3/2014, In English, Tutkimus ja innovaatiot

Impact of the Summer Olympics and FIFA World Cup on micro and small enterprises in Brazil

Introduction

Much has been written about the economic impact of hosting the Summer Olympic Games and the FIFA World Cup. Without doubt, these are the biggest two sporting events in the world. Only once before have these two events been conducted in the same country within a two year period, the minimum time which can separate these two events. Mexico hosted the Summer Olympics in 1968 and the World Cup in 1970. Each event is conducted every four years.

This paper will provide a brief history of each event, leading up to the upcoming 2014 World Cup and the 2016 Summer Olympics, both to be held in Brazil. Following, will be an analysis of the recent economic impact of each of these events on the host nation. Finally, the comparative expected impact of each event on Brazil, and in particular the impact on small business formation in Brazil, will be discussed.

History of the Summer Olympics

A little history of the modern Summer Olympic Games will help the reader understand the 100 plus year growth in the economic importance of the Summer Olympic Games. The Games have been conducted every four years since 1896, The first modern summer Olympics was held in 1896 in Athens. In 1900, Paris hosted the 2nd Olympiad, followed by St Louis (1904), London (1908) and Stockholm in 1912. After a hiatus due to World War I, the quadrennial event continued until 1936, then suspended for 1940 and 1944, then continuing, uninterrupted from 1948 until the last Olympics in 2012, held in London.

With few exceptions, such as the period of the Great Depression and political boycott, each modern Olympics has generally seen increases in participation, audience and economic impact. The 1896 Olympics was conducted over a 10 day period and was a then largest sporting event ever held. The 1900 Olympics in Paris attracted more than four times the number of athletes and, integrated with the World’s Fair, was conducted over e period of five months, and included participation by 20 women.

The 1904 Games were held in St Louis, the first time outside Europe, and again in conjunction with the World’s Fair and was also spread over five months. As it seems with most Olympics, a pivotal event or person is especially memorable. In this case, the “star’ of this Olympics was George Eyser, who won 6 medals, despite having only one leg.

1908 saw the Olympics awarded to London, where the first standard length marathon was run.  1912’s games were awarded to Stockholm where Jim Thorpe won two gold medals, only to have them stripped from him for violation of the amateur code of the Olympic Games. (The medals were later reinstated in 1983, 30 years after his death)

Recommencing after WWI, the 1920 games in Antwerp drew another record number of competitors, only to be surpassed in 1924 by the Paris Olympic with 3000 competitors. The 1928 Games in Amsterdam saw two innovations – female athletes in track and field events and the first commercial sponsorship – by Coca Cola.

The 1932 Games in Los Angeles saw a reduction in competitors, due to the onset of the Great Depression. The 1936 games in Berlin, a showcase for Hitler’s Aryan superiority, are remembered for the multiple gold medal performances by Jesse Owens, an African-American.

The Games were cancelled in 1940 and 1944, with them returning to London in 1948, then Helsinki in 1952. The Melbourne Games of 1956 were the first to see the introduction of televised coverage. The 1960 Games are remembered for the performance of boxer Cassius Clay – Mohammad Ali.

In Tokyo in 1964, the modern age of satellite communications began the era of a global television audience and began the true commercialization of the event. In 1968 the Games moved to Mexico City, where the high jump was forever changed with the introduction of the “Fosbury Flop” and the Games were further politicized by the Black Power salute by American athletes on the medal podium. Politics grabbed the world’s attention with the 1972 Munich Games, when “Black September” terrorists invaded the Olympic Village and captured the Israeli team. The Munich games attracted over 7000 competitors and a record 112 countries.

1976 saw another turning point in the evolution of the Olympics. In this case it was the adverse financial consequences of the Games, held in Montreal, which incurred a debt of over $5 billion – more than $25 Billion in 2014 dollars. Political protest again occurred as African nations boycotted the Games to protest the New Zealand rugby team’s tour of Apartheid South Africa.

1980 saw the Games held in Moscow where 66 nations, including the U.S., Canada, West Germany and Japan all boycotted the Games to protest the Soviet invasion of Afghanistan. For the following Games, in 1984 in Los Angeles, the Soviet Union and 13 allies boycotted the games in retaliation of the 1980 boycott.

The followed the 1988 Games (Seoul), the 1992 Games (Barcelona) and the 1996 Games in Atlanta. The Atlanta Games are remembered for the “Atlanta bomber” but financially it marked the first time the Games attracted more than 10,000 competitors. Subsequent Games in Sydney (2000), Athens (2004) and Beijing (2008) saw successive increases in participants (to almost 11,000) and participating countries to over 200.

The 2012 Games in London resulted in an estimated 20 million visitors to the city and $14 billion in revenues generated. Over four billion viewers watched the opening ceremony – making it the most watched TV event in history.

