“Issues on strategic planning and risk

management. Study on the potential use of client

diversification techniques, in the promotion of the
Panamanian tourism product.
”

Oniel Valdés Díaz.

Submitted for: Masters of Business Administration

(Hospitality Finance) in association with UEM

MBA Dissertation
March, 2009
 Statement of authorship

I certify that this dissertation is my own work and contains no material which has
been accepted for the award of any degree or diploma in any institute, college or
university. Moreover, to the best of my knowledge and belief, it contains no material
previously published or written by another person, except where due reference is
made in the text of the dissertation.

Signed _________________________________________________

Date ________MARCH 5, 2009______________________________

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Dedicated to my mother Julia Diaz Montero, to my life mentor Yenia Mendoza,
and to my circle of friends…

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Abstract

Understanding the risks associated to low diversification and international business

opportunities, is of particular importance when realigning an organization’s strategic
plan with changing environmental realities. Modern authors have used statistical
measures as the reference to develop investment analysis techniques we believe
can improve current decision-making processes of different fields.

Panama started recently, systematic marketing efforts to appeal to international

tourists. Based on the fact that Colombian and US-born clients make-up
approximately half of the tourists visiting Panama every year, an important task for
empirical research is to help discriminate between target groups from a risk-averse
perspective. This study attempted to understand the implications of having targeted
narrow market segments.

A key measure often referenced by the government to report the status of the
tourism industry “Restaurants and hotels in Panama”, showed a significantly robust
correlation with the GDP per capita in the USA; while Panamanian and Colombian
GDPs scored significantly low in this regard. A possible and interesting
interpretation of these findings suggest that the second largest group having US-
based incomes in Panama, the US-Born expats, may have benefited industries
typically associated to international tourism. International tourism receipts, a second
indicator analyzed in the present study, showed unmeaning correlation with GDP
fluctuations of the USA, and gentle correlation with that of Colombia, which could
suggest some consistency in the spending habits of US-tourists, and less
consistence in those of Colombian tourists visiting Panama.

Observations on GDP per capita fluctuations of other countries (added to enrich the
sample) suggested that diversification in the client-mix, together with constant
monitoring on global economy issues, should be taken into consideration when
planning conservative marketing strategies.

KEYWORDS: Real GDP Per Capita, Client Mix, Riskiness, IPAT, Diversification.

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Acknowledgments

This Dissertation has been written while I was a beneficiary of the MEF-IFARHU
Scholarship Programme sponsored by the government of The Republic of Panama.
I am grateful to Mr. Hector Alexander, Minister of Economy and Finances, and to
Mr. Hernan Arboleda from the same Ministry, for having organized the resources
and people that made this programme a reality. The usual disclaimer applies: The
views expressed in the present dissertation paper are my own and should not be
interpreted as reflecting the views of the Ministry of Economy and Finances.

During the process of writing this dissertation, I have become indebted to a large
number of people. First, I wish to thank Professor Franklin Castillo for having
encouraged me to complement my previous studies with an MBA degree, which I
must say was not my priority at that moment.

Special thanks go to my dear friend Yeissinia Rangel who inspired the present
dissertation paper, during one of the several fruitful discussions we engaged in.
Thanks to my good friend Johanna Nuñez for having warned me, that at some point
I was investing too much time in my dissertation and putting aside other
responsibilities we had at the moment… I must say: she happened to be absolutely
right.

Thanks to professor Bruno Eeckels for his guidance and feedback and to professor
Dimitrios Diamantis, for having provided me of his support and encouragement to
finish my dissertation against all odds, and for being an example of human quality
for all of those who had the privilege of sharing experiences with him.

I owe my deepest gratitude to Professor Herman L Davis, Jr. and his wife from
Wyandotte High School in Kansas City, who undertook to act as my proofreaders,
despite their academic and professional commitments. Who knew your trip to
Panama, and my day at work would bring about such a great friendship?

Thanks to my friends in the IPAT Panamanian Tourism Bureau especially to Mr.

Juan Stanziola Chief of the Statistics Division, for having provided me of key data,
required to finish the present dissertation paper, thanks to Ms. Yamina Castillero
Executive Director of Panama National Hotel Association for her readiness to
support the research process.

Thanks to the members of the Les Roches’ staff who cooperated in one way or
another with the completion of the present document.

To my family and friends: my sincerest thanks.

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Table of content

1. INTRODUCTION
1.1. Study Background……………………………………………………………....11
1.2. Study Area…………………………………………………………………….. ..14
1.3. Justification of the Study and Contributions………………………………….14
1.4. Aim and Research Objectives……………………………………………..…..15
1.5. Discussion of Research Objectives…………………………………………...16

2. LITERATURE REVIEW
2.1. Overview of the themes…………………………………………………………19
2.1.1. Overview: The shaping of tourism in Panama……………………...……19
2.1.2. Overview: Colombian and U.S tourists as part of the Panamanian
client-mix……………………………………………………………….....…19
2.1.3. Overview: Tourism as part of the Panamanian GDP, review on
regional integration issues...................................................................20
2.1.4. Overview: Investment analysis techniques and their potential
on designing international marketing plans for tourism………….……..20
2.2 The shaping of tourism in Panama…….………………………..………….….20
2.2.1. Panamanian Tourism Bureau………………………………………...…..20
2.2.2. Promotion of the Panamanian tourism product………………...……….22
2.2.3. Tourism development zones……………………………………….……..24
2.2.4. Underlying reasons for travelling to Panama………………………..…..25
2.2.5. Business in Panama…………………………….…………………………26
2.2.6. Conventions in Panama……………………………………………….…..26
2.2.7. Indicators of satisfaction……………………………………………..,……27
2.2.8. Current issues………………………………………………………...…….27
2.3. Colombian and U.S tourists as a part of the Panamanian
client-mix………………………………………………………………………………27
2.3.1. Promotion strategies in Panama…………………………………………..27
2.3.2. Current mix of clients in Panama……………………………….…………28
2.3.3. Reasons for a Particular mix of clients……………………………………29
2.4. Tourism as part of the Panamanian GDP, review on regional integration
Issues……………………………………………………………………………..29
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2.4.1. Tourism and GDP in Panama…………………………………………………...29

2.4.2. Commercial integrations between Colombia, The United States

of America and Panama…………………………………………………… .….31
2.4.3. Economic importance of Colombian and American
tourists……………………………………………..………………..………..… ..32

2.5. Investment analysis techniques and their potential in designing

International marketing plans for tourism………………………………………...34
2.5.1: The portfolio theory………………………………………….…………….…..35
2.5.2: Diversification and tourism………………………………………….…….…..37
2.6.Summary…………………………………………………………………….….…..…38

3. DATA AND METHODS

3.1. Research philosophy………………………………………………………..…...….40
3.2. Research approach…………………………………………………………..…...…40
3.3. Research strategy…………………………………………………………..……....41
3.4. Data used……………………………………………………………………..……...41
3.4.1. Gross Domestic Product (GDP)…………………………………….………....41
3.4.1.1. Gross Domestic product in countries observed………………….……...42
3.4.1.2. Real GDP per capita…………………………….………………………....42
3.4.2. International tourism receipts………………………….…………………..….42
3.5. Methods and techniques…………………………….……………………………...43
3.5.1. Methods in specific………….………………………………………………..…44
3.5.1.1. Measures of dispersion and uncertainty………………………..……..…44
3.5.1.1.1. Variance………………………………………………………………....44
3.5.1.1.2. Standard deviation……………………………….…………………....44
3.5.1.2. Measures of linear relationship……………………………….…………...45
3.5.1.2.1. Correlation……………………………..………………………………..45
3.5.1.3. Assessment methodologies and research objectives…………….........45
3.6. Minimizing threats to reliability and validity……………………..………………..46
3.7. Summary of the main components of methodology………………..….………..47

4. RESULTS
4.1. Overview of the sections…………………………………………...…………......49
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4.2. Descriptive statistics………………………………………………………...…..50
4.2.1. Empirical results……………………………………………………………….54
4.2.1.1. Relationships between the USA, Colombia and Panama…………….54
4.2.1.2. Observations on GDP per capita fluctuations……………………..…..56
4.3.Discussion of results……………………………………………………………..58

5. DISCUSSION
5.1 Introduction……………………………………………………………….…..60
5.2 Discussion……………………………………………………………….……60
5.2.1. Representativeness of the indicators chosen, and dynamics of
tourism in Panama…………………………………………………………61
5.2.2. Stability of tourism in Panama: Reasons for concern………………..….62
5.2.3. Importance of Colombia and the USA for Panama’s tourism…….…….63
5.2.4. Using economical soundness indicators to assess financial stability….65

CONCLUSION
6.1. Main findings……………………………………………………………..………68
6.2. Recommendations…………..…………………………………………….…….69

REFERENCE LIST ……………………………………………….……………..…..70

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Table of figures
Charts
Chart 1: Simple linear regression: Tourism receipts versus hotel and restaurants.
(In million USD)……………………………………………………………………….....55

Tables
Table 1: Growth Rate in Hotels and Restaurants income as part of the
GDP (1999-2004)…………………………….………………………………………….23
Table 2: Tourist arrivals in Panama 1999 2004……………………….………...........23
Table 3: Reasons for travelling to Panama…………...………………….……….......25
Table 4: Growth rate in major Panamanian industries………………...…….………..30
Table 5: Profile of the U.S.A and Colombian tourists visiting Panama.……...……..33
Table 6: Similarities between managing the national budget for
international promotion, and managing a portfolio of risky assets…………..……...36
Table 7: Changes in the indicators of tourism activity 1997-2005………..………....51
Table 8: Real growth rates (GDP per capita) 1997-2005)...............……..……….....51
Table 9: Standard Deviation Results………………………………………….………..52
Table 10: Growth rates in main sectors of the Panamanian economy (in %)………53
Table 11: Correlation between sectors of the Panamanian economy
(1997-2005)……………………………………………………………………………....54
Table 12: Correlations between Real GDP (1960-2005)…………...........................54
Table 13: Correlations between Restaurants and Hotels vs.
GDP per capita (growth rates)…………………………..…………………..……..……55
Table 14: Tourism receipts versus GDP per capita (growth rates)……………...…..55
Table 15: GDP Growth, riskiness assessment (1987-1998)……………………..…..56
Table 16: Observations on changes (GDP per capita) before crises…………....…57
Table 17: Correlations between GDP p/c growth (1961-2005)…………………...….58

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 CHAPTER 1

_____________________________
_______________INTRODUCTION

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1.1. Study Background

Decisions on where, and how to attract tourists (based the national budget)
represent a challenge for countries around the world. In modern economy, the
popular phrase, “It is not such a thing as a free lunch,” reminds us that making a
choice always carries a cost (Arese,2003).

The rationale of our study starts from the assumption that economic resources to be
invested on international promotion are limited. The same dollar cannot be invested
in two countries at the same time; choices on how to invest the moneys for the
promotion become a key factor in the success of these campaigns.

For our case specifically, the main concern is the distribution of the yearly budget
assigned to the Panamanian Tourism Bureau (IPAT as per its Spanish acronym),
which theoretically can be invested anywhere in the world in any proportion.
Currently the Ministry of Exterior Relations summarizes the strategy in the following
line:

“For the international markets, the efforts of the exterior service should be focused
on those markets with the highest profitability. For this purpose marketing plans
intended to consolidate the country as a destination for special-interests tourism,
have to be established.” (Ministerio de Relaciones Exteriores 2006 p.43)

The problem of resources allocation and the desired client-mix for the country
represent quite a complex decision. As an organization becomes involved or even
interested in international business opportunities, the amount of data that must be
collected and analyzed increases dramatically (Harrison and Enz, 2005). On one
hand planners of marketing campaigns overseas, should not ignore the amount of
tourism receipts generated by a single type of tourist and on the other, they should
regard as highly important the factors affecting the travelling patterns of these
tourists.

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For the case of Panama, statistical information collected by the Panamanian
Tourism Bureau shows that approximately half of the tourists in the country are from
Colombia and the U.S.A in which seems to be the snapshot of an unbalanced client
mix (Instituto Panameno de Turismo 2005).

