Enabling Frameworks for Tourism Investment Drivers and Challenges shaping Investments in Tourism
Series A, Publication #1
Presentation UNWTO Investment Guidelines Series
The multi-dimensional nature of the tourism sector, combined with the dynamics of the source of investment capital presents a complex picture for understanding and measuring tourism investments. At the same time, changing consumer behaviors and expectations, the advantage of technology, and the urgent need for greater sustainability challenge the current business models, and present new opportunities for investors interested in the tourism sector.
UNWTO is developing a series of investment guidelines to help better understand and generate sustainable investments in the tourism ecosystem. The guidelines are divided into three series in order to understand, enable and mobilize tourism investments. They will also help develop new insights for policy making to address the current barriers, new opportunities and encourage sustainable investments in the tourism sector.
Series A: Enabling Frameworks for Tourism Investments, provides insights on drives, opportunities, and strategies for addressing current challenges and barriers when investing in the tourism sector.
Series A: Travel and Tourism Tech Startup Ecosystem and Investment Landscape Publication #2, Provides insights on Travel and tourism tech investment landscape; Travel and tourism tech startup landscape and UNWTO’s travel and tourism tech startups.
Series B: Good Practices and Case Studies on Tourism Investment, promotes experiences and strategies that are working focused on innovations to attract, promote and mobilize investments.
Series C: Policy Considerations on Tourism Investment, provides insights for policymaking based on data driven evidence collected from Members States alongside contributions from other key relevant partners.
Why is this important?
Tourism is a global force for economic growth and development, generating US$ 1.7 trillion annually; this represents about 4% of global GDP and around 29% of service exports. Its labor-intensive nature drives employment. Indeed, tourism directly accounts for one in 10 jobs in the world: in 2019, the tourism sector supported around 300 million jobs globally (UNWTO, 2019).
The COVID-19 pandemic has had a sudden and significant impact on public health and the global economy. It also brought international travel to an abrupt halt. According to the three scenarios put forward by UNWTO, international tourist numbers could fall by between 60 and 80% in 2020 – at the start of the year, growth of 3% to 4% was predicted. This would translate into a loss of 850 million to 1.1 billion international tourist arrivals, $910 billion to $1.2 trillion in export revenues and 100-120 million direct tourism jobs. And it’s not just people’s livelihoods at risk. Efforts to ensure tourism is a driver of the Sustainable Development Goals (SDGs) are at risk of being rolled back (UNWTO, 2020a). For this reason, UNWTO has developed a series of Investment Guidelines to enhance coordination and cooperation and mobilize global investment mechanisms to respond to a global crisis. The Series A “Enabling Frameworks for Tourism Investment” provides insights for understanding and enabling the conditions and barriers to mobilize tourism investment and so build a competitive, sustainable and inclusive tourism sector beyond the attraction and promotion approaches.
1.1 Consumer behavior and demand drivers
According to UNWTO data, international tourist arrivals reached 1.5 billion in 2019 (UNWTO, 2020), and are expected to reach 1.8 billion by 2030 (UNWTO, 2019). This represents around 50 million additional arrivals per year, an increase of more than 150% compared to the period from 1995 to 2010. An estimated 88% of these tourists be from Asia (Kharas, 2017). For example, in 2018 around 10% of China’s 1.4 billion people travelled internationally. It is estimated that by 2027, the number of passport holders is expected to reach 300 million, or 20% of the Chinese population (UNWTO, 2018).
Looking forward, it is important to comprehend the demographic of this new market (2030-2040), which will be predominantly Millennials and Generation Z. Both are ‘digital natives’ and by 2040 they will represent the largest share of the global population at 2.3 and 2.6 billion respectively (Weinswig, 2016). Depending on their socio-economic groups, these behaviors may vary significantly. However, the overall trend is moving towards digital and innovative services, especially mobile services. At the same time, there will be a movement away from traditional experiences and towards more personalized experiences. Moreover, given the impacts of the COVID-19 pandemic, there has been increasing demand for transparency regarding health protocols, safety, data and security during the travels and at final destinations.
Therefore, a significant level of investment will be required to support increasing traveler volumes and changing consumer behaviors and needs. This might present several investment opportunities, opening up new investments flows from traditional hard investments like accommodation infrastructure to soft infrastructure like digital solutions and support services around experiences and sustainability in a post COVID-19 reality.
1.2 Innovation and technology drivers
These new consumer behaviors are shaping the tourism markets and serving as a unique opportunity to implement innovative solutions. These digital natives are demanding technologies such as: 5G, Cloud base Services, or Artificial Intelligence. All these offer increased speed of access to information, more intuitiveness in interactions the chance to extend a tourism experience before and after a trip.
In the last decade, Travel Tech startups presented several innovative approaches that offered both production and use of new technologies to create a new value. The Venture Capital (VC) investments in travel tech have been growing. Around USD 449 billion has been invested in Travel & Mobility Tech startups from 2014 to 2019. The travel tech sector reached USD 61.6 billion in unicorn valuations.
