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Impact of Major Sports Events on the Economy

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Published: Tue, 13 Feb 2018

Introduction

The use of sports markets to explore questions of economic interest has a long history as the majority of this literature analyses US sports, notably American football, basketball, baseball, and ice hockey, whilst there is also a considerable interest in soccer, the leading world sport (For example, the 1998 European Short Course Swimming, 1999 European Show Jumping and the 2001 World Half Marathon Championships).

Over the past two decades there has been increased competition among cities, regions and countries to host mega sporting events Therefore Government and other proponents of major sporting events usually seek to back up their claims of the event providing an economic boost by commissioning an economic impact statement. For example, Economic Research Associates’ (1984) study of the Los Angeles Olympics, Humphreys and Plummers’ (1992) study of the Atlanta Olympics, and KPMG Peat Marwick’s (1993) study of the Sydney Olympics.

Hosting a sport event has revealed a number of benefits in our communities and of those benefits, some reasons like increasing community visibility, positive psychic income, and enhancing community image are all common and acceptable postulations. Economic impact in sporting events can be defined as the net change in an economy resulting from a sport event and the change is caused by activity involving the acquisition, operation, development, and use of sport facilities and services (Lieber and Alton, 1983)which in turn generate visitors’ spending, public spending, employment opportunities, and tax revenue. In study of economic impact Expenditures can be categorized as direct, indirect, and induced effects. For example direct expenditure is the investment needed to meet the increased demand of visitors for goods and services. Indirect effects are the ripple effect of additional rounds of re-circulating the initial spectators’ dollars. Induced effects are the increase in employment and household income that result from the economic activity fueled by the direct and indirect effects (Dawson, Blahna, & Keith, 1993; Howard & Crompton, 1995).

Sports Economics possesses substantial experience in economic consulting to the sports industry, with specific knowledge of the economic impact of facilities, events, and teams so considering the publicity and scrutiny surrounding such studies, it is imperative to select a firm that not only has substantial experience, but also has a reputation for consistently providing an accurate assessment of economic impact.

There are following reasons to conduct economic impact studies of sport events and Firstly, because many sport events in our communities were financed by public tax support, economic impact studies continue to be an important public relations tool for city government. Secondly, there is doubt that sporting events may actually help develop a community in relative to its economy therefore, accurate estimates should be proposed and the results should be reported to community members and Thirdly, as sport is not just an entertainment but an industry so the results of economic impact may be a cornerstone to develop many related businesses in communities. Finally, positive or negative economic results of sport events may be an important method to determine communities’ draft budget for the coming year so as an example in July of 2001, Beijing was awarded the 2008 Summer Olympic Games so most people assume that such an event will bring enormous economic benefits to the host city not just during the event, but for years afterward. “The scale of the organization, facilities and infrastructure required for such a huge undertaking are such that the Games cannot but have substantial economic effects” (Sydney 2000 Games, p 2) but what exactly are these economic effects, and how do they affect the quality of life of local residents?

The relevance of studies for example, it seems logical that a less developed country will have more to gain from long term growth opportunities. Matheson and Baade (2003) argue, however, that the prospects of mega-sporting events are even worse for developing countries and the opportunity costs of providing state of the art facilities are much higher and lack of modern infrastructure requires significant additional investment.

This report examines the wider benefits that move beyond the economic impact and proffers the adoption of the ‘balanced scorecard’ approach to event evaluation. Moreover, the data from the past economic impact studies were used to produce an economic impact forecasting model designed to predict the economic impact attributable to an event prior to it taking place.

This Research have been developed by undertaking wider evaluations of some of the events, for example, the 1998 European Short Course Swimming, 1999 European Show Jumping and the 2001 World Half Marathon Championships. Beyond the economic impact generated by an event, these wider evaluations have also examined the public profile achieved by the events and looked in particular at the media value associated with television coverage and place marketing effects linked to such coverage.

