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Assessing the regional economic impact of one-time major sporting events. London 2012

Bachelor Thesis 2015 40 Pages

Business economics - Economic Policy

Excerpt

Table of Contents

List of Tables

List of Figures

1 Introduction
1.1. Rationale for the Literature Review
1.2. Academic Objectives
1.3. Outline and Structure

2 Setting the Scene

3 Literature Review
3.1. Traditional Methods
3.1.1. Economic Impact Analysis
3.1.2. Use of Multipliers in EIA
3.1.3. Cost Benefit Analysis
3.2. Methods in Practice
3.2.1. Adjusted Input-Output Approaches
3.2.2. Computable General Equilibrium Approach
3.3. Advanced Methodological Concept
3.3.1. Regional Primary Impact
3.3.2. Regional Input-Output Table
3.4. Existing Studies on London 2012

4 Summary
4.1. Conclusion
4.2. Limitations and Further Research

References

Last Page

List of Tables

Table 3-1 Intangible effects related to an event

Table 3-2 Existing Impact Studies of the Summer Olympic Games

Table 3-3 Comparison of output multipliers for a selected region

Table 3-4 Existing ex-ante and ex-post Studies conducted to assess the impact of London 2012

Table 3-5 PricewaterhouseCoopers study on the expected macroeconomic impact of London 2012

Table 3-6 Olympic-related net benefits over selected time periods

Table 3-7 Baseline scenario for Olympic related net benefits by region (2004 to 2020)

List of Figures

Figure 2-1 Perspectives to consider when measuring the impacts on host communities of major sporting events

Figure 3-1 Multiplier concept for the tourism industry in the host region

Figure 3-2 Conceptualised Cost Benefit Analysis of mega sport event

Figure 3-3 Methodology for Estimating the Economic Impacts with RIMSII Multipliers

Figure 3-4 Simplified CGE model

Figure 3-5 Common and Advanced Approaches to calculate the regional impact

Figure 3-6 Preuss’ advanced methodological approach to a regional economic impact analysis

Figure 3-7 Matrix to isolate the regional impact from the total impact

Figure 3-8 Model to identify the regional primary impact

Figure 3-9 Multiplier Effect in Assessing the Secondary Effects

Figure 3-10 Long-Term Multiplier impact in case of non-recurring autonomous expenditures

Figure 3-11 Expected Costs and Benefits of London 2012

1 Introduction

Staging Olympic Games requires extensive restructuring and adaptions of the host city’s infrastructure, thereby triggering a major one-time impact on the region’s private and public sector (Preuss, 2004a, 2005). As argued by Kubr (2002) these are two fields management consultants are expected to be well versed in. In fact, re-known institutions, such as PricewaterhouseCoopers (2005) or Goldman Sachs (2012, 2014) recently commissioned respective studies on the impact of the London 2012 Games.

This work is conducted as a compilation of existing literature from the fields of general economic impact analysis and event impact analysis in particular. One of the dominant critics in this study is Crompton who did some intensive research on the basic economic framework of Leontief. Following Crompton (1993, 1995), Kasimati, Késenne and West each contributed by evaluating various approaches to the event-impact assessment. Finally, this study will present the assessment methods of Preuss and Dwyer who concentrate on the Olympic Games’ and the tourism impact respectively.

1.1. Rationale for the Literature Review

Given the Game’s shift towards gigantism and recurring cost-overruns (Billings & Holladay, 2012; Sanburg, 2012), several authors and politicians started to scrutinise the propagated advantages (Baade & Matheson, 2002) of hosting major one-off sporting event. Preuss (2005, p. 183) questions “whether their impact has a limited duration or creates an economic Olympic legacy” and “whether the anticipated benefits from the Olympic Games justify the often hidden and unforeseen expenses” (Preuss, 2004a, p. 234).