Let us briefly review previous research we regard as valuable for the completion of
the present study:

Statistical behaviour of tourism receipts, in Panama:

Detailed historical information on the international tourism receipts was not
available for the period between 1960 (year of foundation of the IPAT as the legal
promoter of tourism activities in Panama) to 1993. It is by the end of this year, when
major research on tourism industries in the country took place, in order to obtain a
better insight of these activities. It is in 1993 when a 10-years Master Plan was
approved and later executed by the state; all of these with the support of the Japan
International Cooperation Agency (Banco Interamericano de Desarrollo, 2003,
World Resource Institute 2008). This research generated rich economic information
on the tourism sector, that was used later in the first Master Plan (Instituto
Panameno de Turismo 2005, Nel-Lo and Perez 2007). Ever since this initiative was
born, constant collection of economic and demographical data of tourists visiting
Panama, has been taking place. (IPAT, 2005).

Economics:
To understand the need of employing economics principles in our study, we should
bear in mind that just as a business relies on its clientele for its income; same way
international tourism in the countries rely on foreign economic wealth for theirs
(Gwartney & Stroup 1992, Slonman and Hinde 2007). Important studies on the
effects of globalization demonstrate that Panamanian industries are highly
interconnected with economical factors out of its borders, as the Panamanian
government (Ministerio de Relaciones Exteriores, 2006) has already acknowledged.
Tourism receipts in any country typically start as disposable income in the pockets
of people living in tourists-generator countries (Buhalis & Laws, 2002) this suggests
the existence of co-dependency between the incomes derived from the hospitality
industry and the economic stability of the countries generating the tourists.

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Internationally, valuable studies made by the UNWTO (United Nations World
Tourism Organization) have focused on different aspects of tourism, especially in
terms of the economic features of every country. The outcomes of these studies
contribute to the development of tourism in general (World Tourism Organization
2006). Same data is further analyzed on a yearly basis by top capitalist foundations
such as The World Economic Forum, who are themselves the creators of the Travel
and Tourism Competitiveness Index. This index overlaps indicators of tourism
development with socio-economic features of countries around the world (World
Economic Forum 2008) and serves as a standard for making critical judgements in
the field.

Domestically the Informative Manual on International Economic Promotion,

designed by the Ministry of Exterior Relations expresses the national priorities of the
Panamanian government, as to update Panamanian diplomats overseas. This
manual rather than a research effort, is a valuable source of data endorsed with the
official position of the country in all of the strategic aspects of the economy; it also
summarizes economical analyses performed by other institutions (Ministry of
Exterior Relations 2006).

Dealing realistically with multiple investment alternatives:

In 1952, Mr. Harry Markowitz developed a theory of portfolio choices, which implied
both: That investors should diversify and that they should maximize expected
return. It assumes that it is a portfolio which gives both, maximum expected return
and minimum variance and he commends this portfolio to the investors (Markowitz,
1952).
Why Modern Portfolio theory? The principles of modern portfolio theory as they now
stand can be applied to different scenarios: In our case, help manage client-mix for
a country promoting its resources in a well diversified manner, instead of the current
focus on the countries with the highest returns in the short term (without considering
their economic stability).

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1.2. Study Area

The present study devotes special attention to the Republic of Panama, a

transcontinental country linking South America with Central America. This country
also unites the Caribbean Sea on the north, with the Pacific Ocean on the south by
means of a man-made canal created during two independent efforts, the first one
led by the French, and the second one by The United States of America.

Panama borders Costa Rica to the north-west and Colombia on the southeast.
Because of its geographical location, the country has developed a strong economy
based on services such as trading, commerce, banking, logistics (including the
Panama Canal and diverse port facilities), and ultimately tourism which is the
industry to be closely analysed in the present document.

Country Facts and Figures:

Area 75,990 square kilometres

Population 3,292,693 (July 2008 est. CIA)
Life expectancy at birth 75.17 years (Males 72.71, Females 77.73)
Literacy 91.5%
Government type Constitutional Democracy.
Administrative Divisions 9 provinces, and 3 Indigenous territories.
GDP (OER) $19.28 billion (2007 est)
Real GDP Per Capita $6,000 (2007)
Currency Balboa (PAB).US Dollars are the mean of exchange.
PAB per USD= 1.
Human Development Index 0.832 (high)

1.3. Justification of the study and contributions

The sizeable economical benefits obtained from tourism at a relatively low

environmental impact (Mansfeld and Pizam, 2006) look appealing to several
economies worldwide. Because of the particular nature of tourism as an industry,

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and because of the range of benefits it represents for a country such as Panama;
we consider it very useful to understand the variables affecting it.

According to observations made by the IPAT, incomes generated by tourism in

Panama do not seem to fluctuate with other major domestic industries (Instituto
Panameño de Turismo, 2005). Since other domestic industries do not seem to
determine the way tourism behaves in the country, chances are that we have been
ignoring external factors that affect the local behaviour of this industry in particular.

In Panama, international clients rather than domestic ones, generate according to

the Panamanian tourism bureau the biggest share of incomes to this industry
(Instituto Panameno de Turismo 2006). Statistical information in the hands of the
IPAT reveals that near half of the international tourists in Panama are either
Colombians or citizens of the United States of America (Mc Cullough, 2004; World
Trade Organization, 2007) .

The importance of the present research relies largely in the type of understanding
that can be obtained, by examining the behaviour of tourism in Panama from a
different perspective. If ever found, a relationship between the historical behaviour
of the tourism receipts in Panama and the historical growth in the economies
generating our clients: the present research would potentially help the country
design efficient promotion strategies for the future.

1.4. Aim and research objectives

The aim of this dissertation is to develop a simple model of risk analysis, applied to
the tourism sector in Panama considering the particularities of its international
promotion. Doing so, the research seeks to evaluate the representativeness of
indicators currently used to measure growth in tourism, and the usefulness of
economic indicators of a different nature.

Objectives:
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 • To provide an overview of the Panamanian tourism industry.
• To explore the reasons why tourism is regarded as highly important for the
Panamanian economy.
• To determine the impact of tourism receipts from Colombia and the USA
on the Panamanian economic indicators.
• To explore the potential applications of investment analysis, to the
international promotion of Panama’s tourism product.

1.5. Discussion of research objectives.

The research objectives serve as the foundation and guideposts for conducting any
research. In the present section, we hope to explore issues on the nature, linkages
and achievability of the research objectives set.

Objective 1: To provide an overview of the Panamanian tourism industry.

The first objective examines the historical and current profile of tourism in Panama.
We try to achieve this objective by the use of qualitative research to provide a
historical background, and quantitative research to quantify the dimensions of the
trade involved in this industry. To frame the problem within the socio-economical
paradigm, we require documental sources of historical and present events. The
achievability of this objective depends largely on the access to data we already
collected in the early stages of the investigation. We find it realistic to achieve this
objective, and as a result, become acquainted with the evolution of tourism in
Panama before going into more specific debate.

Objective 2: To explore the reasons why tourism is regarded as highly important for
the Panamanian economy.

An assumption of this study is that tourism stands as a pillar of the Panamanian

economy, and as such, it should stay protected from non-calculated risks. Because
of the nature of this research objective, it is necessary the application of quantitative
research to prove tourism as economical and socially important for the country.
Furthermore, the research-design also concentrates on qualitative information to let
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us perceive the impacts of past events in today’s tourism paradigm. This objective is
considered as highly achievable because of the possibility to prove the importance
of tourism with documental evidence of qualitative and quantitative nature.

Objective 3: To determine the impact of tourism receipts from Colombia and the
USA on Panamanian economic indicators.

This research objective represents a link between tourism, its issues on

diversification and the ways in which the economic health of tourist-generating
countries, affect the local economy. The observation of evolution in quantitative
indicators, becomes critical to determine the impact of tourism receipts of Colombia
and USA on local economic indicators. Based on the previous considerations, the
level of achievability of this goal is relatively high. Anywise, a challenge for this
research is to test the desired relationships, in spite of the complex dynamics
moving local and international economic indicators.

Objective 4: To explore the potential applications of investment analysis, to the

international promotion of Panama’s tourism product.

Research objective number four, addresses the diversification issue by referencing

time-tested principles of risk management, and contextualizing them in proportion to
the needs of the country of study. This research objective demands testing the
principles discussed, and in the process, it turns goal number four into an
achievable one. The number of possible applications of investment analysis to the
promotion of Panama’s tourism product can be countless; this study will explore but
a few of them.

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 CHAPTER 2

_____________________________
_________LITERATURE REVIEW_

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2.1 Overview of the themes

2.1.1- Overview: The shaping of tourism in Panama:

This part of the literature review, serves to familiarize the reader with key events of
high significance for Panama, in fields associated to hospitality. The first part
focuses on the internal shaping forces, specially the government and its efforts to
organize this industry from inside out. Towards the end of the chapter, we address
the perspective of the tourists travelling to Panama; and how the assets of this
country match their needs and expectations.
This chapter keeps relation with research objective number one and two: “To
provide an overview of the Panamanian tourism industry” and “Explore the reasons
why tourism is regarded as highly important for the Panamanian economy”
respectively. These objectives are addressed with the help of an organized review
of critical events that gave shape to the current panorama.

2.1.2: Overview: Colombian and U.S tourists as part of the Panamanian

client-mix.
Firstly, this chapter provides an insightful review of the actions taken by the
government of Panama in terms of international promotion. The second half
addresses details of the present mix of clients, by providing a brief summary of the
most notorious groups of tourists as per their nationality. The chapter devotes a
great deal of attention to the largest groups of tourists in Panama according to
national statistical research: U.S Tourists, and Colombian ones. It also devotes
special attention to key demographical data regarded as important for this research.
The first part of this chapter, addresses previously mentioned research objective
number two, while observing closely government’s perspective on the subject.
Second section of the chapter addresses research objective number three “to
determine the impact of tourism receipts from Colombia and the U.S.A in economic
indicators of tourism activity in Panama” by referencing official statistical data of
relevance and complementing it with findings made by other authors on these
subjects.

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2.1.3: Overview: “Tourism as part of the Panamanian GDP, review on regional
integration issues”:
This chapter attempts to understand the reasons for an important degree of
cohesiveness between the economies of Colombia, Panama and the USA, from a
macro-economical perspective. Towards the end of the chapter, we focus on
specific macro-economical features of the countries under study.

This chapter addresses research objective number three, observing for

connections between Colombia and USA with Panama. This time seeking to
understand the kind of causation by which the phenomena expressed numerically in
section 1.7, were produced. Towards the end of this chapter, theoretical
background is provided such as to usher the reader into the topics associated to the
last research objective with relative ease.

2.1.4: Overview: “Investment analysis techniques and their potential in designing

international marketing plans for tourism”:
This chapter attempts to provide theoretical support for considering risk analysis
techniques as useful tools to be used in the design of smarter plans to invest the
national resources for international promotion.
Research objective number four “To explore potential applications of investment
analysis principles, to the Panamanian efforts to promote tourism internationally” is
addressed throughout this chapter, specifically by the provision of theoretical
background pertinent to risk analysis and modern portfolio theory.

2.2 The shaping of tourism in Panama

2.2.1. Panamanian Tourism Bureau.

Panamanian efforts to develop the tourism sector started in the 1930’s they
included attempts to oversee private sector investment in tourism and
entrepreneurial projects. Several steps were taken such as to augment the sector’s
contribution to the country’s economic growth. In spite of having started these
actions early, nowadays’ legal, institutional and planning frameworks continue
limiting tourism development (World Bank 2008).
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For the last 19 years of democratic government (1990-2008), the country has
implemented economical policies to foster the development of formerly sagging
industries such as tourism (Nel-Lo and Perez, 2007), while major strategic actions
have been taken in order to turn tourism into one of the main pillars of the
Panamanian economy. The first step towards promoting Panama internationally
was in fact the restructuration of the only institution in charge of such task. This
institution is the Panamanian Tourism Bureau (IPAT). Founded in 1960, the IPAT
did not go through any major changes during 37 years from its creation and until the
beginning of the post-dictatorship democratic era in Panama (Banco Interamericano
de Desarrollo, 2003).

An initial plan to restructure the entity began after the government of Panama
realized the country remained heavily on just a few financial activities. These
activities were those of the Panama Canal, the Banking District and the Duty Free
Zone, as well as the operations of few businesses that survived the dictatorship
period and the devastations of the war that finished it in: “Operation Just Cause” of
December, 1989 (Banco Interamericano de Desarrollo, 2003; Harris et al 1990). In
1993, the Inter-American Development Bank (IDB/BID) together with the
Organization of American States (OAS) co-financed a study on tourism in Panama.
The Japan International Cooperation Agency (JICA) in hopes to foster the
economical development of Panama also conducted important studies on the
tourism activities in these regards (Banco Interamericano de Desarrollo, 2003).

