the latest demand studies. Tourism demand in one destination tends to be affected by demand for alternative destina- tions due not only to cultural and environmental similarities and geo- graphic proximity, but also to similarity in the economic determinants that underpin destination choice. The interactions between tourist flows and their determinants at different destinations shape tourists’ behaviours when they decide where to travel.

In light of the turbulence in the world economy over the past dec- ade, efforts have been made to address the interdependence of tour- ism demands, although the number of published studies is still limited. These studies often firstly confirm the co-movements of tour- ism demand in different destinations using the co-integration tech- nique and then use VAR models to test for the cause-effect relationships among these demand variables of the destinations under consideration via the Granger causality test (Granger, 1969). Torraleja et al. (2009) and Seo, Park, and Boo (2010) identify the existence of causal relationships between the tourism demand variables across dif- ferent destinations. In particular, Seo, Park, and Yu (2009) recognise the time varying rather than the constant conditional correlations in their study and examine the determinants of conditional correlations among destinations using the VAR model. The results reveal that the industrial production index and the real exchange rate are the key determinants of tourism demand in all of the destinations studied.

One of the problems with the existing literature on the interdepen- dence of tourism demand is the lack of attention paid to economic foundations. The studies usually adopt the series of tourist arrivals itself and conduct analysis based only on its time series properties and omit the important economic indicators in the specifications of the models. Another issue is that the number of destinations under discussion is relatively small (usually four or five) and their selection tends to be

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ad hoc, which limits the scope of the analysis. The small destinations sys- tem may overlook the endogenous effects of variables that are not in- cluded in the models. Future studies should consider a theoretically justified demand system involving a large number of interactive desti- nations using appropriate econometric modelling techniques, such as the Global VAR modelling system (Pesaran, Schuermann, & Weiner, 2004).

FIRM, INDUSTRY, AND MARKET

Economic studies of tourism supply are complex and cover a diverse range of topics from the firm level to the industry and market level. Over the period 1970s-1990s, there was vigorous debate about whether tourism is an industry or a market when it is studied from a supply per- spective (e.g., Leiper, 1990, 1992; Smith, 1988, 1991). In the recent tourism economics literature, it has been commonly recognised that tourism is neither a single industry nor a single market (Dwyer et al., 2010; Stabler et al., 2010). Tourism is a composite product that involves a combination of a variety of goods and services provided by different sectors, such as transport, accommodation, tour operators, travel agen- cies, visitor attractions, and retailing. Moreover, tourism products are serviced and transacted in different markets. Therefore, tourism can be studied using both industry-based and market-based economic tools (Wilson, 1998).

Drawing its theoretical foundation from industrial economics or industrial organisation, the development of tourism supply research follows that of industrial economics. The neoclassical approach domi- nated the development of industrial economics until the late 1970s. The structure-conduct-performance (SCP) paradigm provides a useful framework for studying tourism supply from a market perspective. Ear- lier schools of thought, such as the Austrian school, evolutionary eco- nomics, and institutional economics, were developed to relax the restrictions of the neoclassical assumptions, such as rational prefer- ences, information symmetry, static equilibria, and profit maximisa- tion. In particular, the dynamic nature of the market and its institutional arrangements emphasised by these newer approaches is highly relevant to the operations of tourism businesses. By introducing game theory to the study of the firm and the market, new industrial economics has been developed, and this provides powerful tools for analysing firms’ strategic relationships, particularly in the context of a supply chain (Song, 2011; Stabler et al., 2010).

The Structure-Conduct-Performance (SCP) Paradigm

Based on the neoclassical economic theory, especially different mar- ket structure models, the SCP paradigm suggests that the type of the market structure within which a firm operates (e.g., monopolistic, monopolistically competitive, or oligopolistic) rigidly determines a

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firm’s conduct (e.g., output decisions, pricing behaviour, and innova- tion), which ultimately affects its overall performance (e.g., its efficiency, profitability, and growth) (Bain, 1956; Mason, 1939). In the further development of this paradigm, multiple feedback effects and causation flows were taken into account (Scherer & Ross, 1990; Shepherd, 1990). A number of empirical studies have tested the SCP paradigm in tourism, predominantly in the accommodation sector (e.g., Davies, 1999; Davies & Downward, 1996; Pan, 2005) but also in the restaurant sector (e.g., Jang, 2011). However, the findings are inconclusive, due largely to the different empirical settings and methods used. Davies (1999) and Pan (2005) both suggest that market structure directly influences the perfor- mance of a firm, with no clear intermediate effects between market structure and conduct. However, Cunill and Forteza (2010) find that a franchising strategy contributes to increasing market concentration by hotel chains. Tung, Lin, and Wang (2010) reveal a bidirectional causal relationship between the market structure and strategic behaviour based on a more advanced simultaneous equation model.

Although a number of tourism supply studies at the market or indus- try level do not exactly follow the SCP framework, their research fo- cuses fall into one of the following three groups.

