10

ECONOMIC ENVIRONMENT
1 TOURISM IN THE ECONOMY
1.1 Economics and economy
1.2 Significance of tourism
1.2.1 Multiplier Effect
1.2.2 Employment
1.2.3 New business
1.2.4 Increased commercial and residential development
2 BUSINESS ENVIRONMENT IN HUNGARY
2.1 Financial sector
2.2 Taxation
2.3 Forms of companies
3 MARKETING IN TOURISM
3.1 Services and their Characteristics
3.2 Marketing

Questions and Topics for Discussion

1. Why is the multiplier effect one of the main reasons for encouraging tourism in
developing countries?
2. Which are the most common forms of business companies in the tourism and
catering industries?
3. Why are many developers reluctant to invest in leisure and tourism enterprises?
4. What are the advantages and drawbacks of foreign investors’ presence in the
tourism and catering industry in Hungary?
5. What is the essence of marketing?
6. Which are the marketing mix elements for tourism?
7. What types of promotional activities are commonly applied in the tourism industry?
8. Why is market research important and how is it carried out?
9. Explain market segmentation.
10. List some promotional tools.
1 TOURISM IN THE ECONOMY

1.1 Economics and economy

Economics is a social science that studies how rational individuals, groups, and organizations (called
economic actors, players, or agents), manage scarce resources which have alternative uses, to
achieve desirable ends. The study of economics is generally divided into two main parts, one called
macroeconomics and the other microeconomics.

Macroeconomics is a branch of economics dealing with the performance, structure, behaviour, and
decision-making of an economy as a whole, rather than individual markets. This includes national,
regional, and global economies. Macroeconomists study aggregated indicators such as GDP,
unemployment rates, and price indices to understand how the whole economy functions.

Microeconomics is a branch of economics that studies the behaviour of individual households and
firms in making decisions on the allocation of limited resources. Typically, it applies to markets where
goods or services are bought and sold. Microeconomics examines how these decisions and
behaviours affect the supply and demand for goods and services, which determines prices, and how
prices, in turn, determine the quantity supplied and quantity demanded of goods and services.
Economic sectors

The economy is divided into three sectors of activity:

1. extraction of raw materials (primary),
2. manufacturing (secondary), and
3. services (tertiary).

The tertiary sector of the economy (also known as the service sector or the service industry) is one of
the three economic sectors. The service sector consists of the "soft" parts of the economy, i.e.
activities where people offer their knowledge and time to improve productivity, performance,
potential, and sustainability, what is termed affective labour. The basic characteristic of this sector is
the production of services instead of end products. Services (also known as "intangible goods")
include attention, advice, access, experience, and discussion. For the last 100 years, there has been a
substantial shift from the primary and secondary sectors to the tertiary sector in industrialised
countries. This shift is called tertiarisation. The tertiary sector is now the largest sector of the
economy in the Western world, and is also the fastest-growing sector.

Typical industries:

 Government  Professional services

 Telecommunication o Accountancy
 Hospitality industry/Tourism o Legal services
 Mass media o Management consulting
 Healthcare/hospitals  Consulting
 Public health  Gambling
 Information technology  Retail sales
 Waste disposal  Franchising
 Financial services  Real estate
o Banking  Education
 1.2 Significance of tourism

Tourism is important, even vital, source of income for many countries. Its importance was recognized
in the Manila Declaration on World Tourism of 1980 as "an activity essential to the life of nations
because of its direct effects on the social, cultural, educational, and economic sectors of national
societies and on their international relations."

Tourism brings in large amounts of income into the local economy in payment for goods and services,
accounting for 30% of the world's "exports" of services, and 6% of overall exports of goods and
services. It also creates opportunities for employment in the service sector of the economy
associated with tourism.

The service industries which benefit from tourism include transportation services, such as airlines,
cruise ships, and taxicabs; hospitality services, such as accommodations, including hotels and resorts;
and entertainment venues, such as amusement parks, casinos, shopping malls, music venues, and
theatres.

1.2.1 Multiplier Effect

Owing to the linkages of tourism activity, the tourist expenditure and related investment induces
income generation in the host economy. The direct effects are those created in the establishments
trading directly with tourists and further rounds of economic activity create indirect effects.

