Clancy 1998

Commodity chains, services and development: theory and preliminaryevidence from the tourism industry

Michael ClancySmith College, Northampton

ABSTRACT

Global commodity chains (GCC) present a fairly new and innovativeapproach for understanding the prospects for development among ThirdWorld countries within a larger environment characterized by global-ization. To date, most research using the framework concentrates on thechanging organization of manufacturing activities and helps to explainwhy the chains touch down where they do. This article concentrates ontwo related questions: what can commodity chains tell us about the globalization of services and to what extent do services suggest the needto refine the GCC approach? Both questions are examined by focusingupon tourism, the largest service activity in the world. Concentrating onhotels and airlines, the article demonstrates that tourism services havebecome internationalized in a manner unlike manufacturing activities.Most notably, organizational or governance structures do not conformto either buyer-driven or producer-driven models frequently predictedby GCC analysis. The article concludes that while commodity chainanalysis is useful for examining the political economy of tourism, especially in highlighting power and exchange relationships, it must bebroadened to ‘account’ fully for the unique organization of the globaltourism industry.

KEYWORDS

Development; commodity chains; services; tourism; globalization.

One recent and particularly promising analytical framework foraddressing current issues in international and comparative politicaleconomy is that of global commodity chains (GCCs). The approachrecognizes but also furthers the idea of globalization as a de�ning featureof the contemporary era by considering speci�c developmental conse-quences of the changing organization of capitalism at an international,regional and domestic level. Brie�y, commodity chains trace the socialand economic organization surrounding the global ‘life’ of a product,

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© 1998 Routledge 0969–2290

ranging from the �rst stage of raw material extraction through consump-tion of a �nished good. The key questions to be answered along theway are why particular processes or stages of production take place inspeci�c locales, how the industry in question is organized and governed,and, ultimately, where the economic surplus goes. In other words, atthe heart of the research agenda is the question ‘[w]here does the globalcommodity chain “touch down” geographically, why, and with whatimplications for the extraction or realization of an economic surplus’(Appelbaum and Geref�, 1994: 43).The GCC framework is particularly appropriate for development

studies, especially for those researchers interested in international in�u-ences upon local development patterns. It therefore challenges prevailingviews that development is primarily the result of domestic politics, especially policies of either ‘getting the prices right’ or manipulation ofmarket signals by an omniscient state in order to attain desirableoutcomes. In addition GCCs offer an alternative to homogenized inter-nationalist approaches by arguing that key global constraints andprocesses vary by industry or sector, as well as by region. Thus farstudies utilizing the GCC approach have offered in-depth examinationsof industries that have clearly been globalized in recent years, mostnotably footwear, apparel and automobiles (Appelbaum and Geref�,1994; Geref� and Korzeniewicz, 1990; Appelbaum et al., 1994; Lee andCason, 1994). These studies have uncovered varying international organizational structures within these sectors, along with speci�c impli-cations for local development. The goal of this article is to consider atwo-sided question: what can commodity chains tell us about the glob-alization of services, and to what extent do services suggest the need tore�ne the commodity chains analytical approach? I examine both ques-tions below by focusing on the largest non-�nancial service activity inthe world today, tourism.The basic argument proceeds in the following manner: the commodity

chains perspective, while offering unique insights regarding the polit-ical economy of development, fails to capture the nature of tourismactivities adequately. As a result, there is a need to expand the approachin order to accommodate the more diverse set of linkages and governingstructures that make up this commodity chain. Broadening the approachnot only ‘accounts’ for tourism but also makes GCCs more useful inunderstanding the increasingly complex and differentiated nature ofsectoral organization within the world economy. The remainder of thearticle is made up of four sections. The �rst discusses the GCC approachin more detail, distinguishing it from other theoretical approaches andhighlighting its uses. The second makes a case for studying services,especially tourism. The third examines hotels and airlines, two keytourism sub-sectors, emphasizing how existing labor and production

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processes differ from the governing structures suggested by GCCresearch. Finally, the article closes with suggestions for expanding andre�ning the approach and discusses avenues for further research.

I COMMODITY CHAINS AND GLOBAL CAPITALISM

The commodity chain approach may be traced initially to Hopkins andWallerstein (1986), who de�ne it as ‘a network of labor and productionprocesses whose end result is a �nished commodity’. It is therefore notsurprising that the framework is complementary to and consistent withworld-systems theory. Indeed much of the current GCC literature refersto the regional differentiations of core, periphery and semi-periphery inthe global economy, and generally uncovers production processes thatare consistent with world-systems expectations.1 The primary distinc-tion is that GCCs constitute a more bottom-up or integrative approachand in this sense the framework directly addresses the most commonweakness attributed to world-systems theory – that it is overly broadand excessively functional to the point of being totalizing (Skocpol, 1977;Brenner, 1977; Stern, 1988).A second major advantage for GCC approaches is that they provide

an alternative to dominant neo-classical (Balassa et al., 1986; World Bank,1991, 1993; Williamson, 1994) and statist (Haggard, 1990; Haggard andMoon, 1990; Amsden, 1989; Wade, 1990) approaches to explainingpatterns of Third World development. Each places heavy emphasis onthe domestic level, most often on government policy. In other words,development strategies, de�ned as a set of economic policies adoptedby state elites, primarily account for a range of developmental outcomesin Third World countries, including patterns of wealth and poverty,production pro�le and trade performance. According to these perspec-tives, as Evans (1992, 1995) summarizes, the state takes on dominantexplanatory power, serving as either problem or solution for develop-mental outcomes. The GCC framework explicitly challenges state-centricanalyses. Although Geref�’s (1995) suggestion that today ‘globalizationhas reduced the theoretical centrality of nation-states’ as the key unit ofanalysis in most studies of north–south international political economyis contentious, two points appear to be clear. First, ‘the state’ by itselfcannot completely account for development outcomes; and second, theinternational environment in which development is embedded ischanging.The commodity chain approach engages in encompassing comparison

(Geref�, 1995; Tilly, 1984) that begins with the global production process.Local development patterns must be seen in relation to that largerprocess. This does not mean these patterns are simply determined bythe requirements of the system or that GCCs wholly discount domestic

