Massive Foreign Investment Potential in Chinas Hotel Industry - Dissertation Example

 An overview of prevailing trend of Chinese hotel joining hotel chains 1- introduction The ancient and the mysterious culture of China have remained a source of attraction for the tourists and travellers. Since the membership of China in WTO, the streams of Foreign direct investment has flooded to China. China has become the worlds largest FDI attracting country since the last decade. This trend has given rise to the importance of China as an important business destination. Both the cultural interest and economic interest of the visitors from all over the world has increased the demand for hotels and hospitality industry. In order to cater the increasing demands these hotels are adopting different techniques in order to get the competitive edge in the market. With the exposure to the foreign markets most of the single hotels are adopting the trend of joining the chains in order to get the advanced facilities with continuous renovation and updation. “Increasingly the chains are offering a better and better selection of services and products from around the world, which is rapidly exposing the Chinese consumers to products that they would otherwise not have the opportunity to sample.” (Tibbits, 2003) 2- Literature review “The growth of China’s inbound tourism market appears to have matched its economic growth and has consistently outstripped the world wide average. Between 1990 and 2000, international visitor arrivals to China increased by an average of 11.8% pa, while global tourism grew by a modest 4.3% pa. During 2001, the disparity was magnified. In the face of a global decline of 1.3%, international visitor arrivals to China increased by 6.7% to reach 89.0 million. This growth continued into the first six months of 2002, with international arrivals increasing by 9.4% over the six months to June 2001. The World Tourist Organisation recently announced that China was set to overtake Italy, US, Spain and France and become the top destination by 2020, attracting 130 million international visitors” (Jones Lang LaSalle Hotels, October 2002) Most of the hotels in China are undergoing the process of management improvement. The new techniques of planning by objectives and improved decision making are being implemented by following the lines of the foreign hotels in order to achieve the competitive edge among the industry participants. Another trend, which is gaining popularity in the industry, is the collaborative projects and ventures of the domestic and foreign hotels proving fruitful for both. The foreign personnel trains the trains the domestic employees about the modern techniques on the other hand the local hotel facilitates environmental and legal adjustments of the foreign hotels in the market. The Chinese regulatory bodies have opened the hospitality industry for the foreign hotels but restricted them to the level of 3 star hotels in order to save the domestic hotels having weak position (Jones Lang LaSalle Hotels, October 2002). But with encouraging the foreign hotels to support the domestic hotels the Government has taken cautious measures to limit the role of the foreign hotels to effect the tourism market of the country. Most of the Chinese single hotels are joining into hotel chains in order to undertake better development and provision of strong financial back up in order to respond to the competition posed by the foreign hotels laced with most advanced facilities management and booking system. Most of the single hotels need to undertake strong and aggressive strategic steps to keep themselves present in the market. This surge of drastic steps forces them to affiliate with the foreign large hotel chain such as Six continents, which are the symbol of aggressive and effective strategies. The adoption of the pattern of joining the hotel chain by the single hotels in China has lead to the domination of the large international hotel chain domination in the industry as compare to the low budget domestically owned hotels. The trend has also given rise to the surge of renovation and drastic change in the present state of hundreds of domestically owned hotels. These chains are also playing role in the promotion of the branded products offered at these hotels. (Tibbitts, 2003) 2.1 China’s entry into the World Trade Organisation on December 11,2001 and other liberalisation policies: Being the member of WTO the Chinese government revised the rigid policies and made transition to more flexible policies, which were an attempt towards providing equal opportunity to the foreign and domestic competitors in the hotel industry. The Government in shape of provision of legal, tax and regulatory support supports the entry in the industry. Domestic hotels are promised an end to tax breaks for foreign investors and other changes designed to standardise corporate incentives. The tax preference provision to the foreign direct investment has attracted a massive number of investors in the hospitality industry. The foreign companies have offered a generous tax holiday of 10%-15% in China as compare to the base rate of 33% (whereas domestic companies are generally taxed at 33%). All this led to increased investor confidence in the Chinese market. 