1 Introduction
The travel and tourism industry has been a primary economic activity and reliable source of revenue generation for many nations across the globe. The hospitality industry plays an important role in the overall economic growth of an economy (Seetanah
2011; Schubert et al.
2011; Sharma et al.
2022). The performance of firms has been a subject of great interest to researchers over the past few decades. Many studies on firm performance have initially focused on developed markets (Anderson and Reeb
2003), though the focus has recently been shifting to emerging markets (Jaisinghani et al.
2018). In addition, there are varied aspects of firm performance that have been investigated in depth. These include firms’ financial performance (Waddock and Graves
1997), employees’ performance, and the performance of associated companies (Luo and Chung
2005). Recent studies, however, have focused not only on how organizations perform but also on how organizations sustain their performance in the long run (Gschwandtner
2012). This is usually referred to as the theory of profit persistence (Mueller
1977). The theory states that profitable firms can sustain their profitability in the long run by any of several means including the creation of entry and exit barriers (Gschwandtner
2005), formation of ownership concentration (Agostino et al.
2005), utilization of consumers’ inertia (Choi and Wang
2009), development of managerial and political ties (Kotabe et al.
2011), and exploitation of innovation capabilities (Bartoloni and Baussola
2009).
Studies on persistence dynamics, however, have been mostly restricted to firms’ profitability. There are other aspects of performance that need thorough investigation in terms of their persistence over time. One such aspect pertains to the persistence of firms’ efficiency. It is usually contended that firms’ efficiency should be measured along with firms’ performance. This is because efficiency also provides an insight into the extent of inputs consumed to generate a level of output (Charnes et al.
1978). Various authors have studied the efficiency of firms in the context of both developed and emerging economies (Huther
1997). Most of these studies have primarily concentrated on analyzing the factors that impact the efficiency of the firms. However, there is not much work on analyzing the persistence of firms’ efficiency for both advanced and emerging markets.
Among the emerging markets, the Indian hospitality industry is rapidly emerging as the primary growth driver for the overall services sector. However, to the best of the authors’ knowledge, Indian hospitality and tourism firms have never been researched in terms of their efficiency persistence. Such gap becomes more obvious, as India is ranked 7th out of 184 countries, in the year 2019, in terms of travel and tourism’s total contribution to GDP and is ranked 2nd in the world in terms of the number of people employed in the hospitality and tourism industry (Statista
2021). The hospitality and tourism industry in India generated 8 per cent of the total employment opportunities in 2017 by providing direct and indirect employment to 41.6 million people.
1 Pillai (
2017) highlights the importance of Indian tourism in the region stating that the capital accumulation of tourism in India is substantially higher than the other countries in the region, Asia-Pacific, and world averages. India has attracted the attention of domestic and international tourists due to its unique portfolio of diverse tourism segments, namely, eco-tourism, pilgrimage tourism, medical tourism, rural tourism, heritage tourism, and luxury tourism.
2 The Government of India has taken several steps to make India a hub for global tourism including the allocation of a significant proportion of the federal budget to the promotion of the hospitality and tourism sector.
The Indian hospitality industry has witnessed enormous growth during the last decade, and the industry has maintained persistent growth. The industry presently contributes more than USD 23 billion in the form of international tourist receipts, and the figure is expected to exceed USD 27 billion by the year-end of 2020.
2 The prime growth drivers for the hospitality and tourism industry in India include better travel connections, enhanced international marketing efforts, and increased focus on medical tourism.
3 The increase in tourists’ arrival is expected to provide a growth impetus to hotels in terms of their overall occupancy rates and increased tariffs. Table
1 shows persistent growth in the industry’s direct contribution to the GDP (CAGR 14.05%) and total contribution to the GDP (CAGR 9.72%); the number of foreign tourist arrivals (CAGR 11.51%); and the capital investment outflows in the tourism sector (3.3%).
