Impact of F1 Grand Prix on the Economies of Hosting Countries

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Introduction

This chapter is dedicated to a background research of the subject under discussion, the Impact of F1 Grand Prix on the economies of hosting countries, the research motivations, and specific research questions will also be revealed in this chapter before concluding with an overall outline of the entire research study.

Background

The Formula 1 Grand Prix (F1 GP) managed by Bernie Ecclestone’s company is renowned as the most vociferous sporting program in the world as well as the peak point of the motorsports arena. The F1 GP world championship is generally watched in more than 100 countries around the world and it is broadcasted in every continent. It is estimated that the sporting event has an average viewership of more than 60,000 spectators at the racing circuits. (Tremayne & Huges, 2003). According to the official web site of F1 (2005 & 2006) this spectacular sporting event is also synonymous with tremendous and fantastic overtaking moves, extreme speeds, horrendous crashes, champion drivers super speed pit stops, ground breaking team tactics etc. Not to mention the extremely stunning array of beautiful women who adds further spice to this exhilarating motor sport event of international caliber.

The F1 GP is organized on an annual basis and within a year about 16-18 events takes place in a range of countries around the world. Usually the race takes place every fortnight from the commencement of the season and the F1 teams taking part in each event travel to the destination of the next race in order to be involved in various press conferences, sponsor promotions and testing of their cars in the time between.

The races usually take place on a Sunday afternoon, and the Saturday before the event the teams take part in a one-hour qualifying session, which helps to determine their positions in the starting grid for the following day. According to Burgess-Wise (1999) Sunday, the day of the grand event will see masses of F1 supporters and fans taking their places in anticipation of live coverage of the event.

F1 Constructor Standings in 2011 season as of 25 April 2011

Source – (Constructor Standings, 2011)

The main attractions of the event

The event contains a multitude of attractions from the perspective of its categories of stakeholders says Hes & Mountain (1998) and Burgess Wise (1999). The most prominent attractions can be classified as follows:

F1 Teams – With the intention of entertaining a spectator range that covers billions in numbers across the world and the attraction of honor and prestige of possessing the ultimate glory of being presented as the best world constructor/driver.

Sponsors – To be part of the greatest motorsport event in the world and to be associated with a F1 caliber team and to reap the benefits of global level exposure

Spectators – To enjoy the exhilaration of extreme speed driving and the association buzz of the sport.

FIA F1 World Championship Races Calendar for 2011

Source : (FIA F1 World Championship Races Calendar for 2011, 2011)

Circuit Licenses

A T1 License has to be obtained by a racing circuit in order to be eligible for hosting a F1 Testing session. Thereupon in order to host the main F1 GP racing circuits should obtain a Grade Circuit License which is presented by the FIA. (2011. Web.).

Financial strength

Adequate financial strength has to be proven in addition to securing the license to ensure the annual hosting fee required by the Formula Once Management (FOM) could be met by the host apart from being able to incur the massive maintenance and upgrade costs. (2011).

Major elements of FI

• F1 Profits
  The income of FOM is directly connected to the rate of exchange pertaining to the host country against the British pound, revenue generated from advertising and other promotions, television and other broadcasting rights plus the annual hosting fee received from the host country.
• Rules and regulations
  The rules and regulations of the FIA F1 keep changing at a rapid pace all due to the strictest attention to safeguarding and protecting the involved parties as well as to enhancing the number of viewers.
• Sponsors
  With the advertising as well as consumption of tobacco meeting stringent laws, some of the major sponsors of F1 GP who are tobacco marketers have met with obstacles in hosting countries where advertising of tobacco products is banned. On the other hand civil wars, terrorism, supply reserves and other fuel alternatives will be unfavorable factors that will decide sponsorships of the future F1.
• Research & Development in F1
  According to the F1 official website manufacturers, tire suppliers, and race teams are all spending large amounts of resources on research and development activities with the objective of competing successfully.
• World ranking of F1
  Among the mega sporting events in the entire world the FIA F1 GP is ranked in the third position with the preceding events being the FIFA SWC and world Olympic Games.

The world competition to host F1 GP

Subsequent to 1999, the F1 GP has been staged in countries such as the USA, Malaysia, China and Bahrain. However, one notable factor in these hostings is their considerably high monetary involvement as many of the countries had to construct totally new circuits at major costs in addition to bearing the annual hosting cost. However, the countries mentioned above have enjoyed thriving economies, particularly during the time when the F1 GP was hosted in their countries. Malaysia and Bahrain are countries rich in oil and in the case of China, Malaysia and the USA there was government intervention in bearing out part of the construction costs and contributing to the hosting charge. (2005)

It is forecasted that the FIA F1 calendar would be restricted to a maximum of 18 races per season says the official website of F1 in 2005 mainly due to the following factors:

1. The season schedule of races every second weekend does not allow for further inclusion
2. The training ground of Formula 1 drivers is CART Racing holds about 20 races within season
3. The Europe season in winter is used as a break for resting team members as well as using the time for engraining in value-added research and development (FIA F1 World Championship Races Calendar for 2011, 2011).