The aforementioned projects represented a critically important source of information

for further studies and other initiatives. Unfortunately, these studies had a weakness
represented by the fact that they were merely descriptive, and just provided a list of
the tourism attractions of the country, while overlooked the need to know the nature
of the demand, and the degree of sustainability required to keep this development
running (Petzold-Bradley 1997). By the time these pioneer projects revealed a
critical need to develop Panama’s attractions; the Law N°8 of Incentives to the
Tourism Development (June the 14th 1994) welcomed investments from all over the
world, and at the same time, fostered domestic investors to join the industry of
hospitality (Instituto Panameno de Turismo 1994).

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In 1997 a second loan, this one of $3.58 million, was obtained with the help of the
IDB to launch a restructuration plan for the Panamanian tourism industry. The
program had three main goals with their respective budgets clearly assigned:
strategic study on the markets $900,000, Institutional restructuration of the
Panamanian Tourism Bureau $982,000, and a monitoring system for environmental
and economical issues $740,000. The study also included in the budget
administrative fees for $630,000, financial costs for $86,000, and $246,000 without
specific assignation (Banco Interamericano de Desarrollo, 2003). This was the very
first time in 37 years, Panama had the intention to really exploit tourism as a
potential source of incomes for the GDP. Even though the aforementioned budget
had to be distributed along 36 months, it was the corner stone for what it exists
today. (Asamblea Legislativa de la Republica de Panama 2003)

2.2.2. Promotion of the Panamanian tourism product.

By year 2000, The Panamanian Tourism Bureau, had plans to run a long-range
campaign with a budget of $7.5 million, out of which $5 million were intended to be
used for international promotion aiming for the targets identified in the previous
stage of the plan (Asamblea Legislativa de la Republica de Panama, 2003).

Unfortunately for the country; Argentina, one of the chosen target markets where
Panama was promoted, experienced a major national crisis generated by the
overvaluation of their currency, and large fiscal deficits (Congressional Research
Service, 2002 b), which ultimately led to a very poor performance of the investment
made by the IPAT.

Something similar happened with the United States of America in September 2001,
the terrorist attacks in New York, generated a major depression in the main target
market the IPAT was aiming for (Ministerio de Economia y Finanzas, 2003), causing
the same effect in the results of Panama’s campaign.

The outcomes of the promotion campaigns were not as good as they could
potentially be (See table 1), and the overall strategy had to go through major
changes, including the identification of new targets (Ministerio de Economia y
Finanzas 2005) which represented a misuse of the funds in the already anaemic
budget for international promotion.
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 Table 1: Growth Rate in Hotels and Restaurants income
As part of the GDP (1999-2004)

Industry
1999 2000 2001 2002 2003 2004
Hotels and 3.20% -3.70% -1.80% 5.60% 3.90% 13.50%
Restaurants
Source: Ministerio de Economia y Finanzas 2005.

After the concessions of year 2000, the budget to be invested in advertisement and
public relations, went up from 5 to 6,9 USD million a year (This, for promoting the
country in Europe, Canada, The United States of America and Latin America).
Based on the report of the Banco Interamericano de Desarrollo (2003), from
November 27th 2001 to May the 30th 2003 next table shows the changes in arrivals
after the promotion campaigns started in 1999.

Table 2: Tourist arrivals in Panama 1999-2004

Year
1999 2000 2001 2002 2003 2004
N° of Visitors 555,026 600,169 737,102 800,161 897,047 1,004,207
Change ----- + 8% + 22.8% + 8.6% + 12.1 % + 11.9%

Source : Instituto Panameño de Turismo 2005.

For the year 2004 (Ministerio de Economia y Finanzas 2003) the IPAT signed a
contract with the advertisement company Campagnani/BBDO Panama, for 9 million
dollars to renew the previous contract of year 2001. By law, IPAT evaluates and
reassigns the contracts to their advertisement service providers on a yearly basis
(IPAT 1994).

In year 2007, the IPAT signed another contract to promote the country
internationally. This time the contract represented a record for international
promotion in the institution; the size of the investment was of 39 million 500
thousand dollars and the contract of five years renewable, instead of a single one.
The aim of it was to design a five-years strategy of promotion, communication, and

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public relations to be executed in the U.S.A, Europe, Latin America, Canada, and
Asia-Pacific (Ministerio de Economia y Finanzas 2007 p 10) in fact quite an
ambitious goal if we compare it with previous campaigns.

These efforts of the IPAT and other NGOs resulted in the generation of two major
instruments for the International promotion, during two different administrations.
These instruments are the strategies to manage tourism activities in Panama;
namely: The master plan for the years 1993 to 2002, and the second and more
ambitious master plan (2007-2020) aiming to add the term sustainable tourism in
the formula (Ministerio de Economia y Finanzas 2005, World Bank 2008).

Briefly, the first plan aimed to organize, assess and identify potential and existing
hotspots of tourism activity within the country, while the second plan fostered the
consolidation of the Panamanian offer, and addressed topics beyond tourism i.e.
incentives to selected groups of immigrants. (Instituto Panameno de Turismo 2001,
Ministerio de Relaciones Exteriores 2006, World Bank 2007).

As a final observation, issues have raised around the real intentions of The Master
Plan 2007-2020 since it has been perceived by many, that rather than a mere
tourism promotion strategy it is a Real Estate incentives-law in disguise (Ministry of
Economy and Finance 2007; Organizacion Mundial del Comercio 2007, Nel-Lo and
Perez 2007). Observations made by the U.S Migration Policy Institute (2006) show
that from year 1990 to 2000, Panama witnessed an increase of 136% in the
number of US expats in the country. While this seems to back the point previously
stated, accurate assessments on the economic and social impacts of their presence
in Panama are still unavailable.

2.2.3. : Tourism development zones:

The Panamanian Tourism Bureau has identified nine zones with high potential for
the development of tourism activities, and it has assigned specific goals for the
development of each. Among other things, these zones have current potential for
ecotourism, eco-friendly lodging, resort-type lodging, professional golf tournaments,
and the construction of shopping centers, theme parks, sport clubs, business hotels
and casinos (Instituto Panameno de Turismo 2001). The master plan for the
development of tourism in Panama, divided the country in sections, in first place to
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organize an inventory of assets in each area, and secondly based on the need to
organize the construction of tourism-oriented infrastructure to cope with the
forecasted demand. The 9 zones together, concentrated 71% of the attractions of
the country (Condo 2001 cited in Nel-Lo and Perez 2007; Instituto Panameno de
Turismo 2005).

2.2.4. : Underlying reasons for travelling to Panama:

Tourists visiting Panama are provided upon arrival, a document to be filled up with
personal information regarded as highly valuable (statistically speaking) for the
country. In this document visitors can find five choices that would explain the
purpose of their trip, these reasons are as follows: leisure, business, conventions,
relatives and others (Instituto Panameno de Turismo, 2005).
The pattern of choices along the years 1995 to year 2004 revealed the strongest
reasons generating in the visitors the desire to visit the country (see table ):
Table 3 Reasons for travelling to Panama

Reasons for Leisure Business Convention Relatives Others TOTAL p/ Year

the trip
Percentage 54.18% 32.63% 5.36% 3.77% 4.05% 100%

Source: IPAT (2005)

As seen on the table, tourists visiting Panama feel attracted towards leisure
activities, such as retail shopping, outdoor activities, and short trips supported by
public and private infrastructure. This fact was also acknowledged by the Travel and
Tourism Competitiveness Report of the World Economic Forum, which ranks
Panama 50th of 130 countries worldwide, based on 14 pillars that measure the
factors and policies that make the travel and tourism sector attractive for
socioeconomic development (World Economic Forum 2008).

Economic growth in Panama is strongly supported by growth in the tourism sector

(World Bank 2008), to the point that IPAT predicts that by year 2010 Panama will
have surpassed Costa Rica’s number of visitors, which at the moment represent to
their economy over USD 1000 million per annum (in year 2002), versus Panama’s
400USD million (European Commission 2002). Even though the country is relatively
new in the systematic development of its potential to attract tourists, the results
have encouraged further development of this industry. In the following chapters, we
will keep exploring information on the potential of tourism in Panama.
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2.2.5. : Business in Panama:
An important number of tourists prefer Panama to many other business and
shopping destinations. Trade in Panama relies largely on the economic activities of
the “Colon’s Duty-Free Zone” a segregated area created in 1948 for re-exportations
of international goods. This place is at present time: The world’s second biggest re-
exportation center, (Oficina Economica y Comercial de la Embajada De Espana En
Panama, 2004). With a trade size of approximately 8,500 million US dollars in year
2007 , Colon Duty Free Zone alone, attracts yearly over 100 thousand visitor, most
of them wanting to retail shop in any of its 2 thousand 239 businesses (Instituto
Panameno de Turismo, 2005)

Additional reasons to explain the presence of a high number of tourists attracted to

the business opportunities in Panama, is answered by the inexistence of legal
restrictions to transfer abroad funds associated with capital employed as an
investment (World Trade Organization, 2007). This fact together with the flexibility in
immigration requirements for international travellers, have helped Panama look
appealing to new markets (Asamblea Nacional 2008). As a plus, the presence in
the country near to 120 banks from all over the world have made easier the access
to financing, specially for those clients who save their liquid capital in international
banks. The economical activity of these banks alone represented 8.4% of the GDP
for the year 2007 according to Panama Comptroller’s office (Contraloria General de
la Republica 2008).

2.2.6. : Conventions in Panama:

The celebration of large-scaled conventions is relatively new to the country. After
the construction of the largest convention centre in Central America: The “Atlantic-
Pacific Convention Center” also known as ATLAPA (With capacity for 10,500
people, and an area of 8 hectares) Panama became the host for the most
important events regionally during 1980’s, these events included the Miss Universe
beauty pageant of 1986 (Free Trade Area of the Americas 2000).

In 2003, a second convention centre this time a private one, was built with a
capacity of 12 thousand people, generating a new option for the organizers of
conventions and events. This boosted the arrivals of tourists specially Central-
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Americans wanting to attend major music shows and events (Abordo Publications
2003). Large-scaled events, have the potential of increasing dramatically the
occupancy rates in hotels of the city, and bring short-lived but significant economic
benefits.

2.2.7: Indicators of satisfaction:

According to Dichter & Neira (2006) tourists visiting the country feel a high level of
willingness to return, and 49% of them, considered their return to the country as
highly probable. On the other hand, 95% of the people surveyed, considered the
places they visited as “attractive” or “very attractive”. In general; 40.9% of the
tourists felt “very satisfied”, while 55% reported to feel “satisfied” with their visit to
the country.

2.2.8: Current Issues:

The new master plan for tourism (2007-2020) aims to increase substantially the
already steady growth that the hospitality industry has experienced over the last 15
years. However, some controversy rose on the goals the Panamanian Tourism
Bureau stated to be important for the new master plan. In special, the goal
described as “To use tourism as a key tool to promote Panama, as an ideal country
where to live, visit and do Business” [sic]. This together with the law N°132 which
regulates concessions over islands for its exploitation; have perhaps supported real
state developments and the construction industry, rather than real tourism oriented
activities (Ministerio de Relaciones Exteriores 2006;Contraloria General de la
Republica 2008; Asamblea Nacional 2005 ). Other issues such as a weak
institutional and planning framework to support a growing tourism sector’s
development; have been acknowledged by local authorities (World Bank 2008).

2.3. Colombian and U.S tourists as a part of the

Panamanian client-mix.

2.3.1: Promotion strategies in Panama:

Tourism differs from most industries because its clients travel to the points where
the experience takes place (Mansfeld and Pizam 2006). Other industries face the
logistical challenges inherent in moving goods and services from distant production
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sites to their customers, generating dependence to long chains of distribution
(Buhalis and Laws 2002). The particularities of tourism distribution are the various
ways in which tourism products are promoted and made available for tourists. As
Buhalis and Laws (2002) explain: “In tourism the position of the distribution sector is
much stronger than that of other trade intermediaries… thus, distribution is starting
to assume a much more central position in the strategy of most tourism
organizations and destinations”. Distribution channels in our case are businesses
such as travel agencies, which many times have the power to persuade the clients
to prefer one destination to another choice available. Panama recently started
efforts to deal directly with distribution channels such as to strengthen promotion
strategies already in use. In Panama, the details of the marketing plans are largely
a decision of the Panamanian Tourism Bureau, which, as suggested by the Ministry
of Economy and Finance (2006) awards concessions to companies qualifying to put
these strategies it into practice.