Structure

Among all market structure models, oligopoly has attracted the most attention in the literature, such as the studies by Baum and Mudambi (1994) on the UK fully inclusive tour industry, Davies (1999) on the UK hotel industry, Baum and Mudambi (1995) on the resort hotel industry in Bermuda, Bresson and Logossah (2011) on the cruising sec- tor in the Caribbean, and Ciliberto and Tamer (2009) on the American airline industry. In these studies, the common characteristics of oligop- oly are identified in tourism markets in which a small number of large firms dominate the markets, which leads to both high market concen- tration and fixed costs due to entry barriers.

Conduct

Firms’ conduct, particularly pricing behaviour, has been well studied under certain market structures, especially oligopoly. For instance, Vila and Córcoles (2011) investigate such pricing strategies as dynamic pric- ing and price discrimination between flag carriers and low-cost airlines. Abrate, Capriello, and Fraquelli (2011) examine the effects of quality signals on price setting in the hotel industry based on the hedonic pric- ing approach. Poater and Garriga (2009) reveal that the price discrim- ination and peak-load pricing settings that are often exercised in the airline industry are also evident in some European hotels. Based on firm-level time-series data, Malighetti, Paleari, and Redondi (2010) find that the overall intensity of Ryanair’s dynamic pricing has decreased. The discussions of firms’ pricing behaviour are often related to yield

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management issues. Other research on conduct includes various growth strategies such as mergers and acquisitions (e.g., Vogel, 2009), innovation investment (e.g., Fernandez, Cala, & Domecq, 2011), and diversification (Andreu, Claver, & Quer, 2009). In their re- cent review article, Williams and Shaw (2011) stress the importance of globalisation and innovation strategies and their relationships.

Performance

Firm performance, particularly measured by productivity and effi- ciency, has been a long-standing topic in tourism supply studies. The hotel sector has attracted the most attention, followed by travel agents and restaurants. Research developments in this direction are mostly related to methodological advancement. The empirical literature on tourism firm efficiency has been dominated by a non-parametric approach—the data envelopment analysis (DEA) (e.g., Barros & Alves, 2004; Chiang, Tsai, & Wang, 2004). The main advantages of DEA com- pared to the standard econometric technique are that it (1) does not require any form of functional specification and (2) is able to handle multiple inputs and outputs readily in any (in)efficiency theoretical par- adigm (Bernini & Guizzardi, 2010). Based on the input and output data from DEA, a Malmquist Index can be constructed to measure produc- tivity change. The criticism of the DEA method is related to its potential statistical shortcomings. A further development of this method is to use the bootstrap approach to obtain statistical properties. This method has been applied to tourism firms by Assaf, Barros, and Machado (2011).

Another well-developed method is the stochastic frontier approach (a parametric approach). Its principal advantage lies in the decompo- sition of deviations from the efficiency levels between noise (stochastic error) and pure efficiency; however, it faces the challenge of determin- ing the appropriate functional forms (Barros & Dieke, 2008). Recently, a semi-parametric method which combines non-parametric and para- metric approaches was applied to tourism firms by Bernini, Freo, and Gardini (2004). Furthermore, Assaf (2010) employs a Bayesian pa- nel stochastic frontier model to study the cost efficiency of Australian airports.

In addition to efficiency and productivity, firms’ long-term growth is also used to measure firm performance. Based on the production func- tion (i.e., input-output), significant input factors are identified to ex- plain the growth (e.g., Smeral, 2009a). This line of research departs from the SCP paradigm and does not seek explanations of firm growth from market structure or conduct (e.g., Cunill & Forteza, 2010; Jang, 2011).

Game Theory and Supply Chain

To overcome the limitations of the original static form of the SCP paradigm, game theory provides a more powerful tool and a dynamic

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approach to analysing situations in which the decisions of multiple eco- nomic actors affect each other’s payoff. As such, game theory deals with economic actors’ interactive optimisation problems and inter-firm rela- tionships (Cachon & Netessine, 2004). The game-theoretical approach is useful for analysing the strategic decisions of firms within the same industry, particularly in an oligopolistic market, such as tour operators at a destination (e.g. Zhang, Heung, & Yan, 2009). Recent studies emphasize inter-firm strategic interactions in the context of tourism supply chains (Song, 2011; Zhang, Song, & Huang, 2009). The game- theoretical approach has been employed to study the interactions among tourism supply chain members and their strategic options, such as price competition and coordination between a theme park and a tour operator (Song, Yang, & Huang, 2009); relationships among a theme park, hotels, and tour operators in a context of package holiday supplies (Huang, Chen, Song, & Zhang, 2010); and cooperation and competition between two supply chains (Yang, Huang, Song, & Liang, 2009).

Although a range of games have been developed, their applications to tourism supply are mostly restricted to non-cooperative determinis- tic games and involve simplistic strategy options in abstract experimen- tal situations instead of actual industries. Further applications should consider other types of games, such as cooperative, repeated, differen- tial, signalling and screening, and Bayesian games, especially in their dynamic forms (Cachon & Netessine, 2004). More useful managerial implications will be drawn if more realistic market environments are considered in the developed models.