This restricted schedule means that prospective entrants would be faced with tight competition with many new bidders trying to win a chance among the already existing and established host countries. This aspect applies more pressure on both existing and potential host countries of F1 who are bidding for more than one F1 race in a year or possess outdated circuits in comparison to the newly erected modern race circuits of the new competing bidders.

Many developing countries have increasingly shown an interest in hosting this mega sporting event, which is seen with India joining suit in 2011. Despite this escalating interest there are claims that some of the hosting counties have not received the expected profits by hosting the F1 GP in their country. (2005) This fact was apparent when the British F1 GP had to seek government financial assistance as a subsidy which resulted in the final 2005 FIA F1 GP season calendar being delayed (Turco & Navarro, 1993).

Aims of Research

The main objective of this research is to conduct a broad-based literature review of F1 impact on various local economies and to establish if bringing the F1 GP world championship to various hosting countries will be beneficial to their respective economies at large or only benefit a select group of persons either on a domestic or international level. The research, therefore, delves into the process of analyzing the hosting of mega sporting events in the category of Formula 1 that is anticipated to enhance economic growth via a process of promoting hosting countries and thereby augmenting respective tourism aspects. In this regard, expert opinion will be researched to ascertain if they identify a positive link in sporting event and the local economy.

The Case Studies

In order to facilitate this study and to establish a link between F1 and local economic impact this research highlight statistics and significant elements of past F1 GP events. The F1 economic impact on the European region, F1 impact on the Victoria Grand Prix held in 2006 and the UK Silverstone Foster’s British F1 GP will be analyzed. The aim of these case studies will be to identify lessons to be learnt from some of the hosting countries which host hallmark sporting events.

Research Questions

• Is there a minimum link between a F1 GP World championship event and the economic growth of the hosting country?
• What is the level of significance of F1 for countries interested in hosting mega sporting event?

Research Outline

The framework of this research study has been developed with the objective of gaining insights into the above questions. Consequently, 5 chapters have been included to incorporate a comprehensive research study. The 5 chapters are the Introduction, Literature Review, Research Methodology, Economic impact assessment of F1 in relation to case studies and Conclusion. A brief outline for each chapter is as given below. The study is carried out in an exploration nature with the intention of investigating a possible relationship between the F1 GP World Championship and the economic benefits for the hosting country.

Literature Review

The literature review takes into account the theories pertaining to major sporting events, economic growth and tourism. Additionally, it will review the reasons behind national governments bidding for the hosting of such mega sporting events. The literature review will also study the economic impact on host countries in order to establish opinions expressed by experts in the industry. This is a vital chapter as it constitutes the core and central part pertaining to this research study.

Research Methodology

The study has been carried out in an exploratory research approach and therefore a major part of the research has been based on data obtained on a secondary level retrieved from various literature sources as well as using the internet and other journals and textbooks written on the subjects of economics, tourism and mega sporting events.

Economic impact assessment of F1 in relation to case studies

In this chapter a broad overview will be provided on economic theories, findings and recommendations to further establish the opinions of experts in the relevant fields. In addition, this chapter will also deal with how sporting events can pose a level of significance to countries hosting major events on the international level.

Conclusion

In this final chapter the lessons reviewed in the previous chapter will be summarized with a review of the outlined research questions.

Summary

Both tourism and sports are established as multi-billion industries on a global scale. According to expert information, the two industries are interlinked, however, the degree and level of this linkage are diverting in these expressions. It is apparent that the commercialization of most of mega sporting events in an international scale has driven a large number of sports organizers and stakeholders to join the ranks of the wealthiest people in the world. Therefore sporting events have today become a global marketing concept, particularly in relation to promoting tourism and business potential in the prospective hosting countries. According to Pitts and Stotlar (1996) the sports industry takes into account a broad-based area including sports, recreation, fitness, leisure activities and all types of pertaining goods and services in these categories. Sports-related goods and services buyers represent consumers representing all populations in the world (Donnelly et al 1998).

Commercialization of sports

The sporting industry has experienced a period of transition, especially within the last two decades to be more business-oriented as a result of a commercialization process. This has created a notable concern on business principles for all sports industry stakeholders. As per a statement made by Houlihan in 2003, the commercialization of sports features two main aspects.

