An investor in the country of Pakistan has decided to invest in the hospitality industry of the United States of America. In order to pursue this decision, the investor has decided to assess the feasibility of the choice and take an estimate as to whether this profitable would result to be enough profitable or not. For this reason, the investor has assigned this task to an established and well-known research agency in the home country known as the ‘International Business Research Agency” (IBRA).
The investment would be welcomed by the host country due to the improving performance of the nation state in the global market. “Pakistan’s export grew by as much as 17% and country also saw increasing foreign investments in the IT sector and telecom.” (Waseem, 2005).
Introduction to IBRA
To live up-to its expectations the research agency has to analyze a lot of detailed data and its self-calculated data in order to come up with an extensive analysis and suggest whether the venture would be profitable or not. If the result comes out to be positive or negative, there are complete details given of the suggestion in order to clear room for all queries.
In order to achieve the preceding mission statement the company has certain objectives to abide by, that is, to indulge into all activities that enable a detailed and comprehensive research that can facilitate the investor to the extent of easing the decision. Along with that, the agency has the aim to remain unbiased no matter what country the investment is being made in. Also, the employees are briefed about the specificity in the authenticity of the material that is being provided with little or no margin of error in this department. If there is any doubt in the data, the details are provided to the client for it.
The organizational structure is as follows
Introduction of the Host Country (United States of America)
The country that has been chosen to invest in is one of the most developed countries around the globe with all latest technologies as “the United States is an influential country in scientific and technological research and the production of innovative technological products” (Wikipedia, n.d.) and methodologies available to woo the consumer and win their satisfaction. Hence, the presence of such wide and advanced system has also reduced the margin of differentiation among players of the same industry giving an extremely tough time to all competitors. Therefore, anyone who plans to enter the market should have a plan to counter the tough competition and have that edge in the service that the rest hasn’t thought of yet.
The United States is one of the privileged countries of the world, where each citizen has their own right and can claim it. The edge of United States from the rest of the world can be indicated by the fact that “the per capita income of the United States is among the highest in the world. […] the U.S. has a “two-tier” labor market in which virtually all the real income gains have gone to the top 20% of households, with most of those gains accruing to the very highest earners within that category. This polarization is the result of a relatively high level of economic free.” (Wikipedia, n.d.).
Hospitality Industry in the United States
The Unites States of America has been a tourist spot since ages and therefore has a lot of foreigners for tourism all round the year. Recently the trend has increased and therefore to facilitate and counter the incoming crowd, there has been an increase in the hotels in the country. “Growth of the Travel and Tourism industry has led to the unprecedented rise of Hotels in United States of America as any itinerary to United States of America begins with a look out for staying option in Los Angeles, Boston, New York, Chicago, San Francisco, Seattle, Dallas, North Carolina, Philadelphia” (US Hotels, 2000-2006) etcetera.
With the above findings, it is evident that due to the boom in the industry there is a lot of competition available for whoever enters the market. However, due to the demand, there is still a dearth of hotels present and therefore the host country would appreciate any new competitive entrant, as they need to counter the demand.
Growth of the GDP in Recent Years of United States
The United States economy has shown some weakness during the first half of 2005. This weaker growth has led to a slight decrease in estimates for economic growth in 2005 and 2006. One reason for this relative weakness in the economy is the large and persistent trade deficit, a factor that continues to reduce estimates for economic growth.
The high level of oil prices is another important contributor to weaker than expected economic growth early this year. Consumers are adjusting to the reality that oil prices will remain high rather than being a temporary event, and even if oil prices fall the decrease will be small. Another problem confronting the economy is the weak labor market. One last factor was the end of accelerated depression. On the positive side, consumer demand continued to be strong, and capital spending has been stronger than expected.