This Report also provides additional analysis which helps to put IPL event into context by:

  • Outlining the generic economic benefits and return on investment to a country’s economy of hosting a major event such as IPL.
  • Profiling IPL and comparing it to other similar international events in respect of the key elements underpinning economic impact.
  • Identifying regional factors and drivers that may affect the economic impact of IPL in different regions
  • Outlining the possible contribution to a Host Nation’s Government via taxation, as a result of hosting IPL, investment and cost associated with IPL.

Literature Review on Economic Impact Studies

Precursor

The aim of this literature review is to understand direct and indirect impact of major sports events on economy and understand how major sports can open new dimension in economy. This has been done through referring various journals, articles and magazines; also a survey has been carried out as part of primary research to analyze impact of major sports event on Economy; however validation of data collected is subject to sources and prevailing conditions. Final phase of this study on IPL covers analysis of contribution of IPL to Indian economy, It analyze that how IPL has opened a new dimension for Indian economy to grow and attracts domestic and foreign investors. This phase also covers SWOT analysis of IPL, reasons critical to success of IPL and future ahead.

Statement of Purpose

Previously many research studies have contributed to understand economic impact of sport and/or recreational events; however most studies are based upon the researchers’ personal perception and arguable methodology. The purpose of this study was to review previous economic impact studies and to construct framework for conducting an economic impact study. This entire theoretical framework has been tested by analyzing a case study of economic Impact of mega sports events like “Indian Premier League” on Indian economy.

Literature Review

To study Economic impact of sports is challenging topic in the field of management fields because estimating the economic impact of sporting events and make some constructive statement is very difficult and subjective. Due to the subjective nature of social science, ideas and methodology vary from person to person for conducting economic impact studies. The main barrier behind conducting social science research is based on the level of competitiveness and belief in understanding of the material. and also social objects are hidden behind a screen of pre-constructed discourses which present the worst barrier to scientific investigation, and countless sociologists believe they are talking about the object of study when they are merely relaying the discourse which, in sport as elsewhere, the object produces about itself, whether through its officials, supporters or journalists (Bourdieu, 1999). Therefore, construction of truly scientific objects implies a break with common representations, which can notably be effected by taking these pre-notions as the object of study so this report examines the wider benefits that move beyond the economic impact and proffers the adoption of the ‘balanced scorecard’ approach to event evaluation. This consolidated piece of research builds on the original ‘Measuring Success’ in 1999 which was based on the premise that major sports events have the potential to achieve significant economic impacts for the host town, city or area but economic impact is now one of the parameters upon which an event’s success is measured.

Major sports events have the potential to achieve significant economic impacts for the host town, city or area, Countries, who host the mega sports event, should make a roadmap for significant investments in sports venues and other infrastructure. It is generally assumed that the scale of such event and roadmap of the preparation for it will create large and long lasting economic benefits to the host country. This would result in huge economic benefits that would have significant economic impact. However unfortunately these studies are constructed around misapplications of economic theoretical framework that virtually guarantee their projections will be large. Ex-post studies have consistently showed no evidence of positive economic impacts from mega-sporting events even remotely approaching the estimates in economic impact studies. For example, in the 2008 Summer Olympic Games in Beijing, China have put up huge investments in infrastructure and facility recreation to a new level. The opportunity for long term economic benefits from the mega sports event like Beijing, critically depend on how well mega sports events related investments in venues and infrastructure can be incorporated into the overall economy in the years following the Games

In current scenario economic impact studies have become standard operating procedure for supporters of public funding for sports events. It has led to acceptance of their findings by the government and public due to their prevalence with no critical evaluation. Due to the huge investment involve in such high profile mega sports events, large and positive Economic effects are taken as given; the studies confirm what is already believed. “The promise of worldwide exposure and economic gain has made hosting these major and regularly scheduled sporting affairs a lucrative goal for aspiring cities around the world” (Short 2000, p. 320).

Hosting a mega sport event like Olympic, has exhibited a number of large and long lasting benefits in our communities like enhancing community image, increasing community visibility and positive psychic income are all common and acceptable postulations. However, sport is not just limited to an entertainment, also it act as full fledge industry, the results of economic impact may be a cornerstone to develop many related businesses in communities. Positive or negative economic results of sport events may be a critical factor to determine communities’ draft budget for the coming year.