Table 1
– Economic Indicators of the Indian Tourism Sector (2009–2017)
2009 | 26.0 | 89.0 | 5.2 | 23.8 |
2010 | 31.0 | 103.0 | 5.8 | 29.9 |
2011 | 31.0 | 105.0 | 6.3 | 33.0 |
2012 | 36.0 | 116.0 | 6.6 | 31.3 |
2013 | 40.1 | 122.1 | 7.0 | 32.2 |
2014 | 41.6 | 126.8 | 7.4 | 35.0 |
2015 | 42.8 | 147.7 | 8.0 | 34.6 |
2016 | 71.7 | 208.5 | 8.8 | 36.6 |
2017 | 76.6 | 239.4 | 10.2 | 38.2 |
CAGR
|
14.1%
|
9.7%
|
11.5%
|
3.6%
|
Such contribution of the hospitality and tourism industry, as in the case of India, in terms of its socio-economic contributions, is critical for the firms operating in the industry to be more efficient and maintain a reasonable level of persistence efficiency. This is important for their competitive advantage and capacity to make sustainable contributions to the growth of the hospitality and tourism industry in India. The present study aims to meet this expectation gap and analyses the persistence of firms’ efficiency for firms operating in the tourism and hospitality industry in India. To study the persistence of firms’ efficiency for firms operating in the tourism and hospital industry in India, the study uses Data Envelopment Analysis (DEA) for the appraisal of the firms’ technical efficiencies; followed by the application of the dynamic panel regression estimation of the efficiency scores over a set of specific variables such as firms’ liquidity, age, size, leverage, capital expenditure intensity, and return on sales. The results convey the positive and significant persistence of the financial efficiency of hospitality and tourism firms in India. The results bring the argument for the creation of entry and exit barriers by firms to generate sustainable competitive advantage. The evidence suggests that Indian hospitality and tourism firms are creating entry and exit barriers, besides possibly exploiting the behavioural inertia of consumers to generate higher revenues. This should be helping certain firms to improve and sustain their financial efficiency. The broad results indicate, furthermore, that emerging market firms behave differently from their counterparts in advanced markets. The current results bear certain critical managerial implications for the Indian hospitality and tourism industry in the context of inefficient markets. It is imperative for hospitality and tourism firms to streamline their financial management policies, this involves controlling costs and devising methods for the enhancement of revenues. This can be accomplished by an in-depth analysis and rationalization of certain discretionary expenses such as marketing costs and costs of training and development. The results suggest the firm in the sector can create certain entry and exit barriers and devise ways of exploiting inertia in consumers’ behaviour that enable them to sustain their efficiency in the long run. The management response to changing consumer needs is required to increase financial efficiency. The study suggests regulators specifically focus on policies that can enhance the competitive dynamics of the industry. For this to happen, the licensing requirements must be eased and the opening the sector to foreign competition. This is besides taking measures to prevent firms from forming cartels and indulging in other restrictive practices.
The study makes several useful contributions to the existing body of knowledge. Given the scarcity of past studies on the persistence of efficiency in the hospitality and tourism industry, the study is the first of its kind that examines the persistence of efficiency for the tourism and hospitality firms operating in India. The study analyses the key factors that impact the efficiency of hospitality and tourism firms, the results of this study shall provide managerial implications for the tourism and hospitality industry. This is because managers can take decisions that can enhance the persistence of their firms’ efficiency. These results provide support to the argument on the creation of entry and exit barriers by firms to generate sustainable competitive advantage. Similarly, policymakers can frame regulations that force firms to adopt practices that increase their efficiency in the long run. The findings of the study shall also help the management, regulators and tho policymaking bodies in emerging economies in the region concerning hospitality and tourism firms to understand the need for the persistence of operating efficiency and to develop strategies to attain sustainable competitive advantage. The study applies two advanced quantitative techniques, i.e., DEA and dynamic panel regression to estimate the persistence of financial efficiency in the tourism and hospitality industry. The use of these techniques aids the estimation of the persistence of firms’ efficiency in addition to the persistence of firm performance. This is a significant methodological contribution in measuring tourism efficiency literature.
The remaining paper is organized as follows. Section 2 presents the literature review. Data and research methodology are described in Sect.
3. Empirical results are presented in Sect.
4. Discussion of the results is presented in Sect.
5. The final section concludes the paper and also presents its limitations and scope for future research.
2 Literature Review
Several research studies have contributed to the literature concerning the measurement of efficiency in the hospitality and tourism industry (Corne
2015). There have also been studies that have analyzed the efficiency of tourism destinations (Fuentes et al.
2012). It has also been contended that there exists a positive association between efficiency and the number of tourists arriving at a particular destination (Hu et al.
2010). However, the focus has now been shifted towards maintaining long-term efficiency and generating persistent revenues (Fuentes et al.
2012; Chaabouni, 2018). Therefore, the present paper seeks to expand the existing literature by significantly contributing towards the measurement of financial efficiency and its persistence. In addition, the study also makes an effort to determine the key factors that affect the efficiency of firms operating in the hospitality and tourism industry.