Tourism also encourages growth in the primary and secondary sectors of industry. This is known as
the multiplier effect which in its simplest form is how many times money spent by a tourist circulates
through a country's economy.

Money spent in a hotel helps to create jobs directly in the hotel, but it also creates jobs indirectly
elsewhere in the economy. The hotel, for example, has to buy food from local farmers, who may
spend some of this money on fertiliser or clothes. The demand for local products increases as tourists
often buy souvenirs, which increases secondary employment.

The multiplier effect continues until the money eventually 'leaks' from the economy through imports
- the purchase of goods from other countries. The leakage effect is a concept within the study of
tourism. The term refers to the way in which revenue generated by tourism is lost to other countries'
economies. Leakage may be so significant in some developing countries that it partially neutralizes
the money generated by tourism.

The expectations and needs of visitors can often lead to the creation of new businesses and
commercial activities. This builds a more diverse economic base and reduces reliance on one or two
traditional industries, which is often the case in rural communities.

1.2.2 Employment

Tourism’s ability to generate employment in both formal and informal sectors has often been cited
as one of the key economic gains of promotion of tourism. Tourism is a labour intensive industry and
operates 24 hours a day, seven days a week. There are many opportunities for employment for
young people and for people interested in part time or casual work. While some of the employment
is skilled, there are also opportunities for people less skilled and who lack formal qualifications.
1.2.3 New business

The travel and tourism stimulates enormous investments in new infrastructure, most of which helps
to improve living conditions of the local residents as well as tourists. Tourism development projects
often include airports, roads, sewage systems, water treatment plants, restoration of cultural
monuments, museums and nature interpretation centres. Further, the tourism industry also provides
governments with hundreds of millions of dollars in tax revenues each year through accommodation
and restaurant taxes, airport users’ fees, sales taxes, park entrance fees, employee income tax and
many other fiscal measures.
A thriving tourism industry supports growth in other sectors, such as transport, construction,
agriculture and retailing. As tourism increases, there are more opportunities for small business to
develop.

1.2.4 Increased commercial and residential development

Tourism development often results in increased revenue to councils through rates and other charges.
Tourism can act as a shop window for the lifestyle of the area. It is increasingly common for people
who visit and are impressed with the area to return as residents, thereby increasing demand for
housing and other services.

The marketing approaches for the two major divisions among tourists-recreational and business
travels-is somewhat different. The recreational travels respond to a greater degree to lower fares
and other inducements in pricing and selecting the destination for their trips. In a technical phrase,
they make up a price elastic market. The business groups, on the other hand, make up a price
inelastic market. Their trips are not scheduled according to lower fares, the destination is
determined in advance, and the expense is usually paid for by their employers. They are looking for
dependable rather than inexpensive service. Business travellers also make more trios to large cities
or industrial centres than to resort areas, although many conventions are now held at resort hotels.
It should be noted however, that some large cities, such as London, Paris, New York, Rome, and
Tokyo, are themselves the most important tourist destinations in the world. Because of this, it is
difficult to separate pure recreation travel from business travel.

2 BUSINESS ENVIRONMENT IN HUNGARY

2.1 Financial sector

Banking

The Hungarian two-tier banking system is made up of the National Bank of Hungary and the
commercial banks. National Bank of Hungary acts as bank and functions as an issuing bank. It is an
independent financial institution responsible for the country’ monetary policy. Its primary target is
achieving and maintaining price stability.

The most important requirements for banks are liquidity and solvency. They provide wide range of
services for private individuals and corporate clients for which they charge a handling fee. Their
major source of profit is the interest margin.
 2.2 Taxation

Tax is a payment of money legally demanded by the government. Taxes are the most important
revenue sources of the state. The main function of taxes is to cover the government’s expenditures.

Taxation on individuals or companies, which is made directly by them or through their employer is
called direct taxation. Examples of direct taxes are: personal income tax, corporation tax, local
business tax, capital gains tax. Indirect taxes are levied on turnover and consumption. Examples of
indirect taxes are VAT, excise duty, customs duty.

2.3 Forms of companies

There are three main types of business ownership in the private sector of the economy:

1. Sole proprietorship
This type of firm is run by the sole trader who is responsible for the total control and
management of the business. The owner has unlimited liability for the debts.