Institutional Approach to the Behaviour of Firms

Moving away from the neoclassical perspective, the institutional ap- proach (such as transaction-cost and agency theories) regards the firm as a governance structure instead of a production entity (Coase, 1960; Jensen & Meckling, 1976). Agency theory recognises conflicts of inter- est between different economic actors and deals with the problems resulting from the principal-agent relationship, such as adverse selec- tion and moral hazards (Stabler et al., 2010). Transaction cost econom- ics adopts a contractual approach to the existence of the firm and focuses on the efficiency of making transactions internally compared to the cost of making such transactions through the market mechanism (Williamson, 1975).

Despite its usefulness, this approach has not been widely used in ana- lysing the behaviour of tourism firms. Guilding, Warnken, Ardill, and Fredline (2005) discuss the condominium owner-manager relationship in the Australian tourism context based on agency theory. Hojman and Hiscock (2010) interpret the failure of a festival organisation as being the result of ill-defined property rights, leading to increased transac- tion costs, incomplete information from an unreliable source, and free riding. Gurcaylilar-Yenidogan, Yenidogan, and Windsperger (2011) ex- plain the completeness of contracts using the transaction cost theory in

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the context of tour operator-hotel allotment contracts. Future research could apply agency and transaction cost theories to analyse inter-firm behaviour, such as within a tourism supply chain, or in the context of service outsourcing or integration between firms. In addition, tour- ism firm analysis should also apply new institutional theories such as the steward theory, which better recognises the relevance of coopera- tion and coordination to inter-firm relationships rather than opportu- nistic behaviours, as the agency theory suggests (Donaldson, 1990). This is in line with the network approach advocated by Tremblay (1998).

Industry Agglomeration and Clustering

The new economic geography, or geographical economics, provides another useful perspective for inter-firm relationships in the context of tourism. For example, industry agglomeration and industry clustering are concerned with the economic importance of geographic location (Marshall, 1920; Porter, 1998). The benefits of agglomeration econo- mies include minimising distance, transportation and production costs, obtaining cheap labour, and minimising risks (Dicken & Lloyd, 1990). Similarly, cluster theory suggests that interconnectedness through industry clustering is the source of growth, innovation, and competitiveness (Porter, 1998). Industry agglomeration and clustering (sometimes, the term ‘‘networking’’ is also used) has become an emerging topic in recent tourism supply studies. For example, Novelli, Schmitz, and Spencer (2006) examine tourism industry networks and clusters in relation to innovation in the UK. Bernini (2009) examines the meeting and convention industry in Italy and addresses the impor- tance of convention destination clustering and networking. Zhang, Qu, and Guo (2011) focus on the agglomeration of China’s convention industry. The latter two studies are both based on the econometric ap- proach, providing statistical evidence on the sources of agglomeration and clustering.

In addition to the above topics, a number of other classical supply issues, such as production cost, labour supply, and competition-related policy concerns, have appeared in the tourism economics literature from time to time. Due to space constraints, they are excluded from this review. The imbalance of tourism supply analyses among different sub-sectors should be noted. Hotels, airlines, and tour operators have received more attention than visitor attractions, travel agencies, and other forms of transport. Some research gaps can also be observed with regard to the applications of more recently developed theories of the firm or the market. For instance, the knowledge-based view of the firm, which regards a firm as a knowledge-creating entity, has not been explicitly applied in tourism. This view moves beyond the resource- based theory of the firm, arguing that ‘‘knowledge and the capability to create and utilise such knowledge are the most important source of a firm’s sustainable competitive advantage’’ (Nonaka, Toyama, &

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Nagata, 2000, p. 1). Tourism supply analysis would benefit from the application of these modern industrial economics theories.

MACROECONOMICS OF DESTINATIONS

From a macroeconomic perspective, tourism contributes to local, na- tional, and international economic developments as well as destination competitiveness. This has important policy implications.

The Economic Impact

Given its important policy implications, the economic contribution of tourism and changes in it resulting from external shocks to the tour- ism system, such as specific events and policies, has been a popular to- pic in tourism economics research over the last few decades. The development of tourism impact studies can be seen from both its meth- odological advancement and the development of its supportive statisti- cal tools. The former is evidenced by the applications of Keynesian-type multipliers (e.g., Archer, 1977), cost-benefit analysis (CBA) (Abelson, 2011), I-O models (e.g., Archer & Fletcher, 1996; Frechtling & Horv- ath, 1998), the social accounting matrix (SAM) method as a further extension of the I-O method (e.g., Wagner, 1997), and computable general equilibrium (CGE) frameworks (e.g., Blake, 2009; Dwyer, For- syth, Spurr, & Vanho, 2003; Pratt, 2011). The latest development of sta- tistical tools to support economic contribution analysis involves tourism satellite accounts (TSAs). As noted by Frechtling and Smeral (2010), modern time series econometrics also contributes to impact analysis, especially the impacts of mega events (e.g., intervention mod- els, combined with outlier detection).

Impact Analysis Methods

Among the various impact analysis methods, the use of Keynesian multipliers is the most simplistic, while the CGE approach is the most sophisticated. A CGE model consists of a number of equations describ- ing the key relationships within an economy. The mathematical speci- fication abides by microeconomic optimisation principles (Stabler et al., 2010). Therefore, the CGE approach has its theoretical founda- tion in neoclassical microeconomics.