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factors (Lee and Cason, 1994) such as state policy. Instead, the approachmerely recognizes that external linkages play an increasingly importantrole in affecting local development outcomes. The explanatory aspect ofcommodity chains can be found in three primary dimensions.2 First, aninput–output structure that is both sequential and temporal identi�esthe various steps of the production process, ranging from raw materialsto �nal assembly, marketing and sometimes even consumption. Second,a spatial dimension examines where different stages of productionactually take place. This also involves an explanatory element in that itasks why nations or regions play a particular role in the division oflabor (or for that matter do not). Finally, an organizational or governingdimension examines structural characteristics of the industry itself byidentifying ownership patterns as well as transactions between agentsalong the commodity chain.This last factor is especially crucial for GCC research as well as for

the purposes of this article. Identi�cation of the underlying global organization of an industry plays a central role in uncovering basicpower relations within the chain as well as the allocation of economicsurplus. In short, the governance structure identi�es who the primarydecision makers are within an industry, and also points to where mostof the pro�ts go. The implications for Third World development areobvious. As capitalist production becomes more internationalized anddecentralized, more and more Third World countries are gainingfootholds in economic activities that once were con�ned to the FirstWorld. At the same time it is the particular export niches or links inthe chain that these countries occupy that largely determine wealthcreation and therefore developmental possibilities (Geref�, 1996: 113).Researchers have thus far uncovered two distinct archetypal gover-

nance structures: ‘producer-driven’ and ‘buyer-driven’ commoditychains. The former constitute those chains where large, vertically inte-grated transnational corporation (TNCs) internalize most aspects ofproduction, distribution and marketing processes. Ownership andcontrol by the TNC are therefore present at most, if not all, nodes inthe chain. Producer-driven GCCs are most commonly found in capital-or technology-intensive industries such as automobiles, aircraft andcomputers where barriers to entry and exit are high and economies ofscale exist (Geref�, 1995; Geref� et al., 1994).In contrast, buyer-driven commodity chains are marked by much

more �uidity and decentralization. Typically TNC-based retailers,marketers and trading companies set up and maintain arm’s-length rela-tionships with producers who are usually located in the Third World.In other words, these �rms externalize actual production and insteadconcentrate on design and marketing. The TNCs seldom own any oftheir own factories, and instead establish relationships with separately


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owned, but often nearly captive suppliers. These decentralized buyer-driven chains are most commonly found in labor-intensive activitiessuch as apparel, footwear, toys and consumer electronics (Appelbaumand Geref�, 1994; Geref� and Korzeniewicz, 1990). Here competition is�erce, technology and capital requirements are low, few entry barriersexist, and pro�t margins – at least at the production node(s) of the chain– are very low.Perhaps the most innovative aspect of the GCC approach is empha-

sizing the growth of buyer-driven chains in the world economy today.It suggests that the model of global capitalism organized around large,integrated corporations may be obsolete in this age of globalization.Instead, ‘hollow’ corporations may be the wave of the future. One ofthe best case studies of buyer-driven commodity chains is MiguelKorzeniewicz’s (1994) work on Nike, which is detailed here for illus-trative purposes. He demonstrates that for a �rm that is associated witha tangible product, the athletic footwear giant is in many ways a shellcorporation. Only 4,000 employees work for the $3 billion company (in1991), and almost all serve in an advertising, design or sales capacity.Outside of design, today no Nike employee actually makes shoes.Instead the company has established a series of exclusive productioncontracts with foreign-owned producers located in the Third World.Athletic footwear, like most buyer-driven commodity chains, is an

industry marked by the need for considerable �exibility in production.Organizing production apparatuses in this manner allows Nike torespond rapidly to a very segmented and �ckle market where consumertastes and demand change quickly. This also means, however, that thebrunt of the costs and risks are borne by local producers. Flexibleproduction often translates into frequent lay-offs for workers, as well asrelocation of manufacturing if wage pressures grow. Nike, for instance,has ‘relocated’ factories, through changing buying agreements, fromJapan to South Korea to Indonesia and China over the past two decades.3

The prospect of losing the Nike contract would be devastating forowners and managers of manufacturing facilities, as captive suppliers.The implications for the extraction of economic surplus are also clear.Most of the material bene�ts in buyer-driven commodity chains �ow tothe buyer. The unequal exchange relationship, both at the class andregional level, therefore is made clear by GCC research.Several conclusions may be drawn from the Nike case and applied

more broadly to buyer-driven commodity chains. First, a clear geograph-ical division of labor exists. The more sophisticated and high value-added activities of the production cycle, including design, marketingand distribution, remain at the core. Manufacturing, which constitutesmainly labor-intensive light assembly, is centered in the semi-peripheryand periphery. The extraction of economic surplus mirrors this division

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of labor. Most of the bene�ts deriving from the high wholesale and retail mark-up in athletic shoes, apparel and toys �ow to the buyers,which concentrate on the �nal – and by far most lucrative – nodes ofthe commodity chains (Geref� and Korzeniewicz, 1990). Finally, at thecountry level, national development patterns or production pro�les arenot simply the product of state development strategies, but instead lieat the intersection point of global industrial structures, state policies andinternational and local �rm strategies.

I I THE CASE FOR SERVICES

While the GCC approach is promising for uncovering underlying powerand exchange relationships present in the ‘new’ global economy, itsapplication has mainly been con�ned to manufacturing. Service indus-tries have thus far been all but ignored by the framework, except whenproducer services are part of the larger manufacturing process.4 This is,however, common in development studies. Services are largely invisibleand dif�cult to de�ne. In addition, their eclectic nature makes theoret-ical generalization more dif�cult. Computer software and �nancialservices, for example, are traditionally high value-added activities while‘commerce’, a nondescript but often large subcategory falling under theheading of services, may refer to near subsistence-level vending ininformal markets. A second problem is that services are often treatedas constituting separate activities from other sectors of the economy.Many services, however, are intricately bound to other sectors of theeconomy. Advances in producer services, for example, frequentlycontribute to productivity gains in manufacturing. GCC approaches dorecognize this aspect of the service economy. Mapping commoditychains involves tracing the entire transformative aspect of a product,which usually involves a combination of manufacturing and serviceactivities. Services here are particularly important, especially in increas-ingly fragmented buyer-driven chains (Rabach and Kim, 1994), but theyare only taken seriously to the extent that they add value to a good.Consumer services are all but ignored.The most compelling reason to study services from a development

standpoint is empirical: services are simply too large and important tobe ignored. Relatedly, globalization has signi�cantly affected produc-tion, ownership and trade of service activities. Perhaps the greatestchange has taken place in trade. While services were once thought tobe non-tradable due to the need for close proximity between producerand consumer,5 today international trade in services amounts to morethan $1 trillion. While most trade in services takes place within the core,its importance in the periphery and semi-periphery is growing (Madeley,1992; World Bank and UNCTC, 1990). Just as trade in services has


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increased markedly in recent years, so has direct foreign investment(DFI). By 1990, services accounted for more than half of annual DFI�ows and nearly half of the world’s DFI stock (UN, 1993). One resulthas been the growing concentration of ownership by service-relatedTNCs. In addition to direct investment, TNCs have expanded their inter-national operations through non-equity agreements with local �rms. Inshort, growth in trade, investment and other transnational alliances indi-cates that services have undergone globalization. These changes haveimportants implications for our understanding of international politicaleconomy.