2.2 Massive foreign investment potential in China’s hotel industry: The adoption of flexible and open arm policy for the foreign investors in the hospitality industry by the Chinese government flooded the Chinese hotel industry with the foreign investors. According to an estimate by the National Tourism Administration of China the number of five star hotels in China became five folds i.e. 282 as compare to 57 in 1997 with four-star hotels becoming double in number to 386. With the increasing demand for the hotel industry the internationally famous chains such as Six Continents, which has about 40 Holiday Inns, Crown Plaza and intercontinental hotels in China and Hong Kong. The number of these well-known hotels is expected to increase in future due to the Olympics to be held in China in 2008. (Tibbitts, 2003) 2.4 Barriers in the way of entry in Chinese banking sector: The Chinese government has applied a controlled competition culture which against the liberalisation provided by the WTO which lift most of the regulations from the trade & commerce (Yoost, 2005) Many assets in commercial and industrial sectors are state owned. This in turn gives rise to the problem of hidden state regulation imposition of the government on the foreign investors. This strengthens the view that China does not practise liberty in Business. Some of the sectors of economy are like hotel industry is still protected by the government. Due to the situation the WTO commitments are not fulfilled which gives rise to local competition for foreign investors. The work undertaken in this paper is an improved one because it takes into account all the aspects related to the Chinese hotel industry, including the practices of foreign hotel which contributes towards the FDI in China. The contribution made by this paper is more fully evaluating the trend of the Chinese single hotels joining the foreign and local hotel chains. Second, it takes into account national changes introduced by the Government bodies and the privately owned hotels to make the Chinese hotels competitive with the foreign hotels. 3- Reasons for Choosing this topic The basic motivation behind choosing the topic is the least work done in the area. There is a very nominal amount of work undertaken in the area of the implications of the trend of joining the domestic and international chains by single hotels. There is not a vast research on the topic. Most of the hotels and restaurants are joining the large chains to follow the suit of prevailing trend in the Chinese hotel industry. Researchers and analysts in the hospitality industry should undertake the studies in order to analyse the financial, economic, strategic and social implications of the increasing membership of single hotels in these chains. Another reason is that most of the hotel managers are not aware of the technical management instruments which can be used to analyse the market situation and the validity of the decision made by the management in response to the market situation. The study will use some technical management instruments such as SWOT and PEST analysis to understand and explain the current market situation. The study is an effort to understand and explain the role of Government in order to make the most on the prevailing trend in orders to improve the current industry situation. 4- Aim The aim of this dissertation is to discuss the trend of Chinese Single Hotel, which is to join into international hotel chains or local hotel chains. 5- Objectives To review the literature about this issue up till now. To understand the advantages and disadvantages of the prevailing trend. To help management of the single hotels understand the pros and cons attached to the membership of international or domestic chain. To understand and highlight the role of Government in order to take effective measures to spread the trend in industry. To evaluate the need of the governmental measures to control the increasing influence of the international chains in the domestic market. 6 - Methodology 6.1: SWOT analysis Strengths Weaknesses Opportunities Threats *Increasing popularity of China as an important business market and tourism destination in the world. ----------------------------------------------- * Undertaking of betterment process by the hotels by improving quality and operation standardisation ---------------------------------------------- * Excellent collaboration between the Government and industry to ensure smooth running of the industry. --------------------------------------------- *Diverse markets and products in the hotel industry. --------------------------------------------- *Continuous increase in the growth trend of the Chinese hotel industry with an estimation to become the world’s most popular hotel industry in future. *Most of the hotels are owned by the state. -------------------------------- *Due to bad loans the banks own most of the five star hotels. -------------------------------- *Low financial performance of the hotels owned by the domestic management. -------------------------------- * *High revenue per available room in hotels managed by foreign companies. ------------------------------------- *Adoption of betterment policies by the Government to encourage foreign and domestic investment. ----------------------------------- *Change of ownership from the state owned assets to private parties through direct sales auctions and holding companies. ---------------------------------- *Changing economic trend to recession slowing down the business activities. --------------------------------- * Increasing competition in the industry. --------------------------------- *The possibility of changing political situation of the region. Adopted from (Yu & Huimin, 2005) 6.2: PEST ANALYSIS Political Economic Social Technical *Stability of Internal & External political environment. *Change in the outsourcing trends. * Economic environment (Job market / Chinese economic stability) affecting the industry performance / future. * Interest / Inflation rates fluctuation affecting the industry. * Long term future of the industry in its present state, (referencing economic changes). * Radical upsurge by the foreign investors in the issue of having to be monitored by the Government * Influence of the foreign cultures on the management processes in the industry. * Changes in technological advancement regarding reservations and the marketing issues. * The benefits that new technology could bring to improve the industry functionality. 