Each of the above methods relies on certain economic assumptions and thus has its limitations. The CGE approach, as the latest, most complete and comprehensive method, was developed to overcome some of the restrictive assumptions that the I-O method embodies, such as exogeneity of the determinants of demand, perfectly elastic aggregate supply curve, and infinite or zero substitution effects (Dwyer et al., 2010). CGE models recognise that an expanding tourism indus- try tends to ‘‘crowd out’’ other sectors of economic activity. The extent of these ‘‘crowding out’’ effects depends on factor constraints, changes

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in the exchange rate, the workings of labour markets, and the macro- economic policy context. It has been noted that the multipliers calcu- lated based on CGE models are much more modest, while the I-O method tends to overestimate the economic effects (Dwyer, Forsyth, & Spurr, 2006). However, as with any other method, the CGE approach inevitably relies on some assumptions which may possibly be restrictive (Stabler et al., 2010). For instance, standard CGEs often assume con- stant returns to scale in production functions and ignore market fail- ures (Croes & Severt, 2007). The assumption of fixed real wages and flexible unemployment, and the assumption of fixed unemployment and flexible wages, which can be both incorporated into a CGE model, may give a range of possible outcomes in relation to the crowding out effects (Dwyer et al., 2006). Nevertheless, the merits of the CGE ap- proach compared to other methods are generally accepted.

Increasing attention has been paid to the applications of CGE mod- els to the estimation of (a) the economic impacts of demand shocks occasioned by events such as foot and mouth disease (Sinclair et al., 2003), the World Cup (Lee, Moon, & Mjelde, 2010), the Olympics (Li, Blake, & Cooper, 2011), and a terrorist attack (Pambudi, McCaughey, & Smyth, 2009) and (b) the effects on tourism of policies such as taxation (e.g., Gago, Labandeira, Picos, & Rodrı́guez, 2009; Gooroochurn & Sinclair, 2005), tourism crisis management (Blake & Sinclair, 2003), and international trade policies (e.g., Sinclair et al., 2003). It should be noted that there are two types of impact studies based on CGE models and demand forecasting models, respectively. The former estimate the economic effects of demand shocks not only within the tourism industry but also in other related economic sectors (Adams & Parmenter, 1995), while the latter (e.g., Smeral, 2009b; Song et al., 2011) focus on the impact on tourism demand only. Often the results of the latter are employed in the CGE simulation process (e.g., Lee et al., 2010).

The latest methodological development focuses on dynamic CGE models. Most of the CGE models applied to tourism impact studies since the mid-1990s have been comparative static models, which only provide a snapshot of economic relationships at one point in time; the adjustment process from one equilibrium to another is ignored. Dynamic CGE models introduce a time dimension in various forms to take account of the dynamics in an economic system. Blake (2009) employs a dynamic CGE model to demonstrate the different ef- fects of an increase in tourism demand under different dynamic condi- tions. Further developments of dynamic CGE models, such as consideration of the effects of different market structure models on pricing behaviours, are still required (Blake, 2009).

In contrast to economic impact analysis, CBA is the most comprehen- sive of the economic appraisal techniques. CBA is particularly important in the context of evaluating tourism policy, programmes, regulations, projects, and developments. CBA considers the costs and benefits to society as a whole to determine whether a particular change will make society better or worse off. This requires estimating a wider range of costs and benefits than those included in a financial appraisal, including the

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estimation of values where no direct price is charged. Surprisingly, de- spite the progress in terms of the concepts and applications of CBA in the economics literature, this area is relatively neglected in tourism eco- nomics (Abelson, 2011; Dwyer et al., 2010).

TSAs

The robustness of economic impact assessment relies heavily on the quality and completeness of data support. To meet this need, a statis- tical accounting framework—a TSA—based on the internationally adopted concepts, principles, and structure of the System of National Accounts has been developed (Diakomihalis & Lagos, 2011; Frechtling, 2010). Since TSAs focus on direct effects only, they tend to underesti- mate the overall economic contribution of tourism. Therefore, adjust- ments for indirect effects and intermediate consumption are needed (Smeral, 2006).

A new direction in TSA-based impact analysis is to integrate an esti- mation of carbon emissions into a TSA framework so that a more com- plete assessment of tourism impact, including both economic and environmental dimensions, can be made in a consistent fashion. If the relationship between industry production and greenhouse gas emissions is known, then it is possible to calculate the emissions which are due to tourism as measured by the TSA.

Pioneering studies in this direction include Jones and Munday (2007) and Dwyer, Forsyth, Spurr, and Hoque (2010). The develop- ment of TSA frameworks needs to be further extended to the sub-na- tional level, which still lacks a standardised conceptual framework (Frechtling, 2010).