The need for reliable and objective studies that predict and monitor the actual impact of the Games is apparent, bearing in mind that the event is predominantly financed with public money (Lee, 2001; Matheson, 2002). Given the controversial nature of the Games (Osborn & James, 2012), most of the existent impact studies are criticised for being biased (Késenne, 2005; Lee, 2001). However, despite the continuous criticisms of hosting the Games in the first place (Jenkins, 2014; Preuss, 1998; Sanburg, 2012), the desire to stage the event grew significantly, with ten cities currently considering to enter the bidding process for the Olympics 2024 (Fourie & Santana-Gallego, 2011; Keating, 2015). As, according to Preuss (2006), one of the main reasons for decision makers and residents to host the Games is the expected economic benefit, the need for an objective concept to assess the regional impact of such events remains high.

1.2. Academic Objectives

The aim of this section is to ultimately examine the methodology of existing London 2012 impact-studies in terms of whether or not they employed a holistic approach to assess the regional economic impact. Against this backdrop, the author will cover the following academic objectives in the study:

1. Understanding the shortcomings of traditional economic impact methods;
2. Examining adjusted methods that emerged in practice;
3. Exploring an advanced methodological concept;
4. Investigating current ex-ante and ex-post impact studies on the Olympic Games 2012

1.3. Outline and Structure

This section of the project consists of the following four main sections:

Section 1: Introduction: The general issue and its relevance in regards to the topic are introduced as well as the author’s intention to conduct this study.

Section 2: Setting the Scene: This section will specify the context of the study, as various effects of the Games have been detected throughout the literature.

Section 3: Literature Review: The main body will discuss different methods of assessing the regional economic impact of sporting events, ultimately investigating the London 2012 impact studies.

Section 4: Conclusion: Findings in terms of an appropriate impact analysis and the degree to which the London 2012 studies have adapted a holistic approach as well as the need for further research will conclude this work.

2 Setting the Scene

The ever-rising dimension of the Olympics has been controversially discussed in the literature, as it inevitably effects a growing number of stakeholders (Gratton, Liu, Ramchandani, & Wilson, 2012; Preuss, 2009).

illustration not visible in this excerpt

Figure 2-1 Perspectives to consider when measuring the impacts on host communities of major sporting events

Source: adapted by the author from Preuss and Solberg’s (2006) review of potential effects on host communities

Caution is needed with the term Economic Impact Analysis (EIA) as it actually only refers to one particular approach of impact analyses (Miller & Blair, 2009). Existing studies, regardless of the applied assessment method, can be broadly divided into quantitative or qualitative analyses, depending on whether they consider tangible or intangible effects (Burton & O'Reilly, 2009; Johnson & Sack, 1996; Wihbey, 2014). Scholars further distinguish between primary and secondary impacts, essentially taking into account the “first economic effect of new money spent by outside visitors”, respectively the induced long-term effects (Kasimati, 2003, p. 434).

Furthermore, governments often seek to justify their decisions for hosting the Games in advance, using so-called ex-ante studies (Colaço, Correia, & Pires, 2006; Matheson & Baade, 2006). The literature, according to Kasimati (2003, p. 438), significantly lacks ex-post studies that “examine the economic situation (…) before and after the event”.

This study will focus on approaches to quantitatively and qualitatively assess the economic impact on the host region.

3 Literature Review

3.1. Traditional Methods

Traditional evaluation models generally estimate primary expenditures such as visitor spending, operational or capital costs and construct a secondary effect on the economy, using different forms of economic models (Dwyer, Forsyth, & Spurr, 2005; Taks, Kesenne, Chalip, Green, & Martyn, 2011).

The two methods, that historically dominated, are the Economic Impact Analysis (EIA) and Cost-Benefit Analysis (CBA) (Késenne, 2005; Taks et al., 2011).

3.1.1. Economic Impact Analysis

In broader terms, EIA is referred to as Input-Output Analysis (IOA) and describes a Nobel-prize winning economic framework, developed by Wassily Leontief in the 1930s (Miller & Blair, 2009). In its essence the model illustrates the interrelatedness of industries, households and the public sector in a given area (Stimson, Stough, & Roberts, 2006).

