Global Economic Strategies to Mega Sports Event - Coursework Example

Running Head: GLOBAL ECONOMIC STRATEGIES TO MEGA SPORTS EVENT Global Economic Strategies to Mega Sports Event [The Writer’s Name] [The Name of the Institution] Global Economic Strategies to Mega Sports Event Introduction Sport is simultaneously a cultural and an economic activity. It is also a set of highly organised and structured global phenomena. Our interest lies in the role and nature of the global sports organisation. The GSOs exist to control sports at the world level and take many shapes and forms. In essence they are the supreme governing body of a sport or some other aspect of sport such as doping. Some are massive in their impacts and influence while others are much less so, even though their claim to global control may be legitimate. Whatever their size within their own circuit they all have some claim to be the ringmasters of sport. More than any other part of the world economy, with the exception of global financial markets, sport is intermediated by its own set of institutions and organisations. These were designed to formalise and further the interests of individual sports, events and culture rather than to be commercial enterprises. They have remained non-profit organisations in a stridently commercial activity. (Marshall, 1992, 307-24) So when examined from the perspective of the mass of non-profit global organisations with cultural or humanitarian objectives, a major difference becomes apparent: the GSOs are organisations with the capacity to control, contest or commercially generate hundreds of billions of dollars. Nevertheless, despite the fact that the revenues, either under the immediate control or indirectly under the influence of the GSOs are enormous, these organisations are largely ignored as a group. Perhaps this is precisely because of a fundamental element in their political economy, their non-profit status. Many of the GSOs have tremendous power to generate revenues, but their ambiguous 'ownership' of a sport combined with their non-profit status makes distribution of any surplus difficult. This is part of what makes them singularly interesting. The GSOs are the outcome of processes that precede the formation of the global sport economy. They are one of that economy's main actors but their importance stems from the size of that economy. Both the sport economy and the GSOs rely on the prior formalisation of sport. Without that formalisation sport could not be treated as a commodity. While some previous civilisations, China, Greece and Rome had highly organised, commercialised sports, before the eighteenth-century sport can be regarded as limited in extent, and almost entirely localised, non-professional and informal. So while the global sport economy is now a useful category, it is meaningless in an examination of eighteenth-century sport. After all, it was not until the mid-to-late eighteenth century that many sports began to be formalised and standardised in ways that would eventually allow sport commodities to be identified. To become a commodity, sport not only had to be producible, but also to be re-producible within a standard format, yet maintain uniqueness for each game, match or event. We argue that what is less recognised is that a pool of players, and teams in some cases, had to be created that could play each other on a more than casual basis. This is standardised and trained labour as an input to a commodity production. This requires that games be played under identical rules and is equally true for both amateur and professional sport. Equally important for standards of play, but less recognised, is that the required training for players (often from childhood) be performed under identical and stable rules. Codification, the creation of explicit codes of rules, is only one step in the overall formalisation of sport. Yet neither codification nor overall formalisation relies on sport being a commodity. ( Meenaghan, 1991, 35-47) Continuing and finalising the codification process was one of the first functions of early sports organisations, and was important for amateurs. This process was necessarily one that had begun before the organisations were formed. It was the prior creation of codes, and the competitions and events using those codes that became the catalyst for the creation of sports organisations. In global terms the operation of the calendar and the maintenance of the code and rules becomes one of the most important operational functions of a GSO. Discussion and Critical Analysis Fundamentally, large-scale international sporting events like the Olympics, the FIFA World Cup or the IRB Rugby World Cup, could have an economic impact on a host country because of the additional expenditures they generate. The most basic form of impact study aggregates such expenditures and calculates the final impact on Gross Domestic Product (GDP) of the event by considering the effect of multipliers on economic activity. Multipliers have been a standard component of the economist’s toolkit since Keynes (1936) and are used to calculate the final increase in demand caused by an additional injection from investment expenditure, government expenditure or some other source such as an increase in consumer expenditures caused by the tournament. Multipliers may be assumed to work on expenditure in the economy as a whole, or within specific industries where there are relatively minor externalities, or within a designated metropolitan area. In more sophisticated studies, multipliers are estimated and applied to the sectors most directly affected by a sporting event such as infrastructure construction, rail and air travel, hotels, catering, merchandising and sports goods, etc. The latter approach assumes that in the short run, the reactions of the industries in question to a change in sectoral demand are relatively inflexible and predictable. Analysis proceeds, therefore, by using assumed or calculated econometric estimates of the coefficients of input–out models with the final increase in expenditure determined by the action of the relevant sectoral multipliers. The more macroeconomic approach simply assumes that expenditures generated by an event impact directly on aggregate expenditure and through that on GDP and on economic growth.