While a TSA represents an important information base for the esti- mation of the economic contribution of changes in tourism demand, it is not in itself a modelling tool for economic impact assessment. A TSA measures the economic contribution of tourism, that is, the size and overall significance of the industry within an economy. In contrast, economic impact refers to the changes in the economic contribution resulting from specific events or activities that comprise ‘‘shocks’’ to the tourism system. This should not be confused with the contribution itself. Economic impact implies that the overall change in the eco- nomic contribution must take account of any interactive effects which occur across the economy and thus requires a model to provide the simulations (Dwyer, Forsyth, & Spurr, 2007).

Where the required secondary data support is unavailable for an economic impact analysis, primary data collection from survey sam- pling is probably the only way forward (e.g., Alcover et al., 2011; Lacher & Nepal, 2010; Southwick, Bergstrom, & Wall, 2009). This approach can provide useful information where more sophisticated methods are not applicable, but the results should be used with caution due to sampling biases. Careful statistical treatments with the raw data are also needed (Southwick et al., 2009).

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The Employment Effect

In addition to the income effect which dominates economic impact analyses, the employment effect is another well established research area, dating back to the 1970s (e.g., Diamond, 1974; Diamond, 1977). The focus has shifted from the level of tourism employment, in- put-output analysis and the multiplier effect (Dwyer & Forsyth, 1998) to the quality and structure of employment (e.g., Sinclair, 1990; Sin- clair, 1997), particularly the gender wage gap (e.g., Campos-Soria, Ort- ega-Aguaza, & Ropero-Garcı́a, 2009; Muñoz-Bullón, 2009). These discussions provide useful policy implications in relation to poverty alleviation, labour immigration, and education (Lillo-Bañuls & Casa- do-Dı́az, 2010; Riley & Szivas, 2009). With regard to the methodology of wage-related empirical studies, the traditional OLS method has been criticised and more appropriate alternatives are now employed, such as a two-limit Tobit model (Munoz-Bullon, 2009) and instrumental vari- ables techniques (Lillo-Bañuls & Casado-Diaz, 2010). In the latter case, the authors present different findings from those based on the OLS method.

Most tourism employment studies have their theoretical foundation in neoclassical labour economics, such as the marginal productivity theory of demand. There has been little evidence that tourism labour and employment studies apply alternative approaches, especially the multidisciplinary approaches developed and promoted in the main- stream labour economics field (Spencer, 2011), such as new institu- tional labour economics, which draws on insights from sociology and political science (Osterman, 2009). New economic perspectives are needed to contribute to a fuller understanding of a wider range of la- bour and employment issues in tourism, such as employer-employee relationships, human resource issues, and the transformation of work within modern society.

Tourism and Economic Growth

With the growing importance of tourism to many economies, espe- cially less-developed ones, the relationship between tourism and eco- nomic growth has become one of the main research themes in recent literature. Proponents of the tourism-led growth (TLG) hypoth- esis emphasise that international tourism can bring foreign exchange, generate employment, spur local investments, exploit economies of scale, and diffuse technical knowledge (Schubert, Brida, & Risso, 2011). Since the early 1990s, researchers have borrowed international trade models to investigate (typically within a small open economy set- ting) the effects of tourism on national welfare theoretically (e.g., Copeland, 1991; Hazari & Sgro, 1995) and, more recently, the macro- economic effects of a temporary demand shock (e.g., Hazari & Sgro, 1995, 2004; Schubert & Brida, 2009).

Meanwhile, the implications of a growing economy for tourism development also concern researchers. Smeral (2003) develops a theo-

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retical framework in which structural change in demand (‘demand bias’), after saturation in basic needs is achieved, drives tourism growth at a faster pace than that of the whole economy, whereas the produc- tivity gap between tourism and manufacturing (‘productivity bias’) ren- ders that tourism services become more expensive than manufactured goods in the long run, and the share of employment in the hotel and restaurant industry increases.

Researchers are also keen to find empirical evidence on whether tourism does relate to economic growth. However, the results have been inconclusive. The TLG hypothesis is generally tested by regress- ing GDP (or GDP growth) on tourism receipts (or arrivals) and real ex- change rates. A prevailing practice is to test for the Granger causality between economic variables using the VAR model (e.g., Balaguer & Cantavella-Jorda, 2002; Belloumi, 2010; Kim, Chen, & Jang, 2006; Schu- bert et al., 2011) or panel data analysis (e.g., Narayan, Narayan, Prasad, & Prasad, 2010; Seetanah, 2011). Many studies confirm a unidirec- tional causality running from international tourism to real GDP in spe- cific countries/regions, while some find evidence of bidirectional relationships (e.g., Kim et al., 2006). Conversely, a few studies fail to detect a co-integration relationship and suggest that the TLG hypoth- esis does not hold in the studied case (e.g., Katircioglu, 2009).

Highlighting the role of capital formation, an emerging strand of studies argue that the mechanism underlying tourism’s welfare-pro- moting effect follow the so-called TKIG hypothesis (tourism exportsficapital goods importsfigrowth; see Nowak, Sahli, & Cortes- Jimenez, 2007). The empirical models usually resemble those for the TLG hypothesis, with the variable of imports of industrial machinery included. The Johansen technique of co-integration and Granger cau- sality tests are used to examine the interactions between variables. The findings are, however, mixed. Nowak et al. (2007) yield supportive evi- dence for both the TLG and TKIG hypotheses for Spain, whereas Cortes-Jimenez, Nowak, and Sahli (2011) only detect a short-run TKIG mechanism for Tunisia.