The theory of competitive environment suggests that it is not possible to sustain any kind of abnormal profits over a long-run period. This is mainly because any form of abnormal profit will lead to an increase in competition and thereby restore the normal profits. If this argument is indeed true, then there should be no persistence of abnormal profits in the long run. This should be especially true for firms that operate in highly competitive industries. However, many studies confirm the existence of positive persistence in profitability and other related measures of firm performance (Gschwandtner
2005; Hirsch and Hartmann
2014). Thus, it is a fact that certain firms can create and maintain superior performance in the long run. The usual arguments proposed for this particular occurrence are related to the creation of entry and exit barriers, and exploitation of behavioural inertia. A natural extension of this logic therefore should pertain to the persistence of firms’ efficiency in the long run. It should also be interesting to check the factors that impact firms’ efficiency. Hence, the following two sub-sections present a review of literature on the persistence of efficiency and factors affecting efficiency, respectively.
2.1 Literature on Persistence of Efficiency
It is mostly argued that there is a noteworthy relationship between profitability and efficiency. However, the nature of this relationship is not clear, and contrary empirical evidence is usually reported in applied studies ( Stierwald
2009). These studies also bring to the fore the need for studying the persistence of efficiency along with analyzing the persistence of profitability. The formation of entry and exit barriers and utilization of production and behavioural inertia, which are usually contended to be causing persistence of profitability, can also cause persistence of efficiency in the firms.
Many authors have analyzed the relationship between profitability and efficiency in the context of advanced markets. For instance, Stierwald (
2009) studies the impact of cost-efficiency on the profitability of Australian firms. The author performs the study for a sample of 961 Australian companies operating over the period 1995–2005. The author finds that efficiency has a significant and positive impact on firms’ profitability. The author further finds that the relationship does not vary greatly across different sectors. A few studies have tried to analyze the persistence of certain aspects of efficiency for developed markets. Wang and Huang (
2007) analyze the persistence of economic efficiency of Taiwan’s commercial banks. The authors find a moderate persistence of economic efficiency for the sample firms. Similarly, Chen et al. (
2009) examine the impact of efficiency on reward for CEOs of US banks over the period 1997–2004. The authors also analyze the persistence of efficiency of CEOs over the study period. The authors found that CEOs’ efficiency has a positive and significant impact on their overall compensation. The authors also find that efficiency scores of CEOs decreased over the study period. However, this subject remains less explored in the context of emerging economies.
2.2 Literature on Factors Affecting Efficiency
In recent years many studies have attempted to identify and analyse the factors that account for the differences in the efficiency of firms. These studies mostly posit that firm-specific factors such as age, size, growth intensity, marketing, and research and development have the largest impacts on firms’ efficiency (Singh and Gaur, 2009; Mia and Soltane
2016). Thus, efficiency is believed to be most affected by internal factors rather than by external factors (Kilic and Okumus
2005). Hence, there is a need to determine the key factors affecting efficiency for different firms operating in different industries.
Several researchers argue that the age and size of a firm are the key determinants of its overall efficiency. The underlying belief is that learning by firms acts as a costless and automatic method of improving efficiency. Sharma et al. (
2022) in their study on the persistence of the financial efficiency of the tourism and hospitality industry in China observed that even though creating efficiency in financial operations may require time, but advocated efforts by both new and established entrants as this ultimately provide consistent improved financial performance. Such clarity in long-term strategies is important for sustainable value creation for stakeholders in the tourism and hospitality industry (Sharma et al.
2022; Glancey
1998) posits that older firms enjoy the benefit of reputation which allows them to achieve higher profitability and efficiency. Similarly, Jovanovic (
1982) contends that large-sized firms are more efficient than small-sized firms, because of their ability to exploit economies of scale. However, certain authors also cite that age and size are inversely related to firms’ efficiency (Lundvall and Battese
2000). This is mostly because smaller-sized and young firms embrace the latest technologies to outperform the more established firms. Moreover, the organizational inertia in the older firms can also lead to their inefficiency (Sorensen and Stuart, 1999).
Apart from age and size, it is also generally argued that firm-specific variables such as leverage, marketing, growth, and accounting profitability have large impacts on firms’ efficiency (Mok et al.
2007). In addition, it has also been found that the levels of efficiency are also related to location, internationalization, audit service and other management variables (Parte-Esteban and Alberca-Oliver
2015). The proponents of these variables argue that firm-specific variables are the leading factors that cause organizations to be efficient or inefficient. Thus, there is a need for proper identification of the key factors that impact efficiency. This is even more relevant for firms belonging to emerging markets.
5 Discussion
The results of the present study convey the positive and significant persistence of the financial efficiency of hospitality and tourism firms in India. The results also show that the level of persistence is quite high for both OTE and PTE scores. These results are in sharp contrast to some of the previous studies that have found moderate to low levels of persistence in the efficiency (Chen et al.