1. An influx and enhancement of commercial operations in all types of sports.
   In this regard, many sports organizations are focused on optimizing their revenues with an underlying objective and rationale on strategic development and decision making. With sponsorships pouring in and income from television rights increasing, players’ remunerations have also been on a notable rise in the recent past (Donnelly et al 1998). With this new scenario being highly attractive, many sports organizations are seeking to generate more revenue by integrating shrewd business principles within the sports management aspect (Statistics and Tourism Satellite Account, 2011).
2. Not-for-profit state organizations involved in sports management have also undergone significant operational and cultural changes with many adopting business approaches in their management procedures. Therefore the decision-making process of these organizations now reflects similar attitudes of those engaged in commercial organizations. The thrust in commercialization in these organizations can be attributed to an aim of reaching effectiveness, efficiency and quality of operations as well as increasing competitiveness in the industry. Houlihan (2003) mentions four primary reasons that have promoted commercialization in the sports industry.
   • The trend established for sports spectating
     Due to the high amounts of funds involved and high expectations of the sponsors and spectators along with spectator-related gate receipts, sponsorships and television rights sporting events should be considered as business ventures.
   • Technology transformations
     Television has made a significant impact on sports as well as boosted the commercialization aspect of sports necessitating sports organizers to develop relevant business practices vital in dealing with the many demands made by spectators. The Internet has recently bypassed television adding further commercialization emphasis.
   • Tight competition
     Competitiveness is increasing notably in the sports industry particularly in the leisure provider’s category in a local and global scale.
   • Professional management of sports
     The need for strategic planning on marketing plans and human resources has spurred significant advances in professional practices. In this order programs and training are expanding for youngsters aspiring in becoming sports managers. These academic studies have led to an exploration of research for analyzing and evaluating new processes of sports management and in establishing new management practices (Statistics and Tourism Satellite Account, 2011).

Commercialization of motorsports racing

In the present day Formula One car racing is considered to be the cutting edge of technology and related advances. (Haulihan 2003). The F1 is very often compared as a ‘miniature space program’. This event is one of the few international sporting events which consume huge amounts of capital with sponsors clamoring to pay teams massive rates ranging from £9 million to £35 million in a single year in return to seeing their company insignia appearing prominently in the racing cars. With the attraction of billions of viewers who tune in to watch the live coverage, British American Tobacco and Benetton even purchased entire teams under their sponsorships. The huge amounts of funds involved mean that stakeholders stand a chance of filling up their coffers with impressive amounts. In 1990 one of the best racing drivers in the world, Michael Schumacher entered a contract with Ferrari amounting to £14 million annually and this has even increased to £18 million later on the strength of his outstanding performances. In 2000, Bernie Ecclestone, the main man behind the F1 and who is significantly credited with the current commercialization of F1 was nominated as the richest man in Britain. (Haulihan 2003).

Finance resources for sports

Sports managers have increasingly found it difficult to cope with emerging challenges due to visible reductions of traditional revenue sources associated with sporting activities amidst rapidly escalating costs. Due to sagging overall economic conditions, new rules and regulations some of the traditional revenue sources such as media revenues, tax income and other receipts have declined in the recent past. This has resulted in a large number of sporting organizations slashing their budget allocations and introducing new changes to existing traditional operational patterns. According to Howard and Crompton (1995) to maintain sporting events on current levels managers are compelled to plan on harvesting “more with less” while looking for alternative funding sources.

Public subsidies in sporting events

The most comment subsidy packages take into account the following components according to Howard & Crompton (1995).

• Charge of a lease fee lower than the amount required by a private organization for providing necessary facilities
• Use of municipal bonds that will be issued at lower interest rates than usually paid out to a private organization for obtaining sporting facilities.
• Forego the specific property taxes that would otherwise have been paid for facilities privately owned.
• Investing in infrastructure facilities connected with the facility
• Use of in-kind public services such as the police service by omitting the charge of market rate.

Benefits of sporting subsidies

• Enhanced community presence
  A professional sports franchise can assure valuable media coverage for cities in which the event is hosted. (Howard & Crompton 1995). This was notably visible in the high exposure received by Adelaide by hosting the Grand Prix event and was at the time regarded as the first venture in marketing Adelaide in a global level.
• Promoting community image
  Enhanced exposure provides means for sharply defining and promoting a city’s image on a global level. (Howard & Crompton, 1995). When the Adelaide F1 GP was held sponsors and organizers concentrated more on promoting the glamour and action involved in the sport to by linking it with Adelaide tourism and this was strongly associated with the image of the city henceforth. The F1 GP was instrumental in spearheading the ‘Adelaide Alive’ image and effectively managed to replace its traditional unexciting image that was inherent to Adelaide says Howard & Crompton (1995).
• Stimulate new development in the city/country
  When a sports event of mega caliber is held it will facilitate additional and new development which in return will contribute to further expansion of the country’s tax base. This development can be classified as approximate development, general development and complementary development according to Howard and Crompton 1995. Approximate and complementary development is not expected to expand into substantial sports facilities as they are physically not interwoven with other elements of the urban fabric.
• The psychic income (Statistics and Tourism Satellite Account, 2011)
  When a sports event is successfully completed its associated benefits are accrued to the collective morals of residents. These types of benefits are known as ‘physic income’. Successful organizers of sporting events prosper with time as their confidence grows and they can be proud of their accomplishments. Physic income is derived from actual benefits garnered by the residents who were not actually involved in the organizing process and who did not physically attend the sporting event. However, such persons can also be strongly identified with the event. (Howard and Crompton, 1995).