A straightforward implication would be that tourism does not always increase economic welfare. In fact, since the very early literature, researchers have noted that a tourism boom may lead to ‘‘de-industri- alisation’’ in other sectors (Copeland, 1991). The phenomenon is of- ten termed the ‘‘Dutch Disease effect’’. Focusing on a small island economy, Nowak and Sahli (2007) show that increased inbound tour- ism may lead to net welfare losses when tourism products are intensive users of coastal land. On the empirical side, Holzner (2011) examines a set of panel data for 134 countries over a period of 38 years. Although no signs of a contraction of the manufacturing sector are found in the long run, the author warns that the danger of the Dutch Disease effect could still be valid in the short or medium run.

The main criticisms faced by the TLG and TKIG studies related to their reliance on the use of the Granger causality test. In fact, the Gran- ger causality test only represents the secessionist’s view of causation (i.e., some economic activities precede others) and does not necessar-

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ily suggest the real cause-effect relationship (Stock & Watson, 2003, p. 21).

International Economics

As a significant form of international trade flows, tourism inherently lies within the scope of international economics studies. As summa- rized by Zhang and Jensen (2007), trade theories can be extensively ap- plied to explaining the service trade. The price competition among destinations and tourists’ pursuit of sun, sand, sea or cultural heritage are reflections of the difference in destinations’ technology/produc- tive efficiency (Ricardo theory) and that in the natural endowments (Heckscher-Ohlin model). In the meantime, pilgrim tourism can be explained by similarity in preferences (e.g., cultural affinity), as in the Linder model. Strands of the new trade theories that capture the ownership advantages, innovation/diffusion patterns and agglomera- tion give an account of recent trends such as international hotel chains, internet marketing and tourism clusters.

From an empirical perspective, although concepts such as trade vol- ume and exchange rate are readily considered in tourism demand modelling, their underlying relationships have been under-researched. Using the Granger causality test, a number of studies find supportive evidence of the bidirectional causality between international tourism and international trade (e.g., Kulendran & Wilson, 2000; Santana-Gal- lego, Ledesma-Rodriguez, & Perez-Rodriguez, 2011; Wong & Tang, 2010). An exception is Khan, Toh, and Chua’s (2005) study, which de- tects rare Granger causality between tourism and trade in the case of Singapore.

Foreign direct investment (FDI) is also linked to tourism, but the lack of comprehensive data has bedevilled researchers. On the basis of the data available, FDI in tourism actually remains quite low com- pared to FDI in other sectors. Endo (2006) argues that this is because many transnational corporation hotels use the non-equity forms of en- try, resulting in no record in the FDI statistics. Some other researchers focus their attention on overall FDI, investigating the causal link be- tween tourism and FDI (e.g., Sanford & Dong, 2000; Tang, Selvana- than, & Selvanathan, 2007), but again this suffers from the problem of reliance on the Granger causality test.

As regards exchange rate, its microeconomic role in deciding tour- ism demand has been well documented. However, few have investi- gated it at the macro level. Following Gil-Pareja, Llorca-Vivero, and Martinez-Serrano’s (2007) examination of the effect of the Economic and Monetary Union of the European Union on tourism, Santana-Gal- lego, Ledesma-Rodriguez, and Perez-Rodriguez (2010) conduct an extensive panel analysis on the impact of an exchange rate regime on tourism and find that less flexible exchange rates are more favour- able to tourism.

1670 H. Song et al./Annals of Tourism Research 39 (2012) 1653–1682

Destination Competitiveness

Destination competitiveness has stimulated continuous research (Crouch & Ritchie, 2006). It has been defined from various angles and measured by different methodologies. The most comprehensive conceptual framework has been crafted by Crouch and Ritchie (1994), 2003). This framework incorporates such key elements as com- parative and competitive advantages, macro and micro environments, and core and supporting resources. Crouch (2011) evaluates 36 com- petitiveness attributes with ‘‘expert’’ judgment to develop an insight into the importance of each attribute. Other researchers focus on spe- cific destinations or particular aspects of competitiveness (e.g., Dwyer, Forsyth, & Rao, 2000; Mangion et al., 2005; Ribes, Rodrı́guez, & Jimé- nez, 2011). With most studies being concerned with the competitive position, however, few have paid attention to its (economic) return. Croes (2011) is among the exceptions that take account of the change in economic value when constructing the competitiveness model.

ENVIRONMENTAL ISSUES

The environmental issues of tourism are more complex than those in many other industries. Tourism production and consumption both have either positive or negative environmental consequences. Mean- while, tourism activities are often affected by the quality of environ- mental resources (Tribe, 2011). The relationships between tourism and the natural environment are also distinct in comparison to those in manufacturing industries, where the environment is mainly viewed as an input factor of production. In the tourism industry, the environ- ment is not only an input factor (e.g., water and energy), but also a key component of its output, such as national parks and agritourism (Razumova, Lozano, & Rey-Maquieira, 2009).