Tourism services

Perhaps the most signi�cant problem in studying services is their eclecticand widely varying nature. Rather than any attempt at broad general-izations, a more useful and empirically accurate approach focuses onindividual service activities. Tourism is an obvious choice for severalreasons. First, tourism constitutes the largest service industry in theworld,6 and also accounts for the single largest item in internationaltrade of services.7 Recent data, reported in Table 1, show internationaltourism to have been a $380 billion business by 1995. They also demon-strate the rapid growth of global tourism in recent decades. This growthhas not been con�ned solely to the core. Linda Richter (1989) reportsthat by the end of the 1980s more than 125 nations considered tourismto be a major industry where the activity had become a primary gener-ator of employment and foreign exchange. This is especially the casefor developing countries. While several small Third World destinationshave long been attractive to international tourists, today more than 28percent of arrivals and 25 percent of all cross-border tourist expendi-tures take place in developing countries (WTO, 1996). Increasingly,governments throughout the Third World have moved aggressively tocapture part of this $95 billion market. Finally, tourism is also in themidst of internationalization. Aside from growth in international tradeand foreign investment, the industrial organization of tourism haschanged rapidly in the past two decades. The sector has become muchmore centralized and integrated at the global level. TNCs have come topredominate in hotels, airlines, travel agencies, tour operators andrestaurant chains. Technology, especially information technology, hasalso fundamentally altered the nature of the industry. For instance,computer reservation systems (CRS) allow travelers to plan almost everyaspect of a journey at once. They also link major �rms offering trans-port, lodging and entertainment (Bressand, 1989; Lanvin, 1993). Oneresult is that the separate components of tourism have become muchmore closely tied together.

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For these reasons, tourism is particularly appropriate as a case fromwhich to evaluate a GCC approach. Mapping the tourism commoditychain, however, is particularly dif�cult for two reasons. First, the sequen-tial and spatial nature of tourism differs from that of manufactures.Production and consumption, for example, take place simultaneouslyand in the same locale. Therefore one cannot as easily trace certain linksin the chain as taking place in one region in the world and then beingexported to another, as is the case in many buyer- and producer-drivenchains. Instead the industry is organized much more horizontally, withidentical productive and consumer links existing throughout the world.In fact, the overwhelming majority of tourism remains domestic innature. International tourism – de�ned by the World TourismOrganization (WTO) as the provision of tourism services for travelerswho cross international borders and remain for at least one night andless than one year– accounts for 560 million arrivals and $380 millionannually (WTO, 1996), but that amounts to merely a fraction of totaltourism expenditure. What is also clear is that within internationaltourism, production and consumption remain largely a First Worldactivity. As Table 2 demonstrates, more than 50 percent of expendituresfrom international tourists take place in Europe, and combined with theUnited States that �gure increases to nearly 70 percent. All top ten


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Table 1 World tourism arrivals and receipts

Arrivals Variation Receipts VariationYear (thousands) % (US$ millions) %

1950 25,282 – 2,100 –1960 69,320 10.6 6,867 12.61965 112,863 10.3 11,604 11.11970 165,787 8.1 17,900 9.11975 222,290 6.1 40,702 18.01980 287,787 5.3 103,535 20.71985 329,616 2.8 117,374 2.41986 340,650 3.4 142,067 21.01987 366,754 7.7 174,232 22.61988 401,710 9.5 201,540 15.71989 430,993 7.3 218,369 8.41990 459,212 6.6 264,714 21.21991 465,844 1.4 271,880 2.71992 503,258 8.0 308,745 13.61993 517,607 2.9 314,249 1.81994 545,878 5.5 345,540 10.01995 561,027 2.8 380,693 10.2

Source: World Tourism Organization (1996).

spenders and eight of the top ten tourism earners are First World coun-tries (WTO, 1996).A second dif�culty in mapping the chain is that tourism does not

technically constitute one single industry; instead, it is made up of aseries of overlapping services and goods ranging from accommodationto selling handicrafts. The two most lucrative sub-sectors of tourism,however – hotels and airlines8 – are services and are prime candidatesfor study from a GCC framework. The problem, however, as I demon-strate below, is that commodity chains fail to capture fully theorganizational complexities associated with the tourism ‘commodity’.

III TOURISM AND COMMODITY CHAINS

A GCC approach to tourism could emphasize one of two sets of factors.First is a geographical focus relating back to where and why commoditychains ‘touch down’.9 An alternative is to concentrate on organizationalor governing structure at the global level in order to highlight power and exchange relationships. The two are not mutually exclusive but forthe sake of brevity and theoretical clarity this article is con�ned to the latter. This focus also holds the advantage of emphasizing the develop-mental opportunities and constraints associated with the activity throughidentifying the prevailing global division of labor found within these sub-sectors. Most global tourism expenditure is directed toward trans-portation and lodging. As the discussion below demonstrates, the gov-erning structures of the two sub-sectors in question here vary and neitherconforms purely to buyer-driven or producer-driven commodity chains.

Hotels

The hotel industry constitutes a unique economic activity in that it hasreally become two businesses: providing hospitality services and real

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Table 2 International tourism share by regions (1994)

Arrivals ReceiptsRegion (thousands) World share ($ millions) World share

Europe 329,807 60.4 173,182 50.1Americas 107,049 19.6 95,733 27.7East Asia/Paci�c 76,948 14.1 61,915 17.9Middle East 9,868 1.8 5,107 1.5South Asia 3,946 0.7 3,166 0.9

Source: World Tourism Organization (1996).Note: Percentages do not equal 100 due to rounding.

estate. The two were once combined, but became separable with theappearance of chains. Hotels, like much of the global travel industry,began to form a clearer organizational structure after the Second WorldWar. Prior to the war most hotels and motels were independent oper-ations. Owners were operators, and they mainly catered to businesstravelers (EIU, 1988). After the war, however, the industry was markedby the growth of association through chains, and by internationaliza-tion. Today, as Table 3 demonstrates, tourist class hotels are dominatedby TNC-oriented chains. It shows that as of 1995, nineteen of the twentylargest �rms, measured by number of rooms, were based in core coun-tries. The twentieth was located in Hong Kong, a British colony until1997.10

Two overriding factors condition the global organization of hotelchains: the nature of the service product itself, which creates �rm-speci�ccompetitive advantages, and the ability to separate these advantages


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Table 3 World’s largest hotel chains, 1995 (based upon room offerings)

Rank Firm Country Rooms Hotels

1 HFS, Inc.a USA 509,500 5,4302 Holiday Inn WW USA 369,738 2,0963 Best Western International USA 282,062 3,4624 Accor France 268,256 2,3785 Choice Hotels USA 249,926 2,9026 Marriott Corp. USA 198,000 9767 ITT Sheraton USA 129,201 4148 Hilton Hotels Corp. USA 90,879 2199 Promus USA 88,117 669