( Arthur, 1996, 100-109) Much of the controversy concerning the actual size of the economic impact of a tournament relates to estimation of the value of the multiplier(s) used in any impact study. In the simplest model of a multiplier effect, a closed economy is assumed with underutilised resources. In such circumstances, even unproductive government expenditure is seen to lead to a multiplied increase in final expenditure. (McCarville, 1994, 102-14) Applying multipliers to the economic impact of sports events is less straightforward. First of all, the existence of ‘leakages’—such as the proportion of income spent on goods and services coming from outside the market area, in metropolitan studies, or outside the country in national impact studies—reduce the size of the relevant expenditure multiplier. Similarly, account should be taken of the impact of taxes which also leak income out of the subsequent expenditure flows generated by an initial impulse. Secondly, there is the problem of crowding-out effects if there are not spare resources sitting around idly as is the case with the simple model. Furthermore, investment in sports infrastructure such as new stadia has an opportunity cost in terms of other infrastructure projects not undertaken by a city or a national government. Similarly, the impact of expenditure by visitors to a tournament is lessened if it displaces expenditure that would have come from tourists or businesses that now stay away to avoid congestion. Finally, the expenditure patterns of residents affected by a major sporting event need to be assessed. All of these factors need to be considered and quantified in impact studies. Porter (1999), for example, went so far as to argue that the combined consequences of factors such as these meant that a thorough analysis of the multiplied economic impact of the Super Bowl would show there was no impact at all. The most direct economic impact of the additional expenditures created by hosting an event is relatively straightforward to quantify or to estimate in order to evaluate the additional increase in demand at a regional and national level generated by it. It is the direct impact of longer-term investment expenditures and of additional short-term changes in consumer expenditures just before and during the event. (Hiller, 1998, 47-57) Long-term investments include additional spending to upgrade or build new sports stadia to hold spectators and provide them with the necessary comfort and security for a successful event, but they may also include spending on infrastructure, roads, railways, airports and hotels to facilitate the sudden influx of visitors. Japan and Korea, co-hosts of the 2002 World Cup, spent a combined sum of US$4.5 billion on stadia alone in the years before the tournament—a small figure in relation to both countries’ gross investment expenditure, but significant additions to the capital stock of their sports industries. In contrast, the World Cup 1994 in the USA was played in stadia that had mostly been used for other sports, so there was a minimal amount of infrastructure investment prior to the event, and, in the case of the World Cup 1998 held in France, the only completely new stadium constructed was the 80,000 capacity Stade de France, and total investment for the tournament has been estimated at no more than US$500 million. (Rosen, 2001, 47-68) Germany invested US$1.92 billion on stadia in preparation for staging the most recent World Cup, and initial estimates made recently by the South Africa Organising Committee for the World Cup 2010 are that the total stadium costs will be around US$1.0 billion to build five new stadia and to renovate a further five. Consumer expenditure generated by a sports tournament is the other main form of increase in demand which could have a multiplier impact on economic activity. The World Cup, however, unlike the Super Bowl considered by Porter (1999), is an international sporting event. In the last four tournaments, for example, 55 separate national teams have competed in the Finals8 and the host country for the event normally expects a great number of foreign visitors whose spending within the country represents a direct stimulus, although, of course, only to the extent that it does not displace local expenditure. But it is true to say that the more international the sport, the greater the likely impact. For example, for the 2003 IRB Rugby World Cup, 65,000 international visitors are estimated to have travelled to Australia for the event. In contrast, the FIFA World Cup 2006 in Germany attracted 2 million tourists, double the predicted number. Currently, it is estimated that a total of three million tickets will be sold for the 2010 tournament—one-third for the South African market, one-third for international fans, and the rest reserved for marketing partners and FIFA. The Chief Executive of the World Cup Local Organising Committee, Danny Jordaan has said South Africa expected 350,000 visitors for the tournament in 2010, down on the numbers in Germany primarily because of the country’s geographical position and the cost of long-distance travel. In addition to spending by visitors, there are expenditure items that need to be taken into account in an impact study such as increased public and private spending on items like security and policing, which, like consumer spending, are essentially short term, but which may provide a multiplied boost to the national and regional economies. Caveats are again in order against the dangers of double-counting. (Ritchie, 1991-3-10). Baade (1996) emphasises the importance of totting up net consumer expenditure rather