Environmental Research at Micro and Macro Levels

The increasing attention being paid globally to sustainable tourism and climate change has led to growing research and debates on the environmental issues of tourism, particularly over the last decade. At the micro level, the effects of the environment on both the demand for and the supply of tourism have been addressed. The topics associ- ated with demand for tourism include the impact of overcrowding on visitation (Santana-Jimenez & Hernández, 2011), weather variations on demand for skiing (Shih, Nicholls, & Holecek, 2009), and the influ- ence of natural environment conditions on holiday destination choice (Huybers & Bennett, 2000). These studies are commonly based on tourism demand models and incorporate environmental factors as explanatory variables in a demand function. The topics relating to the supply of tourism are often to do with the pricing strategy of nature reserves (Becker, 2009), the economic incentives to undertake volun- tary environmental management (Blanco, Rey-Maquieira, & Lozano,

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2009), and firms’ environmental strategies and economic performance (Claver-Cortés, Molina-Azorı́n, Pereira-Moliner, & López-Gamero, 2007; González & León, 2001).

At the macro level, attention has been paid to the assessment of the environmental impacts of and on tourism. For example, Berrittella, Bigano, Roson, and Tol (2006) study the economic implications of cli- mate-change-induced changes for tourism demand based on a CGE model. Kytzia, Walz, and Wegmann (2011) examine the impact of tour- ism development on land use efficiency based on regional augmented I-O tables. As discussed in the previous section, one of the latest devel- opments is to combine the economic and environmental dimensions into the same framework using TSAs. To address the concern of tour- ism sustainability, an even more complete tourism impact assessment framework including economic, social, environmental, and institu- tional dimensions has been proposed by Fernandes and Sanchez Rive- ro (2009), and a composite index is created. Such a system will be useful for monitoring a destination’s sustainable development and comparing the competitiveness among destinations provided that the indicators are carefully chosen.

Valuation of Environmental Resources

Environmental issues are often discussed in relation to market fail- ure. As market prices do not reflect the full social costs or benefits re- lated to the use of natural resources, overuse of these resources, worsening environmental conditions, overcrowding, and congestion problems merge. Lack of property rights, public goods, and externali- ties are common explanations of the market failure associated with the environmental impacts of tourism (Dwyer et al., 2010). In order to make more effective use of these natural resources and pursue a more sustainable path of development, governments and communities need to understand the total economic value of their resources and imple- ment appropriate policies.

Four practical methods for estimating the non-market value of an environmental amenity have been developed and applied in tourism- related contexts: contingent valuation and contingent choice methods, which are both associated with state preferences, and hedonic pricing and travel cost methods, which are both based on revealed preference techniques. The state preference methods are more straightforward since the willingness-to-pay amounts can be easily obtained or calcu- lated through a survey process (e.g., Bostedt & Mattsson, 1995; Snyder & Smail, 2009; Tapsuwan, Burton, & Perriam, 2010). However, the lim- itations of these methods associated with hypothetical bias (i.e., the respondent’s stated value of willingness to pay and the actual behav- iour) have been well recognised. Given its foundation on Lancaster’s ‘‘characteristics’’ approach to consumer theory, the hedonic pricing method is the most theoretically rigorous. Its validity depends on the extent to which the price of a tourism product is determined by its environmental attributes. Its applications in tourism are few, with

1672 H. Song et al./Annals of Tourism Research 39 (2012) 1653–1682

Baddeley’s (2004) study being an exception. The travel cost method fo- cuses on the influence of distance on the demand to visit an environ- mental amenity (e.g., Hesseln, Loomis, Gonzalez-Caban, & Alexander, 2003; Park, Bowker, & Leeworthy, 2002); however, it cannot be used to assess the non-use value. As each of the above methods has certain lim- itations (Dwyer et al., 2010; Stabler et al., 2010), careful consideration should be given to the choice of the most appropriate alternative or combination of alternatives. The evaluation results based on traditional methods should be used with great caution, especially when their aim is to inform certain policy making.

Environmental Policy and Governance

To control and reduce the adverse effects of tourism on the environ- ment and to achieve more sustainable development of tourism, espe- cially at nature-based destinations, increasing scholarly attention has been given to discussions about the appropriate instruments for envi- ronmental governance. Neoclassical environmental economics con- forms to the principle that market mechanisms will solve the environmental issues. Based on this principle, price-based instruments are advocated to internalise adverse environmental impacts, lower tour- ism capacity, and increase long-term societal welfare. For instance, Loz- ano, Gomez, and Rey-Maquieira (2008), Piga (2003), and Schubert (2010) propose theoretical models based on partial or general equilib- rium frameworks to support overnight-stay tax, tourism tax in general (payable by tourists), and land-use tax, respectively.