The basic assumption of the IOA is that “industries (…) both produce goods (outputs) and consume goods from other industries (inputs) in the process of producing each industry’s own output” (Miller & Blair, 2009, p. 2).

Rose and Miernyk (1989), however, argue that one of the major shortcomings of IOAs is their fixed structure. Grady and Muller (1987, p. 8), who take the same line, reason that assuming “proportionality between inputs and outputs, (…) income and its components, and between employment and output (…) can be particularly inappropriate”.

Johnson and Sack (1996) add that the model not only ignores resource constraints but also adverse and non-economic aspects. Leontief (1986), himself states that the concept aims at long-term analyses which led Porter and Fletcher (2008) to question the validity to predict event-induced, short-term demand shocks. In this context, Grady and Muller (1987) state that outcomes of event-situations have to be benchmarked against unaffected situations.

After all, Miller and Blair (2009) and Stimson et al. (2006) propose that regional after-event performances in terms of changes in inter-industry transactions can only be forecasted by using economic multipliers.

3.1.2. Use of Multipliers in EIA

The concept of multipliers is based on the “difference between the initial effect of an exogenous change and the total effects of that change” (Miller & Blair, 2009, p. 244).

illustration not visible in this excerpt

Figure 3-1 Multiplier concept for the tourism industry in the host region

Source: Kasimati (2003, p. 435)

Event-impact authors, such as Kasimati (2003), often distinguish between a direct, indirect and induced impact in this context. Either way, multipliers translate the total event-related initial expenditures into the net amount of income that remains within the host region (Gratton & Taylor, 2002).

As shown in Figure 7-1, money that gets injected into the regional economy by foreign visitors, gets magnified through continuous re-spending, thereby becoming income for other market participants (Owen, 2005) and ultimately determining the event’s total contribution (Dwyer et al., 2005).

The event-related EIA literature usually differentiates between sales multipliers, measuring the induced business turnover and income multipliers, estimating the change of household incomes in the host community (Frechtling & Horvath, 1999; Kasimati, 2003). At the same time, however, Archer (1984) and Crompton (1993) state that it is often not clear which, if any, multiplier concept has been employed in impact studies.

An even broader critique comes from Dunnavant (1989) who questions the overall validity of EIAs as they are subject to a great degree of subjectivity. Crompton stresses Dunnavant’s concerns by arguing that

“changes in the assumptions used can lead to dramatically different impacts being identified, and economic impact analysis should be best viewed as an educated guess” (Crompton, 1995, p. 17).

This subjectivity allows administrators sufficient leeway to influence impact studies, ultimately overestimating the gains and underestimating the costs of the Games to show how beneficial a realisation would be (Barclay, 2009; Best, 2009; Késenne, 2005; Matheson & Baade, 2006).

Crompton (1995) further emphasises wrong assumptions in the inclusion of spectators and the omission of opportunity costs to be sources of inaccurate results in EIAs. The expenditures of local spectators as well as ‘Time-Swithers’ are often included in the multiplier-calculations, although they do not represent the injection of new money into the region (Crompton, 1995). Barget and Gouguet (2010) and Késenne (1999) generally argue that traditional IOAs ignore negative effects. Against the backdrop of the economic principle of opportunity costs, Archer (1977), Crompton (1995) and Preuss (2009, 2011) add that IOAs essentially ignore a comparison of alternative projects and thereby fail to assess “the real cost to society of devoting resources to that activity” (Archer, 1977, p. 46).

This extensive criticism made Dwyer et al. (2005) and Hunter (1988) assume that on the basis of studies that rely on multipliers, large amounts of public funding are currently misallocated as the concept is simply not sufficient to justify public spending.

