Piotr Niewiadomski

INTERNATIONAL HOTEL GROUPS

AND ECONOMIC DEVELOPMENT

IN CENTRAL AND EASTERN EUROPE (CEE)

University of Aberdeen, UK

University of Wisconsin in Eau ClaireApril 2015

OUTLINE

1. Central and Eastern Europe (CEE) and post-communist transformations after 1989

2. Path-dependency, lock-in and mechanisms of de-locking

3. The hotel industry and international hotel groups

4. The influence of the hotel industry on economic development in CEE

CENTRAL AND EASTERN EUROPE (CEE)AS THE FORMER ‘SECOND WORLD’ (1)

- The so-called ‘Second World’ was born out of the post-World War II division of Europe into the Allied Forces-controlled part and the Soviet Union-controlled part

- The European part of the communist bloc consisted of nine countries: the Soviet Union, Poland, Czechoslovakia, Hungary, East Germany, Romania, Bulgaria, Yugoslavia and Albania

- The bloc was based on the Soviet political, economic and military control over the area and was built around two organisations – the Warsaw Pact (1955) and the Council for Mutual Economic Assistance (i.e. Comecon) (1949)

CENTRAL AND EASTERN EUROPE (CEE)AS THE FORMER ‘SECOND WORLD’ (2)

- The communist system was maintained and controlled by the national communist parties

- The state owned the means of production, controlled economic activities, determined the direction of economic development and planned the volume of production

- Capitalist market relations were hugely limited (or illegal)

- The economic system was underpinned by a political totalitarian system and political oppression

- Societies of CEE opposed communism and tried to fight for freedom of speech, human rights and liberal democracy

(Bradshaw and Stenning 2004)

POST-COMMUNIST TRANSFORMATIONS (1)

- In 1989 communism in CEE collapsed and the “communist bloc” ceased to exist

- The map of CEE was completely re-drawn...

POST-COMMUNIST TRANSFORMATIONS (2)

- The CEE countries embarked on an ambitious path of transition from socialism to capitalism

- Economic development based on capitalist principles was one of the key objectives

- A central role in the transition was accorded to FDI and foreign firms which were expected to create jobs, bring modern technology and generate industrial upgrading

(Bradshaw and Swain 2004, Pavlinek 2004, Sokol 2001)

PATH-DEPENDENCY, LOCK-IN AND DE-LOCKING

- However, the legacies of communism keep surfacing and determining the pace and direction of changes...

- The CEE countries are developing in a ‘path-dependent way’, i.e. the economic landscape in CEE is shaped by its history

- Countries, sectors “are ‘locked-in’ to existing trajectories of development as the weight of inherited investments, practices and skills inhibits their capacity to adapt to wider processes of economic change” (MacKinnon 2012: 233)

- Links to external networks and sources of innovation and investment can serve as effective mechanisms of ‘de-locking’

(Martin and Sunley 2006, Boschma and Martin 2010, MacKinnon 2012)

What about the international hotel industry and its role?

THE HOTEL INDUSTRY (1)

- The hotel industry is a very fragmented sector:

- Independently-owned and managed hotels (85%)

- Hotels comprised by large chains and groups (15%)

- But... hotel groups account for 52% of the global sales in the hotel industry! (Euromonitor 2010)

• Hotel chain – a group of hotels which operate under the same brand, maintain the same standards and have a uniform marketing policy (Włodarczyk 2003)

• Hotel group – a group of hotel chains which are controlled by central management and have the same strategy and marketing policy (Littlejohn 2003, Włodarczyk 2003)

THE HOTEL INDUSTRY (2)

- High sensitivity to fluctuations in demand and external political and economic forces

- A ‘localised focus’ – a highly context-specific and context-dependent nature despite the global scope

- High level of globalness – a high number of hotels comprised by each group outside its home market

- The existence of multiple, well-recognised brands such as Hilton, Marriott or Holiday Inn

- Long history of international expansion (since the 19 thC)

- High costs of investment, high dependence of external capital the existence of non-equity business models

(Niewiadomski 2014)

BUSINESS MODELS OF HOTEL GROUPS DIFFERENT TYPES OF NETWORKS

- Owning – when the hotel is both owned and operated by a given hotel group

- Managing – when the hotel owner employs a hotel group to operate the business on the owner’s behalf

- Leasing – when a hotel group rents the hotel from its owner in order to operate the business on its own behalf

- Franchising – when the hotel owner/operator employs a hotel group to flag and market the hotel

- Hotel consortia – when the hotel joins an affiliation of independent hotels to jointly carry out marketing activities

(Athiyaman and Go 2003, Cunill 2006, Go and Pine 1995, León-Darder et al 2011, Littlejohn 2003, Niewiadomski 2014)

THE HOTEL INDUSTRY IN CEE BEFORE 1989

- After WWII all hotels in CEE were nationalised

- The communist governments did not want to invest in “non-productive” services such as tourism

- The number of hotels was very low, their condition was very poor and the range of facilities was very limited

- The region was separated from the international tourist flows and the money and knowledge they would bring

- There was no service culture under communism and no quality education in hospitality and tourism was available

(Błądek and Tulibacki 2003, Johnson and Vanetti 2004, Witkowski 2003)

DIRECT INVESTMENT

- Hotel projects imply large injections of capital in real estate of high quality, but:

- Is capital foreign or local?