Tourism Industry and relevance to F1

The World Tourism Organization (UNWTO) is the authority that sets pertaining international standards for tourism reporting and measurement and is the provider of the most comprehensive statistics related to the world tourism industry. (World Tourism Organization 2011). Pope and Turco in 2001 declared that UNWTO has termed tourists as visitors, ranging from one night to a maximum of 3 months with the main purpose to exercise some sort of activity which is remunerated from the places they visit. Tourist attitudes regarding a particular destination either positive or negative will depend on their past visitations, word of mouth, referrals, promotions of the destination or a blend of these facts. According to Pope and Turco (2001) the tourism system is comprised of six main mechanisms. They are namely tourists, local services, transportation, infrastructure, communications and government institutions. When it comes to the tourism industry it consists of organizations that cater to tourists such as accommodation, transportation, attractions and information. Tourism is today considered as one of the biggest revenue-making industries in the world and particularly event-related tourism is significant in the overall picture.

The trend of international tourism

The international tourism has continued to rise on a positive long term growth according to the worldwide statistics. However interim fluctuations have been noted due to rising terrorism in the Asian region, Gulf War, and health hazards which have created notable ructions in the flow of tourism. (Grant 2005).

Despite the setback witnessed in recent years, Grant Thornton (2005) highlights that the World Tourism Organization expects total international arrivals to reach approximately over 1.5billion towards 2020.

The inter-relationship of sports and tourism

The potential of having a link between the tourism industry and sports lead to social, environmental and economic impacts on both positive and negative levels. In the recent past, these facts have been significantly highlighted, especially in relation to the commercial leisure industry. The reason is the industry’s emphasis on making use of the immense marketing potential and accompanying economic benefits by utilizing sporting events to augment the development of tourism in a country. According to Houlihan (2003), this move has resulted in substantial diversification and adoption of niche marketing strategies. The recognition of the value of a collaborative attitude in tourism and sports particularly among the government agencies concerned in policy administration, development planning and resource allocation is today increasingly evident around the world. However as highlighted by Houlihan in 2003 in European countries the integration of authorities connected with the two industries are rare compared to other regions in the world, except when mega events are taking place. Therefore a potential scope for integrating policies in tourism and sports with a view to producing joint investment and commercial strategies is seen in order to achieve greater social and economic benefits and better facility developments. Houlihan (2003) further states that mainly the commercial tourism sector has only been involved and so far reaped the economic benefits arising from the recognition and prestige of contributions from a mega sporting event by linking it as a tourism product development (Donnelly et al 1998).

The demand for sports tourism

According to Houlihan (2003) the sports tourism sector is generally seen in the category of short holidays or weekend trips, but later trends have shown a potential increase in longer holiday stays. On the other hand, sports-related tourism is evenly spread within a year and is less significantly focused on coastal holiday destinations. The age groups that commonly fit in with sports tourism include mainly young adults with above-average incomes. Some of the ‘Hall mark’ sporting events give an opportunity for tourists to enjoy a holiday based exclusively on their preferred high-class sports viewing or by incorporating sports spectating as a part of their holiday. With travel arrangements being facilitated by specialist travel and tour companies, traveling to witness a vast array of sporting events has become a smoother process and such sports events are earmarked as massive tourism generators in the hosting countries.

Impact of sports tourism

The local economic benefits from sports tourism mainly arises from revenue of food, beverages, accommodation facilities, gifts and souvenirs, admission fees, facility fees, transportation and other spending fees. It is apparent that there are definite benefits by luring visitors to watch sports events and in using it as a key element of a tourism product. (Houlihan 2003). Additional income generators can be sought from inward investments, sponsorships, media exposure, sustaining tourist appeal and other secondary level multiplier effects. Further economic advantages can be accrued by employment opportunities, and infrastructure development. In most cases such direct economic benefits are supplemented on a longer term by the post tourism boost that occurs as a result of the success of the sporting event. Many countries are increasingly bidding for the privilege of hosting mega sporting events due to the clear advantages and boost of local tourism as a result of staging these mega events. Examples provided by Houlihan (2003) in this regard include the later interest for hosting Olympic Games which incurred losses for hosting countries in the past but made a turnaround profit in the Los Angeles Olympics games in 1984. Since then substantial interest and competition is seen among hosting countries to make their respective cities the host of this mega international sporting festival. Despite the massive cost initially required in hosting a mega sporting event, today there is a greater understanding of the broader direct and indirect benefits that is open for cities, countries, regions and government by hosting them. Thereby the act of winning a bid for hosting a sports event is a catalyst in introducing better infrastructure and related investments that would have otherwise remained as a planning proposal for a number of years. In anticipation of the Barcelona 1992 games the city acquired a totally new airport with a derelict area being fully revamped as the waterfront of the proposed Olympic Village. (Houlihan, 2003).

The public investments needed for hosting such events are generally justified along the benefits mentioned earlier. Many cities attach great significance to establishing themselves as world-class cities, particularly in the paths of international tourism, culture and business. From a city perspective, their major motivation for hosting sports-related tourism events can be the important level of their central government funding that is in most cases associated with mega projects. In 1994, the group that steered Victoria’s bid for hosting the Commonwealth games has cited their main reason for forbidding as the potential infusion of funds from the federal government. In this respect, Houlihan (2003) declares that despite there being an initial cost for a hosting country in staging a mega sporting event the resulting benefits to the wide economy is far more significant. According to Houlihan (2003) once a city has hosted a major event it is imperative that they continue to attract future events of the same level in order to sustain the promotional and economic effects. The subsequent events can be hosted at considerably lower costs as the necessary infrastructure has already been put in place.