2009; Galán and Pollitt
2014). The findings are also in contrast to some of the previous studies that have found a low level of persistence in certain other measures of firm performance such as profitability and market share (Gschwandtner and Hauser
2016).
These results lend support to the argument about the creation of entry and exit barriers by firms to generate sustainable competitive advantage. Thus, the empirical evidence suggests that Indian hospitality and tourism firms are creating entry and exit barriers. The evidence also shows that Indian firms could be exploiting the behavioural inertia of consumers to generate higher revenues; and that this, in turn, is helping certain firms to improve and sustain their financial efficiency. The high degree of persistence of financial efficiency also indicates the pursuance of prudent financial policies by a segment of hospitality and tourism firms. The broad results indicate, furthermore, that emerging market firms behave differently from their counterparts in advanced markets. This shows that evidence on advanced markets may not be valid for firms from emerging markets.
The current results bear certain critical managerial implications for the Indian hospitality and tourism industry. Since the study reveals that the majority of firms are in inefficient regions, it is imperative for hospitality and tourism firms to streamline their financial management policies. This should specifically involve controlling costs and devising methods for the enhancement of revenues. This can be accomplished by an in-depth analysis and rationalization of certain discretionary expenses such as marketing costs and costs of training and development. Furthermore, the results on positive persistence of efficiency highlight that the benefits of increased efficiency can be sustained in the long run. Hence, hospitality and tourism firms should focus on concentrated efforts for increasing and sustaining financial efficiency. This can be achieved in multiple ways. However, the most common modalities for achieving this are through the creation of entry and exit barriers and devising ways of exploiting inertia in consumers’ behaviour. Furthermore, there should be binding incentives for managers to explicitly increase financial efficiency by focusing on higher quality standards and by swiftly responding to changing consumers’ needs.
The findings of the present study also have certain useful implications for regulatory authorities. The findings of the high level of persistence of efficiency reveal that the intensity of competition is quite low in the hospitality and tourism industry in India. Thus, regulators should specifically focus on policies that can enhance the competitive dynamics of the industry. This can be achieved by allowing additional players to operate in the industry. For this to happen, the licensing requirements must be eased. Besides this, the opening of the sector to foreign competition can also go a long way in making the industry more competitive. Moreover, efforts should also be made to promote healthy competition by preventing firms from forming cartels and indulging in other restrictive practices.
6 Conclusions
Given the increasing role of the hospitality industry in the overall economic growth of an economy (Seetanah
2011; Schubert et al.
2011; Sharma et al.
2022), the nature and degree of persistence of the financial efficiency of firms are important considerations in developing a fundamental understanding of legitimate long-term industry growth. The present study analysed the persistence of financial efficiency of firms operating in the hospitality and tourism industry in India. The analysis was carried out for 32 publicly listed firms in the Indian hospitality and tourism industry. The time frame of 2009 to 2017 was considered to estimate the results. The study uses a combination of advanced techniques of DEA and dynamic panel regression analysis, a significant methodological contribution in measuring tourism efficiency. The results confirm significant and positive persistence of firms’ financial efficiency. The results also hint at a moderate to the high level of persistence of efficiency. These results indicate that there is low intensity of competition in the Indian hospitality and tourism sector. The results also signify that Indian hospitality and tourism firms can create certain entry and exit barriers that enable them to sustain their efficiency in the long run. The finding during the study can be read for both, new entrants as well established firms in the sector in the context of inefficient markets. As the results suggest a different response from the firm in the inefficient markets vis-a-vis their counterparts in the developed markets. The study has implications for the policymaker in the sector. The sector needs measures to encourage and protect the competitive dynamics of the industry. The easing up of the licencing, allowing the foreign and local entrants, besides measures against cartelisation. Such measures may make it imperative for the management of the firms in the sector to streamline their financial management policies. An in-depth analysis and rationalization of expenses such as marketing costs and costs of training and development are required to control costs and devise methods for the enhancement of revenues.
There are a few limitations of the current study that need to be mentioned. Although the study is conducted on an emerging economy with high growth in the tourism and hospitality sector, the results of the present work cannot be generalized to other industries due to the limitation of the sample However, there is tremendous scope for gaining more insights by replicating the study for other emerging economies which are experiencing similar growth patterns in the hospitality and tourism industry. The study has also considered one combination of inputs and outputs to generate the efficiency scores. However, future studies can extend the scope of this work by exploring more variables for estimating the efficiency of firms. In addition, adding qualitative inputs and outputs variables in the model, such as quality of services and customer satisfaction, can further increase the depth of the research.
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