Thus we have a condensed history of the Summer Olympic Games, leading to the 2016 games to be held in Rio de Janeiro, which beat out Madrid, Tokyo and Chicago for the hosting honor.

Benefits and costs of the Olympics

But what of the benefits and costs to the host city? Given that around two-thirds of the world’s population watches some part of the Olympics, there are both obvious public relations and financial implications of hosting the Games.

As previously mentioned, Montreal was left billions in debt, while Barcelona’s public debt rose to $6.1 billion as a consequence of the Games. Atlanta claims to have broken even, as did Sydney, but there is little evidence of an economic boom as a result of hosting. In fact, an Arthur Anderson survey on hotel occupancy indicated that while Sydney saw near 100% occupancy during the Games (a 49% increase over the period immediately preceding the Olympics), occupancy rates in Melbourne and Brisbane saw 19% and 17% drops in occupancy rate during the Olympics as compared to the early September figures. Overall, with the exception of Sydney (and for some reason, Adelaide), there was an overall nationwide decline in hotel occupancy in September 2000, compared to September 1999. (Anderson, 2000)

This substitution effect may apply to specific corporations as well as to alternate cities. For example, might the increase in occupancy at a Hilton hotel in Rio de Janeiro result from a decrease in occupancy in, say, Buenos Aries?

One should also consider the possibility of a smaller event generating the same incremental benefits. There is a capacity limit beyond which facilities cannot accommodate additional economic activity. Perhaps a smaller event – like the Commonwealth Games, for example – might fill the host city to capacity but cost considerably less to host.

When Athens won the right to host the 2004 Olympics, the budget was estimated to be $1.6 billion. The final public cost was around $16 billion. In addition, annual maintenance costs on the now under-utilized facilities is costing well in excess of $100 million a year. Some of the Olympic venues sit unused. (In fact, it was the probability of such happening that caused Chicago, in its bid for 2016, to propose it would dismantle and recycle the materials used in erecting Olympic venues.)

Other cities have been more successful in utilizing Olympic facilities. Atlanta’s two main Olympic stadia are now Turner Field (Braves Baseball) and Georgia Dome (Falcons football). The Olympic Village is used as dormitories for Georgia Tech. Urban redevelopment certainly helped Atlanta’s revitalization efforts.

History of the FIFA World Cup

The FIFA World Cup has been conducted every four years since 1930, with the exception of 1942 and 1946, due to WWII. It is held two years after (or before) the Summer Olympics. The quadrennial event resulted from the amateur code of the Olympics, which conflicted with the growing professionalism of football (soccer).

The World Cup final is the world’s most widely viewed single sporting event, with a global audience of over one billion people and a cumulative audience that exceeds that of the Olympic Games. The cumulative audience of the 2006 World Cup was estimated to be 26.29 billion.

The first host country was Uruguay, followed by Italy (1934), France (1938), Brazil (1950), Switzerland (1954), Sweden (1958), Chile (1962), England (1966), Mexico (1970), West Germany (1974), Argentina (1978), Spain (1982), Mexico (1986), Italy (1990), USA (1994), France (1998), South Korea/Japan (2002), Germany (2008) and South Africa (2010).

The first World Cup was televised in 1954 and commercialization and popularity of the event has grown annually ever since. Attendance at all venue games now exceeds three million.

Benefits and costs of the FIFA World Cup

Much like the available data for the Olympics, the economic benefits of hosting the World Cup do not paint a picture of huge financial benefits. However, as Matheson (2009) points out, although “studies of the 2006 World Cup in Germany showed that the country experienced little in the way of improvements in income or employment figures… surveys noted a noticeable improvement in residents’ self-reported levels of happiness following the event” (imagine if Germany had won!). The World Cup didn’t make Germans rich, but it appeared to make them happy.

Especially in the case of developing countries, one may raise the question of the opportunity cost and value of expending scarce public capital on venues which may have only marginal utility following the event. This is true of both the World Cup and the Olympics. A developing country needs far more capital expended to provide the nationwide infrastructure required for a mega-event like the World Cup. It is these very countries to which the cost of capital is higher than for richer countries. In addition, developing countries may better spend the infrastructure “dollars” on projects other than stadia and the roads to simply get to them.

Further, tourists tend to be attracted by more developed countries as venues. In the 2002 World Cup, hosted jointly by Japan and Korea, occupancy rates for the Japanese stadia were 88.7% while Korean stadia filled only 73.9% of seats, excluding games involving the “home” team and the finals. Remember, in the late 1990s, Japan’s GDP per capita was almost 80% higher than Korea’s.

Comparison of the two events

From the preceding, it would appear that neither event represents a potential windfall for the hosts. However, the basic differences in the two events need to be recognized.