Hall Mark events identified for sport tourism boost

The Commonwealth Games, Olympic Games, Speed World Challenge and the FIA F1 GP World Championship are hallmarked sporting events that greatly facilitate the participation of tourists and nonresident sportspersons as well as spectatorship. These hallmarked events are identified as main attractions that can draw massive tourists for desired destinations. Event tourism of this nature also serves as a secondary or supplemental attraction for the host community. In such circumstances, such events can serve as the lure to extend tourist visits where their primary reason for visiting could be due to other attractions. Economic activity can be stimulated by such secondary attractions being able to extend the length of stay of tourists. (Pope & Turco, 2001). According to Pope and Turco (2001) such hall mark sporting events are considered to be of worldwide importance due to their prominent visibility and often generate a range of other attractions to capitalize on the enhanced tourist volume arising from focal attractions.

Conclusion

According to expert opinions expressed in this chapter there is a strong inter-relationship between the tourism and sports industries which are both big businesses and this link is further defined in the rapidly growing sports-tourism. Existence of this linkage has spurred many governments being identified as prime targets for the purpose of subsiding potential financial constraints experienced by the private organizations involved in the sporting event. The prime selling points for mega sporting events can be classified as the massive amounts of expected spending and creation of employment as a result of the anticipated large delegations of sports tourists. This is further backed by the aftermath of tourism boost arising from the international exposure received for the event and in being associated with it as the host country or city. Hosting of hall mark sporting events is identified as a means of attracting more tourists as well as retaining local tourists for longer stays particularly during off peak seasons.

Research Methodology

Miles and Huberman (1994) declared that realizing what you need to find out will inexorably lead to the next step of how to get the required information. Therefore research methodology will be helpful in augmenting the possibilities of obtaining relevant and appropriate answers to all the research questions put forward as well as deriving important insights into the subject matter.

Use of exploratory research methods

This research study has been done with an approach based on an exploratory nature and therefore has adopted secondary data that has been retrieved from a variety of literature interviews and sources. According to Zikmund (2003), exploratory research methods can be defined as a combination of casual and descriptive research methods that can be adopted for conducting a particular study.

Secondary data research

Towards this end a broad based literature search was carried out combining the principals of tourism, economics and mega sporting events. In this order, secondary data and information were sought from sources such as the internet and a variety of journals and textbooks on the subjects of economics and tourism.

Qualitative Research

A qualitative research approach was not taken in this study as a major part of the data and information was accumulated from literature and existing secondary data and information sources.

Definition of information required in this study

Opinions of experts relating to how significant the hosting of the F1 GP World Championship to enhance tourism and thereby promote local economic benefits was gained from the literature review.

Data collection, sampling, analysis and formation of results

As this study has been primarily conducted on secondary level data, sampling and relevant data collection and a report based on the nature and form of such results have not been executed.

However, the findings and analysis of data and information mainly rely on information that has been collected earlier by other experts, individuals and agencies. The relevancy, accuracy and reliability of data have been checked to the maximum possible level and used only in instances that seem reliable. Major new findings are therefore beyond the scope of this research exercise. Finally, it should be recorded that the main purpose of this work has been to illustrate a significant method and approach in evaluating a major sporting event and its relevance to the economic structure of the hosting country. Therefore this analysis is of an ex-post (following the event) evaluation, a similar approach can be taken for an ex-ante (preceding the event) evaluation.

According to Amaratunga et al. (2002) different people perceive research with different meanings. However, the underlying intention remains as of investigating a large number of theories, data, concepts, experiences and laws. As declared by Remenyi et al. in 1998 the definition of research methodology is the procedural framework in which particular research is carried out. In this endeavor in order to obtain the goal of this research study by critically and optically evaluating the findings of secondary information through a thorough examination has been conducted of responses generated from the expert opinions.

Economic impact assessment of F1 in relation to case studies

Business plans are formulated in most cases with a primary objective of sourcing funds, which makes the plan an integral sales tool for capturing financial resources like investors or lenders (Nieman et al 2003). A well established Economic Impact Analysis will therefore facilitate Government authorities to become involved in public spending in private undertakings that are anticipated as beneficial to the community in general.

Economic Impact Analysis (EIA)

The EIA that was carried out for the Commonwealth games held in 1990 in Victoria, British Columbia is regarded as the first proper study that set the guidelines and example for performing an EIA study in relation to sports events. (Howard & Compton,1995). According to Howard & Crompton (1995), the study lacks the following elements.

• A formal definition pertaining to the region where the economic impact was expected to occur
• An estimation of average expenditure per visitor, per day in the defined region
• Identifying the relevant costs of the hosting region and pertaining benefits
• Switching of expenditure, in circumstances where spending on other products is now associated with the expenditure of the sporting event.
• Estimates for future tourism resulting from the event we’re not based on previous event results (Goldman, & Nakazawa, 1997).