6.3: Primary research: The role of primary research is to generate or collect data to address the information needs in relation to a specific problem or issue (McGivern, 2003). Primary sources of data are those from which the researcher can gain by direct, detached observations or measurement of phenomena in the real world, undisturbed by any intermediary interpreter (Walliman and Baiche, 2001). It is data collected by the researcher where the researcher is the first user (Veal, 1997). Qualitative or quantitative research depends on the project. However quantitative research as empirical research where the data are in the form of numbers, and qualitative research where the data are not in the form of numbers (Finn, Elliott-White & Walton, 2000). The drawback with qualitative research is that it is a time-consuming task both in terms of recording and analysing data and small sample sizes are therefore generally used (Jennings 2001). Semi structured interviews were conducted providing qualitative insights and illuminations. 6.4: Secondary sources The most common forms of secondary sources are books, academic journal articles, official government statistics or financial records, and other publications. Secondary sources can not be described as original to the researcher and do not have a direct physical relationship to the event being studied, either because of the presence of intermediaries or because of the period of time between the recording and the event (Veal, 1997; Walliman and Baiche, 2001). I.e. secondary sources involve seeking and analysing data that already exist, data that have not been created particularly for the purpose at hand but were initially collected for another purpose. It is valuable source of information, especially in the early steps of a project, helping with problem explanation and research design and planning, and at later stages, providing a context for the understanding of primary data (McGivern, 2003). A wide amount of secondary data was collected and reviewed from an extensive range of sources. Information was gathered from articles in academic journals and magazines, textbooks, research documents and specialised Internet web sites. 6.5: Types of research methods: a) Qualitative research definition The term qualitative is used to describe research method and techniques, which used, and gave rise to, qualitative rather than quantitative information. In general the qualitative approach tends to collect a greater deal of rich information about relatively few people rather than more limited information about large number of people. It is however possible to envisage qualitative research which actually deals with large numbers of people (Veal, 1997). Qualitative research involves the studied use and collection of a diversity of empirical materials – case study; personal experience; life story; artefacts; interview; culture text and productions; observational, historical, inter-actional, and visual text-that describe routine and meaning in individuals’ lives and problematic moments (K. Denzin & S. Lincoln. 2005). b) Quantitative research: After getting the required data qualitatively some conclusions are drawn from the data; the results are tested on a larger scale by taking statistical analysis. This is the quantitative research also termed the secondary phase of research. There are many ways to collect a data qualitatively; they are Questionnaires, checklists and surveys: the aim of this method is to get the information quickly; the advantage is the identity of the respondent can be protected; lots of data can be collected. However, in this method clear feed back cannot be obtained. i) Documentation review: The aim of this method is to review how the programme operates, without interrupting it, it can be performed through memos, review of applications, finances etc, the advantages to this method are, and comprehensive and historical information can be obtained. The disadvantages are the process is time consuming, there is not flexibility to collect the data, and the data may be incomplete. ii) Observation: The aim of the programme is to gather the information on how the processes of the programme actually operate, the advantages are the actual processes can be viewed and the events can be adopted. The disadvantages are the difficulty to interpret the seen behaviours, can be difficult to categorise the observations, and are expensive. iii) Interviewing: Data collection is one of the central challenges in any research project. It is the process through which the opinion of people are collected and categorised. There are many methods of collecting data such as interviews; questionnaires; documents and observation provide invaluable information that is used for policy decisions, marketing strategies, and academic studies etc (Miller & Salkind, 2002). Interviewing is a data collection method in which the researcher asks for information verbally from the respondents (Jennings, 2001). It is the way to access people’s perceptions, definitions, meaning, situation and construction of reality, where it involves discussing or questioning issues with people to collect data unlikely to be accessible using techniques such as questionnaires or observation (Punch, 1998). The interviewing research method will be followed in this paper. Structured interviews: Generally speaking, an interview is a social interaction between two people, with one person gathering information from the other. The interaction is what differentiates the interview from the questionnaire, even when the questions posed are identical. Thus structured interviews give the researcher specific answers as opposed to narrative response to questions gathered from semi-structured in-depth interviews (Gubrium and Holstein, 2002). Structured interviews enable the interviewer to ask each respondent the same questions in the same way. A tightly control structured schedule of questions and format is used, very much like a questionnaire. The questions contained in the