2.3.2: Current mix of clients in Panama:

The mix of tourists visiting Panama is in a way, the outcome of the international
advertisement campaigns carried out during the last years. Getting to know the
details of this clientele is a topic that of interest for the Panamanian government,
which thanks to a join effort of the IPAT, the immigration office of Panama, and the
Comptroller’s General Office of the Republic of Panama; collected valuable
statistical data on the subject (Condo et al 2001).

As mentioned earlier, documents including the Embarkation and Disembarkation

Card (IPAT 2006) are handed to every person arriving the country from any of the
ports of entry. The information collected by these documents is afterwards
processed by the immigration office of Panama. The tendency found by IPAT
(2005) and acknowledged by Nel-Lo and Perez (2007) is that the countries of origin
of most of the tourists visiting Panama are in order of importance: The United States
of America (29%) and Colombia (19%) being the proportion subject to little change
over the time. This means that natives from both countries represent almost half
the total of tourist arrivals in the country.

Other influential countries with a strong presence in Panama according to this

study, include Mexico (5%), Ecuador and Costa Rica (4% each), Venezuela and
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Canada (3% each), Guatemala and Spain (2% each) and the remaining 29% being
a mix of tourists from different nations with a proportion smaller than 2% (IPAT,
2005) (Dichter & Neira 2006).

2.3.3: Reasons for a particular mix of clients:

There are several possible reasons for such distribution of tourists.
Distance: Panama is approximately 2 hours and 50 minutes from the United States
of America (Miami International Airport) and only 1 hour 30 minutes from Colombia
(Bogota Airport), meaning that from Panama: Both countries can be reached by
plane within few hours.
Promotion: According to the IPAT 2005 the international promotion strategy of the
country can be summarized; as a strategy to consolidate the inclusion of Panama in
the route of major cruise ship companies, and some specific geographical areas. To
achieve this, last budget was distributed as follows: U.S.A 30% , Canada 10%, Latin
America 25% ,Europe 30% , Middle East and Asia Pacific 10% (Ministerio de
Relaciones Exteriores 2006; Carl-Frederik Nordström 2008) .

2.4.Tourism as part of the Panamanian GDP, review

on regional integration issues.

2.4.1: Tourism and GDP in Panama:

The Panamanian government by means of the Directorate of Analysis and
Economic Policies of the Ministry of Economy and Finance, keeps the track on the
economic tendencies in the country every year, and publishes them in the
Economic Statistics document a year after the end of the fiscal period.

According to the Ministry of Economy and Finance (2006) the Economic Indicators
of Panama are broken down into 4 sectors namely: real sector, fiscal sector,
financial sector and external sector. At this point we shall focus our attention on
what the Ministry of Economy and Finance calls the real sector. It is there, where
the sectoral indicators “Agriculture and Manufacturing”, “Commerce and Services”
are included. Incomes generated by tourism in the country appear under the sub-
sector Hotels and Restaurants and because of the changing proportions of each

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component of this sub-sector, cautious interpretation of this figure is required;
people attending restaurants are not necessarily tourists (Ministry of Economy and
Finance 2005,2006,2007) and their proportion in this statistical figure is subject to
change.

Based on concerns related to the meaningfulness of the aforementioned indicator,

this research will make use of a second measure of tourism activity, in order to
obtain a neutral view of the situation. The chosen indicator is the “International
Tourism Receipts” calculated by the UN World Tourism Organization, and
represents a useful reference for the case under study (World Resource Institute
2008). In the report made by the Ministry of Economy and Finance (2006) it can be
observed a remarkable growth rate of 8.1% experienced in the GDP during year
2006 (The highest in 10 years). Among other industries, tourism contributed
significantly to the achievement of such record growth rate. In this year the sub-
sector Hotels and Restaurants increased 12.5%, which could be attributed to an
increase of 22% in the number of tourists arriving the country during this period
(Contraloria General de la Republica 2008).

Table 4: Growth rate in major Panamanian industries.

Industry 2004 2005 2006 2007
Agriculture & Livestock +2.0% +4.5% +7.4% +4.0%
Fishing +0.3% +1.6% -5.4% -2.2%
Mining +12.5% +0.1% +16.2% +19.6%
Manufacturers +2.1% +3.0% +5.1% +5.7%
Electricity generation and Water treatment. +6.1% +5.0% +3.6% +5.1%
Construction +13.9% +1.0% +17.4% +19.6%
Hotels and Restaurants +13.5% +11.1% +12.5% +14.6%
Transport, Warehousing, Communications +17.4% +7.8% +9.2% +17.6%
Financial activities -5-6% +16.0% +12.8% +18.7%
Real Estate +7.5% +7.4% +5.3% +7.3%
Private Education +4.6% +2.3% +6.3% +4.2%
Health Services +5.4% +3.5% +2.6% +6.0%
Other social and private services +3.9% +4.0% +6.2% +8.7%
Housemaid service +8.0% +1.8% +3.3% +2.3%
Central Government +2.4% -0.7% +1.9% +3.3%
Sources: Contraloria General de la Republica 2008; Ministry of Economy and
Finance 2007.

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In spite of a global slow-down in travel activity from 2001 to 2004 (generated by the
terrorist attacks in U.S.A of 2001) a recent study done by Nel-Lo and Perez (2007)
argued that from 1993 to 2006 the percentage of GDP generated by tourism in
Panama has quintupled. Such a steady growth, led to important increase in the
generation of formal jobs countrywide (Minsterio de Economia y Finanzas 2006).
Official estimations for year 2007 reveal that out of 1,421,114 economically active
persons in Panama, 76,847 (5.04%) work for the sub-sector Hotels and Restaurants
(Contraloria General de la Republica 2008b)

The industries bringing the strongest contributions to the GDP as shown by the
yearly report of the Ministry of Economy and Finance (2006), are in order of
importance: services, industry and agriculture. These same studies show that
incomes generated by tourism have grown steadily in spite of fluctuations in other
industries (see table 4).

2.4.2: Commercial integrations between Colombia, The United States of America,

and Panama.
Member of the General Agreement on Tariffs and Trade (GATT) since 1977 and
member of its successor agreement, the WTO since 1997; Panama is a country
with an economy depending largely on the maritime industry, and services
connected to the Panama Canal; which alone, represents in excess of 6% of the
GDP (Ministerio de Economia y Finanzas 2006).

The United States of America is open to a great deal of imports from Panama and
Colombia. Bilateral agreements, known as trade preference programs e.g. The
Caribbean Basin Initiative (CBI) and the Generalized System of Preferences (GSP),
contribute to a smooth exchange process for these goods. Nearly half of the
Panamanian imports come from the United States of America, and nearly 96% of
Panamanian exports entered the U.S market duty free (The Office of the United
States Trade Representative 2007).

According to The Office of the United States Trade Representative, (2007) only in
2006, bilateral trade between Panama and the United States of America, totalled
3.1 billion dollars. The United States of America is in fact, Panama’s most important
commercial partner (Ministerio de Comercio e Industrias 2008). Trade with
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Colombia is very important for Panama as well: In 2006, Panama exported to
Colombia goods and services in account of USD 18,563,762 (Contraloria General
de la Republica 2006) while imported from Colombia USD 257,484,333 worth in
products and services (Proexport 2006).

The United States of America is Colombia’s most important commercial partner,

totalling in year 2006, 16 billion dollars in bilateral trade, which ranks this country, in
the 29th place in the list of export markets of the United States of America (U.S
Department of commerce. 2008). The sustained magnitude of this intense
commercial trade with Colombia is possible thanks to the Andean Trade
Preferences and Drug Eradication Act (ATPDEA) of 2002, which replaced the
Andean Trade Preference Act (ATPA) of 1991 signed between the United States
and Colombia, Bolivia, Peru and Ecuador (United States Trade Representative,
2001). This act was created as the result of trade policies of the U.S, aiming to
encourage commercial alternatives to drug trafficking in these countries.

In brief: Strong trade between Colombia, Panama and the United States of America
is in great deal, the result of multilateral agreements, enforcing commercial
interrelations and sharing strategic interests. It is important to emphasize the fact
that a high percentage of Colombian and Panamanian exports are bounded for the
United States of America. Such condition may signify that economic wealth and
stability of these two countries depend on that of the U.S.A if no other sizeable
commercial partners are available.

2.4.3: Economic importance of Colombian and American Tourists:

According to Nel-Lo and Perez (2007) tourists from South American countries were
for decades the ones with the strongest presence in Panama, in early 1980s U.S
tourists outnumbered in presence any other nation in the country. Later, escalating
tensions with the U.S, in January 1988 changed this trend dramatically. This year, a
U.S court indicted Panama’s military leader, and in March, the U.S government
imposed economic sanctions on Panama. The sanctions included declaring
Panama off-limits for military personnel, compelling American companies not to pay
taxes in Panama, ceasing payments to the Panamanian government from the U.S
government, and freezing of all Panamanian government accounts in banks in the
United States (Moreno-Villalaz 1999). All of these unilateral decisions, undermined
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the stability of tourism in the country, and caused serious damage in the economy
overall. It results noticeable the fact that after the aforementioned sanctions were
removed (in 1990), the client-mix distribution went back to a strong presence of
U.S tourists, followed in second place by South Americans, in specific Colombians
(Condo et al 2001).

Tourists from Colombia and the U.S.A in Panama, share similar profiles in terms of
demographic and financial features as found by a recent study of Dichter and Neira
(2006). Table 4, displays a set of features relevant to the analysis of the Colombian
and U.S tourists in Panama. By means of a survey, this marketing and advertising
consultant, made important socio-economic findings on tourists visiting Panama:
Among other things they have found that tourists whose origin were the United
States of America, averaged monthly incomes of $5,557 and spent an average of
$2,021 during their stay in Panama. On the other hand, the same study shows that
the average monthly income of Colombians visiting Panama is of $3,116 while their
average spending in the country account for $1,716 (The study does not specify
whether this money was spent in tangible goods or in services).

Table 5: Profile of the U.S.A and Colombian Tourists visiting Panama.

U.S.A Colombia
Reasons to travel
Business 22.5% 25.1%
Leisure 64.1% 62.9%
Visit friends/Relatives 13.4% 12.0%
Average length of the stay 7.2 nights 7.0 nights
Monthly Family Income
Less than USD 1,000 5.5% 8.4%
USD 1,000-2,999 23.3% 38.9%
USD 3,000- 4,999 24.2% 21.0%
USD 5,000 and above 32.7% 17.4%
Amount of money spent during the trip
Less than USD 500 17.2% 16.2%
USD 500 – 899 23.4% 22.8%
USD 900 – 1,499 17.2% 16.8%
USD 1,500 and over 36.4% 40.1%
Source: Dichter & Neira, 2006; Nel-Lo and Perez (2007)

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The level of expenditure, particular to each type of tourist seems to many, a correct
reference to estimate the return on investments the government wishes to obtain
from its campaign. However as seen in the following sections, the nature of this
spending may influence the economy in different ways. Average Colombian tourists
during their stay in Panama, prefer to go shopping 65.3% of the time, go to the
beach 29% of the times, and visit historical sites 17.8% of the times (see table 6).
Suggesting that, their presence in the country is felt stronger in the commercial
sector rather than in the tourism sector (Dichter & Neira, 2006).

On the other hand, average tourists from the U.S.A (outnumbering in approx. 10%
those from Colombia) prefer in the practice to go to the beach 41.5% of the times,
go shopping 39.4% of the times, and visit historical attractions 26.8% of the times
(Dichter & Neira, 2006). These observations suggest interest in cultural aspects of
the visit, in spite of the distances tourists need to cover to reach them. Tourists from
the U.S.A normally create demand for English-speaking labour, such as translators,
bilingual tour guides, and english-speaking hospitality staff in general. Tourists from
Colombia, have on their side the fact that Panama’s native language same as in
Colombia: is the Spanish. Under normal conditions, they do not require specialized
labour such as bilingual assistance to deal with their needs. There is a positive side
on this fact, which is that an increase in the number of Colombian visitors will not be
limited by the availability of specialized labour in the host country. While on the
negative side, the number of jobs generated by this type of tourist is comparatively
smaller.

2.5. Investment analysis techniques and their

potential in designing international marketing plans
for tourism:

Many professionals of trade evaluate trading-risk by looking at the volatility of the

markets and learning the rate at which prices move up and down. The theory we
present next, has been designed to estimate ways in which volatility affects money
invested in portfolios of risky assets.