2. Partnership
 General partnership
This is a type of business entity in which partners share with each other the profit or
losses of the business undertaking in which all have invested. At least one partner
must accept unlimited liability.

 Limited partnership
In this type of business the internal member has unlimited liability. The external
/silent partner doesn’t take part in the activity of the partnership. He/she has limited
liability.

3. Corporation
 Limited liability company – Private limited company (ltd)
The members have limited liability. The capital of the firm is divided into shares, but
the shares are not sold on the stock exchange and they cannot be offered to the
general public.
 Company limited by shares – Public limited company (plc)
This business has to be founded with a certain amount of issued capital. When an
investor buys shares he/she becomes a part owner. Shareholders have limited
liability to the extent of the face value of their shares.

Special forms of private business enterprises and relationships

 Franchise
This is a business selling named goods on the basis of a licence given by a company to
use its established brand name and sell its goods.
3 MARKETING IN TOURISM

3.1 Services and their Characteristics

Tourism products are services rather than tangible goods. Services have several unique
characteristics as follows;

Intangible nature of services. The essential difference between goods and services is that goods are
produced but services are performed.

Inseparability. This means that the act of production and consumption is simultaneous and takes
place in the same environment, not in the consumer’s home environment. It also means that most
of the staff of the service companies have some consumer contact and are seen by the customer.

Perishability. Products can be stored for future sale; services cannot. The sale of an empty hotel
room, airline seat is lost forever. Services, more importantly, the time available to experience them,
cannot be stored. For example, there is only one chance to enjoy a summer vacation in 1990.

No possibility of creating and holding stocks. Linked with the inseparability and perishability that it
is not possible for a service producer to create a stock of products to be used to satisfy daily
fluctuations in demand.

Heterogeneity. This means that every service performance is unique to each customer.

Particular Characteristics of Travel and Tourism Services

Besides the basic characteristics common to all services, there are three further features that are
particularly relevant to travel and tourism services. These are;

Seasonality and demand fluctuations. It is a characteristic of most leisure tourism markets that
demand fluctuates greatly between seasons of the year. As a result, the occupancies in many
tourism businesses increase to 90 to 100 per cent in the high season but drops to 30 per cent or less
in the low season. In addition, seasonal closure of many leisure tourism businesses is common as
well. These demand variations in tourism is more important because of perishability.

Interdependence of tourism products. The fortunes of tourism attractions in a destination are

linked. Since a vacationer chooses attractions at a destination together with the products of
accommodation, transport, catering etc., all organizations should function in coordination.

High fixed costs of service operations. In the travel and tourism industry, it is generally the case that
the operations have high fixed costs and relatively low variable costs. This fact focuses all service
operators’ attention on the need to generate extra demand. Since most large scale businesses are
obliged to operate on a very narrow margin between total cost and total revenue because of intense
competition, plus or minus one percentage point in average load factors makes the difference
between profit or loss.
 3.2 Marketing

Marketing is the process of researching, promoting, selling and distributing a product or service.
Tourism marketing is the application of marketing concepts in the travel and tourism industry.
Tourism marketing could be complex due to the product being an amalgam of many different
industries such as accommodation and transportation. The markets also vary widely, and
determining the consumers´ preferences could be difficult.

Tourism marketing involves several steps. Market research seeks to understand the consumer, while
product development aims to meet his needs. Analysis and selection of target markets, also known
as segmentation, means studying potential customer groups and selecting only certain groups whose
needs and wants can be best met with a certain producer´s product. Marketing strategy seeks to
reach the target markets using promotion, advertising, pricing and distribution.

Marketing communications occur in three ways: external, internal and word-of-mouth. External
marketing uses formal communication channels to promote the tourism product to the traveller,
boasting of its benefits and making promises. Internal marketing communication occurs when the
tourism service provider makes contact with the tourist and delivers the promised benefits. Word-of-
mouth communication occurs informally when visitors or employees discuss their experiences of the
tourism product to others.

Marketing is the creation and promotion of an idea, service or product, which satisfies a customer's
need, and is available at a reasonable price. Tourism is a service-based industry, offering intangible
services such as history or beauty of a destination, rather than offering an intangible product such as
an appliance. Follow the eight Ps in marketing tourism to create a successful tourism business.