Mega-events” such as the Olympic Games require large sums of public money to be spent on venues and infrastructure improvements. Economic impact studies are often commissioned In order to justify the use of large sum of public money towards invariably large inflows of money that will have a long-term positive effect on the economy by such means as job creation and visitor spending. Scale of the mega sports event which attract large amounts of money from outside a local economy, are forecasted to have economic impacts in the billions of dollars

The simple elegance of economic impact studies, injections of money circulating over and over in an economy to create a multiplier effect, has an alluring “something for-nothing” quality that is hard to refute. However to justify a counter argument can be difficult due to numerous mistakes made in economic impact studies. Critics have focused on numerous subjective areas like: 1) using multipliers that are too large, 2) treating costs as benefits, 3) ignoring opportunity costs and 4) using gross spending instead of net changes.

In hosting mega sports event the major part of investment required on constructing stadiums, which to a large degree is spent on hiring construction workers and purchasing materials from local suppliers, is counted as a benefit to the local economy. However It is backward looking and the most egregious error in economic impact studies, which looks on production cost benefit of the project and ignores the effect of the actual consumption of the products on economy.

Ex-post studies, however, have consistently found no evidence of positive economic impacts from mega-sporting events even remotely approaching the estimates in economic impact studies. In a study of the impact of Super Bowls on local economies, Philip Porter (1999) found “no measurable impact on spending associated with the event. The projected spending and spill over benefits of regional impact models ever materialize” (Porter 1999, p. 61) Porter’s explanation is that capacity constraints in the hotel industry cause room prices to increase with no change in occupancy rates. Higher rates contribute to the crowding out of regular traffic and net spending in areas other than hotel rooms changes little or not at all.

Longer term sports programs, usually involving stadium subsidies to attract or keep professional teams, have also failed to deliver on projected economic benefits. Even for cities that usually are considered success stories for sports development strategy, such as Baltimore (Hamilton and Kahn 1997) and Indianapolis (Rosentraub 1994), empirical research does not find evidence of statistically or economically significant positive impacts.

Sports economists, on the other hand, have found economic impact studies lacking both in theory and practice. Ex-post studies have consistently failed to find evidence of any economic benefits related to sports teams and facilities. In examining recent retrospective studies, Coates and Humphreys (2003, p. 6) concluded “building new sports facilities and attracting new professional sports teams did not raise income per capita or total employment in any US city.” A closer look at the methodology of such studies reveals an appealing but fundamentally flawed line of economic reasoning that virtually guarantees a forecast of large economic benefits.

The term “economic impact analysis” refers to rigorous surveys, research, and modeling to estimate the direct and indirect economic effects of an entity or event on the local, county, state, or U.S. economy, as measured by employment, tax revenue, income, or gross product (overall economic output).

The impact of an economic event is the summation of direct effects and indirect effects. For example, when a hundred dollars is invested in building a new library in a city, that money (the stimulus) flows through the local economy multiple times as construction supplies are purchased, and as construction workers spend their paychecks at local supermarkets, restaurants, and other retailers, who in turn buy more inventory, and so on. That is, an initial stimulus triggers a chain of spending. This chain of spending is estimated via multipliers.

The term ‘economic impact’ used in isolation can be interpreted in different ways in both the short term and long term. Therefore, in order to be clear what is meant in the context of the sixteen events reviewed in this report, UK Sport has adopted the following definition within its major events strategy:

The net economic change in a host community that results from spending attributed to a sports event or facility. Turco & Kelsey (1992)

The change is caused by activity involving the acquisition, operation, development, and use of sport facilities and services (Lieber & Alton, 1983). These in turn generate visitors’ spending, public spending, employment opportunities, and tax revenue. Specifically, the economic impacts of expenditure are composed of direct, indirect, and induced effects. Direct effects are the purchases needed to meet the increased demand of visitors for goods and services. Indirect effects are the ripple effect of additional rounds of re-circulating the initial spectators’ dollars. Induced effects are the increase in employment and household income that result from the economic activity fueled by the direct and indirect effects (Dawson, Blahna, & Keith, 1993; Howard & Crompton, 1995). The initial construction of a $10 million sports facility provides an initial impact of $10 million on the local economy. This is the direct impact. Clearly, the construction of the facility will require concrete, steel, construction workers, and so forth. The money spent on these materials and services comprises the indirect expenditures, or the indirect impacts. (Hefner 1990, pp. 4-5)