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2.5.1: The portfolio theory:
The classic portfolio choice problem is the theory developed by pioneer economist
Mr Harry Markowitz (1952) who divided the process of selecting a portfolio into two
stages: the stage which “starts with observation and experience and ends with
beliefs about the future performances of available securities”. In addition, the
second stage starts with the relevant beliefs about future performances and ends
with the choice of portfolio.

Portfolio theory applied to the case:

The original theory, was intended to serve the purposes of the individuals or
organizations owning portfolios of risky assets e.g. stocks and bonds issued by
private companies or governments. Markowitz’s theory uses principles widely
studied by modern statisticians to among other things estimate degrees of
relationship between variables, and degrees of dispersion between their values
(Makridakis et at 1998). The approach we intend to give to Markowitz’s theory is
achievable by analogically comparing the components in a portfolio of risky assets,
with the factors associated to the distribution of the IPAT’s international marketing
budget
As expressed in formal documents of the Panamanian Government, the current aim
focuses on what they call “the markets with the higher profitability” (Ministerio de
Relaciones Exteriores 2006 p 43). But, this priority has been no guarantee of
success. Poor outcomes were obtained from the campaigns previous to the
Argentinean crisis of 1999, and the U.S.A crisis of 2001 (Ministerio de Economia y
Finanzas 2003 b; Ministerio de Economia y Finanzas 2001).

During the period of research done for this paper (on formal strategic marketing
documents), there were found no considerations on the risks inherent in
international commerce. This makes us believe that their assumption was; that the
conditions at the moment of the marketing research, were taken for granted in the
future. Mansfeld and Pizam (2006), identified there were two main types of factors
that can potentially generate crises in all types of organizations:

External factors:
Subdivided in physical environment and human/social environment: As an example,
September the 11th 2001, for the very first time in US history there was a complete
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shutdown of the US aviation system, creating such huge losses that a federal
government bailout and guaranteed loans for airlines were warranted (Mansfeld and
Pizam 2006 p 280). External factors in several cases are hard to forecast, and have
the potential to generate complex scenarios.

Table 6: Similarities between managing the national budget for

international promotion and managing a portfolio of risky assets

National budget for international promotion Portfolio of risky assets

1. Choices: The government chooses 1. Choices: The investor (individual or
where, and how much money to invest, corporate) chooses the securities and
based on data collected and analyzed, or its weight within the portfolio (Elton et
based on subjective opinion forecasts al 2007).
(Harrison and Enz 2005).
2. Risk: There are five different measures of 2. Risk: Each security is awarded a
country risk: political risk, the financial risk, level of risk, which can be calculated
economic risk, composite risk indices, based on previous performances, and
institutional investor’s country credit ratings, other information available (Elton et al
each calculated based on past 2007, Markowitz 1992).
performances (Comptroller of the Currency,
Administrator or National Banks 2008).
3. Limits: The amount of money in the 3. Limits: The amount of money in the
hands of the investor (the country) is limited hands of the investor is limited.
(Arese 2003).
4. Risk Compensation: Even though 4. Risk Compensation: Securities with
managing risks from international activities, the highest volatility, tend to pay the
demand higher care from the investors higher returns to compensate risk-
(Comptroller of the Currency, Administrator taking investors (Kan and Zhou 2007).
of National Banks 2008). In the case of
tourism and marketing investments, any
risk taken should be assumed without
expecting compensations.

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Internal Factors:
Represented by Management failure which is the case of Argentina’s crisis of 1999
(Mansfeld and Pizam 2006 p 297) these can be detected, by the correct analysis of
socio-economic indicators. Since deterioration of the domestic economic activity
increases a country’s likelihood of crises (Lanoie and Lemarbre cited in
Loughborough University, Department of Economics 2007), arguably economic
information can provide us clues, to forecast periods when tourism promotion is not
as effective.

Considering that tourism is one of the industries most susceptible to crises (Santana
2003) and being such crises of different natures, we acknowledge the importance of
developing international promotion strategies that would adjust to changing
economic panoramas.

2.5.2: Diversification and tourism:

The rationale of portfolio investment before 1952’s Markowitz theory was “Since the
future is uncertain, this must mean that we value a stock by its expected present
value; and similarly must value a portfolio of securities. But to maximize the
expected value of a portfolio, one puts all one’s money on the security with
maximum expected return” Markowitz 1992. This argument, of putting the investor’s
money into the security with maximum return, is addressed in this research as being
the equivalent to spending the marketing budget on attracting the nationalities
yielding the highest returns to the country.

From Markowitz’s portfolio management theory and a little common sense, we

know today that we should diversify to reduce risk. Based on the idea that
diversification decreases risk Black (2002) stated: “The advantage of diversified
markets is that a firm or a country will be less risky, as its markets are unlikely to
slump at the same time.” The term risk of diversification and its association with
the mix of tourists in Panama is the major concern of the present paper.

The present document aims to explore only, a few basic principles of Markowitz
(1952) including that investors should both; diversify their portfolios, and maximize
expected return while minimizing risks. Recent studies (Kan and Zhou, 2007) have
demonstrated that estimates obtained by the classic portfolio theory, lead to very
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poor out-of-sample performance. In this case, we are applying this principle to a
situation other than the portfolios of risky assets, bearing in mind that; diversification
alone cannot eliminate all variance.

2.6 Summary

During the years of military dictatorship (1968-1989), Panama underexploited its

potential in tourism, which caused the economy to depend on practically three
activities: the Panama Canal, banking services, and commerce. During 1990’s:
Panama with the support of international organizations, developed hospitality
business in hopes to generate more incomes and job opportunities for the country.
As an outcome of the aforementioned events, the percentage of GDP generated by
tourism quintupled from 1993 to 2006.

It seems evident that the country recently placed its bet for an international
promotion strategy oriented to clients in the American continent especially those
from The United States of America. Alas, as the advertisement budgets suggest;
the factors stopping Panama from a transcontinental advertising campaign, may
have to do in a great deal with the size of the yearly budgets for international
promotion.

Concerning the use of smart ways to manage limited resources, it is important to

consider methods used by statisticians and investors around the world to measure
levels of riskiness associated to different economical activities. Stocks traders
worldwide have dealt with similar types of decisions and approached them
rationally, adjusting their investment strategies to matching degrees of risk
avoidance or acceptance, not leaving these decisions to mere subjectivity. Tourism
turned already into an important pillar for the Panamanian economy; and there are
clear opportunities to improve the decision-making process related to promotion
strategies

In the following chapter we have made an assay to explain the methodology used in
the effort to complement aforementioned theoretical approaches, with empirical
research.
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 CHAPTER 3

_____________________________
__________DATA AND METHODS

39 Page |
 3.1. Research philosophy.

This research is based on interpretation of knowledge rather than on mere

observations, insofar as it does not search deductively after constructions unrelated
to the matter in question. By the use of the scientific method’s “third person
approach”, useful when researching objective phenomena rather than subjective
ones (Booth W, Colomb G, Williams J, 2003.), this paper follows the principles of
positivistic philosophy in general, based on the sense-given as the real source of
knowledge. Positivism is in essence the form of empiricism that bases all
knowledge on perceptual experience to avoid subjective judgments, frequently
backing arguments on quantifiable or countable items (Gunning 2004).

3.2. Research approach.

This research provides first: a sense of the whole and its structure before turning to
specific arguments. It treats subjects, important to Panamanian tourism in outline.
Afterwards, it addresses theories about risk management and tourism, based on an
analogy between a portfolio of risky assets and a portfolio of countries where to
promote Panama. The research eventually narrowed it down to a testable
hypothesis.

In logic, deductive reasoning works from the general –premises- to the specific –
conclusions- (Booth et al 2003), which in fact is the research approach of the
present dissertation. The purpose of the use of this style has been to clarify basic
claims related to the main topics of interest, backing them with reasons and
evidence, before addressing complex topics connected to the initial claims. The
assumption has been, that readers will easily judge and understand the
fundamental claims of this research, if they are ushered to them through more
general concepts of great importance.

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3.3. Research strategy.

This research was conducted with the aim of identifying signals of economic
deterioration in countries targeted by the promotion campaigns of the IPAT. To
accomplish this goal, it was required to study tourist-generating countries that faced
economic hardships, and contrast them against tourist-generating countries that
experienced economic stability during the same period.

To describe accurately any finding, empirical research procedures, such as

experimentation and observation, were applied throughout this document, in special
to determine the role of volatility in real GDP before an economic crisis. These
procedures were done under the assumption that, economic deterioration of a
country decreases the generation of tourists on-site.

Being the research focused mainly on three countries: Panama, The United States
of America, and Colombia; it was considered opportune to enrich the sample and
observe economic-growth patterns of additional countries such as accumulate more
evidence for or against the claims stated herein. The outcomes of the statistical
analysis performed and additional observations were evaluated and interpreted in
the final stages of the research.

3.4. Data used

The data collected from secondary sources was expressed originally in nominal
values; however, this research relies largely on the usage of percentages and rates
of change. This in an attempt to diminish the distortion that could be generated by
using large values of different magnitudes.

3.4.1: Gross Domestic Product (GDP):

According to Black 2003, GDP is a measure of economic activity in a country, which
is calculated by adding the total value of a country’s annual output of goods and
services as follows: GDP= Private consumption + investment + public spending +
change in inventories + (exports – imports) . Even though GDP alone is not a

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perfect measure of welfare (Boustead 1998), GDP growth serves as a tool to
estimate (within certain limits) variations in labour vacancy rate, components of
capital and technology (Knotek 2007) which are critical elements affecting the
access of people to wealth.

3.4.1.1: Gross Domestic Product in countries observed:

GDP Size for the countries of study has been obtained from the databases of the
World Bank, as posted by World Resource Institute. Detailed information required
for the countries we devoted more attention to: USA, Colombia and Panama has
been obtained from governmental sources. The website of Colombia’s Vice-Ministry
of Exterior Commerce (VICOMEX), and Panama’s Ministry of Economy and
Finance, have been of great utility while collecting such information.

Governmental offices and well-recognised databases have been consulted in order

to avoid inaccurate sources of information, reducing chances for incongruence to
happen. It is worth mentioning that during the process of data collection, there were
found restrictions to access recent statistical documents, as the government offices
dealing with the processing of such data did not consider the files ready for public
access.

3.4.1.2: Real GDP per capita: Real GDP is an inflation-adjusted GDP. The figure
obtained when divided by the country’s population results in what we call GDP per
capita (Black 2003). It is frequently used as an indicator of standard of living in an
economy. For this research this data was obtained from the official registers of the
World Bank from 1961 to 2005.

3.4.2.: International Tourism Receipts: Refers to the expenditures made by inbound

tourists of international origin; it includes services provided to these tourists in the
host country, and payments to national carriers for international transport. The
World Resource Institute, who uses information released by the World Bank in
cooperation with the World Tourism Organization, has made these figures available
for public use. In this research, international tourism receipts are referred to: as
tourism receipts alone. One limitation found in the study, had to do with tourism
receipt’s unavailability of official records for public use for the year 2005 onwards
(World Resource Institute 2008).
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 3.5. Methods and techniques

The initial steps of this research measure fluctuations experienced in meaningful

economical indicators, belonging to a list of countries chosen. Other statistical data
were also collected and analyzed, in special if they measured tourism activity, or
wealth. These data sets include GDP figures (Real country’s GDP, and Real GDP
per capita), International tourism receipts for Panama, and the indicator used by this
government as the measure of tourism activity: the subsector “Hotels and
Restaurants” as a percentage of the Panamanian GDP.

For the additional countries under study, measures of dispersion in the real growth
rates of their GDP per capita were calculated. This, with the purpose of observing
one relationship between them and their economic performance during the years
observed. As a complement, simple descriptive statistics were used to help explain
the outcomes.

The second steps of the research made strong use of forecast methods to base our
findings on. The forecasting methods to choose from were in short: the subjective
opinion forecasts, and the statistical analysis of past demand. The first system
acknowledging experience and expertise of interviewed individuals in order to depict
a future scenario: It is considered by many as simple to operate but usystematic in
character and subjective to biases. In this regard statistical analysis of past demand
was a more accurate method of obtaining a forecast. Since this method uses
numerical information from the past to provide a useful basis for future, and since its
findings can be proved mathematically; it matched the requirements of the present
research.