questionnaire will have been planned in advance, the interviewer has some discretion how these might be elaborated/explained but the aim is to get standardisation of data as far as possible and to eliminate biases due to different wordings. The questions in a structured interview may be phrased in such a way that a limited option response is elicited. The possible answers are defined in advance so that the respondent is limited to one of the pre-coded responses that data analysis is relatively easy (Denscombe, 2003). Interviews must be well prepared and must have clear objectives for each interview. Interviews can be conducted after the team has established the topical areas to be covered in the interviews and after the lead investigator has reviewed with the board the objectives of the interviews and strategies for obtaining useful information. In much research situation permission requests should be received before the interview takes place. The interviewer should consider the length of the interview to cover his aims, normally between 15 minutes to an hour. Provide contact information of the interviewer and it must be determined who to interview, in what order, what interviewing techniques to employ and what method of record to use (Denscombe, 2003). The following aspects should be considered when defining a strategy for the interview (Mason, 1996): The questions should make sense and be meaningful to the interviewee. The questions should be related to the interviewee experiences based on what is already known about them. The interviewer must take care to be sensitive to the needs of the interviewee. The interviewer should be aware of the flow of the interview interaction by attempting to move seamlessly between topics and questions. The interviewer needs to focus on issues and topics that are relevant to the research problem and questions. For the structured interviews the researcher will record all interviews and then transcribed the tape of each interview. Although this is a time consuming process, the richness of interviews’ contents will warrant such an effort. In cases where interviewees will not want the interview recorded, the researcher will write up detailed notes of the interviewers during and after each interview will be conducted. Interview questions have been compiled from the existing literature and detailed in relation to the research topic, aim and objectives. 6.6 Research method, which could be used instead of Case study: Documentation review is an excellent way of evaluating the industry by taking a review of the research done in the past. Lot of useful information can be obtained through this method. For the effective implementation of the documentation major objectives of the research should be identified. Research plan should be developed very carefully keeping in view the main objectives of the research. Sequence of process should be such, that the a large amount of information can be possible to obtain in a very short time span, written notes should be taken and finally written notes on the documentation review are verified. Agenda should have, review of the agenda, review of the goal of the agenda, review of the ground rules and wrap-up etc. Documentation review normally comprise of the important information from documents of similar nature relating to the field of research, so documents should be selected from the set of documents having useful information regarding the research topic. They should be selected from variety of sources such as journal article, newspaper reviews, experts interviews, information available at Internet. In the review each document should be referenced properly and the key addressed points should be summarised. In the present study, the method of case study is adopted. In this process, we focus on the case of two single hotels of China. The reactions to the experience and suggestions from the directors and mangers of the hotels will be obtained which can be very useful in evaluation and policymaking decision regarding the increasing trends of joining chain. This is the quick and reliable way to get common impressions. 6.7. Rational for choosing the research instrument: The telephonic interview is probably the most efficient and speedy mean of data collection. The interviewer can effectively explain his questions to the respondent. Another advantage of the telephonic interview is the minimum degree of non-response error. 6.8. Sampling and sample size Sample is a subset or subgroup of the population, while the sample size is the actual number of subjects chosen as a sample to represent the population characteristics. Sampling is the process of selecting items from the population so that the sample characteristics can be generalised to the population (Jennings, 2001). To guarantee the representativeness of the sample, the researcher must make sure that it is random. In random sampling all members of the population have an equal chance of being included in the sample (Veal, 1997). In qualitative research sample size are in general small, thus probability theory and notions of statistical representativeness do not apply. The sample might choose to encapsulate a range of characteristics relevant to the subject under study, or provide a detailed view of behaviour, events or experiences that are seen in the wider population (McGivern, 2003). 6.9. Justification for choosing the sample size It is the absolute size of the sample, which is important, not its size relative to the population. A sample size of 10 interviewees was determined because of the following: The researcher wanted a good level of precision and details in the results. Because of the limited budget the researcher could not conduct more interviews. Interviewees were all managers of the hotels, and these qualified people are more likely to give detailed and precise information, which has caused the researcher not to extend the sample size beyond this number. Telephone calls will be done with the hotel directors in order to take an appointment to hold interviews or in case of positive response direct interviews will be taken. Faxes and emails will be sent to the group who would require explaining reasons behind the interviews. Regarding the public sector the researcher will try to visit the ministry of tourism himself and asked to meet the general director of tourism department and/or his assistant, as well as the head of the tourism marketing department. 