Notwithstanding these fundamental issues, Kasimati (2003) points out that the majority of present impact analyses relies on multipliers in some form and, whilst IOA has long been rejected in other areas of economic analyses, it seems to remain the dominant tool for event assessments (Dwyer et al., 2005). The simple reason is the model’s ease of use and capability to manipulate results (Késenne, 2005). After all, even Crompton (1995, p. 34) ultimately agrees that the concept can be valuable “if it is implemented knowledgeably and with integrity”.

He therefore suggests incorporating costs into the calculations (Crompton, 1995). As agreed by Grady and Muller (1987) and Késenne (2005), this would not only simplify the comparison with opportune projects, but also provide the government with enhanced information about the ultimate benefit of a potential event. Van Puffelen (1996) essentially advocates abolishing EIAs completely and suggests focussing on Cost-Benefit Analyses (CBA).

3.1.3. Cost Benefit Analysis

While EIAs attempt to assess and forecast the flow of foreign money in the host region, CBAs are set out to estimate which money flows are rather considered costs and thereby diminish the benefits of hosting events (Késenne, 2005).

CBA as an economic framework describes an assembly of various techniques that refer back to the concept of Welfare Economics (Barget & Gouguet, 2010; Mishan & Quah, 2007). In its essence it tries to “estimate the total cost and benefits of the project to society as a whole” (Mankiw & Taylor, 2011, p. 226) and thereby to answer the question whether or not the event’s benefits exceed its costs (Barclay, 2009; Haxton, 2000).

illustration not visible in this excerpt

Figure 3-2 Conceptualised Cost Benefit Analysis of mega sport event

Source: Preuss (2009, Figure 1)

In the context of event assessment, Késenne (2005) and Campbell (2003) argue that the term benefit not only refers to the actual output of infrastructure and enhanced public perception, but also includes the overall consumer surplus. In terms of costs, decision-makers are expected to consider opportunity costs as well as financial costs (Hiller, 1990; Késenne, 2005).

Preuss (2009) puts this into perspective by arguing that potential opportune projects have to be within the same target system, ergo address the same needs of the residents. With regards to Figure 7-2 he presents the inclusion of cross-subsidies as another advantage of CBAs, effectively claiming that a holistic event-related analysis requires the regionalisation of data:

“The input of public city resources (Xc) is only a part of the overall input Xa,b,c necessary to stage a mega event. But also the output for the city (Yc) is co-financed by the input of other systems (Xa,b). These systems contribute to the input but do not necessarily benefit from the output for the city” (Preuss, 2009, p. 137).

In an earlier paper Preuss (2004a) stresses CBA’s ability to consider intangible and negative effects, such as the crowding out of locals and re-allocation of resources. However, at the same time, he admits that most of these effects rely on calculations using the multiplier concept (Preuss, 2004a).

Table 3-1 Intangible effects related to an event

Source: Andersson, Armbrecht, and Lundberg (2008, p. 171, Table 2)

illustration not visible in this excerpt

A number of papers (cf. Késenne, 2005; Taks et al., 2011) have been dedicated to compare CBAs and EIAs and both approaches seem to overcome one another’s shortcomings (Késenne, 2005) but also fail to present a holistic concept to assess regional event impacts (Preuss, 2004a). CBA falls short as it fails to “display the economic stimulation of certain industrial sectors, or quantify jobs and tax effects” (Preuss, 2004a, p. 237). Centre of debate for both models remains the appropriateness of the multiplier concept (Lee, 2001) and the lack of long-term data shortly after the event (Taks et al., 2011).

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Details

Pages
40
Year
2015
ISBN (eBook)
9783668225848
ISBN (Book)
9783668225855
File size
2.6 MB
Language
English
Catalog Number
v323351
Institution / College
Northumbria University – Newcastle Business School
Grade
1.0
Tags
regional economic impact economic impact analysis london 2012 olympic games impact analysis olympic games economic impact

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Title: Assessing the regional economic impact of one-time major sporting events. London 2012