The expectations are, that these steps would contribute achieving research goal
number four “• To explore the potential applications of investment analysis, to the
international promotion of Panama’s tourism product.”, the outcomes derived from
this step, can provide quantitative reasons to judge certain circumstances to be
risky investments.

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Third step was a comparison between the results obtained through statistical
analysis of past demand, with the purpose to base inferences. This step intends to
contrast results obtained through identical methods of risk analysis but using
different economic indicators for tourism activity.

This study has its limitations; No method we know, can deal realistically with the
happening of unknown events without the usage of assumptions. Any statement on
future events based on past performances is arguable. Other limitations of the
study included the access to very recent information on real GDP, and tourism
receipts for the countries of study. Much of this information was reported to be for
official use only.

3.5.1. Methods in specific.

3.5.1.1: Measures of dispersion and uncertainty:

The most popular indexes because simplicity wise are variance (VAR) and standard
deviation (STDEV), based on that fact and on the familiarity with both they preferred
over other methods.
3.5.1.1.1: Variance:
Given a time series x= x1, x2, x3…., xi …, xn where the index i refers to discretized
data points, the sample variance is defined as:
Σ (xi - ὶẋ)²
Var (x) = s² = i = 1____________

n-1
Where ẋ is the sample mean and s is the standard deviation. Variance measures
average distances of data points from its mean.

3.5.1.1.2: Standard deviation

This research makes ample use of variance’s square root: the standard deviation s
= √s².
The reason for this is that since the data sets whose variability will be computed,
are percentile points it is easier to interpret the meaning of the results if those are
expressed in the original units.

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3.5.1.2: Measures of linear relationship:
3.5.1.2.1: Correlation
This paper devotes special attention to the outcomes obtained through the
correlation coefficient (CORREL) as a statistical measure of linear relationship
between two random variables. CORREL is typically used to determine whether the
two sets are independent (ρ= 0) or whether one is an affine function of the other
(ρ= ±1).

Correlation coefficient was chosen from other similar methods e.g. Co-movement
coefficient and dynamic correlation, based on the familiarity with the method and the
reliability of its results. Also known as the Pearson product-moment correlation
coefficient it was obtained by dividing the covariance (cov) of the two variables by
the product of their standard deviations (σ).

ρ x,y = cov (X,,Y)__ = E(XY) – E(X)E(Y)_

σxσy √E(X²) – E²(X) √E(Y²) - E²(Y)

Where E is the expected value and cov means covariance.

3.5.1.3: Assessment methodologies and research objectives

Risk analysis methodologies chosen in the present research paper; initially address
impacts of tourism receipts in Panama by describing the behaviour of tourism
activity indicators. Correlation research is considered a useful tool in the process of
fulfilling this research objective, because of its potential in describing relationship
between two indicators, which in our case intend to measure the same industry
(tourism) from different perspectives.

Concerning the application of investment analysis principles to the International

promotion of Panama (research objective N°4) standard deviation as a key indicator
of riskiness, is considered valuable especially in the task of spotting countries
displaying inconsistent economic growth. This method alone may help visualize
important riskiness factors with significant ease.

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Next section display the results obtained by applying the concepts seen in this
chapter, followed by their analysis.

3.6. Minimizing threats to reliability and validity

Research studies based on deductive inferences; accept that justified true beliefs
constitute knowledge. These justified beliefs are possible though the use of reliable
sources of information and processes of thinking (Morse et al 2002).

Reliability can be defined as “The extent to which the measurements of a test

remain consistent over repeated tests of the same subject under identical
conditions” University of Indiana 2007. And it occurs when one has a justified belief
that a phenomenon X if, and only if, the belief is the result of a reliable process of
thinking; more often than not, this process is associated to the knowledge of the
mechanisms causing the phenomenon X (Goldman 2003). Because of the
knowledge of the causes of this event, it is theoretically possible to reconstruct the
causal chain and prove knowledge of the phenomenon (Golafshani 2003). This is
the reason why these concepts constitute a concern for the researches in general: if
the research failed to find valid information and analyze it through valid processes,
future replication of the study would be compromised.

On the other hand, validity can be explained as “The degree to which a study
supports the intended conclusion drawn from the results” University of Indiana
2007. While the issue of validity can be technical and complex, the concerns of
validity are straightforward (Shoemaker 2006). Often this issue is reduced to the
question of what else other than the factors we explore in this project could have
caused the results observed (known as internal validity) and how general or
representative are these findings to other individuals or groups, which is external
validity (Morse et al 2002). Other aspects of validity include construct validity, which
is related to the adequate representation of what is intended by the theoretical
account; and statistical conclusion validity with which statements about the
experimental findings can be made based on statistical tests (University of Indiana
2007).

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In summary, Reliability is associated with consistency, while validity is more
associated with “targetness”

3.7. Summary of the main components of

methodology.

As this chapter has argued, the research methodology that is better suited for this
study is a positivist, deductive one, based on secondary data. The emphasis of this
research is on the measurement and analysis of causal relationships between
variables, using a naturalistic approach that seeks to understand phenomena in a
context-specific setting that for our case is the “real world”.

In order to generate a trustworthy research report, we have considered factors such

as reliability and validity, important to the research in any paradigm; these two
factors are conceptualized as trustworthiness, rigor and quality in qualitative
paradigm. It is also through this association that we seek to eliminate biases and
increase the researcher’s truthfulness of the proposition. The next chapter presents
the results of the statistical analysis performed on the data sets, and findings based
on them.

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 CHAPTER 4

_____________________________
_________ _RESULTS

48 Page |
 4.1. Overview of the sections

Overview: Descriptive statistics.

Presents collected numerical data as a summary contained in charts. This data
includes recent evolution of two important indicators of tourism activity. Being the
first indicator (hotels and restaurants), the most popular reference for the
performance of the tourism industry in Panama and the second indicator
(international tourism receipts), a more universal indicator used by institutions
ranging from the United Nations World Tourism Organization (UNWTO), to the
World Bank. Growth rates in these indicators have been preferred over the nominal
values to avoid confusion caused by the use of large numbers and help compare
values of different magnitudes.

Overview empirical results:

This section collects the results of the correlations between GDPs per capita, as an
indicator of standard of living, in the main countries under study (USA, Colombia
and Panama). The outcomes are expressed as a coefficient (see “Methods and
techniques” section 4.3.1.2), in brief this section intends to provide mathematical
support for the existence or inexistence of trends that would help design strategic
marketing plans in the future.

Overview subsections 4.4.2.1 and 4.4.2.2: Aim to apply principles of regression

analysis, such as to model relationships between the variables. Being these
variables real growth (GDP per capita) and tourism activity indicators of Panama,
versus the real growth (GDP per capita) for Colombia and The United States of
America.

The results in section 4.4.2.3 explore the risks associated to international

promotions, using as a reference IPAT’s campaign of year 1998, which happened to
coincide with major economic crises in two of the target markets of Panama (see
Literature review 1.10.1). The data in this section is expressed as standard
deviation as a measure of riskiness.
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The central part of section 2.4.2.3 displays information of additional countries, some
of them have been included for the importance they represent to Panama, and
these include: The United States of America (USA, Colombia (COL), Argentina
(ARG), Italy (ITA), Spain (ESP), Chile (CHL), France (FRA) and The United
Kingdom (GBR).

Other countries have been added to serve as a reference because of the economic
stability demonstrated from 1961 to 2005 (see table 8), these include: Switzerland
(CHE) and Great Britain (GBR). Two countries have been added to serve as a
reference of poor economic performance (see table 8) these countries are: Haiti and
El Salvador.

Observations on potentially relevant events such as unfavourable changes in the

chosen indicators and historical notes have been added to enhance comprehension
of the causes of these crises. Last part of this section, displays correlation
coefficients between the countries analysed in the previous step, in an effort to
provide information necessary to determine if diversification of risks is of any help in
the case of study.

4.2. Descriptive statistics

Measures of tourism activity:

The indicators hotels and restaurants, and tourism receipts measure tourism activity
(in Panama) and it is expected to see them sharing their views. Notwithstanding,
when compared to each other, we see in years 2001 and 2000 discrepancies where
one of the indicators claim that the growth rate fell below zero, while a second
indicator (tourism receipts) reported important gains in the same sector.

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 Table 7: Changes in the indicators of tourism activity 1997-2005

Units: Percent (%) 2005 2004 2003 2002 2001 2000 1999 1998 1997
Hotels and restaurants
PAN 11.1 13.5 3.9 5.6 -1.8 -3.7 3.2 13.2 7.8
International tourism
receipts PAN 22.7 12.3 13.2 6.7 5.8 24.1 2.8 4.5 9.0

Correlation: -0.1242 Source: World Bank 2008, IPAT 2005.

Table 8 lists historical growth rates in GDP per capita for the period 1997-2005, in a
number of countries who experienced different degrees of economic growth during
the time frame. They will serve as a reference to recreate different scenarios of
economic stability.
Table 8: Real growth rates (GDP Per Capita) 1997-2005.

Units: Percent (%) 2005 2004 2003 2002 2001 2000 1999 1998 1997
Argentina ARG 8.1 8.0 7.8 -11.8 -5.4 -1.8 -4.5 2.7 6.8
Chile CHL 5.2 5.0 2.8 1.0 2.2 3.2 -2.0 1.9 5.1
Colombia COL 3.5 3.2 2.2 0.3 -0.2 1.2 -5.9 -1.2 1.6
France FRA 0.6 1.7 0.2 0.3 1.3 3.5 2.8 3.1 1.9
Haiti HTI 0.5 -3.6 -2.0 -1.5 -2.3 -1.0 1.2 0.7 1.2
Italy ITA -0.8 0.1 -0.7 0.0 1.7 3.5 1.9 1.4 1.8
Japan JPN 2.6 2.3 1.6 -0.1 0.2 2.8 -0.4 -2.0 1.1
Mexico MEX 1.9 3.1 0.4 -0.2 -1.2 5.1 2.4 3.4 5.2
Nicaragua NIC 3.4 4.6 1.6 -0.4 1.5 2.3 5.1 1.8 1.9
Panama PAN 4.5 5.7 2.3 0.3 -1.3 0.7 1.9 5.2 4.3
Spain ESP 1.7 1.4 1.3 1.2 2.4 4.2 4.2 4.1 3.6
Switzerland CHE 1.2 1.4 -1.0 -0.4 0.4 3.0 0.9 2.5 1.7
United Kingdom GBR 1.2 2.7 2.0 2.3 2.6 2.3 2.8 3.0 3.0
United States USA 2.2 3.2 1.9 0.5 -0.3 2.5 3.3 3.0 3.3

Sources: World Bank (2008) and Ministry of Economy and Finances (2007)

It is remarkable that 3 countries in the sample (GBR,FRA and ESP) have not
registered negative growth within the selected time frame. Of the remaining
countries 4 faced negative growth 11% of the cases (USA, PAN, CHL,NIC), 3
countries had it 22% of the cases (ITA, CHE, MEX), 2 countries 33% of the times
(JPN, COL), 1 country experienced negative growth 44% of the times (ARG), and
one country experienced negative growth 67% of the times (HTI).

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Using as background the information listed in table 9, the following table measures
dispersion in the way of standard deviation for the real growth rates in GDP per
capita figures displayed. Information on Table N° 10 was arranged in descending
order.
Table 9: Standard Deviation Results.

From 1997-2005
Country Standard Deviation Years facing negative growth
Argentina 7.29 4
Chile 2.33 4
Colombia 2.86 3
France 1.23 0
Haiti 1.73 5
Italy 1.43 2
Japan 1.60 3
Mexico 2.25 2
Nicaragua 1.70 1
Panama 2.44 1
Spain 1.33 0
Switzerland 1.29 2
United States 1.29 3
United Kingdom 0.57 0

Computed by the author, based on the information given in table 9.

Ten industrial sectors build up the Panamanian economy, according to the Ministry
of Economy and Finance some sectors show strong tendency to grow, while others
have weaker performances if compared with the rest.

Tourism (represented by H/R on table 10) displays a moderate average growth

rate, and apparent ability to recover from sporadic contractions. This based on the
fact that the negative growth rates in the sample, ranged between -1.8 and -3.7%
while the rest of the growth rates, ranged between 3.2% and 14.6%.

It is worth noticing that in year 2000 and 2001, while tourism’s growth rates were of
-3.7% and -1.8%, the average industry growth were of 3.2% and -2.6% respectively.

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 Table 10: Growth rates in main sectors of the Panamanian economy (In %).