10 Carlson/Radisson/SAS USA 84,607 38311 Hyatt Hotels USA 79,483 17212 Inter-Continental UK 61,610 17913 Hilton International UK 52,063 16114 Forte Hotels UK 49,183 27015 Grupo Sol Melia Spain 46,825 18516 Club Méditerranée France 45,205 15017 New World/Renaissance Hotels Hong Kong 45,104 14018 Westin USA 40,074 8219 Société du Louvre France 32,926 51120 La Quinta Inns USA 30,000 240

Source: Hotels (1996).Note: Country reference refers to location of hotels chain headquarters. It does not

include the locale of the parent (e.g. Holiday Inns by Britain’s Bass PLC, Westin by the Japanese Aoki Corporation until late 1995).

a HFS, formerly Hospitality Franchise Systems, held Ramada, Super 8, Howard Johnson, and Days Inn brands as of 1995.

from actual ownership. Among the most important assets hotel chainsseek to create is a reputation for quality. While this is not unique tohotels, of course, this reputation or trust is critical in the hospitalitybusiness: trust emerges from the nature of the hospitality product itself.A stay in a hotel room is an ‘experience good’, meaning that unlikemost commodities, it cannot be inspected before being consumed.11

Potential customers therefore undertake extra risk in purchasing theproduct and often seek ways to contain that risk. One such strategy isto rely on �rm reputation. In other words, trust may be embodied in abrand name, and that name makes a particular difference in the case ofhotels. This factor initially created incentives for the formation of chains,and also encouraged chains to expand abroad. Trust becomes especiallypowerful where customers are in an unfamiliar environment such as aforeign country. In short, most mass tourists favor a name they know.A second de�ning feature for hotels is that strategic assets held by

�rms may be unpackaged and separated from ownership. The resulthas been expansion of hotel TNCs largely through alternatives to equityparticipation, especially since the 1960s (Dunning and McQueen, 1982;UNCTC, 1982, 1990). This feature produces signi�cant problems for aGCC approach as it is presently conceptualized. Most signi�cant, neitherthe producer-driven nor buyer-driven models fully capture the realityof the organization of international hotels. Instead, the industry is woventogether through a series of contractual agreements. These resemblebuyer-driven models but contain important differences. Most important,hotel chains primarily sell rather than buy. In buyer-driven GCCs, core�rms subcontract out production itself while concentrating on highvalue-added activities such as design and marketing. The actual product,however, is purchased from a supplier. Hotel chains also tend to operateat arm’s length, but commonly enter into ‘production’ agreementsthrough selling or renting out their trusted name to hotel owners. It isthe owners who provide much of the hospitality product to customersthrough rooms, beds and other amenities.Again, this is not to argue that hotels have nothing in common with

buyer-driven chains and in fact this distinction between buying andselling should not be overdrawn. Many big apparel buyers, for instance,also engage in selling through franchising and licensing,12 and hotelchains also buy from suppliers. In addition, individual hotel chains havehistorically pursued very different strategies,13 although increasinglymost have come to concentrate on selling nodes. On the other hand,hotel chains mainly operate through offering expertise to hotel ownersin exchange for payment. The basic distinction, then, is that hotel chainsprimarily engage in selling, not only at the retail level but also to thosewho contribute so much to the hospitality product, the owners of prop-erties themselves.

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The most common forms of non-equity expansion into new marketsfor hotels have been through management contracts and franchising.14

Each is contractually based, and results in a fee being paid to the chainby the owner of the hotel. Franchise agreements vary, but usuallyinclude use of the chain’s name, trademark and other services such asaccess to a toll-free reservation system in return for a �xed fee alongwith other percentage-based charges. The chain normally provides addi-tional operating expertise, often in the form of manuals and otherinformation, while requiring the individual hotel to maintain certainstandards.15 In management contracts, responsibility for various aspectsof operation of the hotel fall to the chain itself.Standard management contracts usually contain the following fees to

be paid to the chain:

l basic fee: usually a percentage of total revenue from all departments,ranging from 3 to 7 percent of revenue;

l incentive fee: usually 8–20 percent of ‘adjusted’ gross operating pro�t;l marketing fee: commonly 1 percent of total sales, sometimes waived

internationally;l reservation fee: linked to CRS, these vary widely, and can be

percentage- or �at-rate-based.16

Management contracts have become more common and standardizedover the past twenty years. One executive of a chain indicated that ‘itis joked that if you take the cover page off a management contract youcan’t tell the difference between one company’s and another’.17 Franchiseagreements, which are usually geographically based and contain theright to use a trademark, often a reservation system, and some technicalsupport, are somewhat similar. One chain receives the following fran-chising fees: 4–5 percent of gross room sales, a 2.5 percent marketingfee and $11 per reservation through the chain’s CRS.18 Finally, theseagreements may be much broader in scope, for example in the form of‘master franchises’. Here the rights to the company name may be rentedon a regional or national basis. In Mexico, for instance, Holiday Inn oncegranted a master franchise for the entire country to a local operator.19

By expanding globally through these means, today many hotel chainsmay in fact only be called chains in the sense of loose associations.20

Some share only a name and single, centralized toll-free telephonenumber. From the standpoint of the hotel chains, however, the terms ofthe franchising or management agreements are usually quite lucrative:they are generally short in duration, fees paid to the TNC tend to bebased on gross receipts rather than pro�ts, and costs associated withrequired remodeling or redecorating generally fall to the owners.21

Although individual �rm strategies vary, �rms are generally strati-�ed by reputation for quality and prestige and similar chains tend to


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pursue similar global strategies. This is another feature that hotels holdin common with many buyer-driven chains, as is demonstrated byGeref� (1994). Among hotels, the more up-scale chains tend to take amore ‘hands on’ approach through management contracts, where mostaspects of hotel operation are either in direct control of, or are closelywatched by, the chain in an effort to ensure the highest quality. Incontrast, budget-oriented hotels are usually franchised by the chain anddaily operations are monitored only periodically and at arm’s lengththrough such mechanisms as surprise inspections. Another strategy thathas become more widespread in recent years is multiple branding bychains in order to accommodate the rapidly segmenting hospitalitymarket. Marriott, for example, now offers nine different brands thatrange from luxury to economy class.The most signi�cant work on the structure of TNCs in the international

hotel sector has been done by Dunning and McQueen (1982; UNCTC,1982). Their research shows that the accommodation sector is becomingincreasingly concentrated as chains expand worldwide. Moreover, sincethe 1970s the chains have accelerated non-equity-based expansion, espe-cially into developing areas. Exactly where these GCCs have toucheddown may be traced to a number of factors, including �rm strategy, touristdemand, individual state policy, political instability and even local crimerates. The form of expansion, however, is more the product of the industrycharacteristics and resulting �rm strategy, speci�cally the shift towardfavoring non-equity participation. Again, these patterns of expansion forhotel chains hold certain commonalities with buyer-driven commoditychains. For example, as a result of these contractual alternatives, TNCshave been able to skip over barriers to DFI in the semi-periphery andperiphery (Witt et al., 1991). More often, however, unpackaging strategicassets has been the favored strategy of chains regardless of state policytoward DFI in the host country. More important for the hotel chain is �exibility and avoiding the high initial capital outlays associated with construction of new hotels or purchase of existing ones. The frequentresult is control of individual hotels by TNCs with little or no sunken costs or signi�cant risk to the parent �rm. Moreover, chains do not simply concentrate on the most lucrative and least competitive links in theproduction chain; in some ways they produce little outside of the promiseto maintain their own reputation for reliability.In many ways power and control held by hotel TNCs is tighter than in

buyer-driven chains. Because the name recognition factor is so importantin hotels, especially to masses of foreign, middle-class tourists who seek to contain their own risk, nations outside the core have little choice but todeal with TNC chains when attempting to promote tourism as an export.As a result, the chains occupy the most lucrative links of the commoditychain while simultaneously minimizing their own risk. Meanwhile much