In high level terms economic impact studies aim to measure the increased economic activity surrounding an event. For sporting events, the key stimulants of activity are the expenditure of spectators, event organisers and other stakeholders, which flow through the local economy to expand total regional and national GDP. The diagram below illustrates the principal components of economic impact. There are three broad areas in which impact will occur, as follows:

  • Core impacts – primarily comprising expenditure by, or generated from, international spectators attending sports events from tickets and match day catering;
  • Other direct impacts – comprising spending by spectators and other visitors on accommodation, food and beverage, transport and other spending, as well as investment in infrastructure; and
  • Indirect and induced impacts – relating to the ‘ripple effect’ as the direct spending is recycled through the economy. The primary components are indirect impacts, achieved largely by businesses spending on suppliers, and induced impacts, as recipients reinvest money in the economy themselves. In addition, there is also significant expenditure by domestic residents. Domestic spending comprises an important element of the full value of sports event to a Host Nation.

Economic impact is based on the theory that a dollar flowing into an economy, that otherwise would not have been spent, is a benefit to the economy. Economic impact studies not only measure economic impact, but are also used to provide information in the decision to publicly fund sports venues or sports commissions/authorities, or to measure the “success” of events hosted in a local community in generating positive economic outcomes for both the event owners and the locale.

Economic impact analysis measures new spending in a local economy due to the presence of, for example, a facility or an event. The change in the economy is measured in terms of total new spending, fiscal impact (total new taxes collected), personal income generated, and jobs created, both directly and indirectly. By increasing the new money in an economy, the economic benefit is serving a greater good by increasing government tax revenue, augmenting business income, and ultimately resulting in more jobs and higher personal income for residents of that economy. In developing the model there are specific regional factors and drivers that will have an influence on the economic impact The diagram below illustrates the key components in determining the potential economic impact :

Event Economic Effects/Impacts (Pre-event & Post-event phases)

  • Economic growth (GDP) and impact
  • Targeted growth in economic relevant sectors
  • Direct and indirect employment created
  • Direct, indirect and induced impacts (“Multipliers Analysis”)
  • Economic-social Net Present Value
  • Touristy flows (“visitors economy”)
  • Olympic legacy (“stadia & infra-structures”)
  • Globalization (“Global branding & exposure”)

Sports Economics possesses substantial experience in economic consulting to the sports industry, with specific knowledge of the economic impact of facilities, events, and teams. Considering the publicity and scrutiny surrounding such studies, it is imperative to select a firm that not only has substantial experience, but also has a reputation for consistently providing an accurate assessment of economic impact. Sports Economics’ methodology is sound and defensible, and we are qualified to and capable of affirming our results to any audience necessary

The benefit in economic terms to a host economy is defined according to the additional expenditure by visitors to that economy which is directly attributable to the staging of the event. These visitors can come from elsewhere in the same country or from overseas. If the visitors come from elsewhere in the same country, any economic impact is actually a redistribution of money around that country’s economy and is not necessarily ‘new’ money to the economy. Visitors from overseas actually provide ‘new’ money in the form of invisible exports and potentially a ‘net export effect’ on overall GDP. One might argue that the quality of economic impact can be gauged according to the net export effect associated with an event, namely the extent of any ‘new’ money brought into the UK economy from overseas visitors (and other sources) as a result of staging an event. However, this may be of little concern to local organisers who do not care whether any additional expenditure is attributable to someone from for example the USA or elsewhere in the UK, hence redistribution is not an issue.

The main point of note is that only some people are eligible for inclusion in the economic impact calculations i.e. visitors to the host city or area specifically as a result of an event being staged. The remainder live locally and their expenditure would have been made regardless of a specific event taking place, hence such expenditure is termed ‘deadweight’ and not eligible for inclusion in the calculations.

