Review of International Political Economy 5:1 Spring 1998: 122–148

Commodity chains, services and

development: theory and preliminary
evidence from the tourism industry
Michael Clancy
Smith College, Northampton

A BS T R A C T
Global commodity chains (GCC) present a fairly new and innovative
approach for understanding the prospects for development among Third
World countries within a larger environment characterized by global-
ization. To date, most research using the framework concentrates on the
changing organization of manufacturing activities and helps to explain
why the chains touch down where they do. This article concentrates on
two related questions: what can commodity chains tell us about the
globalization of services and to what extent do services suggest the need
to refine the GCC approach? Both questions are examined by focusing
upon tourism, the largest service activity in the world. Concentrating on
hotels and airlines, the article demonstrates that tourism services have
become internationalized in a manner unlike manufacturing activities.
Most notably, organizational or governance structures do not conform
to either buyer-driven or producer-driven models frequently predicted
by GCC analysis. The article concludes that while commodity chain
analysis is useful for examining the political economy of tourism,
especially in highlighting power and exchange relationships, it must be
broadened to ‘account’ fully for the unique organization of the global
tourism industry.

K E Y WO R D S
Development; commodity chains; services; tourism; globalization.

One recent and particularly promising analytical framework for

addressing current issues in international and comparative political
economy is that of global commodity chains (GCCs). The approach
recognizes but also furthers the idea of globalization as a deŽning feature
of the contemporary era by considering speciŽc developmental conse-
quences of the changing organization of capitalism at an international,
regional and domestic level. Briey, commodity chains trace the social
and economic organization surrounding the global ‘life’ of a product,
© 1998 Routledge 0969–2290
 COMMODITY CHA INS, SERVICES AND DEVELOPMENT

ranging from the Žrst stage of raw material extraction through consump-
tion of a Žnished good. The key questions to be answered along the
way are why particular processes or stages of production take place in
speciŽc locales, how the industry in question is organized and governed,
and, ultimately, where the economic surplus goes. In other words, at
the heart of the research agenda is the question ‘[w]here does the global
commodity chain “touch down” geographically, why, and with what
implications for the extraction or realization of an economic surplus’
(Appelbaum and GerefŽ, 1994: 43).
The GCC framework is particularly appropriate for development
studies, especially for those researchers interested in international inu-
ences upon local development patterns. It therefore challenges prevailing
views that development is primarily the result of domestic politics,
especially policies of either ‘getting the prices right’ or manipulation of
market signals by an omniscient state in order to attain desirable
outcomes. In addition GCCs offer an alternative to homogenized inter-
nationalist approaches by arguing that key global constraints and
processes vary by industry or sector, as well as by region. Thus far
studies utilizing the GCC approach have offered in-depth examinations
of industries that have clearly been globalized in recent years, most
notably footwear, apparel and automobiles (Appelbaum and GerefŽ,
1994; GerefŽ and Korzeniewicz, 1990; Appelbaum et al., 1994; Lee and
Cason, 1994). These studies have uncovered varying international
organizational structures within these sectors, along with speciŽc impli-
cations for local development. The goal of this article is to consider a
two-sided question: what can commodity chains tell us about the glob-
alization of services, and to what extent do services suggest the need to
reŽne the commodity chains analytical approach? I examine both ques-
tions below by focusing on the largest non-Žnancial service activity in
the world today, tourism.
The basic argument proceeds in the following manner: the commodity
chains perspective, while offering unique insights regarding the polit-
ical economy of development, fails to capture the nature of tourism
activities adequately. As a result, there is a need to expand the approach
in order to accommodate the more diverse set of linkages and governing
structures that make up this commodity chain. Broadening the approach
not only ‘accounts’ for tourism but also makes GCCs more useful in
understanding the increasingly complex and differentiated nature of
sectoral organization within the world economy. The remainder of the
article is made up of four sections. The Žrst discusses the GCC approach
in more detail, distinguishing it from other theoretical approaches and
highlighting its uses. The second makes a case for studying services,
especially tourism. The third examines hotels and airlines, two key
tourism sub-sectors, emphasizing how existing labor and production
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processes differ from the governing structures suggested by GCC

research. Finally, the article closes with suggestions for expanding and
reŽning the approach and discusses avenues for further research.