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of the capital is supplied by peripheral governments, in the form of infra-structure and tax holidays,22 and private investors who own hotels.Although there is evidence that some local �rms have been able to moveup the export ladder from hotel owners to operators and franchisers, FirstWorld-based TNCs continue to occupy most of the top rungs.23

Airlines

Air transport resembles other technologically sophisticated and capital-intensive sectors. Capital and technology requirements create high entrybarriers. Start-up costs are high due to the need for expensive equip-ment and a skilled labor force. In addition, production is fairly in�exiblein the short term, although it may be adjusted in the medium and longterm. As a result, excess capacity is frequently a problem. Economies ofscale exist, but �xed costs are also high and tend to contain a cyclicalspike re�ecting the cost of updating equipment (O’Connor, 1989;Morrison and Winston, 1995; Petzinger, 1995). Finally the nature ofproduction means that all commercial passenger aviation is regulatedin some way, if only for scheduling, air traf�c control, maintaining take-off and landing slots, gates at airports or general safety. All of thesefactors suggest that the industry would be marked by oligopolisticcompetition, and, more important for purposes here, that structurally itwould resemble other producer-driven commodity chains.In fact most markets – that is individual routes – are con�ned to a

few producers, but the international division of labor for commercial airservice is more the product of international governance and regulationthan industry characteristics. Because of high costs combined with theunique and strategic nature of air transport, �rms have been the subjectof tight domestic and international controls that have produced signif-icant amounts of state ownership, simultaneous national oligopolies andcontrolled international competition.International air transport is uniquely strategic in several ways:

whether carrying humans, mail or other cargo, the �rms, equipment andpeople not only reach borders (as in shipping) but penetrate what hascome to be recognized as sovereign air space controlled by nation-states.Because national defense routinely involves the monitoring of air space,governments require that commercial air patterns be easily identi�ableand regularized. National defense concerns have also led governmentsto pay particular attention to the air transport industry. Governmentstend to favor developing some type of national carrier or carriers, inpart due to the added reserve capacity for moving troops and materielin times of national defense needs, and in part for the spillover effects.24

The movement of considerable numbers of people also involves safetyconcerns and invites international and domestic regulation. Finally, the


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oligopolistic nature of the industry invites government attention. All ofthese factors have played a role in producing the rather unique devel-opment of the international airline industry during the last �fty years.Airlines, quite simply, are not like other industries. This is especiallythe case internationally where trade and investment are closely regu-lated. Commercial airlines must seek special permission resulting fromgovernment negotiations in order to serve a foreign country. Investmenthistorically has been even more limited. Unlike most industries whereTNCs may enter for the purpose of serving the domestic market, thispractice is all but prohibited in commercial air service. These two factorsmake airlines unique compared not only to hotels and other services,but also with respect to most other economic activities.Tight regulation has been the norm for international air transport since

its inception early this century. International commercial air travel hasbeen governed by a �fty-year-old system of rules and norms created atthe Chicago Convention in 1944 (Jönsson, 1981; Doganis, 1993). Theconvention was called primarily in order to �nd a way to govern thegrowing air transport sector and produced the so-called third and fourthfreedom rights that today allow for international air traf�c.25 The existingsystem re�ects the fact that in addition to carrying out business, manyairline companies in effect serve the role of showing the national �agabroad. Globally, in fact, many airlines are partially or fully owned bynational governments.The two most signi�cant regulations emerging from Chicago were

(and are) cabotage and bilateral air agreements. Cabotage, which existedearlier but was legitimized at the Chicago Convention, prohibits foreigncarriers from serving solely domestic routes. While pure cabotage hasbeen chipped away at since, it continues today and forms the economicbasis for the existence of domestic airlines in most countries in theworld.26 Bilaterals, also known as Air Service Agreements (ASAs), referto the two-country negotiated agreements that govern all air transportbetween nations.27 The pacts, which legally hold the status of treaties,set the routes, frequencies, capacities and fares for airlines travelingbetween the two countries. Without a bilateral agreement, no commer-cial air transport takes place between any given two countries. One ofthe most important early bilaterals was made between the United Statesand Britain, stemming from negotiations held in Bermuda in 1946. Othersimilar agreements, known as Bermuda-types, have followed and arecharacterized by being more liberal than other bilaterals in that theyusually leave many of the details over �ight frequency and passengercapacity to the principal airlines involved, subject to governmentapproval.28 Even though air transport has grown phenomenally since1944, bilaterals continue to govern air transport, and more than 1,800exist today (Findlay, 1990).

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While the Chicago Convention and the resulting practice of bilateralASAs distinguish air transport from many other services, three otherdevelopments since then have also heavily in�uenced the industry. First,common government practice severely limits foreign investment indomestic airlines. Again, this results mainly from national securityconcerns and a desire to show the �ag abroad. Second, the InternationalAir Transport Association (IATA), an airline trade association, wasformed shortly after the close of the Chicago Convention and quicklygained the ability to set international fares. This was especially the casein Bermuda-type agreements, which left such details to the airlinesinvolved (Sochor, 1991; Golich, 1990). As a result, pricing for interna-tional �ights followed a strict regulatory regimen: fares were set byIATA members �ying speci�c routes, which had themselves been deter-mined by individual governments, stemming from the terms negotiatedin ASAs. Frequently airlines agreed to share revenues on routes, as wellas other aspects of providing service (e.g. ground crews, catering, etc.).This classic cartel arrangement lasted for thirty years and only began

to break down due to the �nal development, deregulation. The dereg-ulation of the US market in 1978 brought with it pressure for inter-national liberalization. The US government, representing several of thestrongest private carriers and holding the key to the largest domesticairline market in the world, used both assets to renegotiate several bilat-erals on more liberal terms. Other nations subsequently followed suit.29

Gradually the ability of the IATA to set international rates deterioratedas a result of competitive pressure.30 In the last decade liberalization hasaccelerated throughout the globe, with the United States taking the leadthrough pursuing new bilateral agreements with several key nationswithin Europe and the western hemisphere.The impact of the postwar bilateral system is subject to some debate.