Defining EIA

According to Howard & Crompton (1995) local governments commission a study of EIA, when they are faced with increasing pressure to prove efficient use of the public funds. Their main endeavor in this regard is to assure that the government receives returns for their subsidizations allocated to privately held sporting businesses. In political reality, such studies are typically executed to substantiate a specific view or position that may be proposed or adopted by a community-nominated official or sports organization. The economic impact is the net change in any economy as an outcome of spending that can be associated with a particular event. Host communities can experience positive economic impacts when nonresidents comprise a majority portion of the spectators and when they opt to extend their stay and utilize local accommodation facilities (Howard & Crompton, 1995). However, the economic impact should not calculate the spending of residents at the event site as these expenses is not regarded as a stimulus of the local economy. Such expenses are categorized as switching expenditure from different categories says Howard & Crompton (1995). Their study also highlights that nonmonetary benefits like enhanced image and awareness of the host country are difficult to measure and considered as secondary level impacts arising from the event(Goldman, & Nakazawa, 1997).

Forms of economic impacts

Generally economic impacts resulting from new expenditures which are related to events are composed of effects such as direct, indirect and induced nature. Howard & Crompton (1995) explained that

“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”, (Howard & Crompton, 1995)

Far-flung misuses in economic impact research linked to sporting events

According to Howard & Crompton (1995), EIA can prove to be a powerful tool if operated with integrity and cognition irrespective of the inherent drawbacks and constraints of the process. They further state that the only identified way to address manipulation of EIA is to disallow any misleading applications as follows:

• Inclusion of resident spectators in statistics – such expenditure related to local communities are not net economic stimulus and hence should not be included in calculating economic impacts
• Absence of time switches and other casuals. Costs that are relevant to spectators from out of town who have initially intended to visit the city and subsequently who have coincided with their visit with the event and others who are lured by other attractions in the area are considered under this category. This expenditure should be discounted as they would most likely have visited the city despite the attraction of the event and therefore should not be regarded as true money attributed directly to the event (Turco & Kelsey, 1992).
• The appearance of ‘fudged’ multiplier coefficients. These can occur from budget insufficiencies and a lack of experts who are capable of deriving multiplier coefficients. The result can invariably translate into an overrated economic impact (Turco & Kelsey, 1992).
• Instead of calculating marginal economic benefits showing the total results generated by the respective public and private partnership events and attributing benefits solely as a contribution from the government. The final translation results then show an unrealistic positive income to cost ratio in favor of the government (Goldman, & Nakazawa, 1997).
• Lack of opportunity costs. For all Investors including the government, an investment decision should be met with desired levels of returns. However, opportunity cost which is also known as the value attributed to the best alternative available and not taken is most consistently omitted in calculating EIA. Most analysts consider other factors of production with a zero benefit and opportunity cost and the as such the investment do not have any other better employment which is highly unrealistic (Wang, 1997).
• Sole concentration of measuring benefits thereby ignoring the effect of costs. A cost-benefit analysis is vital but seldom carried out in identifying the most viable investment opportunity. Despite EIA being a tool for establishing economic effects, it sadly ignores the negative cost impacts such as road accidents, traffic congestion, police, fire services, garbage collection, disruption of local lifestyles etc., and additional expenditure associated with an event due to the reason of obstacles found in translating such costs as economic values. (Howard & Crompton, 1995) (Donnelly et al 1998).

The multiplier concept

In 1995, Howard and Crompton have compared the economy in a country to a flowing lake declaring that new revenues generated through event spectators can represent incoming water in a lake and the rippling effect of this water is compared to the initial expenditure born by spectators who have a further effect that goes beyond their first entry point. This rippling effect has been termed as a multiplier by Howard& Crompton in 1995.

Forms of multipliers

According to Howard & Crompton (1995) economists generally differentiate between the following:

• Transaction/sales multiplier – This is a measurement for induced, direct and indirect effects of every additional unit of visitor expenses on related economic activities within host community (Archer, 1984).
• Employment multiplier – This is a means of recording the effect on job opportunities stemming from induced, direct and indirect effects of every additional unit of visitor expenses on related employment activities within host community. The ratio will take into account the number of full-time employment created as external visitors spend leading to enhanced employment capacities. The assumption made here is that all existing employment positions have been fully utilized. In the case of Adelaide F1 GP it was revealed that officials have simply enhanced the working hours of existing employees without taking in to account full-time staff. In this case, the employment effects resulting from the F1 GP were short-lived and marginal showing only increased productivity and not an increase in employment in the city (Leiber & Alton, 1983) (Archer, 1984).
• Income multiplier – This is a measurement for induced, direct and indirect effects of every additional unit of visitor expenses on related changes that will occur In each household incomes within the host community.

Derivation of multipliers

The derivation of multipliers is done according to Howard & Crompton (1995) from input and output tables separating the economy into individual industries and thereby examining the relevant flow of goods and services. In their study, this is compared to a car system security tracking device. In essence, a multiplier keep tracks of flows and transactions of fresh money introduced to the economy. This system allows a different multiplier for each industry sector which is influenced by initial expenditure on a direct level (Leiber & Alton, 1983) (Wang, 1997).