Industry 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average
A/L 3.3 6.6 1.8 10.1 6.4 2.0 4.6 2.0 4.5 7.4 4.0 4.8
MIN 80.8 26.1 23.9 -10.6 -4.1 18.1 25.2 12.5 0.1 16.2 19.6 18.9
MAN 3.3 2.2 1.1 -7.2 -6.3 -2.8 -1.6 2.1 3.0 5.1 5.7 0.4
E/W 6.2 -2.5 12.0 9.3 -4.7 6.6 1.7 6.1 5.0 3.6 5.1 4.4
CON 6.7 11.9 36. 1.3 -21.8 -7.1 32.5 13.9 1.0 17.4 19.6 10.1
H/R 7.8 13.2 3.2 -3.7 -1.8 5.6 3.9 13.5 11.1 12.5 14.6 7.3
T/W/C 14.6 16.9 9.6 17.8 2.3 2.7 15.6 17.4 7.8 9.2 17.6 12.0
FIN 5.8 12.5 5.3 9.7 -2.9 -1.1 -6.2 -5.1 16.0 12.8 18.7 6.9
R.E 4.9 5.2 6.1 3.6 1.0 3.2 3.7 7.5 7.4 5.3 7.3 5.0
C.G -0.9 2.5 0.8 1.8 5.8 3.8 2.6 2.4 -0.7 1.9 3.3 2.1
AVERAGE 13.3 9.5 10.0 3.2 -2.6 3.1 8.2 8.2 5.5 9.1 11.6

Sources: Ministerio de Economía y Finanzas 2003b, 2007.

A/L: Agriculture and livestock

MIN: Mining
MAN: Manufacturers
E/W: Electricity and water treatment
CON: Construction
H/R: Hotels and restaurants
T/W/C: Transport, warehousing and communications
FIN: Financial intermediation
R.E: Real estate
C.G: Central government

In order to test the popular statement saying that tourism (H/R) is negatively
correlated with several other industries of Panama, we applied statistical analysis to
the sample seen on table 10. The results on table 11 do not show any special
tendency in this regard.

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Table 11: Correlation between sectors of economy in Panama (1997-2007).

All correlations expressed as a coefficient

Sector A/L MIN MAN E/W CON H/R T/W/C FIN R.E C.G
A/L 1
MIN -0.43 1
MAN -0.37 0.48 1
E/W -0.32 0.11 0.12 1
CON -0.27 0.30 0.51 0.41 1
H/R -0.34 0.29 0.90 -0.07 0.32 1
T/W/C 0.17 0.23 0.28 0.18 0.53 0.30 1
FIN 0.36 0.08 -0.10 -0.11 -0.07 -0.29 -0.29 1
R.E -0.38 0.14 0.80 0.44 0.53 0.47 0.47 -0.37 1
C.G 0.14 0.14 -0.47 -0.55 -0.37 -0.30 -0.30 -0.07 -0.57 1
Computed by the author, based on the information given in table 10.

4.2.1. Empirical results

4.2.1.1: Relationships between the USA, Colombia an Panama: The first table
explores relationships between Panama, USA and Colombia’s real GDP by the
computation of their correlation coefficient.

Table 12: Correlations between Real GDP 1960-2005

PAN GDP vs. USA GDP 0.99
PAN GDP vs. COL GDP 0.96
COL GDP vs. USA GDP 0.95

In an attempt to understand connections between tourism indicators and external

elements: the research contrasted the statistics on growth rate of hotels and
restaurants industry, versus growths rates in Real GDPs of Colombia, The United
States of America and Panama. The results contradicted our supposition that hotels
and restaurants were to show strong correlation with Panama’s GDP (assuming that
restaurant guests were mainly locals).

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 Table 13: Correlations between Restaurants and Hotels
vs. GDP Per capita (growth rates) 1997-2005
PAN H&R vs. USA GDP 0.89
PAN H&R vs. PAN GDP 0.47
PAN H&R vs. COL GDP 0.27

Given that international tourism receipts act as a well accepted measure of tourism
activity (World Tourism Organization 2005) it became the second indicator to be
contrasted against growth rates of the Real GDP per capita of Colombia and the
U.S:A. These figures were not contrasted against Panamanian GDP because local
expenditures in leisure activities are not considered by this indicator.

Table 14: Tourism receipts versus GDP per capita (growth rates) 1997-2005

TR PAN/ COL GDP 0.67

TR PAN/ USA GDP 0.10

In order to obtain visual reference for the co-movement between the indicators used
in this research, international tourism receipts and Hotels and restaurants, chart 1
displays the simple linear regression of both variables. It is clearly seen an
association between the variables, at a correlation coefficient of 0.97.

Chart 1: Simple linear regression: Tourism receipts versus hotels and restaurants.
(In million USD)

Simple Linear Regression: Tourism Receipts versus Hotels and Restaurants.

450

400

350
Hotels and Restaurants

300

250

200

150

100

50

0
0 200 400 600 800 1000 1200
Tourism Receipts

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 Computed by the author, based on information provided by World Bank (2008), and
Ministry of Economy and Finance (2007).
Series
Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Tourism
receipts 372 432 471 492 506 628 665 710 804 903 1108
Hotels &
restaurants 146.3 155.0 141.7 188.4 236.4 234.5 259.2 277.4 306.2 347.3 386.1
Correlation Coefficient= 0.97

The series display absolute figures as reported by the World Bank, and the Ministry
of Economy and Finances.

4.2.1.2: Observations on GDP per capita’s fluctuations.

1998 was the year when the Argentinean crisis caused Panama, lower than
expected tourism receipts. Fluctuations in GDP per capita observed 10 years before
that marketing campaign demonstrated Argentina displaying record highs in
riskiness, expressed here as the standard deviation of its per capita GDP,
significantly higher than countries typically associated to low economic
performances e.g. Haiti (HTI).

Table 15: GDP Growth, Riskiness assessment (1987-1998).

Countrys Standard Deviation
(In percent)
ARG 6.16
CHE 1.81
CHL 2.57
COL 1.66
ESP 1.9
FRA 1.41
HTI 5.05
ITA 1.36
JPN 2.35
GBR 1.9
MEX 3.35
NIC 4.9
PAN 6.09
USA 1.36

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 Table 16: Observations on changes (GDP per capita) before crises
STDEV 1 STDEV
GDP p/c 5 years
Country Year/s of Growth % previous to
Crisis 1960-2005 their crises Observations
Rooted in large government spending increases
that outpaced the growth of tax revenue. It was
COL 1998-1999 2.09 1.62 their biggest crisis since 1930 (Interhemispheric
Resource Center and Institute for Policy Studies
2000)
An unsuccessful plan to stabilize the economy,
caused a loss of trust in the monetary system
which originated a bank run, among other serious
ARG 1999-2002 5.85 4.14 complications (Congressional Research Service
2002 C).
It kept association with dramatic economic-policy
changes implemented by the Sandinista Front in
NIC 1984-1995 2.3 13.26 Feb and June 1988, and declines in Soviet
economic assistance. All of these, in times of
internal war. (University of Texas at Austin 1988)
Caused largely by internal rivalries, abuse of
military power, and historical inability of the
HTI 1993-1995 2.7 2.12 government to overcome evils from the past,
(University of Georgia 2005)
After difficulties dealing with a fragile peg
MEX 1995 3.32 1.16 exchange rate system with the USD. In December
1994 the Mexican government decided to devalue
the peso by 15% to about 4 pesos per dollar and
within a few days, the peso lost 40% of its value,
sinking the country into a financial crisis.
(Loughborough University, Department of
Economics 2007)
September 11, 2001 coordinated terrorist attacks
USA 2001 1.96 0.4 result in the destruction of World Trade Center in
New York City, the western portion of The
Pentagon in Virginia, and an unintentional
passenger plane crash in Pennsylvania (Mansfeld
and Pizam 2006)
Computed by the author, based on information provided by World Bank (2008), and
Ministry of Economy and Finance (2007).

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 Acknowledging that crises in very few cases respond to a single factor, next chart
intends to point their causes, and the ways in which specific events showed in their
per capita GDP. Reasonableness of the concept international diversification
depends on the degree of intensity in the correlation coefficients across the markets
(Elton et al 2007) the following chart intends to find associations between countries,
bolded numbers display correlation indexes above .5 for easier identification.
Table 17: Correlations between GDP p/c growth (1961-2005).
USA COL PAN ARG ITA ESP CHL CHE FRA GBR NIC HTI JPN MEX
USA 1
COL .17 1
PAN -.05 .10 1
ARG .04 .26 .22 1
ITA .25 .31 .03 -.07 1
ESP .24 .14 .11 -.02 .64 1
CHL .23 .28 .07 .16 .12 -.08 1
CHE .26 .26 .10 .04 .61 .56 .33 1
FRA .33 .29 .09 .02 .76 .71 -.06 .64 1
GBR .59 .15 -.30 -.08 .21 .23 -.11 .15 .31 1
NIC .01 -.17 .23 .08 -.04 .38 -.17 .08 .11 -.15 1
HTI .10 .04 -.02 .01 .25 .13 .06 .19 .23 -.14 -.04 1
JPN .24 .38 .20 .04 .64 .59 -.03 .50 .71 .21 -.03 .00 1
MEX .16 .15 .36 .13 .18 .10 .05 .28 .22 -.12 -.03 .21 .30 1

Average Correlation Coefficient: 0.1744

4.3. Discussion of results

Key results of this research, include the correlations existing between “Tourism
Receipts”/ “Hotels and Restaurants as part of the Panamanian GDP”, and the
fluctuations in the GDP per Capita of Colombia and the USA. The importance of
these figures, rely on the fact that they have two different perspectives of tourism in
Panama, this help us assess in a more accurate way, the impact tourists from the
USA and Colombia affect the Panamanian tourism industry overall. This throws
light on possible interconnections between specific domestic sectors and specific
types of tourists. Not less important, are the results on the tendencies in GDP per
capita growth, in currently important target markets. This sets a benchmark to
determine factors of risk, and desired features in the current and future clients.

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 CHAPTER 5

_____________________________

__________________DISCUSSION

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 5.1 Introduction

The discussion laid out hereafter debates the claim that Panama needs to assess
the risks inherent to international promotion, by the use of statistical analysis
techniques.

The bases to support this claim include descriptive statistics applied to the topic,
and observations made to obtain a realistic view of the problem. While this data
can be used to discover ways in which the theoretical approach of future research
works can be improved, the primary purpose of this section is to provide a deeper
insight of the original domains of interest.

The body of the discussion has been designed to address in four sub-sections, the
same objectives described in chapter 1.4. The theoretical base for these
observations and ideas, is the same employed by the Literature Review. The
empirical base is majorly a free interpretation of the Results chapter.

As one of the purposes of this research, we have tried to determine the impact of
tourism receipts from Colombia and the U.S.A in the Panamanian tourism industry
using statistical methods to study them. Moreover, in an attempt to apply basic
principles of investment analysis to the case of Panama, we have analyzed the
fluctuations in GDP per capita in a group of countries in hopes to find meaningful
patterns. Next, we discuss the findings and identify information that would help
creating ways to manage Panama’s international promotion budget more efficiently.

5.2 Discussion

We challenge the prevailing notion that the marketing campaigns of the IPAT must
target the markets with the highest profitability. Our argument is based on the
premise that the concepts of risk-management and econometric methods can be
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appropriate to analyse the economic paradigm of tourism. Based on the principles
of Harry Markowitz (1992) and considering future tourism receipts as random
variables, it seems obvious that one should seek high expected value and low
variance on the “portfolio” as a whole.

5.2.1: Representativeness of the indicators chosen, and dynamics of tourism in

Panama:
Considering research objective number one: “To provide an overview of the
Panamanian tourism industry” we consider critical the use of appropriate indicators
such as to attain rigor in our research.

Importance of indicator’s representativeness:

Regular monitoring of, and reporting on the relevant data sets (e.g. Hotels and
restaurants, International tourism receipts) ensures that information about the
selected data set is available to inform the authorities, and maintain decision-
makers aware of any significant change of the indicators.

Association with the topic of interest:

From chart 2, we learn that the correlation coefficient between Hotels and
restaurants and International tourism receipts both measuring tourism activity in
Panama is of 0.97, which suggest a significant degree of correlation (in spite of
some incongruence spotted in the observations). Since theoretically both measure
aspects related to the evolution of the same phenomenon (tourism) using different
systems, a low relationship between those two indicators could have complicated
the interpretation.