Obtaining a value for the initial impact of a team or event is the first step in any economic impact study. The initial impact is then magnified through the use of a multiplier, based on the idea that money brought into a local economy will be respent over and over, becoming income for others in the economy.

In this way a multiplier also magnifies the errors made in calculating initial impact, especially by once again failing to recognize opportunity costs. The multiplier is applied to any new spending in the economy regardless of the source. If the multiplier does not depend on the spending source, then it is useless in the comparison of alternative projects.

The multiplier effect accounts for the overall economic impact of a sport event. The multiplier effect demonstrates the process through which initial spending in a region generates further rounds of re-spending within the region. The ripping process of subsequent re-spending is the multiplier effect. The basic principle of the multiplier effect begins with an initial spending as an increased income into an economy. A portion of the increased income is spent and further re-spent within the region (Archer, 1984; Crompton, 1995; Wang, 1997). In summary, there are three elements that contribute to the total impact of visitor spending: Direct impact (the first-round effect of visitor spending), Indirect impact (the ripple effect of additional rounds of re-circulating the initial visitors’ dollars), and Induced impact, which is further ripple effects caused by employees of impacted business spending some of their salaries and wages in other business in the host community (Howard & Crompton, 1995).

A variety of multiplier used modeling techniques are available: TEIM (Travel Economic Impact Model), RIMS (Regional Input-output Modeling System) (Donnelly, Vaske, DeRuiter, & Loomis, 1998; Wang, 1997), TDSM (Tourism Development Simulation Model) (Donnelly, et al., 1998), RIMS II (Regional Input-output Modeling System, version II) (Wang, 1997), ROI (measuring financial Return On Investment) (Turco & Navarro, 1993), and IMPLAN (Impact Analysis for Planning) (Bushnell & Hyle, 1985; Dawson, Blahna, Keith, 1993; Donnelly, et al., 1998; Howard & Crompton, 1995; and Wang, 1997). Of those modeling techniques, IMPLAN is one of popular methods. The IMPLAN model was developed by the U.S. Forest Service and Engineer Economics Associates, Inc. The IMPLAN develops input-output models for all states and counties in the United States. This model was used to estimate the employment, income, and net sales and adopted as the regional impact analysis program-of-choice. Another often-used model is RIMS, which was developed by the U.S. Department of Commerce, Bureau of Economic Analysis (BEA). This model also offers input-output tables down to the country level (Turco & Kelsey, 1992). Also, a lot of simple formulas were developed to conduct economic impact study of sport events by local sport commission companies.

In addition to the standard projections of economic impact, Olympic studies also include longer term benefits sometimes referred to as the “Olympic Legacy.” These legacy effects, derived from positive publicity from the Games, include increased tourism after the Games, attraction of business, and infrastructure investments that improve the urban environment. Legacy impacts are generally not incorporated into the economic impact numbers, but rather offered as an additional, unquantifiable benefit. The lack of any ex post study that finds improvements in economic growth or living standards due to mega events should cast some suspicion on the legacy effects of Olympics, or at least the ability of such effects to be transformed into real economic benefits to the local economy. Baade and Matheson (2002) found “the evidence suggests that the economic impact of the Olympics is transitory, onetime changes rather than a ‘steady-state’ change” (p. 28).

Empirical Analyses of Economic Impact Statements

It is one thing to point out bias that could potentially be introduced in impact studies. It is another thing altogether to examine whether actual economic impact studies are, in practice, truly flawed. One tool that can be used to determine the accuracy of economic impact studies is ex post comparisons of predicted economic gains to actual economic performance of cities hosting sporting events. Empirical studies have been conducted on the observed economic impacts of large sporting events as well as on the construction of new sport facilities.