6.10. Analysis Veal (1997) suggests that the essence of any qualitative data analysis must be to return to the research questions at hand and begin to sort and evaluate the information gathered in relation to the question posed and the concepts identified. Thus the initial steps in the analysis involve fairly methodological procedures to classify and organise the information collected. According to Blanche and Durrheim (1999), qualitative data analysis tends to be primarily an inductive method of organising data into categories and identifying patterns. For this study a content analysis method was followed to understand the procedures and importance of qualitative data analysis. Babbie (1995) states that the most general guide to analysing qualitative data involves looking for similarities and dissimilarities. The focus must be on those patterns of interactions and events that are generally common to what the researcher is studying. This type of analysis formed the core of analysing the qualitative data collected during this study. Themes were identified and the data then was classified into categories and themes. The analysis will be complete when the researcher feels that his interpretation can be shared with tourism policy-makers and tourism marketing planners in both the public and private sectors and will make a meaningful contribution to theory. 6.11. Limitations: During the study several foreseen limitations are evident: a. As this is initiative research on the specific subject, the reference material is not available to its full extent. This causes some difficulties, which can be resolved by using different types of media i.e. internet, books, newspapers, informal discussion with my supervisor as well as other colleagues in the department and my previous colleagues. b. The availability of the data is also being a great hurdle for the research. The currently available data are not suited exactly to study the proposed topic. It needs to develop new data collection specifically oriented to fulfil the needs of the proposed topic. c. In this research, it will be impossible to identify the body language of the interviewers, because the interviews take place over the phone. Not much research has been done before and that influenced the secondary data needed for the research. d. Sample in this research will be difficult to be wide as there are several reasons limited the size such as, distance, financial, respond, time and cancellation of interviews. On the other hands, the responds might do not have time to answer the quotations in depth, and might he/she answer the questions from managers side and do not consider the current employee environment which will influence and limited the data. Beyond sampling, however, other issues present themselves when we actually attempt to use the phone to conduct interviews. The issues arise from the fact that phone interviews lack any visual component to assist the interviewer in conveying the issues and the respondent in understanding them. The study will be undertaken according to the following Gantt Chart Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Introduction Literature Review Methodology Interviews Data Interpretation Results Compilation Results and Conclusion Future Recommendations: If the aim of attracting FDI to Chinese hotel industry is to introduce advanced technology, improve management and expand markets, it would appear to be working. More and more private Chinese-owned spin-offs of the FIEs are capable of competing with these FIEs in China as well as in the global markets. China needs to learn from post-World War II Germany and avoid the experiences of Botswana. The former encouraged foreign investments but was not dominated by them – instead, it succeeded in strengthening its own innovation capacities. By contrast, foreign companies have to a large extent dominated the economy of Botswana, with daunting social and political consequences, even though FDI has contributed to the economic growth of the country. To many foreign investors with market-seeking motivations, preferential treatment is not the determining factor in their investment decisions anyway. Thus it is not a sustainable strategy for attracting efficiency-seeking FDI. China must create open and fair competitive environment for all hotels, domestic and foreign hotels alike, to cultivate the growth of national champions. As it strives to build up a rule-based market economy that respects policy transparency, protects intellectual property rights and upholds fair competition, China will increase its advantages in attracting FDI, increase economic activity and capital inflow. (Zhang, 2005) References Babbie, E., (1995). The practice of social research, Belmont, CA: Wadsworth. Denscombe, M., (2003). 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Yoost, Dean A., June 20-26,2005,”China’s progress towards WTO Compliance”, Orange County Business Journal, Vol.28, No.25, December 2005, retrieved at 12/05/06 from < http://www.ocbj.com/>. Yu, L., & Huimin, G., (2005). Hotel Reform in China: A SWOT Analysis, Cornell University, Volume 46, Number 2, 153-169. Zhang, Y., (2005). China must adjust its FDI policies if it wants to retain its global lead in inflows, Foreign Direct Investment, Financial Times Business, April 12, 2005, retrieved at 11/05/06 from http://www.fdimagazine.com/news/fullstory.php/aid/1211/Tips_for_the_top.html Read More