In spite of apparent contradictory observations occurred e.g. in year 2000 when The
World Bank reported an increase in International tourism receipts, while Panama
reported a contraction in the sector Hotels and Restaurants. Both indicators
associated to tourism activities, considered in the present study (Hotels and
Restaurants, and International Tourism Receipts) corroborate the occurrence of
important growth in International Tourism Receipts, and incomes generated by
Hotels and Restaurants in Panama (see Table 8).

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Behaviour of tourism in Panama: With an average growth of 7.3% for the period
1997-2007, tourism ranks 4th as the sector with the highest average growth in
Panama’s GDP in spite of its modest operational budget. This growth is a recent
phenomenon that has required important numbers of qualified and less-qualified
labour to keep moving forward. On the way, tourism influences positively other
sectors (e.g. construction), implying significant social and economical impacts in the
country.

Tourism sector outperformed GDP’s average- growth 63.6% of the times in the last
11 years, and in the last 4 years the growth rate has surpassed it in at least 3%
(See table 11). This may suggest that, Government’s investments in the
development of this sector are yielding larger revenues to the economy, in
comparison with those made in other sectors displaying less dynamic
performances.

While this research acknowledges the interaction of several variables in the

phenomenon; we acknowledge there is significant correlation between H/R and
MAN sectors. While this high correlation (0.9) by itself is not convincing proof of
“cause-and-effect relationship”, it may suggest that either: They both correlate with
a third variable not detected by this study, or that in fact fluctuations in MAN move
together with fluctuations in H/R sector. Speculating on the subject, one may
assume that a higher demand for H/R eventually leads to increasing activity in R.E,
especially by the acquisition of land for tourism developments. These eventually
lead CON create infrastructure intended to face the larger demand for H/R services.
Such edifications require for their completion the necessary supply from MAN and
MIN of raw, and processed materials. Since the five sectors just mentioned
correlate positively between each other, one may assume this statement to be true
to some extent, because of the natural co-dependency between these industries
(not contradicted by the outcomes of this study).

5.2.2: Stability of tourism in Panama: Reasons for concern.

As stated by our research objective number two, it is our intention “”To explore the
reasons why tourism is regarded as highly important for the Panamanian economy.”
in special, the reasons to believe it should remain stable in the years to come.

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Investment criteria of previous years could have been a source of risk exposures,
which aroused when the target markets were unable to meet the expected supply of
tourists.

This research has found that if repeated; effects of such scenario can impact
several other industries. Tourism provides new opportunities to increase GDP, and
on the process it supports 5.04% of the occupied labour countrywide (see chapter
1.8.1). From table 9, we see that from year 2004 onwards, tourism has experienced
an important growth rate adding-up to the Real Growth of GDP, benefiting other
sectors that made possible the logistics and infrastructure required to face the
demand.

Concerning the kind of approach we give to the problem, we try to improve the
authorities’ awareness and insight in the financial stability of the target markets
addressed by marketing campaigns. Secondly, we think these studies could
motivate a dialogue between branches of the government, specially between
tourism authorities, and entities experienced in the management of financial risks.

Panama’s challenge is to develop tourism as accorded in the Master Plan,

safeguarding the natural beauty and other attractions on which tourism industry
ultimately depends. These, and whichever other objectives the government and
Panamanian society may have, demand smart managerial decisions such as to
keep the benefits coming (and preserve those already obtained).

5.2.3: Importance of Colombia and the U.S.A for Panama’s tourism:

Research objective number three, tries to find ways “To determine the impact of
tourism receipts from Colombia and the USA on the Panamanian economic
indicators. a” and to do so, we recurred to the indicators addressed in section 5.2.1
in combination with statistical tools to ease comprehension.
Tourism in Panama and the U.S.A: Results in table 12 show that Panama’s Hotel
and Restaurant sector is significantly correlated (at a coefficient of 0.89) with
fluctuations in GDP per capita of the USA. Such association could suggest the
existence of other significant variables (e.g. Trade with the USA) not considered by
this study, adding weight to this relationship.

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From chapter 2.4 we learn that Panamanian economy for several reasons (mainly
related to international trade) is highly correlated with that of Colombia, while
fluctuates strongly with that of the USA. Since the current tendency is that half of
the international tourists in Panama, are either of U.S or Colombian origin, we
believe that same correlation applies to the indicators of tourism activity.

The correlation analysis we just performed, is but an initial step towards

understanding the relationships between tourism sector, and its main two
international clients (U.S.A and Colombia). It would be interesting to research on
the percentage of guests of USA origin who annually stay in Panamanian hotels
rooms, as well as their consumption habits such as to obtain an insight of their
spending patterns, hoping this would provide a clue on the reason for the correlation
we have observed.

Speculating on this subject, and given that from year 1990 to 2000 Panama saw a
136% increase in US-born senior residents and since this tendency has not
changed ever since (See parts 1.6.2 and 1.7.2 of the literature review) we consider
highly likely that US-born expats would be playing a role in this relationship. This
group, same as the U.S-born tourists visiting Panama, have U.S-based incomes
and share the same cultural background (which ultimately may signify that they
share similar spending habits). This could explain among other things, the fact that
restaurants and hotels’ growth rate (the parameter considered by the Ministry of
Economy and Finance, to measure tourism) differ from the results in the correlation
between Tourism Receipts of Panama, and fluctuations in the real GDP per capita
of both Panama and the USA.

Real Growth per capita in U.S.A and Panama, showed insignificant correlation (at
0.10). with the Panamanian Tourism Receipts. Since nor Panama or the USA’s
GDP per capita have dramatically decreased within the period from 1997 to 2005,
we may assume that spending habits of these individuals have been somehow
consistent throughout these years. It is possible that since Colombians had to deal
with two major economic crises within the same timeframe (see tables N°11 and
N°17). Their spending habits while travelling abroad got adapted to an ever-
changing buying power.

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As suggested by the section 1.6.4 , spending habits of Colombian tourists in
Panama, differ significantly from those of U.S-tourists, and this would have an
impact in the relationship standard of living – tourism activity indicators. Even
though the nominal average spending of both groups is similar; the sectors where
these moneys go, depend on the types of activities these tourists practice in
Panama. Colombian tourists prefer shopping to hospitality services, much of the
money they report as expenditure was spent in goods they took home when they
left. Since most of the times, these goods are imported goods (associated to the
operations of the Colon Duty Free Zone and its import and re-export activities), it is
just the “profit margin” what remains in Panama (since an important percentage of
the final price, was paid to the manufacturer). Money spent in services such as
translation, accommodation, food among others, could be comparatively more
beneficial for the tourism industry exclusively.

Perhaps, because of the spending habits prevailing in Colombian tourists in

Panama, their standard of living indicators fluctuate stronger with indicators of retail
and wholesale shopping in Panama; than they do with indicators of tourism activity
alone. Further research will be required to answer this question.

3.2.4: Using economical soundness indicators to assess a country’s financial

stability.
As the last step of this discussion, we address research objective four “To explore
the potential applications of investment analysis principles, in the Panamanian
efforts on promoting its tourism attractions internationally” and suggest strategies to
deal with these issues.

Analysis of previous performance, the case of Argentina:

Based on the assumption that the government of Panama, intends to attract the
largest number of tourist possible, from the countries where it promotes. And
considering that the underperformance of 1998’s campaign was a the result of
Argentina’s crisis, same way 2002’s was the result of USA’s crisis of 2001 (See
literature review 2.2.2). We can say that at least in the case of Argentina’s crisis, the
economy gave signals of instability (see riskiness factor for Argentina in table 16)
before the problem was evident. This country showed standard deviations of 6.16%
few years before the crisis, other countries in the sample which did not suffer crises
65 Page |
during the same period, displayed standard deviations at least 3 times below that of
Argentina. Apparently, high riskiness in GDP per capita and slumping growth rates
represented a signal to adopt conservative positions.

When trying to assess risk, we find important not to oversimplify the causes of
observed phenomena. Table 15 shows how hard forecasting the vicinity of a crisis
is (see the cases of COL, USA and MEX). Out of the 6 countries of the sample (all
of them suffering major crises in the continent) only 50% showed warning signals of
upcoming economical hardships. This takes us back to the use of diversification, as
a tool to diminish the impacts of risk inherent to international business opportunities.

Looking at table 16 Colombia and the USA (the main origin of the tourists visiting
Panama), displayed a positive degree of correlation, with almost every other country
in the sample excluding Panama itself who showed a correlation of -.05 with USA,
and Nicaragua who showed a correlation of -.17 with Colombia. This low correlation
may suggest that international diversification could reduce to certain extent risks
associated to international promotion. However, since risk in international business
opportunities do not depend solely on correlation coefficients, but on several other
factors. We believe that further research on socio-political and macroeconomic
elements can shed light on alternative ways to reduce these risk factors at the
moment of planning a marketing strategy for the country, identifying target markets
and deciding how much of the budget to invest on them. Following chapter,
presents in a summarized way, the conclusions made possible by this research.

66 Page |
 CHAPTER 6

___________________________
_______________CONCLUSION

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 This dissertation started out with a set of ambitious tasks. It reached most of its initial
objectives, however, more work needs to be done if we want to have a better
understanding of the underpinnings of tourism industry and the ways in which the local
economy responds to international events affecting tourist-generating countries to
Panama. In the following paragraphs we start with the main accomplishments, before
turning into its shortcomings and areas for future research.

6.1. Main findings

Addressing research objective number one “To provide an overview of the Panamanian
tourism industry”; findings show repeated outperformance in terms of income, recently
achieved by this industry. In spite of having started its development recently, in early
1990’s, statistics demonstrate this economic sector is particularly well suited to become
the fourth pillar in Panama’s economy. Observing the relationships between industries,
we found out that opposed to what it is believed, tourism does not correlate negatively
with any particular industry of Panama.

In association to objective number two “To explore the reasons why tourism is regarded
as highly important for the Panamanian economy”; it is the conclusion of the research that
tourism is regarded as important, because it represents an alternative to common income-
generating activities in Panama. Traditionally, main economical activities included those
related to banking services, the Panama Canal, and the external trade sector. As
observed in this research, the capacity of tourism to support an ever-increasing number of
jobs and create opportunities for development in other sectors, made it one of the most
promising sectors. Based on its recent growth, tourism has the potential to become the
main activity in terms of its proportion to GDP size in Panama.

In reference to objective number three: “To determine the impact of tourism receipts from
Colombia and the USA on the Panamanian economic indicators.” it became clear during
this research, that out of the several nationalities building up the mix of tourists in Panama,
those from USA and Colombia, represent approximately half of the total. This fact does not
represent an issue, as long as both economies do not slump at the same time, which is
68 Page |
 highly likely to happen if a random event causes a collapse in the economy of the USA; as
it correlates strongly with the economy of Colombia. The impact both tourist-generating
countries cause in Panama is large in size and scope, and we found highly advisable that
future research concentrates on the socio-economical effects visitors from both countries
are causing in this country.

Concerning research objective number four “To explore the potential applications of
investment analysis, to the international promotion of Panama’s tourism product”, we have
found that risk analysis techniques can be applied to the process of choosing markets where
to promote Panama internationally. By tracking the economic performance of tourist-
generator countries, and evaluating their patterns of growth, we should be able to manage
risks associated to advertisement expenses. It seems that countries displaying high
riskiness in their GDP growth, may not have the right conditions to experience sustained
(and predictable) economic growth. In order to design sound investment strategies, we find
critical the possibility of forecasting returns; without the conditions to figure-out future
economic scenarios, such forecast would rather be inaccurate and misleading. The
shortcomings of this method are the failure to predict the impact of political events in the
economy; another weakness would be its incapability to find risky patterns in qualitative
factors. All of which could foster dependency on the good judgement of the administrators to
deal with such situations.

6.2 Recommendations

Other types of considerations when choosing the appropriate target markets for international
promotion are possible. If instead of GDP alone and GDP per capita growth rate: United
Nations’ Human Development Index, or any other measurement of quality of life is used,
important findings can be made in the future (Latin American Research Network 2007). In
this research we have not explored economic details on every possible country, but
collected a small sample. Extensive research in this regard, can help Panama or any other
country identify the best target markets for their international promotion This research has
not considered expenses incurred while addressing target markets distant to Panama, nor
issues generated by currency exchange rates. Both of these factors should be explored
further, as to help decision-making individuals choose the alternatives that are more
convenient for the interests of the country.
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_____________________________
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