Non-price instruments, such as government regulations and industry voluntary management, as well as semi-price instruments such as quo- tas have also been discussed in the tourism literature. A positive view has been proposed regarding environmental regulations and manage- ment leading to the improved competitiveness of firms or the destina- tion. In a tourism context, Razumova et al. (2009) argue the validity of the Porter hypothesis, which states that efficient environmental regula- tion may improve both environmental quality and domestic firms’ international competitiveness (Porter, 1991). Razumova et al. (2009) stress that given the distinct nature of the tourism industry and its products, ‘‘the findings of works on different sectors cannot be applied in a straightforward manner to the tourism sector’’ (p. 387). The posi- tive demand effects of environmental regulation and management are more relevant to the tourism industry. Huybers and Bennett (2003) illustrate the above view in an empirical study through simulations of a model of imperfect competition. Moreover, Blanco et al. (2009) ex- plore the validity of firms’ voluntary environmental management and collective voluntary actions as alternative environmental policies.

In future studies on the environmental issues of tourism, particularly the implications of tourism development for environmental policy and governance, a new institutional approach should be considered, as sug- gested by Blanco et al. (2009). Advocated by ecological economists, the new institutional ecological economics highlights the interdependence

H. Song et al./Annals of Tourism Research 39 (2012) 1653–1682 1673

among environmental resource users which can be used to characterise environmental problems and to design institutional responses. Institu- tional ecological economics also acknowledges the positive transaction costs of the institutional design of governance solutions. In addition, theories of institutional change and social capital will be useful for explaining the change in environmental governance institutions (Paa- vola & Adger, 2005). This direction of environmental studies has yet to be explored by tourism economists.

CONCLUDING REMARKS

Through half a century’s research endeavours, tourism economics has made substantial developments and has contributed significantly to knowledge creation in the broad tourism field. The special charac- teristics of tourism products call for new perspectives and approaches beyond the conventional economic principles applied to other indus- tries. The research developments among various sub-subject areas are unbalanced.

Demand analysis continues to dominate tourism economics studies in terms of research interests and methodological advancements. In addition to continuous endeavours in seeking more powerful statistical tools to assist new insights, further research attention should be paid to the interrelationships among international tourism demand through a more complete system which accounts for the endogeneity among the economic variables. Supply studies are diverse and often fragmented. Comparably fewer methodological innovations have been observed, but alternative approaches (e.g., agency theory and transition cost economics) to the neoclassical philosophy and cross-disciplinary perspectives (e.g., new economic geography) have emerged. Further studies should aim for a more comprehensive understanding of the complex relationships between tourism organisations, both within and across sectors, in modern tourism supply and the corresponding firm behaviour. The more advanced game theoretical approach is wel- come, particularly in the context of supply chains.

At the macro level, assessment of the economic impacts of tourism development continues to be a central focus, although it will take a long time for this field of research to reach its methodological matu- rity. Further advancements in research on the relationship between tourism development and economic development should not ignore the theoretical foundation of such studies. In the context of the increasing attention paid to sustainability, environmental issues have attracted increasing research interest. Methodological limitations with regard to environmental impact assessment and the valuation of envi- ronmental resources deserve careful attention given the policy implica- tions of these types of research. Studies on environmental governance need to take account of the different perspectives on this issue. Due to space constraints, this review is unable to give a full coverage of the developments of tourism economics research. Many aspects and issues have been omitted, regrettably.

1674 H. Song et al./Annals of Tourism Research 39 (2012) 1653–1682

Overall, the economic approach, especially the neoclassical economic theories, has contributed to a better understanding of tourism. Alternative economic perspectives such as new institutional economics will help to extend the boundaries of our knowledge. In the wider context of tourism knowledge creation, economics should continue to play a significant role along with other social science disci- plines. The earlier observation that ‘‘many tourism researchers seem unwilling to reach across disciplinary and methodological boundaries’’ (Echtner & Jamal, 1997, p. 869) must be avoided. As Tribe and Xiao (2011) note, ‘‘tourism is gradually evolving from a multidisciplinary endeavor into an interdisciplinary stage of research and scholarship’’ (p. 22). Integrating economics with other social sciences will not only advance our understanding of tourism, but also enrich the develop- ment of tourism economics. To pursue this direction, collective effort is necessary.

Acknowledgement—The authors would like to acknowledge the financial support of The Hong Kong Polytechnic University (Grant No: G-U332).

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Submitted 31 January 2012. Final version 21 May 2012. Refereed anonymously. Coordinating Editor: John Tribe.

  • Tourism economics research: A review and assessment
    • Introduction
    • Demand
      • Demand and its Determinants
      • Methodological Developments
      • Interdependence and Interrelation
    • Firm, industry, and market
      • The Structure-Conduct-Performance (SCP) Paradigm
      • Structure
      • Conduct
      • Performance
      • Game Theory and Supply Chain
      • Institutional Approach to the Behaviour of Firms
      • Industry Agglomeration and Clustering
    • Macroeconomics of destinations
      • The Economic Impact
      • Impact Analysis Methods
      • TSAs
      • The Employment Effect
      • Tourism and Economic Growth
      • International Economics
      • Destination Competitiveness
    • Environmental issues
      • Environmental Research at Micro and Macro Levels
      • Valuation of Environmental Resources
      • Environmental Policy and Governance
    • Concluding remarks
    • Acknowledgement
    • References

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