The Olympics is awarded to a city. Although various events may be spread around outside the host city, these tend to be the more minor events. The real audience draw is for events occurring in the host city. While some country teams might set up training camps in various cities in advance of the actual Games, the vast majority of the infrastructure of the Games is focused on the host city. Tourists flock to the host city, global TV coverage focuses on the host city and to a great extent, most of the structural improvements and construction finances are spent in the host city.

In addition, the Olympics are focused over a condensed time period. The Rio de Janeiro Games are scheduled for 16 days – 5-21 of August. In addition, the host city hosts the Paralympic Games for 12 days (7-18 September) with almost 5000 handicapped athletes expected to compete, and over one million ticket sales. Further, television coverage continues to expand, resulting in added Olympic-based benefits.

By comparison, the FIFA World Cup is awarded to a country. In the case of the 2014 World Cup, obviously the major focus city is Rio de Janeiro, where the final will be played. The World Cup will take place over a period of a month – 12 June to 13 July, approximately double the time of the Olympics. Further, the games of the 2014 World Cup will be spread over 12 cities – each the capital of its state. Each of the 32 participating nations has a “base camp”, spread out over the entire country.

In addition, in the year preceding the World Cup, the Confederations Cup is awarded to the World Cup hosts. It uses half the stadia which will be used the following year in the World Cup. Held from 15-30 June, 2013, it included 8 qualifying nations. According to a study released by the Economic Research Institute Foundation and published by the Brazilian Ministry of Tourism, the Confederations Cup created 300,000 jobs, $9.3bn in financial transactions and added $4.7bn to Brazilian GDP. However, these data are likely to be quite optimistic.

According to estimates by Ernst and Young, the amount invested in infrastructure around the country, primarily due to the World Cup, will exceed $10bn, while Valente and Tur cite a November 2012 estimate of $14.7bn. However, if one adds private investment, the Brazilian Association of Infrastructure and Basic Industries concluded that the investments in urban mobility, Information Technology, public security, sanitation, electricity, hotels and hospitals is roughly $62.4bn.

As one can see, comparing the benefits of the two events is quite complex. Overall, one can conclude the Olympics may generate a more culturally broad-based tourism boast, as competing athletes (and their fans) come from around 200 countries. The bulk of the economic benefits accrue to the host city, although some benefits may accrue to the various training camp cities.

The World Cup has a longer “life”, extending from the beginning of the Confederations Cup to the end of the World Cup – approximately 13 months (compared to the Olympics/Paralympics approximate 6 weeks of competition). The economic benefits are more systematically spread across the country, with multiple games played in 12 cities. The economic benefits can currently be easily seen across Brazil, with public works projects underway in each of the host cities. Public investment in new roads, public transport systems, enhanced airports, power grid and information handling plus private investment in hotels, restaurants and other tourist support activities are geographically spread across the main population centers of the country.

Comparing results from the past

There is much post-facto evidence to suggest that the net financial gain from hosting either the Olympics or the World Cup has not been very significant for past host cities and countries. However, each host represents a different set of circumstances and outcomes may need to be measured differently. In the case of Brazil, the long-term benefits of enhanced public transportation alone should be significant. Favelas (very poor, generally crime-ridden neighbourhoods) have been cleared and many people relocated to improved and safer housing. Compare Rio to Berlin or London, where improvements needed in public transportation for the latter were relatively minimal but the cost of acquiring land to develop sports sites were much greater.

One must also consider that there is an efficiency in hosting both events in such a short period of time. In some cases, the cost of stadium construction can be spread over two events, while public spending may be better justified because the combined “tourism boost” period of both events extends from mid-June 2013 to mid-September 2016 – more than 3 years.

Finally, as pointed out with increased “happiness” in Germany following the 2006 World Cup, certain intangible benefits may result. France was culturally changed by the 1998 World Cup. All of a sudden signs and announcements were being made dually in French and English. The Queen song, “We are the Champions” echoed around Stade de France after France won the final. France became more “international” as a result of hosting the event. Likewise in Germany, aside from the aforementioned “happiness”, for the first time German flags were flying everywhere. The newly re-united Germany came of age with the World Cup. Brazil is likely to enjoy similar benefits. In the past, there was a concept of “Island Brazil”, an idea that Brazil’s economy could operate without internationalization. There was little drive to teach English. Now there are English (and other language) classes being taught to all sorts of members of the service industry – taxi drivers, hotel workers, retail store employees – even prostitutes. The country is already exhibiting a sense of confidence in its place in the global economy.

Impact on micro and small businesses

According to the Institute of Applied Economic Research, small businesses were responsible for 40 percent of the 15 million new jobs created in Brazil. Brazil now has about 6 million micro and small enterprises. The government defines micro enterprises in manufacturing as those employing up to 19 people, while small enterprises are those employing between 20 and 99 workers. In the retail sector, micro enterprises employ up to 9 workers and small enterprises between 10 and 49 workers.

