The influence of political risk events on the investment decisions of multinational hotel companies in Caribbean hotel projects

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Virginia Tech

The objective of this exploratory study was threefold. First, it was to identify the political risk events that drive the level of equity involvement of multinational enterprises (MNEs) in hotel projects in the Caribbean region. Second, it was to learn how these forces influence specific financial parameters involved in the funding of these projects. The final dimension of the study’s objective was to learn to what extent the stage of tourism development had a moderating effect on these parameters.

It was hypothesized that the occurrence of political risk events influence the willingness of multinational hotel companies to participate in hotel projects, given a particular stage of the tourism development. The definition of political risk events is based upon Friedmann and Kim’s (1988) list. Butler’s (1980) Concept of Tourist Area Cycle of Evolution was used as the basis for consideration of the influence of political risk events. Key investment parameters, on which managerial decisions were to be made such as level of investment, mode of investment and risk premium requirements were examined.

Methodology for the study was a modified Delphi technique conducted in three rounds of panel considerations. Panelists were senior executives, drawn from the Caribbean Hotel Association’s Corporate Forum and from international hotel investment and consulting firms. These executives were asked indicate what they perceived the level of risk associated with each variables to be. In addition, they were asked to rank 12 Caribbean countries in terms of the level of tourism development. During the third round their tasks were to rate the variables again and to indicate, based on rating scales provided, how they would invest in three designated countries: Haiti, the British Virgin Islands and Puerto Rico.

Analysis of the results of the panel considerations indicated that when political risk was perceived to be high, investment levels were low and the associated risk premiums were high. The non-equity mode was preferred for all countries.

Results of the study should be useful to the decision makers in the hospitality industry, and to policy makers and scholars of international tourism development.