- What about tax holidays?

- Do the profits outweigh in time the invested money?

- Does it lead to the host country’s dependence on foreign firms?

- Developers invest money, not hotel groups

(Britton 1991, Chang et al 1996, Dicken 2007, Niewiadomski 2015) Watson 1991)

(Source: Eurostat Online 2010)

FDI stocks in hotels and restaurants

INFRASTRUCTURE UPGRADING (1)

“For the city it’s a long-term investment. (...) And it is not something with which you can do whatever you want. If for any reason you have cheaper labour next door you

move the factory. (…) But the hotel won’t move because our business is local. (...) We are here almost forever, we can’t move. We might build another hotel somewhere

else, that’s true, but this one will stay.” (General Manager of an international hotel, Sofia, Bulgaria, September 2009)

- Hotels are an important part of urban infrastructure – they often stand out in the landscape

- They are usually the most modern developments – in Eastern Europe they set modern standards!

- They include facilities which the region lacks

- They play a part in revitalisation projects – more later!

- Developers build hotels but hotel groups dictate standards!

(Niewiadomski 2015)

INFRASTRUCTURE UPGRADING (2)

Top-left: InterContinental Hotel Warsaw (Warsaw, Poland)Top-middle: Radisson Blu Hotel Tallinnand Swissôtel Tallinn (in the background) (Tallinn, Estonia)Top-right: The Westin Warsaw (Warsaw, Poland)Bottom-left: Hilton Hotel Sofia (Sofia, Bulgaria)Bottom-middle: Barceló Royal Beach Hotel (Sunny Beach, Bulgaria)

EMPLOYMENT CREATION

- New hotels bring jobs (something that is badly needed in CEE!) – more than automated industries!

- They also generate many casual and indirect jobs

- In contrast, when existing hotels are taken-over, there often have to be collective lay-offs

- Hotel jobs are usually low-paid, servile and unskilled

- Foreign hotel groups lead to a loss of jobs at local hotels (it is difficult to measure the net gain for the host area!)

- Foreign hotel groups sometimes offer attractive benefits

- Developers create jobs but hotel groups that manage these hotels are responsible for their quality

(Baum 1993, Brown 1998, Dicken 2007, Fortanier and van Wijk 2010 Niewiadomski 2015)

FORGING LOCAL LINKAGES

- New hotels generate demand for products and services

- They source food and beverage products from the local economy in order to reflect ‘local flavours’ and save on costs of delivery

- International hotel groups are also instigators of qualitative changes

- The same applies to services: laundry, cleaning, taxi etc.

- However, sometimes hotel groups prefer chain agreements at the expense of local supplies

- The demand at the construction stage is generated by developers while the demand at the operational stage is down to hotel operators and their strategic decisions

(Dicken 2007, Niewiadomski 2015)

TRAINING AND KNOWLEDGE TRANSFER

- The most important category of long-term impact and the most important mechanism of de-locking in CEE!

- It is intertwined with the previously discussed categories

- It may encompass:

- Technical innovations and modern construction standards

- Management, sales and marketing techniques and strategies

- Rules underlying the organisation of work (health and safety)

- Customer service standards

- This knowledge spills out beyond the hotel industry (i.e. to suppliers, local governments, customers)

- Hotel groups play a key role, not hotel developers

(Jacob and Groizard 2007, Niewiadomski 2015, Orfila et al 2005)

POWER OF THE BRAND

- Famous hotel brands enhance the visibility of the host market and reflect its size and strength

- They attract more visitors and more investments

- Such role proved to be critical in the early years of transformations in CEE “the halo factor”

- Resort brands have the power to create destinations from scratch (e.g. in Albania, Montenegro)

- This category of impact is (almost) impossible to quantify!

- Famous hotel groups, not developers, play this role

CONCLUSIONS

- The impact of the hotel sector on economic development should not be under-estimated

- It depends on the business model of the hotel group- It is not always hotel groups who should be credited for fostering

economic upgrading- In CEE the impact of the hotel sector on economic development

has a few peculiar dimensions and has proved overtime to be an important mechanism of de-locking CEE from the post-communist path-dependence

- It is easy to identify different mechanisms and processes but it is almost impossible to measure and quantify the impact of the hotel sector on economic development

REFERENCES

• Athiyaman, A., Go, F. (1993) Strategic choices in the international hospitality industry, in: Brotherton, B. (ed.) The International Hospitality Industry: Structure Characteristics and Issues, Oxford: Butterworth-Heinemann, pp. 142-159

• Baum, T. (1993) Human resource issues in tourism: an introduction, in: Baum, T. (eds.) Human Resource Issues in International Tourism, Oxford: Butterworth-Heinemann

• Błądek, Z., Tulibacki, T. (2003) Dzieje Krajowego Hotelarstwa – od Zajazdu do Współczesności: Fakty, Obiekty, Ludzie, Poznań: Palladium Architekci – Błądek, Mańkowski

• Boschma, R., Martin, M. (2010) The aims and scope of evolutionary economic geography, in: Boschma, R., Martin, R. (eds.) The Handbook of Evolutionary Economic Geography, Cheltenham: Edward Elgar, pp. 3-39

• Bradshaw, M., Swain, A. (2004) Foreign investment and regional development, in: Bradshaw, M., Stenning, A. (eds.) East Central Europe and the Former Soviet Union, Harlow: Pearson

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