Unlike other transportation sectors such as shipping, for instance, openregistries or �ying ‘�ags of convenience’ are not an option and one likelyresult has been that the safety record of air travel has been compara-tively strong. Yet by lying outside of the GATT/WTO, air transport hasalso been among the most protected industries in the world (Findlay,1990; Golich, 1990). As a result, commercial carriers operate in a uniqueenvironment: as Golich (1990) and others have pointed out, on the onehand they are international businesses that form strategies based onpro�t maximization. On the other, ownership often includes govern-ment participation, operations take place in a heavily regulated market,and at times airlines become embroiled in foreign policy disputes.31

From a GCC standpoint commercial air transport should conform toa producer-driven model due to its capital- and technology-intensivenature, the existence of high entry barriers and the tendency towardoligopoly, and in fact this is the case. What the model does not explain


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well, however, is the existence of national carriers rather than core-baseddominant carriers throughout the world. Producer-driven chains arecommonly marked by oligopolistic competition among mainly core-based TNCs throughout the globe. Participation in the semi-peripheryand periphery is frequently con�ned to work in wholly ownedsubsidiaries or sourcing within lower and less lucrative links in thecommodity chain. Within airlines, however, most countries possess theirown airline industry where airline TNCs are all but precluded from thedomestic market and have less than an overwhelming share of inter-national traf�c. This is due mainly to the strategic nature of the industry– and its broad recognition as such by most governments – and in prac-tical terms directly results from cabotage and ASAs.To be sure, deregulation and privatization have produced important

changes of late. Legal and regulatory restrictions continue to limit bothcabotage rights for international carriers and majority foreign owner-ship in most countries, but airlines have engaged in alternativestrategies. Many integrated with other tourism activities, especiallyhotels, travel agencies and car rental �rms, at a fairly early stage.32 Morerecently several airlines have also pursued a series of strategic alliancesthat include cross investment and �ight coordination through codesharing. Code sharing, which links passengers �ying on more than oneairline, has recently grown among domestic feeder airlines with majorcarriers in the USA but also frequently links separate airlines in differentcountries. A passenger buying a Royal Dutch KLM ticket to South Bend, Indiana, from Rotterdam, for example, may be channeled intoNorthwest’s hub at Detroit and then �own Northwest on the �nal leg,where KLM has no landing rights. The ticket itself, however, shows thepassenger traveling via KLM throughout. Code sharing is a response tolimitations on both foreign investment and cabotage.33

Finally, many compete through CRSs. CRSs display routes and faresfor travel agents and others who book travel and they also carry infor-mation on hotels, car rentals and other tourist-related services. All majorCRS systems are owned by airlines or airline groups. AMR, for example,the parent of American Airlines, also owns SABRE, the most widelyutilized CRS in the world. When a travel agent uses the SABRE reser-vation system to book a passenger �ight on United Airlines, for instance,United pays a fee to SABRE. In recent years SABRE has been the mostpro�table division in the company.34 Frequently they have been associ-ated with screen bias, where the parent service provider is displayedmore prominently than competitors. Whether CRS expansion is a meansof cooperation or competition is a question of some debate but it is clearit is a major source of gaining market share and pro�t for carriers. By1988 the US Department of Transportation calculated that domestic CRSsearned pro�ts of more than $1 billion (Lundberg et al., 1995).

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To the extent that airlines are becoming more and more global inscope – that is, not just adding more international destinations but alsoaccelerating cross investment, horizontal and vertical integration andlicensing or selling of technology – the most dominant emerging airlinesin recent years are core based. Table 4 demonstrates that all the top tenand sixteen of the twenty largest carriers were based in core countriesin the early 1990s. As deregulation continues globally, airlines havebegun to look more and more like �rms in other producer-driven chains, and despite some remaining limitations the largest and mostaggressive �rms are expanding into the semi-periphery and periphery.Despite this the airline industry hardly resembles other producer-drivenchains in that core �rms neither dominate domestic markets in theperiphery and semi-periphery nor use them as export platforms. In the single busiest core-peripheral market, that of the United States andMexico, US carriers were precluded from serving the Mexican domesticmarket and have held roughly half of the international market betweenthe two countries over the past twenty-�ve years (Jiménez Martínez,1990; SCT, 1990).


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Table 4 World’s largest scheduled airlines, 1995 (scheduled passengerkilometers �own, domestic and international)

Rank Airline Country Killometers (million)

1 United Airlines USA 179,4992 American Airlines USA 165,2473 Delta Air Lines USA 136,9624 Northwest Airlines USA 100,6035 British Airways UK 93,8606 Japan Airlines Japan 68,1147 Lufthansa Germany 61,6028 USAirways USA 60,5389 Continental USA 57,131

10 Qantas Australia 51,87011 Air France France 49,52412 Singapore Airlines Singapore 48,40013 KLM Netherlands 44,45814 All Nippon Airways Japan 42,85515 TWA USA 40,07416 Cathay Paci�c Hong Kong (China) 35,32317 Korean Air Lines South Korea 33,78218 Alitalia Italy 31,74819 Thai Airways Thailand 27,05320 Air Canada Canada 26,341

Source: IATA (1996).

IV CONCLUSIONS

One of the primary claims made by commodity chains research is thatidenti�cation of buyer-driven governance structures demonstrates a newdecentralizing tendency within global capitalism. Attention to services,however, suggests that decentralization is not completely new and thatit takes on more than one form. The two primary sub-industries asso-ciated with tourism present clear challenges to current commoditychains theorizing. The organizational or governance structure associatedwith each economic activity varies from the two typologies – producerdriven and buyer driven – proposed by the approach. By no means doesthis challenge the general validity of the GCC framework. Instead thepoint here is to argue for broadening the approach.Doing so requires attention to the alternative organizational structures

that exist in global industries today. The lesson stemming from airlinesis relatively simple and straightforward: there is a necessity for payinggreater attention to state intervention at a global level in shaping industrycharacteristics. Although present GCC theorizing would accuratelypredict the form of the airline commodity chain, it would be lesssuccessful in addressing its substantive nature, especially the wide-spread survival of national �rms outside of the core. Too often, acommodity chain governing structure is posited from industry charac-teristics alone. State policy is addressed, but mainly to argue why nodesof a chain touch down where they do. In airlines, however, nothingabout the global organization of the industry can be understood withoutacknowledging the legacy of the Chicago Convention. In this case, stateaction, from both a multilateral and a bilateral standpoint, has shapedthe fundamental nature of the industry over the past �fty years.Hotels present a greater challenge in that the organization of the

industry differs from either producer- or buyer-driven chains. It containscertain commonalities with the latter but constitutes a third variation –or one that subsumes buyer-driven chains – that might best be calledcontract-driven chains. The key difference is that hotel chains primarilysell rather than buy, and what they sell is frequently an intangible asset.Again similarities exist between contract and buyer-driven chains. Mostimportant, as with buyer-driven chains, this organization places a highpremium on �exibility and many activities formerly internal to �rmsare now externalized (Geref� et al., 1994). Moreover, core �rms tend toconcentrate on the high-value activities within the chain. Many of thedevelopmental prospects and power relationships between buyer-drivenand contract-driven chains are therefore similar: pro�ts tend to accruemainly to core �rms, and producers frequently �nd themselves in acaptive position. Again, however, power may be even more totalizingin the case at hand. Because tourism is ultimately an experience, and