On the sport facility side, numerous researchers have examined the relationship between new facilities and economic growth in metropolitan areas (Baade & Dye, 1990; Rosentraub, 1994; Baade, 1996; Noll & Zimbalist, 1997; Coates & Humphreys, 1999). In every case, independent analysis of economic impacts made by newly built stadiums and arenas has uniformly found no statistically significant positive correlation between sport facility construction and economic development (Siegfried & Zimbalist, 2000). This stands in stark contrast to the claims of teams and leagues, who assert that the large economic benefits of professional franchises merit considerable public expenditures on stadiums and arenas.

On the events side, nearly every national or international sporting event elicits claims of huge benefits accruing to the host city. For example, the National Football League typically claims an economic impact from the Super Bowl of around $400 million (National Football League, 1999), Major League Baseball attaches a $75 million benefit to the All-Star Game (Selig et al., 1999), and the NCAA Final Four in Men’s Basketball is estimated to generate from $30 million to $110 million (Mensheha, 1998; Anderson, 2001). Multi-day events such as the Olympics or soccer World Cup produce even larger figures. The pre-Olympics estimates for Atlanta’s Games in 1996 suggested the event would generate $5.1 billion in direct and indirect economic activity and 77,000 new jobs in Georgia (Humphreys & Plummer, 1995).

In many cases, variation in the estimates of benefits alone raises questions about the validity of studies. A series of economic impact studies of the NBA All-Star game produced numbers ranging from a $3 million windfall for the 1992 game in Orlando to a $35 million bonanza for the game three years earlier in Houston (Houck, 2000). The ten-fold disparity in the estimated impact of the event in different years serves to illustrate the ad hoc nature of these studies. Similarly, ahead of the 1997 NCAA Women’s Basketball Final Four, an economic impact of $7 million was estimated for the local economy in Cincinnati, while the same event two years later was predicted to produce a $32 million impact on the San Jose economy (Knight Ridder News Service, 1999). Such increases cannot be explained by changes in general price levels or growth in the popularity of the tournament. Instead, they are explained by the fact that economic impact studies are highly subjective and vulnerable to significant error as well as manipulation.

In further cases, the size of an estimate can strain credulity. The Sports Management Research Institute estimated the direct economic benefit of the U. S. Open tennis tournament in Flushing Meadows, NY, to be $420 million for the tri-state area, more than any other sporting or entertainment event in any city in the United States; this sum represents 3% of the total annual direct economic impact of tourism for New York (United States Tennis Association, 2001). It is simply impossible to believe that 1 in 30 tourists to New York City in any given year are visiting the city solely to attend the U. S. Open. Similarly, the projected $6 billion impact of a proposed World Cup in South Africa in 2006 would suggest that soccer games and their ancillary activities would represent over 4% of the entire gross domestic product of the country in that year (South Africa Football Association, 2000).

As in the case of sports facilities, independent work on the economic impact of mega-sporting events has routinely found the effect of these events on host communities to be either insignificant or an order of magnitude less than the figures espoused by the sports promoters. In a study of six Super Bowls dating back to 1979, Porter (1999) found no increase in taxable sales in the host community compared to previous years without the game. Similarly, Baade and Matheson (2000) found that hosting the Super Bowl was associated with an increase in employment in host cities of 537 jobs, for a total impact of approximately $32 million, less than one-tenth the figure trumpeted by the NFL. In a study of 25 Major League Baseball all-star games held between 1973 and 1997, Baade and Matheson (2001) found that, in the case of three all-star games in California (1987, 1989, 1992), the events were correlated with worse-than-expected employment growth in host cities and were furthermore associated with an average reduction in taxable sales of nearly $30 million. Finally, Baade and Matheson’s examination (1999) of the Olympic Games held in Los Angeles in 1984 and Atlanta in 1996 found total observed increases in economic activity of $100 million and of $440 million to $1.7 billion, respectively. While the range of the economic impact for Atlanta exhibits a great deal of uncertainty, even the most favorable figure is only one-third of the amount claimed by the host committee.

Tax impact

With its large economic footprint, long duration and significant international visitor numbers, mega sports event delivers substantial tax revenues to a Host Nation’s government. This section outlines the potential types of tax revenue that can accrue to a sport event host government and an indication of the possible levels of such tax revenue. In summary, the tax revenues to the government of the Host Nation include:

  • Sales t

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