Promotion is a fundamental part of any marketing strategy. Promote products and services to raise
public awareness and allow customers the opportunity to purchase the products and services. Ideas
for tourism products promotion are tourist information centres, airports, travel shows, town or city
welcome centres and local tourism associations and offices.

People
Customer service is an essential part of tourism marketing. Customers are likely to share their travel
experience with friends and family, whether the experience was good or bad. Word-of-mouth
advertising is a large part of the tourism industry, and an unpleasant experience with a customer
service employee can result in bad publicity.

Product
In the tourism business, the product is similar to a service as some aspects of the product offer
experience, rather than tangible items. The success of a tourism business largely depends on the
customer's satisfaction with services such as transportation, food, accommodations and cultural
experiences.

Partnership
Partnering with companies which share similar business objectives, promotes cross selling of
products and ultimately benefits both companies by allowing for shared marketing costs and meeting
the overall needs of the customer. An example of partnering is a wedding-planning company
collaborating with a travel company to promote destination weddings.
Planning
A marketing plan is essential for a tourism business. Developing a marketing plan allows a company
to identify customer expectations and design a method of meeting the expectations. Marketing plans
are working documents and must be maintained, revised and reviewed when necessary.

Place
Part of marketing a tourism product to a customer is ensuring that there is an easily accessible place
for customers to purchase the product. Distribution of most tourism products occurs through travel
agents, tour wholesalers and tour operators. As a marketing strategy, find new and beneficial places
to sell the product.

Packaging
A tourism package consists of a variety of services, attractions and accommodations combined in one
purchase for customer convenience. Aside from the destination location, the tourism package is what
draws in the customers due to the services offered. Tourism package presentation is key, and must
be flexible depending on the combination of services offered for a particular type of trip.

Price
Price is the amount a customer will pay for a service or product. Most customers of a tourism
business are looking for a quality experience at a reasonable price

No matter how attractive a tourist destination is, people aren't going to go to it if they don't know
about it. Therefore, promotion and marketing are critical to the success of any tourism venture.
Almost by definition, tourists are from somewhere other than where the destination is, so marketing
efforts need to be very broadly disseminated in order to reach the target market.

The Internet is custom-made for tourism promotion. The problem is, of course, that everyone knows
this, so the competition for public attention on the Internet is fierce. Development of an easy-to-use
and compelling website is essential for any tourism company, but don't expect it to bring you instant
fame. Because of the competition, a website is a prerequisite, not a ticket to success. In addition to a
website, exploit the possibilities of social networking sites such as Facebook and Twitter. By
maintaining a consistently high profile in venues such as this, you can grow public awareness of your
location and venture. It will take time for this to happen; a consistently high-profile online presence,
as well as patience to help it grow, are essential.

Placing an ad in an airline magazine is a good way to reach your target demographic. People who
read this magazine are by definition people who travel, so they are more likely to be interested in
visiting your location than your average person. Like the Internet, airline magazines are a popular
advertising medium, so go the extra mile to make your advertisement larger and more compelling
than any other. Effective gimmicks could include offering discounts to readers of that magazine, two-
for-one sales, or offers of special accommodation for people who book a visit within a certain time
frame.

Many companies are experimenting with the possibilities of viral marketing, a nebulous field that is
still developing. Essentially, viral marketing involves the presence of advertising where people aren't
expecting it; for example, in casual conversation in a bar. People are hired by a company to engage
socially with others and to promote a product. Other methods include written messages in unlikely
places and the emulation of counter-cultural techniques, such as wheatpasted posters or graffiti. This
methodology could be adapted for tourism promotion by appealing to people who are already in the
target area as tourists and offering them various discounts or special deals if they return with their
friends or family.
Vocabulary

capital gains tax tőkenyereség adó

corporation tax társasági adó

customs duty vám

excise tax jövedéki adó

sole proprietorship egyéni vállalkozás

sole trader egyéni vállalkozó

partnership társulás

Limited liability company – Private limited zárt részvénytársaság

company (ltd)

Company limited by shares – Public limited nyílt részvénytársaság

company (plc)

issued capital kibocsátott tőke

face value névérték

two-tier kétszintű

interest margin kamatrés