than gross receipts received by industries associated with the event, since the latter fails to account for changes in the spending behaviour of locals who spend on the event instead of on other items. The 2002 World Cup was hosted jointly by Japan and Korea. An article by Finer (2002) published prior to the hosting of the 2002 World Cup quoted estimates by the Dentsu Institute that the economic impact of the forthcoming tournament would raise Japan’s GDP by US$24.8 billion over and above what it would have been otherwise. This represented a predicted increase of 0.6 percent, a respectable figure for the recession-prone Japanese economy in the decade before the tournament. In the case of South Korea, the tonic effect of the World Cup was expected to be stronger, with a positive impact forecast of US$8.9 billion, or 2.2 per cent additional growth in the economy. Germany hosted the 2006 World Cup, and before the event there was a wide range of optimistic predictions produced from a variety of sources. According to a research study carried out by the Landesbank Rheinland- Pfalz (LRP) in 2005, the World Cup could result in an economic growth impulse of around 0.3 percentage points of GDP compared with an overall LRP forecast GDP growth of 1.7 percent. The study forecast that the influx of tourists into Germany would add an extra five million overnight stays in hotels and youth hostels, contributing to an estimated a1.5 billion worth of direct tourism-related spending. According to the Postbank, the demand for goods and services ahead of and during the World Cup would bring in “two to three billion euros”, producing a growth of 0.5 percent in Germany’s GDP.10 The study predicted that the German economy would benefit most from the World Cup in the early months of 2006, before the tournament actually started; but the analysis also projected some gains for the overall economic growth during the tournament as well. The study stated that electronics and sporting goods stores and companies would all benefit from spending by football fans. Postbank estimated that each visitor would spend between 800 and 1,000 for a five-day visit. There are already a number of optimistic economic forecasts around for the impact of the next World Cup tournament to be held in South Africa. Prior to the bid in 2003, consultants Grant Thornton Kessel Feinstein, acting officially for the South African bid committee, estimated that hosting the tournament would lead to direct expenditure of R12.7 billion (US$1.41 billion), leading in turn to an economic contribution of R21.3 billion (US$2.37 billion) to the GDP of the country (a multiplier of 1.68) and would create an additional 159,000 new jobs.11 Optimistic estimates of the economic impact of events can also be found in studies on the economic impact of other sporting tournaments. For example, unusually an ex post study prepared by consultants URS Australia Pty Ltd found that the Rugby World Cup 2003 contributed US$289 million in additional GDP to the Australian economy and created an additional 4,476 full-time and part time jobs in Australia during 2003. The report, Economic Impact of the Rugby World Cup on the Australian Economy—Post Analysis argued that in terms of international events, the economic impact of the 2003 Rugby World Cup was third overall, behind the Olympics and the leading event, the FIFA World Cup. Structural change which favours an expansion in the growth of one industry relative to another can be manifested in many ways, but the most obvious is evidence of a change in the average rate of growth in real income in the markets comprising or associated with that industry. In the case of football, there are three main sources of income: match day attendance revenue (ticket sales, programmes, and catering); commercial revenue (sponsorship, stadium advertising, merchandising sales, etc.); and income from the sale of broadcast rights, primarily to television companies. (Giulianotti, 1999, 86-107) An acceleration or significant change in the trend rate of growth of any one of these revenue sources for football as a whole, ceteris paribus, can be taken as an indication of a change in the relative popularity of the sport, and, in as much as the increase in spending is not diverted from other substitutable activities, then this growth can be seen to be a contributory factor, albeit relatively minor to changes in real GDP. In the absence of detailed revenue figures, other indicative data may be employed, such as changes in participation in a sport, increases which should have positive consequences on the demand for sporting goods and the use of sporting facilities. Also, in line with Gouguet’s comments above, the general health of the nation may be positively impacted as a result of increased participation in one of the most cardio-friendly of sports, with the associated economic benefits. Similarly, anyone who spent any time in Germany during the last World Cup could not have failed to notice the feel-good factor around the nation. As with most problems in economics involving change over time, there are problems of separating cause and effect in attributing the hosting of a World Cup tournament to structural growth in the football industry. (Ashworth, 1988, 213-38) Indeed, there are a number of global sector trends that have lead to an increase in the revenue of football clubs in most markets, if not in their profitability. Two of these are attributable to changes in the broadcast market, particularly the rise in multi-channel subscription television, and in additional investment in stadia infrastructure, making the watching of football a safer and more comfortable experience. In England, for example, the original home of the association game, the income accruing to the Football League in 1988 from the sale of television rights, to be shared across all 92 professional clubs, was equivalent to around £11 million per annum, but by 1993 this had increased dramatically