The potential growing demand and emerging markets have driven these flows of capital to new records. According to Morningstar Equity Research, only the booking market represents around a US$ 600 billion with growing expectations between 35.5 to 39.4% by 2029 (Morningstar Equity Research, 2020). Moreover, investments in the Travel & Mobility Tech startups has reached several other sub areas such as: Alternative Housing, Hotels & Hospitality Management, Artificial Intelligence & Analytics, Tours & Activities, Enterprise Management Software, Payment & Connectivity, Smart Luggage, Ride hailing & Carpooling, Electric Vehicles & Autonomous Driving, Aircraft & Flying, among others. These sub areas have been expanding through the value chain reaching different actors, diffusion technologies, and increasing productivity in the sector as a whole.
1.3. Sustainability and inclusion drivers
According to UNWTO by 2030, the total number of tourist trips is expected to reach 37.4billion, of which 17.4 billion will be international and domestic overnight arrivals (1.8 billion international/15.6 billion domestic). The hotel developments have been increasing 17.7 % from 2008 to 2018, and with a global pipeline of 2.4 million new hotel rooms in development. Furthermore, its reports mentioned the hotel sector is made up of almost 200,000 hotels containing over 18 million rooms globally (International Tourism Partnership, 2020). Sustainable Investments in the tourism sector has been oriented towards Green Transitions suggesting frameworks to shift from a growth-paradigm to a sustainable-paradigm in the long term (Peeters et al., 2018) in order to develop financial instruments for resilience and renewal of the tourism sector. Therefore, a significant level of investment will be required to support increasing traveler volumes and their changing needs.
2.1. Measuring capital formation in tourism
One of the biggest challenges in tourism economics is the measurement of its outputs. According to UNCTAD, tourism as an economic activity involves several sub sectors from real estate infrastructure to personalized services. There is not a formal industry classification in national accounts, which makes it difficult to quantify the size and importance of tourism assets, revenues or employment (UNCTAC; 2007,2010). Besides the increasing application of the tourism satellite account (TSA) as a statistical approach which identifies 12 separate national accounts industries as tourism characteristic activities. The methodology does not distinguish between foreign and domestic enterprises. Therefore, the multi-dimensional nature of tourism, combined with the dynamic nature of investment capital, presents a complex picture, making understanding and measuring tourism investments challenging.
Table 1: Tourism FDI industries concentration
These measures have raised methodological challenges in the tourism sector regarding equity ownership, or establishment of firms abroad, but also present challenges in the collection of investment data available. There are also recent challenges to measure flows of capital on Travel Tech startups. Although they are not considered (TNC), they manifest fast growth and their speed in expansion to new markets due its technology is exponential, which involves flows of capitals, and co-investments generating information signals to the FDI markets.
Greenfield tourism financial FDI data was used in partnership with the fDi Intelligence from the Financial Times as a proxy to measure international investment position (stocks). The data shows the top 10 subsectors, where accommodation represented more than 55% of the FDI construction and development (tangible) investments, while around 31% represents services and platform related (intangible) investments. The guidelines also use secondary information to track activity of global foreign investments. One of the main purposes of the series of publications is to gain knowledge regarding tourism investments, and generates information to fill the current gap on the matter.
Top 10 Subsector Tourism FDI Globally (fDi Intelligence classification) (by number of projects 2015-2019)
2.2. Evolving value chains and ecosystems in tourism investments
Tourism labor-intensive nature drives employment. It directly accounts for one in 10 jobs in the world: in 2019, the tourism sector supported around 300 million jobs globally (UNWTO, 2019a). Notably, tourism employs more women and young people than any other sector. In OECD countries, women account for 60% of tourism workers (Stacey, 2015). Around 32% of people working in tourism are between 15 and 34 years old. There is evidence that for every US$1 of tourism exports, 89 cents of domestic value added is generated (OECD, 2020). More than 30% of this value comes from indirect impacts on the local value chain, that is through links to other sub sectors such as: passenger transport (21%), accommodation (19%), food and beverage (16%), and other services (44%), among them travel agencies, entertainment, financial services, and digital startups. Around 85% of all these businesses are small and medium enterprises (SMEs) (OECD, 2019).
The tourism value chains have been evolving. From a traditional perspective, the tourism sub sector outputs include: recreational services, accommodation, food, services, dwellings, trade, construction, among others create investment opportunities along the value chain. Furthermore, from a non-traditional perspective, there are other tourism sub sector outputs emerging from the flows of capital allocated to travel tech innovations. From UNWTO investment research, we identified two main groups of subsectors based on capital raised. The first group is related to travel tech non-mobility sub sectors outputs that includes: alternative housing, hotels & hospitality management, artificial intelligence & analytics, tours & activities, enterprise management software, payment & connectivity, among others.
Subsectors Travel Tech Startups Funded (Non-Mobility)
The second group is related to travel tech mobility sub sectors outputs, such as: ride hailing & carpooling, electric vehicles & autonomous driving, aircraft & flying, micromobility, car rental & sharing, intercity/urban mobility, taxi services. Both of these sub groups' outputs are very relevant in terms of capital formation, representing around USD 450 billion investments in Travel Tech from 2014 to 2019. But it is also relevant in terms of innovation and its relationship with the tourism ecosystem. They attempt to disrupt current business models with technology, and present new opportunities for investors interested in the tourism sector in the new, post-COVID-19 reality. Integration of the tourism ecosystem and its stakeholders that are part of each sub sectors, both traditional and non-traditional is essential.