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because international airlines and hotel chains often provide themarketing of that experience in the home country, the TNCs in essencegain control over de�ning the destination (Lanfant, 1980). Sun and seadestinations, which are very common in peripheral countries, are partic-ularly vulnerable because of easy substitutability.As globalization proceeds and capitalism takes on increasingly com-

plex and varying forms, developmental possibilities in the semi-periphery and periphery will undoubtedly be altered. GCCs amount to afresh and particularly useful approach in this sense, but the perspectiveneeds to expand to account for the many forms that global capitalismtakes today. Two �nal points emerge from the analysis here. First, industry studies provide a rich empirical basis for generating mid-leveltheoretical contributions. As such greater attention is warranted to organizational features surrounding different economic activities at theinternational level and their implications for development. Second, ser-vice activities in particular demand greater attention, both within com-modity chains approaches and development studies more generally.Their eclectic nature, which is documented in the two cases summarizedabove, is testament to the increasing complexity of global capitalismtoday, one that is reshaping developmental possibilities and limitationsfor much of the world.

NOTES

Many thanks go to Mary Geske, Greg White and three anonymous reviewersfor offering valuable comments on earlier drafts of this article. Thanks also toMike Barnett and Leigh Payne for their guidance on the larger related project.All errors remain my own.

1 For a discussion of similarities and differences between GCC and world-systems perspectives see Geref� (1995).

2 This section relies signi�cantly on Appelbaum and Geref� (1994) and Geref�(1995).

3 See Korzeniewicz (1994), which points out that sites of production are notsolely driven by wage rates. Instead Nike has returned to South Korea forproduction of some shoes for the up-scale market due to better qualitycontrol. Consistent with emphasizing �exibility, currently the company hascontractual agreements with �rms in several Asian countries in order to giveit a menu of options for manufacturing.

4 I am aware of just two exceptions: Rabach and Kim (1994), and Korzeniewiczand Pitts (1995). The former mainly addresses producer services. While thelatter also uses GCCs to study tourism, the approach here may be distin-guished for reasons detailed below.

5 Jagdish Bhagwati (1987) refers to this as the ‘haircut’ view of services: youcan’t get a haircut long distance. He and others increasingly eschew such astrict conception of the tradability of services. Nevertheless, conceptual andde�nitional problems remain. Gibbs (1987: 87) contends, for instance, thatthe concept of trade in services was ‘invented for negotiating purposes and


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has become a category ex post facto’. Snape (1990: 5) de�nes trade in servicesas ‘the supply by residents in one country to demanders resident in anothercountry of services that are not incorporated in goods (other than in thepaper, �lm, disks and the like used to record and transfer the service)’.

6 Tourism trade results from residents of one country visiting another countryand consuming services. The World Tourism Organization (WTO) de�nesa tourist not by purpose of travel but by length of stay: those visitors whostay in another country for more than one night but less than a year areclassi�ed as tourists. Less than twenty-four-hour stays are listed as excur-sions. Christine Richter (1987) argues that by the year 2000 leisure andtourism are expected to be the single largest economic activity (measuredin dollar terms) in the world economy. Enloe (1989), citing the WTO, makesthe same claim. Linda Richter (1989) argues that tourism already constitutesthe largest industry in the world. Also see Greenwood (1992).

7 Again, de�nitional problems plague measurement of tourism trade. Riddle(1986), using statistics from a US government study, reports the largestservice category is ‘other services’, a residual category that includes compo-nents ranging from various producer services to remittances from migrantworkers. Trade in tourism is listed separately under ‘travel’ in internationalstatistics. For a discussion of measurement of trade in tourist services thatargues for expanding the category, see Baretje (1982) and C. Richter (1987).

8 It should be noted that airlines are not traditionally included in tourismexpenditure statistics but instead are grouped with the transportation sector.They are excluded, for instance, from of�cial WTO statistics. Clearly,however, hotels, airlines and tour operators make up the three largestcomponents of tourism. In this sense I am following other tourismresearchers who adopt a political economy approach, such as Britton (1982)and Lea (1988).

9 This is utilized by Korzeniewicz and Pitts (1995) in their study of tourismin Mexico. Their spatial concentration is even more pronounced in that theyfocus on one new resort area, Huatulco. The approach here differs but inmy view is complementary to theirs.

10 Only one Third World chain is found among the top �fty. DusitThani/Kempinski, based in Bangkok, Thailand, ranked thirty-�fth in 1995.See Hotels (1996).

11 Experience goods contrast with ‘search goods’, which can be inspected orexamined before purchase (Dunning and McQueen, 1982; Witt et al., 1991).Experience goods are common, if not unique, to services.

12 I am indebted to an anonymous reviewer for emphasizing this point to me.13 Marriott and Sheraton, for instance, held a long-time preference for actual

ownership of hotels while other chains such as Hyatt, Best Western, HolidayInn and Ramada have pursued non-equity expansion. See note 20, below.

14 Dunning and McQueen (1982) argue that often TNCs are involved in acombination of ways. Some, for example, have a small amount of equitywhile operating the hotel through a management contract. They categorizefour alternatives of expansion: ownership, leasing agreements, managementcontracts and franchising. Witt et al. (1991) identify ten different strategies.They also discuss more general methods of operation for tourism �rms,including franchising. Technically a franchise is a particular form of licensingagreement that involves a trademark (brand name) and almost always ageographical-based right to sell under that trademark. Franchising may alsoinvolve access to more technical expertise that can make it dif�cult to distin-guish from the management contract category of Dunning and McQueen.

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15 These can range from accounting procedures to requirements on thefrequency of cleaning a swimming pool. They are often enforced by unan-nounced inspections (UNCTC, 1982). Ramada, for example, includes severaldifferent categories of hotels based upon a point system relating to minimumquality standards. Those standards are enforced by two surprise visits ayear, and from the resulting scores properties may move up and downthrough the different categories (and price structures) or, in the worst-casescenario, face expulsion (New York Times, 1995).