to £54 million per year and to £192 million per year by 1997. Although the distribution of revenue had changed dramatically towards the top clubs in 1993 with the start of the Premier League, this represents an annual rate of revenue growth of 183% per annum—significant structural change by any definition. After a short period of relative stagnation, the latest contract for the live rights to Premier League games only has been awarded this year for the period 2007–10 and totals nearly £570 million per year. None of these changes can be attributed to England hosting and winning the World Cup in 1966, but are due to the investment in stadia required after the Hillsborough disaster of 198914 and to the advent of competition in the broadcast market from subscription-based satellite television with the launch of British Satellite Broadcasting in 1988 and its merger with Sky in 1991. However, structural change in the size and facilities available to consumers in the football market has not just been an English phenomenon. Data from the sports team of accountants Deloitte (2006) on football club revenues among the top leagues of the ‘big five’ football nations in Europe (England, Italy, Germany, Spain, and France), show strong evidence of structural change in all of the football markets of these countries. (Hinch, 2001, 45-58) The combined revenue for all the five countries rose from a1, 943 million in the annual rate of growth of 25%—far in excess of the rate of growth in aggregate nominal GDP in these countries over the same period (Figure 1). Football’s market history in the USA or that of ‘soccer’ as the game is popularly known there has been very different from that in many other countries. It is difficult to measure the direct impact of holding the World Cup on the football market in its narrowest sense, since the tournament predates the latest experiment in creating a professional league in the country capable of attracting spectators, sponsors and interest by broadcasters. (Miyazaki, 2001, 9-15) Nevertheless, despite earlier failures to develop a sustained professional soccer league in the USA, football matches at the 1984 Los Angeles Olympics attracted capacity crowds, indicating that a market for soccer as a spectator sport potentially existed in the USA. After a period of lobbying by U.S. Soccer, FIFA awarded the 1994 World Cup to the United States in 1988 following the promise that a top division professional league would be established. On December 17, 1993 in order to fulfil that promise, the World Cup USA 1994 Chairman, lawyer Alan I. Rothenberg, announced the formation of Major League Soccer (MLS), but the competition did not play its first game until 1996 when a 31,683 crowd at Spartan Stadium saw Eric Wynalda of San Jose Earthquakes score the League’s historic first goal in a 1–0 victory over D.C. United. Attendances at MLS games have fallen back from their initial level of 17,406 per game in their first season in 1996, reaching a low point of 13,756 in 2000 (Figure 2). Since then, there has been a slow recovery, but the number of average spectators per game is still below that reached in the league’s first season. In many ways, the USA might be the exception that proves the rule, since hosting the World Cup in 1994 did not lead to any upgrading or the construction of new stadiums designed for soccer, even though it provided the impetus for the creation of a professional league. MLS Commissioner Don Garber sees the existence of ‘soccer specific’ stadia as crucial for the continuing development of the sport in the country. It was not until 1999 that the Columbus Crew, an MLS franchise club based in Columbus, Ohio, opened the first 22,500 capacity soccer-specific stadium at a cost of US$28.5 million.15 Since then, the rate of infrastructure investment in the American game has increased, with three more soccer-specific stadia for MLS clubs already built and a further four due to open between now and 2009. Szymanski (2002) noted that although the figures for French tourists in 1998 “were well up on 1997”, given the rise in previous years “often by larger percentage amounts” there was no evidence to suggest that the additional number of tourists attracted by the World Cup was a significant deviation in the trend increase in visitors. A similar conclusion cannot be made for the impact of the World Cup on attendances at French football grounds. In the season 1987–88, average match day attendance in Ligue 1, the French top flight, was 11,240 per game. By the season 2004–05, the average number of spectators per game was 86.5 per cent higher at 21,294 per game. The season-by-season average figures are also shown in Figure 2 and demonstrate that there was a strong rise of 34.7 per cent in average Ligue 1 attendances per game in France in the two seasons after hosting the World Cup and after France’s victory in 1998. The average number of spectators per game rose from 16,571 in the season 1997–98 (just before the Finals were held in the summer of 1998), to 22,314 per game in the season 1999–2000. Since this step change, attendances have levelled off, but it is interesting to note that a ‘World Cup effect’ began after France was awarded the right to host the Finals in July 1992 at the FIFA Congress held in Zurich. (Brewer, 2001, 15-20) Average Ligue 1 attendances per game rose from 11,100 in the season 1991–92 to 14,207 for the season 1996–97. Not only did this structural change raise French attendance revenue, but the favourable impact of the World Cup also increased the value of Ligue 1’s broadcasting rights. The rate of change of French league revenue notably accelerates from 1996–97 to 1999–2000, as shown in Figure 1. There have been a number of other positive structural trends increasing the popularity and income of football in France following the World Cup. The increase in the demand for football on television and broadcaster competition for league rights has raised fees to the current