Marcelo Neri, a Brazilian economist (Economist newspaper) states that the middle class in Brazil now makes up more than half of the nations’ population, growing from 35% in 1990 to 50% in 2012. Some commentators, according the Economist article, suggest the new middle class is entrepreneurial. These trends would suggest that much of the benefits from hosting the World Cup and secondarily, the Olympics, would to a great extent accrue to the entrepreneurial middle class, rather than solely to large domestic corporations and multinationals.

A research organization in Brazil, SABRAE, has performed a study to identify opportunities for Micro and Small Businesses in each of the World Cup host cities. Nine sectors were identified:

  • Civil Construction
  • Information Technology
  • Tourism
  • Tourism-related production
  • Retail
  • Services
  • Clothing
  • Wood and Furniture
  • Agribusiness

Further, three distinct stages can be identified – pre-event, event and post-event. One could identify differing time periods in different parts of the country.

For the six cities areas impacted by the Confederations cup, the pre-event period would be up to mid-June, 2013. For other World Cup venues, the pre-event period extends to mid-June 2014. The event period likewise will be different for the Confederations Cup venues and the World Cup only venues.

The post-event period will be either from the end of the World Cup matches in the regional centers, or the end of the Paralympics in the case of Rio de Janeiro.

The study completed by SABRAE details opportunities in each of these business sectors, in each regional center in each of the three periods of time. This presents a matrix of opportunities. Given the emerging, entrepreneurial middle class in Brazil, it is likely that micro and small businesses may be in a position to take advantage of the business opportunities that will arise from hosting the World Cup. Further, those in Rio de Janeiro can additionally benefit from the business opportunities generated by the Summer Olympic Games.

The estimated direct costs of hosting the World Cup are roughly $18bn, while the Olympics will cost an additional $15bn, for an estimated total cost of $33bn (Sverrisson). Of course, accurate allocation of costs to one event over the other is somewhat arbitrary. For example, renovation of the main soccer stadium in Rio de Janeiro will also benefit the Olympics.

Overall, combining the Ernst and Young estimate of an economic impact of $70bn generated by the World Cup and the estimate of the University of Sao Paulo the Olympics would generate $51.1bn, yields a total impact of over $120bn in gross economic impact.

It is estimated in the case of Rio de Janeiro, for every dollar invested, $3.26 will be generated until 2027, with an impact on GDP of $13bn. Additionally, 120,000 new jobs will be generated per year until 2016.

Based on these, albeit rosy, estimates, the return on investment looks pretty good. However, few independent observers are “sold” on the accuracy of these estimates, and point to the previous rosy estimated that went unfulfilled at each of the recent previous venues for both the Olympics and the World Cup. However, although the short term benefits may not live up to the hype of the supporters, some of the infrastructure investments may be a driving force for economic growth in the long run. Improved roads and railways, telecommunications, electricity distribution and IT, and enhanced tourism facilities could all be a catalyst for image building, long term investment and growth.

Conclusions

This paper has presented an overview of the comparative impact of the FIFA World Cup and the Summer Olympic Games, and the secondary events related to each of these major events. In terms of event duration and geographic spread, the World Cup presents the greatest economic growth opportunities.

On the other hand, the Olympic Games provides a culturally broader yet geographically concentrated window of opportunity for business activities. The Olympic Games also provides greater variety in the types of venues which are developed, the cultural diversity of those tourists visiting the country and unique opportunities catering to the specific needs of the handicapped in connection with the Paralympic Games. This will obviously provide long term benefits to the handicapped in Brazil.

Especially for those in Rio de Janeiro, the combined opportunities related to both events are enormous. But even in the least impacted areas – those cities which host only World Cup games – the pre-event, event and post-event business opportunities are significant.

The end result should be a Brazil which will benefit from a large short term boost in economic activity but also a significant long term boost due to improved infrastructure and an enhanced global view. The physical (like public transportation and technology) and personal infrastructure (self-confidence and language skills) will be in place for long term economic benefit.

Authors

Dr Peter J. Gordon, Professor, Southeast Missouri State University, USA, pgordon@semo.edu

Dr Francisco Vidal Barbosa, Professor, Universidade Federal de Minas Gerais, Brazil, fvberlim@gmail.com

Agencia EFE, “Small businesses account for 40 pct of jobs created in Brazil”, April 30, 2013.

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Business Day, (2014) “Brazil made $4bn from Confederations Cup, says report”. Retrieved from http://businessdayonline.com/2014/04/brazil-made-4bn-from-confederations-cup-says-report/#.VBFumHfit3s. Accessed 11 April, 2014.

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