Statistics of the Change in GDP in the Last Years
Congressional Budget Office – January 2005 4.40% 3.80% 3.70%
Mortgage Bankers Association – May 2005 4.40% 3.40% NA
National Association for Business Economics – May 2005 4.40% 3.40% 3.40%
RSQE Forecasts – May 2005 4.40% 3.30% 3.50%
The large trade deficit will lead to further declines in the trade-weighted value of the dollar. This decline will lead to the dollar/euro exchange rate continuing to equal about 1.25 dollar to the Euro. Uncertainty due to the rejections of the constitution for European Union will lead to a short-term increase in the value of the dollar relative to the Euro, but this trend will not persist due to the trade deficit. The dollar should also lose value relative to the yen. It is expected that China will not maintain its currency peg with the dollar and as a result the value of the dollar will decline relative to China’s currency, but this decline will not be significant. It is expected that foreign exporters, including those from China, will be will to accept lower profits rather than raising prices and risking losing market share.
Inflation Scenario of USA
High oil prices, and to a lesser extent the weaker dollar, are contributing to the raised expectations for inflation. An expected decrease in the rate of increase in labor productivity is another factor that it contributing to higher inflation expectations. On the other hand, there are factors that are contributing to lower inflation expectations. These include the fact that while it is expected that the rate of increase in labor productivity will decline, productivity gains are still relatively good or at least on trend.
Labor Costs for the United States
Labor costs are expected to increase during the course of the next two years. Continued economic growth will lead to higher payrolls and begin to exert greater upward pressure on wages. In addition, decreases in productivity growth to levels more consistent with long-term trends will lead to increases in labor costs per unit of output. Another important factor is the continued fact that the costs of providing benefits, especially health benefits, will continue to increase at an above average rate.
Interest Rates Scenario of the United States
The Federal Reserve is expected to raise the Federal Funds rate through the balance of this year. This will allow the Federal Reserve to raise short-term rates to a level that is considered “neutral” and will allow the Federal Reserve to have the flexibility needed to act if the economy weakens unexpectedly. This will contribute to restraining inflation in the face of continued economic growth and increases in inflation expectations due to high oil prices. The effect of this will be higher short-term lending rates.
Long-term interest rates should also increase but at a slower rate. The reason for this is continued relatively low inflation expectations discussed above. The biggest contributor to the low interest rates the economy has experienced recently has been relatively low inflation expectations. The reasons for this include the still relatively poor labor market, wage increases less than the inflation rate contributing to the expectation that aggregate demand will suffer in the future, domestic and foreign competition restraining price increases, and the belief that the Federal Reserve will act to control the inflation rate.
Political Economy of the United States
To assess the future viability, it is also essential to take into review the political stability of the country as well. United States of America has one of the strongest economies around the globe and due to its firm status worldwide it has an extremely reliable political environment. The reasons of United States for being one of the worlds leading authorities and its currency dominating the world, is its stable political environment along with a fast growing economy. Despite the dated prosperity of United States, it has come a long way as “The diversity of some of the economic phenomena of this new world from those of the old; […] and of the peculiar direction which they give to production and distribution, seem to open a most promising field of observation.” (Leslie, 1880).
The political environment of US is very peaceful as no matter what happens around the globe, the United States has the strongest technologies and therefore can compete with anyone who poses a threat. “No written constitution in history has established a more durable or successful democracy than has the U.S. Constitution” and “Every economy is a political economy and the enormous success of the U.S. economy has been as dependent on their political system as on their economic system.” (Lee, 2007).
Although, there have been certain downfalls in the economy of the country but not to the extent of the breakdown of the system with loss of the global trust. The downfalls are manageable and therefore are not a threat; these occurred due to the reason that “political power is a force for progress only when tightly constrained and directed toward limited objectives.” (Lee, 2007).
Despite all the strength, there are certain factors that need to be taken into account such as the wide and strong competition available in every industry. Due to the advancement in technology and methodologies the US have latest products and their market would reject anything less than perfect. Hence, only a strong game plan can help an entrepreneur survive in their market.