Realistic EIA Findings in relation to sporting events

According to Matheson (2002) a sporting event both national and international is associated with a large number of benefits for the host city. When it comes to a mega sporting event such as the F1 much larger numbers are attached. In the 1996 Atlanta Olympics the pre-estimated figures calculated an income of $5.1 billion in direct and indirect economic activities with the creation of 77,000 employment positions says Matheson in 2002. Likewise, Grant Thornton in 2003 declared that a consulting firm assessing the financial and economic impact of South Africa from the 2010 Soccer World Cup has estimated a contribution of R21.3 billion towards South Africa’s GDP with the creation of approximately 159,000 fresh employment opportunities. These numbers were taken from quotes appearing on local newspapers by Matheson in 2002.

Analysis of specific case studies

In the year 1997 the FIA, implemented an EIA study covering the European F1 GPs. The resulting findings with respect to spectator expenditure associated with each F1 GP event are as tabled below:

European GP (1997) economic impact

Source: F1 GP Website 2005

Consequently the MIA, Motorsport Industry Association in 2003 conducted an EIA for the FIA F1 Foster’s British GP which was held in Silverstone. This EIA was carried out for Brand Hatch Circuits Ltd., Agency for South East England Development, Agency for East Midlands Development and Advantage West Midlands. The main objective of carrying out this EIA was to estimate relevant economic impacts arising from the grand racing event particularly on the employment and income facts pertaining to the vicinity within the Silverstone circuit and in general the entire UK economy. (Motorsport Industry Association, 2003)

European F1 GP economic impact

According to the study concluded by the MIA in 2003 the Foster’s British F1 GP recorded a positive economic impact for the hosting country in terms of both income and employment. Some of the highlights revealed in this regard were:

• The spectators comprised on 95% local community and only 5% international
• Out of the 5% a further 445 of international spectators has expressed that the F1 was their primary reason for visiting UK. The visitor stay during this period averaged about 13 nights in UK.
• The component of spectators was also divided as 85% independent, 8% working on site and 7% corporate guests.
• There were about 1150 employment creations with 400 related to the host region that were directly attributed to the racing event.
• Total estimated income generated by F1 GP was £17.2million covering UK in general and £5.6 million directly attributed to the benefits of host region.
• The estimated expenditure generated by F1 GP was £34.7 in the year with the composition of ticket sales 29%, spectator spending 33%, helicopter transport 10%, team spending 15%, corporate hospitality 13% and media expenditure of 1%.

Australian F1 GP economic impact

The Australian Grand Prix Cooperation (AGPC) claimed in their 2002 annual report that economic benefits arising from hosting FIA F1 GP at the circuit in Albert Park Reserve were far greater than the acquired cost of hosting the event in the Victorian community. The report also enclosed an independently carried out CBA, Cost-Benefit Analysis undertaken by Save Albert Park Inc in 2003. Some of the significant areas highlighted in this analysis were:

• The multiplier and output methodology according to reports of the National Institute of Economic and Industry Research did not establish if the F1 GP has yielded a net economic benefit (Turco & Navarro, 1993).
• A CBA carried out by Save Albert Park has indicated that this event has produced minimal profits almost bordering on a loss.
• The event also incurred significant annual operating losses as shown up to the year of 2002 with a total loss exceeding $40 million.
• The Capital Investment costs (CIA) in 1995 and the consequent race associated costs have reached an amount of $73 million which also reflect the annualized cost of about $4.75mn.
• Media exposure that was generated as a result of the event does not have any proven evidence of the effect that it has helped promote the city of Melbourne as an attractive tourist destination.
• The AGPC has utilized patron attendance statistics to represent a high level of participation in the event and have also utilized such numbers for the EIA. Realistic attendance counts according to the report for the ensuing six years of the event indicates that these figures established by the AGPC have been far exaggerated up to about 40% or higher.
• The transformation of park roads as car racing circuits has resulted in significant traffic blocks and accidents and this has resulted in an increased cost of around $20 million (Donnelly et al 1998).

In the final submission of their report to the Auditor General of Victoria, the Save Albert Park has expressed these statements with valid numbers to prove their claims. According to analysts of this company, the hosting of F1 GP in Victoria Australia Albert Park Reserve have recorded significant costs and recommends that tax payer funds should have been employed in an alternative option.

Recommendation of EIA

According To Lee (2001) an EIA study is imperative for evaluating the development of a particular community in terms of social and economic perspectives. He further says that professionals who undertake EIA studies should take in to account the following recommendations:

• Defining and limiting the objective of the study in order to save research time and record far useful outcomes that is more specific to the objective.
• Other alternatives in relation to the subject rely on factors like practical options as well as on limitations such as data available, the time factor, political realms and funding options.
• Acquire sufficient information in order to conduct a realistic and meaningful economic impact study. Appropriate as well as diverse information is necessary to produce unarguable and exact results. In this regard information such as a demographic profile of the audience, the tax effects, the level of economic growth within the hosting community, and other useful social principles can be employed. Such information can be best used for making efficient surveys/ questionnaires and several other essential research medium in conducting studies of this nature (Turco & Navarro, 1993).
• The study should be conducted without assumptions and taking in to account evidenced information. A common argument for EIA studies includes that many researchers use advocates of the events based on their own assumptions. Such assumptions can yield inaccurate results as well as apply to the entire community’s perception of hosting a sporting event.
• Such studies should take into account all relevant impacts pertaining to the community from hosting a sporting event and not single out the economic impact alone. Such factors may include environmental impacts, vandalism, traffic congestion, etc. Communities may sometimes hold such impacts in greater significance that the mere economic impact.
• Avoiding result exaggeration. EIA can be used for making vital decisions such as tax policies. Therefore, political sponsors may want to misinterpret the results of the study for realizing ulterior motives (Turco & Kelsey, 1992).
• Under estimation is considered favorable in comparison to the overestimation of numbers. However, most advocates of sports events tend to overvalue projects with the sole intention of securing public approval and garnering political support. The issue is more of an ethical and moral nature and therefore researchers should bear in mind to produce realistic data.

Conclusion

According to Matheson in 2002, an EIA study can be used by sports event managers to produce justified proof for the spending of public funds on expenditures such as sports infrastructure. The ultimate question that arises from an EIA study would be if the agents who have conducted the study possess a vested interest of its outcome. Additionally, it is also important to see if the study can be taken as a true picture for evaluating the economic impact of the sporting event. Therefore many economists are of the opinion that the lack of EIA’s conducted for sports-related events such as F1 GP is an indication of the Government official’s reluctance to produce realistic information to the general public. However, an EIA is a substantial and important tool in assessing the significance of the economic impact of a sporting event like F1 GP and therefore critical steps should be taken in order to ensure a creditable EIA is carried out. Towards this end researchers can incorporate the EIA recommendations made by Lee in 2001. A good example is the post-event EIA study conducted by the Australian Department of Tourism, Industry and Resources with a view of assessing the accuracy of their pre-event EIA for the Rugby World Cup in 2003.

A literature review pertaining to some hallmark sporting events have identified that sports is today considered as a mega business industry and therefore a tool for enhancing local economies of host cities, countries and regions. The conception has empowered event organizers to generate a bidding war by playing potential hosts against one another which would ultimately lead to the higher payments to the event organizer.

The product FIA F1 GP

Preceding the year of 1904, a majority of countries in the world organized auto races with their own set of rules and regulations which in turn hampered the organization of international level organizing. The influential automobile clubs put an end to this obstacle by forming the FIA, an international racing organization with a compiled set of rules and regulations that was applied in a global context. (Burgess & Wise 1999)

However the F1 GP entered the motorsport arena only after the end of Second World War. Consequently the FIA F1 GP World Championship was formulated in 1950. Silverstone British GP had the honor of hosting the first F1 GP motor race. However, at this initial stage F1 did not possess the immense popularity the sporting event has acquired over the ears and therefore the championship only contained seven grand prix events. In today’s context the event has transformed as a massive spectator attraction generating huge amounts of revenue by marketing of television rights, sponsors and other revenue generator avenues. According to Treayne and Hughes (2003) the F1 GP has the prestige of having the highest following for a sporting event in the entire world.

A significant feature that is associated with this sport is its rapid changes of rules and regulations. The FIA which is the F1 regulating authority has justified such changes as being attributable for participant’s safety and an objective of reducing the rate of fatal and serious accidents says Burgess and Wise (1999). Spectator interest is stimulated with the competitive nature and changes occurring in the racing performances between all the racing teams. (Treayne and Hughes, 2003).

Lessons learnt in this study

The outcome of previous chapters reveals two significant view points if hall mark sporting events such as the F1 GP contain a real economic stimulus to the hosting country i.e. typical advocates to hosting sporting events are those people who will directly benefit from the staging of such events and opponents who would not benefit and therefore compete for same funds. According to Mules (1998), the involvement of a government in a sporting event is most likely influenced by social, economic and political reasons. Therefore governments are compelled to justify their expenditure on these events in relation to the particular economic returns such events would generate for the host country.

General Perception

The general opinion as per expert statements are that many hall mark sporting events such as the F1 GP have the power of attracting millions of spectators from around the world. This interest has the ability of raising the awareness of the hosting region says Mules (1998).

With regard to EIA requirements, the general perception is that these studies could be overstated in most cases as well as provide inadequate risk assessing, opportunity costs and social impacts.

As highlighted by Mules in 1998 there is a visible tendency for many governments in being included in sponsoring mega level events, especially in relation to sporting events such as F1 GP. However, they are equally expensive bids and involve higher maintenance and operational costs. The benefits include a political image boost and visitors who augment the tourist contingent in a country.

Concluding observations

Observations that have been made from countries hosting sporting events such as the F1 GP include the following:

• The tourism industry should be involved as a contributor in the funding process of mega sporting events
• Accurate, ethical and publicly available reporting is an integral part of conditions for government subsidies of sporting events.
• Findings of this research endeavor based on literature surveys conclude that there is a relationship between FIA F1 GP Championship and tourism in any hosting country. Henceforth enhanced tourism can lead to a significant impact on the local economy of the hosting country in general.

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Appendix

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