2.3. Attractiveness and Foreign direct investment in tourism
According to fDi Intelligence from the Financial Times and UNWTO data, the Tourism Foreign Direct Investment (TFDI) reached USD61.8bn globally, which, in turn, created more than 135,000 jobs in 2019 (fDi Intelligence Financial Times/ UNWTO, 2020). This translates into 715 FDI projects in 2019, compared with the 648 FDI project in 2018, and 347 FDI projects in 2017. This data shows the resilience of the tourism sector among other sectors that have been declining in the same period. Nevertheless, the COVID-19 pandemic has hit the tourism sector hard. Data suggests that global FDI into tourism plummeted by 73.2% in the first half of 2020, compared to that of 2019, putting an end to the sector’s record high years.
There is evidence that the world’s major sources of FDI in tourism are located in developed countries (as much as 90%). Less than 10% of total outward tourism related FDI stocks is concentrated in developing countries (UNCTAD, 2007, 2010, 2020). However, there is a trend to increase the efforts particularly in Latin America and the Caribbean, where FDI reached new record levels. It created more than 56.000 jobs in Mexico from 2015 to 2019. Tourism FDI was also strong in the Middle East and Africa, where it rose to the highest level in a decade (fDi Intelligence Financial Times/ UNWTO, 2020).
When it comes to developing tourism investment, attraction and promotion strategy, the need for knowledge and expertise is latent among developing countries. In a survey developed by UNWTO taken by 44 countries on investment promotion, 72.7% considered capacity building on Tourism Direct Investments a “high priority”. Furthermore, 84.1% of the surveyed countries expressed interest in Investment Attraction and Generation, and 70.5% demanded support on Tourism Investment Strategy.
3.1. From Traditional investment to Non-Traditional investment
From a Traditional perspective, during the period 2015-2019 USD195bn were invested on tourism FDI, two thirds were invested in the regions of Asia-Pacific (41%) and Europe (27%), while the remaining is evenly distributed among North America (6%), Latin America and The Caribbean (14%) and Middle East and Africa (11%) it is important to notice that, while the FDI investments in North America has been declining, there is a increment on investments in Latin America and the Caribbean (fDi Intelligence Financial Times/ UNWTO, 2020).
According the fDi Intelligence Financial Times and UNWTO report on Greenfield Investments, the “accommodation” was the most prominent sub-sector of tourism FDI projects globally, with more than 1249 projects, which are considered to be traditional investments related to construction (around 57% of total Greenfield investments from 2015 to 2019). However, there is an increasing number of non-traditional investments related to services around software technologies that include travel arrangement and reservation services, internet publishing, and web search engines, which represented around 32% of total investments between 2015 - 2019.
Two non-traditional investments in the tourism sector are Venture Capital (VC) investments in Travel Tech, and Corporate Venture Capital (CVC) as a whole based on the available information. Both Venture Capital and Corporate Venture Capital have been growing. Around USD 449 billion was invested in Travel & Mobility Tech startups between 2014 and 2019. These technology related investments offer opportunities beyond digitalization, they increase the productivity of the tourism value chain, and create different business models to innovate the sector.
However, it is worth highlighting that the aggregated Venture Capital Investments in Travel & Mobility Tech Startups were led by developed countries. In contrary global travel tech investments in emerging economies performed under 1% of which Brazil and South Africa accounted for around 97%. There must be a real push in investments vehicles to support and foster innovations and travel tech startups solutions in emerging economies as well as open opportunities to invest in untapped markets with growing potential demand.
3.2. Tourism investment attraction, promotion and mobilization strategies
In order to provide a practical technical note to develop a Tourism Investment Strategy (TIS), UNWTO suggests a basic framework of three simple stages to enable its Member States to attract, promote and mobilize tourism FDI to their countries. i) Organizational Strategy (Enabling Capacities), focusing on creating a clear vision and ownership to undertake FDI attraction; ii) Attractiveness Strategy (Enabling Conditions), generating the right conditions to increase the levels of attractiveness or investment climate of the country, analyzing its macroeconomic stability and its political, regulatory, legal and technological environment; and iii) Promotion Strategy (Enabling Opportunities), with the ultimate purpose to create a value proposition for the country, understanding its potentialities, identifying key projects and opportunities, but also taking advantage of the trends in order to develop an offer, and target investors.
The COVID-19 pandemic has made clear that sustainable tourism requires sustainable investments at the center of new solutions, and not just of traditional investments that promote and underpin economic growth and productivity. It has also highlighted the importance of non-traditional investments that enhance innovation through the creation and diffusion of new solutions to decarbonize the sector. To harness the advantages of investments, it is critical that governments promote policies as well as new investment vehicles to recover, retain and attract foreign direct investments. Only this way can we reimagine tourism and enhance the sector’s positive impact on people and planet as we accelerate the achievement of SDGs.