Along with that, another threat that the investor might be exposed to are the recent wars that America has indulged into, that is, with Afghanistan and Iran. No matter how strong the economic status of the country, such acts are dangerous to the political environment of the nation. “The root cause of the troubles and frustrations, moreover, is commonly thought to be more political than economic. The promise of nuclear power in the United States is said to have been dimmed primarily by an eccentrically risk-averse public and an unusually hostile regulatory climate. Practically nowhere else, it is said, have political and legal institutions been so uncooperative” (Nivola, 2004).
Political Economy of International Trade in US
“The Nation’s international deficit in goods and services decreased to $58.2 billion in November from $58.8 billion (revised) in October, as exports increased more than imports. (10 January 2007)” (International Trade Statistics, 2007). The presented statistics indicate that the deficit has been decreased which is good news for the economy of the country. The increment of exports to imports also indicates the brilliance of product and services produced domestically that it is able to live up-to global expectations.
“The U.S. Census Bureau, Department of Commerce, released the report, A Profile of U.S. Exporting Companies, 2004 – 2005, on January 10, 2007. This report shows the known export value for 2005 increased by 10 percent and the number of identified exporters increased by almost 3 percent. (10 January 2007)” (International Trade Statistics, 2007). This again indicates the increment of exports to imports, which again poses a positive image and good news for the investor.
The statistics provided by the Information Bureau of Commerce gives a stable picture of the political economy of International trade in the US. Hence, an investor has more reasons to invest than not.
Political Economy Foreign Direct Investment (FDI) in the US
“Foreign direct investment in the United States1 declined sharply after 2000, when a record $300 billion was invested in U.S. businesses and real estate. In 2004, according to preliminary data, foreigners invested about $100 billion.” (Jackson, 2005). These investments in the US are much sought after as it offsets the effect of any negative economic efforts of the US firms that have invested abroad.
This decline has come in the FDI due to the recent acts of United States indulging in war with two countries. This made the investors think twice before investment and made United States vulnerable for investment. The British have the most firm hold on the FDI statistics of the country followed by French, Dutch etcetera.
Although, this matter seems like an issue of concern for the country but it is not something new. This issue has been dealt with before, as “The decline in foreign direct investment flows, although particularly sharp for the United States, is not unique According to the United Nation’s World Investment
Report, global foreign direct investment flows dropped by 41% in 2001 and 21% in 2002 due to slow economic growth in most of the parts of the world” (Jackson, 2005). The statistics for the year 2003 are as presented below.
As far as the outgoing FDI is concerned “with regards to FDI U.S. is one of the largest foreign direct investors in India. The stock of actual FDI Inflow increased from U.S. $11.3 million in 1991 to US $4132.8 million as on August 2004 recording an increase at a compound rate of 57.5 percent per annum. The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.” (FDI in India and US, n.d.). The FDI in the US goes as below
|Latin America and OWHd||0.9||1.3||1.6||1.7|
|Asia and Pacific||1.0||0.0||0.6||0.6|
|European Union (15)e||42.3||45.8||80.7||86.9|
The Inflow FDI statistics are
Hence, despite of a down flow in the inflow of Foreign Direct Investment, it is not much of concern for the investor in a hospitality industry as the stability of the economic and political environment is still in place.
Social Cultural Factors of Concern
In this regard, there are a lot of concerns for the investor due to the vast difference in the society and the culture of the two countries, that is, Pakistan and the United States. There is also a fear of racism for the investor due to belonging to a different ethnicity. Although, there has been no direct problem of the two countries, in fact they are on good terms, but the religious factor would play a negative role in this case.
As far as the hotel business is concerned, apart from a few factors, the two countries have different type of hotels with different features in their respective countries due to their social background, preferences and cultural acceptability. Due to the restriction of liquor, dancing, music etcetera there is found an absence of such entertainment in the Hotels in Pakistan.
The SWOT analysis of the country is extremely important in order to gain a complete understanding of the entire scenario, for investment. However, it is imperative to state that even with the SWOT analysis, we must look into other factors like the political and economic factors discussed earlier in the paper.