16 Author interview, Regional Vice-President of US-based hotel TNC, May 1995.17 ibid.18 Author interview, Vice-President for Development, US-based hotel TNC,

May 1995.19 Author interview, public and private sector of�cials, July–August 1992,

Mexico City. Granting master franchises is a favored strategy, especiallyamong mid-priced chains expanding in developing nations (New York Times,1995a).

20 Hyatt Hotels Corp, for example, owns no hotels. It manages more than 150hotels and resorts worldwide, including one on the campus of theMcDonald’s Corporation’s famed Hamburger University near Chicago (LosAngeles Times, 1994). According to the UNCTC (1990), 100 percent of BestWestern’s hotels took the form of non-equity (franchised, licensed ormanagement contract) agreements, while other chains such as Holiday Inn,Ramada, Trusthouse Forte and Howard Johnson all exceeded 85 percent.The Marriott Corporation expanded aggressively in the 1980s, growing fromseventy-�ve to 539 hotels, mainly by building hotels to its own speci�ca-tions, selling them to investors, and then managing them. Ultimately,however, it found itself owning several of the properties and carried morethan $3 billion in debt. In 1993 Marriott split into two companies: one ownsthe real estate (and most of the debt), while the other provides hotel services(Forbes, 1995).

21 Author interviews, private and public sector of�cials, Mexico City, July 1992;author interview, international hotel chain vice-president, May 1995; Ascher(1985). Major physical alterations usually require owner consent, but manycontracts stipulate that this should not be withheld ‘unreasonably’. Chainsalso usually favor large-scale, capital-intensive luxury hotels. Ascher (1985:44–5) points out that from the standpoint of the chain, hotels that offer fewerthan 300 rooms are seldom pro�table, and chains will often push for 600–700rooms or more. Finally, the contracts often contain escape clauses for theTNC (UNCTC, 1982).

22 One government tourism of�cial in Mexico, for instance, summarizedmanagement contracts as ‘very poor for the owners, and very good for theoperators’. Author interview, Mexican public sector of�cial, July 1992.Despite this, the state �nanced the construction of �ve major resorts duringthe last twenty-�ve years, including Cancún and Ixtapa. In addition to infra-structure, public money went to hotel ownership and offers of preferential�nancing to private hotel investors. Finally, state of�cials there relaxed regu-lations in order to make it easier for foreign chains to operate in Mexico.

23 Again the Mexican case is instructive. There two domestic �rms, Posadasde México and Situr, each moved from simple ownership in partnershipwith TNCs into hotel management and franchising. Today the former is thelargest hotelier in the country, markets its own brand, and operates hotelsin the United States and Venezuela. On the other hand, Table 3 demon-strates that hotel management remains a largely First World business.


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24 Some claim there is a broader posturing incentive of �ying the national �ag.In the United States airlines that �y international routes are also subject tohaving planes temporarily seized by the government in times of emergency.This took place during the Gulf War as commercial planes were used fortroop movement.

25 For a summary of the freedoms of the air, see OECD (1993).26 The primary manner in which foreign airlines serve domestic routes is

through continuation services. This allows point-to-point service within acountry as long as the �ight originates or terminates in the home countryof the carrier. As a result American Airlines, for example, offers MexicoCity–Acapulco service on a route that originates in Dallas–Ft Worth.

27 Bilateral accords were clearly a second-best option after the failure to reacha multilateral agreement at Chicago. The convention was marked by whatSochor (1991) calls ‘aviation competition’ between the United States andGreat Britain, the two leading nations in terms of airlines at the time. TheUnited States, which had a strong domestic private airline industry, favoredan open skies policy. Britain called for an international regulatory body withbroad powers in setting standards, routes and prices. In the end neither gotwhat it wanted. Open skies was defeated and although the conferenceproduced the International Civil Aviation Organization, a UN body, it hasalmost no enforcement power. For more on the politics of the ChicagoConvention see Sochor (1991), Doganis (1993), Jönsson (1981), Golich (1990).

28 Bilaterals emerged from Article I of the Chicago Convention, which held thatair space above a country is sovereign territory and therefore requires stateauthorization for foreign �ights. The �rst Bermuda agreement was replacedby a more liberal bilateral (Bermuda II) in 1977. Similar, if even more liberal,agreements today are commonly referred to as ‘open skies’ agreements.

29 On US deregulation see Vietor (1994) and Morrison and Winston (1995).Between 1977 and 1980 the USA successfully renegotiated bilaterals with�fteen countries, and several more were completed by 1985 (Sochor, 1991;Doganis, 1993).

30 While debate continues over the costs and bene�ts of domestic deregula-tion and international liberalization, Sochor (1991) argues that the one clearloser has been the IATA. In the past, governments almost always rati�edthe fares set by the organization. As competitive pressures increased IATArate making has largely been dismantled. The USA played a central role inthe demise of the IATA cartel, �rst threatening to subject it to domesticantitrust laws and second threatening withdrawal. See Golich (1990) and deMurias (1989).

31 Recent examples include the Gulf War, which resulted in a sharp drop indemand for air transport, and Haiti, in which commercial air service to theisland was halted as part of the effort to restore ousted President JeanBertrand Aristide. US policy makers also withdrew landing rights for theYugoslav national airline early in the Balkan war. More generally see Golich(1990) and de Murias (1989).

32 Most big US carriers have owned hotels at one point or another, althoughalmost all subsequently sold them off. Today most hotel ownership byairlines is con�ned to other AIC carriers. Integration strategies varied andwere in�uenced by deregulation in 1978. American Airlines, for example,expanded horizontally and vertically before deregulation (owning, forexample, Flagship and Loews hotels through its Sky Chef’s subsidiary) andthen streamlined as deregulation approached. United Airlines expandedvertically both before and after deregulation, eventually buying Westin and

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Hilton International hotel chains along with the Hertz rental car corpora-tion. This strategy fell apart in 1987 and each was sold. Other internationalcarriers, such as SAS (Intercontinental), Air France (Meridien), KLM (GoldenTulip) and Japan Airlines (Nikko), have also become involved in hotels. TheGerman airline Lufthansa has established charter and tour operator compa-nies in its home market and elsewhere in Europe (Feldman, 1987; Bull, 1991).

33 In the United States, for instance, foreign investment in airlines is limitedto a 25 percent equity stake since the 1958 Federal Aviation Act. Among theemerging partnerships have been British Airways and United Airlines,United and Lufthansa, KLM and Northwest, British Airways andUSAirways, American Airlines and Canadian Airlines International, andBritish Airways and Qantas. Most recently British Airways and Americanproposed an alliance in 1996. Many of these involve some cross investment.Airlines also raise money through international capital markets and tradeon foreign stock exchanges. In 1991 Air France had an equity stake in twelveairlines, KLM in seven (Johnson, 1993; Feldman, 1987; Lundberg et al., 1995).

34 On the major CRS systems in the world see Morrison and Winston (1995)and Feldman (1987).

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Documents

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