level of a 600 million per annum for the period 2005–2008. This compares with total income from all sources, including broadcasting, in the top flight of French football of a696 million in the season 2004–05 according to figures estimated by Deloitte (2006). Furthermore, the number of players registered with the French Football Federation (the national association) increased from 2.034 million in 1997–98 to 2.162 million during 2004–05, an increase of 6.3 per cent. In the words of Phillipe Diallo, president of the Union des Clubs Professionnels de France: The enthusiasm created around the tournament boosted the media coverage, and the star quality of our sport and our players, who appeared in the celebrity press and women’s magazines, reaching an audience completely new to us. This media coverage opened football up to a new public, particularly to women. This new positive image reflected on the French clubs and was reflected in their everyday activities. Japan and Korea 2002 In Japan, US$3 billion was invested in 10 stadia for the World Cup 2002 tournament, nine of which were completely new builds, with an average capacity of 40,000. These stadia are owned by local governments, but are used by the nation’s professional league teams. Although the capacity of the venues is still well in excess of spectator demand, hosting the World Cup gave Japan’s fledgling football market a much needed shot in the arm. National league football started in Japan in 1965 based on teams belonging to industrial groups, but, amateur in nature, the sport was second to baseball in terms of attracting consumer interest. There was no official professional football league in Japan until the launch of the J-League in 1993, and although still supported largely by corporate interests, an attempt was made to encourage local affiliations in the new names of the clubs. It was an immediate success. Brazilians, Italians and Eastern Europeans all made their way there towards the end of their careers, and recently African players have followed in their footsteps. (Foster, 1986, 48-65) Unfortunately, after a strong start, attendances at J-League matches began to slide. From an average of 19,598 spectators per game in the season 1993–94, in the season 1996–97 the number of mean attendees per game had fallen to a low of 10,131. The decision to award the World Cup jointly to Japan and Korea—the first to be held in Asia—was made in May 1996. Average J-League attendances per game began to recover, raising by 63% from the nadir of 1996–97, to 16,548 the season before the tournament was held—the rise attributable to ‘World Cup fever’, but also to the impact of the new stadia on demand. The favourable economic impact of the World Cup on the Japanese football market continued after the tournament and, by 2003–04, average attendances at J-League games had raised to 18,965 per game. The average revenue of J-League clubs grew from a17.7 million in 2000 to a20.3 million in 2002, rising further to a 22.0 million by 2004—an average annual rise of 6.1%, again far in excess of the growth in Japanese GDP. Korea invested US$1.5 billion on building 10 new stadia, but unfortunately data problems restrict an analysis of the impact of the World Cup on the structure of the country’s football market. Whether or not the structural change in these two countries’ football markets justifies the cost of stadium construction on cost–benefit terms is another issue; the main point is that macroeconomic studies of the impact of hosting large-scale sporting events fail to measure anything but the short-term impact on aggregate demand, a variable swamped in the problems of measurement and other influences. (Anheier, 2001, 160-66) Conclusions Should a country bid to host the FIFA World Cup? This question is now relevant for those nations thinking about bidding for the next two tournaments, 2014 and 2018, to be staged after South Africa. If the decision is to be made solely upon the expected increase in GDP arising as a result of hosting the tournament, then proponents of making a bid face a major problem. While ex ante studies almost all show a positive economic impact, ex post macroeconomic studies show little or no impact or, what is more likely, these studies are simply not adequate in terms of their methodology or the accuracy of their data to detect an impact. Our contention is that the real economic impact of hosting the tournament is instead upon the structure of the industries most affected long term, and that macroeconomic impact studies, although useful from the point of view of persuading the public and politicians, have limited use in providing answers about the impact of hosting the World Cup on, say, the degree of maturity of a country’s football and broadcasting markets. It is now an explicit policy of FIFA, and the Confederations that are affiliated to it, to promote the development of the game across the world by policies of direct financial assistance or through the improvement of a country’s football infrastructure. There is strong evidence that, in many cases, selecting a country with an underdeveloped football infrastructure provides the incentive to take positive steps to improve the structure of the game in that country. Ultimately, the decision to bid for the World Cup requires an assessment of the state of this infrastructure relative to other countries, and the desirability of improving it. Perhaps more significantly, we, as football ‘nuts’, believe that notwithstanding any economic factors, England should bid for a World Cup again because—well, it’s football. Decision making on World Cup bids may be more sensibly located in the neuro–economic discipline. References Anheier, H., Glasius, M. and Kaldor, M. 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(2002), ‘The Economic Impact of the World Cup,’ World Economics, The Comparative Economics of North American and European Sports, Cheltenham, UK; Vol. 3, No. 1, January–March. Read More