The strengths of the country as a whole and in response the hospitality is very strong, that is, the visible hold of the US on the world’s economy along with the strength of its currency. The most strengthening aspect of the currency is that the import and export around the world takes place in US Dollars. Therefore, the currency is pretty strong in terms of trade. Trading and using dollars as the currency can help us gain a better position, rather than charging in any other currency.
The robust nature of the country’s status in the global environment provides as a cushion even during the times economic slumps. The Hotel industry in the USA has seen a bright side in the recent years due to tourism and demand for hotels. Therefore, we must understand that the hotel and entertainment industry in the US is pretty strong, not only in terms of the economic stability of the continent, but also in terms of its global position.
Despite the strengths, there are various weaknesses that needs to taken into account that includes the indulgence in combating activities around the globe and along with that reduced trust of the investors. This means that the focus must be on maintaining a position that counters the different political aspects of the US. This essentially also means that in case hotel industry is targeted as the area of business, we must focus on improving the image in terms of luxury and peace, even with political objectives of the US, as well as the reduced trust of the investors.
The opportunity that is available is the increased demand of hotels and space in the market for more hotels and new entrants. Along with that the new entrant would fear the strong competition already present, which can result to be a threat for the business. The country as a whole has a threat for indulgence in any further wars. Being a Pakistani investor, they might face some racism by the US citizens, which can be another threat to the investment in the hotel industry for a Pakistani. However, as an opportunity, a niche can be targeted in terms of creating a hotel that caters to the people of the subcontinent, in terms of the luxuries offered and the food catered.
According to the Porter’s model of Diamond analysis, we can see that the US has immense opportunities when it comes to the Hotel and Entertainment industry. In the hotel industry of US there are a lot of opportunities for all kind of competitors and therefore the investor and the country would welcome any such entrant. Investors therefore can very well invest in this industry and the investment would be more than welcome.
However the demand is on a rise for the hotel industry due to the increased tourism in the recent years. For this reason the Government policies have also been lenient for the new entrants. Additionally, we can see that this can give a rise to immense competition in terms of more investors, and with that, there would be a gain in the prices in the industry since the demand of establishing hotels would increase.
The related and supporting industries have enough resources to facilitate the hotel industry therefore in the United States; lack of resources is not a concern. However, as far as the factors are concerned, skilled labor, capital and infrastructure is of utmost importance. The infrastructure of the US as known by all has no drawback whatsoever for this industry or any for that matter. However the Pakistani investor should make sure that he/she has enough capital to survive and compete in the given market. And the third factor of skilled labor is also in sufficient amount in the United States.
As explained in the SWOT analysis, we must also conduct a PEST analysis, that is analyze the political, economic, social and technological conditions of the country in order to understand how the country is working, before we decide on any strategy for the hotel industry and the organization to invest in. additionally, with a given strategy, we must have to play with external factors and use techniques to control them in order attain profits in the hotel industry.
TRIPS Implementation by the US
It has been noted that “steps to be taken to implement the GATT-TRIPS Agreement in the United States and commented briefly on the actions being taken in other countries. Legislation is pending in many countries for implementation of the requirements of this Agreement.” (GATT-TRIPS Implementation, 1995). The implementation as by the 1995 report hadn’t taken place, which is a matter of concern for the investing party.
Not implementing the TRIPS just indicates the non-compliance with an international level that has been set by the World Trade Organization. But due to the strength of the US in the global economy, this matter is not of as concern as it may have been in case of any other developing or third world country.
Despite certain drawbacks, the economic and political stability of the United States of America is undeniable. Therefore in the current scenario, despite the indulgence of the United States in two wars, the investment scenario is quite favorable with good advanced environment present for the investor to practice his skills and earn of it.
Culminating the research, it is appropriate to place the United States of America, a profitable venue for an investor to enter into despite the drawback it holds. The investor would experience an environment of healthy competition giving an opportunity to it to grow further.
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