I C O M MO D IT Y C H A I NS A N D G LO B A L C A PIT A LI SM
The commodity chain approach may be traced initially to Hopkins and
Wallerstein (1986), who deŽne it as ‘a network of labor and production
processes whose end result is a Žnished commodity’. It is therefore not
surprising that the framework is complementary to and consistent with
world-systems theory. Indeed much of the current GCC literature refers
to the regional differentiations of core, periphery and semi-periphery in
the global economy, and generally uncovers production processes that
are consistent with world-systems expectations.1 The primary distinc-
tion is that GCCs constitute a more bottom-up or integrative approach
and in this sense the framework directly addresses the most common
weakness attributed to world-systems theory – that it is overly broad
and excessively functional to the point of being totalizing (Skocpol, 1977;
Brenner, 1977; Stern, 1988).
A second major advantage for GCC approaches is that they provide
an alternative to dominant neo-classical (Balassa et al., 1986; World Bank,
1991, 1993; Williamson, 1994) and statist (Haggard, 1990; Haggard and
Moon, 1990; Amsden, 1989; Wade, 1990) approaches to explaining
patterns of Third World development. Each places heavy emphasis on
the domestic level, most often on government policy. In other words,
development strategies, deŽned as a set of economic policies adopted
by state elites, primarily account for a range of developmental outcomes
in Third World countries, including patterns of wealth and poverty,
production proŽle and trade performance. According to these perspec-
tives, as Evans (1992, 1995) summarizes, the state takes on dominant
explanatory power, serving as either problem or solution for develop-
mental outcomes. The GCC framework explicitly challenges state-centric
analyses. Although GerefŽ’s (1995) suggestion that today ‘globalization
has reduced the theoretical centrality of nation-states’ as the key unit of
analysis in most studies of north–south international political economy
is contentious, two points appear to be clear. First, ‘the state’ by itself
cannot completely account for development outcomes; and second, the
international environment in which development is embedded is
changing.
The commodity chain approach engages in encompassing comparison
(GerefŽ, 1995; Tilly, 1984) that begins with the global production process.
Local development patterns must be seen in relation to that larger
process. This does not mean these patterns are simply determined by
the requirements of the system or that GCCs wholly discount domestic
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factors (Lee and Cason, 1994) such as state policy. Instead, the approach
merely recognizes that external linkages play an increasingly important
role in affecting local development outcomes. The explanatory aspect of
commodity chains can be found in three primary dimensions.2 First, an
input–output structure that is both sequential and temporal identiŽes
the various steps of the production process, ranging from raw materials
to Žnal assembly, marketing and sometimes even consumption. Second,
a spatial dimension examines where different stages of production
actually take place. This also involves an explanatory element in that it
asks why nations or regions play a particular role in the division of
labor (or for that matter do not). Finally, an organizational or governing
dimension examines structural characteristics of the industry itself by
identifying ownership patterns as well as transactions between agents
along the commodity chain.
This last factor is especially crucial for GCC research as well as for
the purposes of this article. IdentiŽcation of the underlying global
organization of an industry plays a central role in uncovering basic
power relations within the chain as well as the allocation of economic
surplus. In short, the governance structure identiŽes who the primary
decision makers are within an industry, and also points to where most
of the proŽts go. The implications for Third World development are
obvious. As capitalist production becomes more internationalized and
decentralized, more and more Third World countries are gaining
footholds in economic activities that once were conŽned to the First
World. At the same time it is the particular export niches or links in
the chain that these countries occupy that largely determine wealth
creation and therefore developmental possibilities (GerefŽ, 1996: 113).
Researchers have thus far uncovered two distinct archetypal gover-
nance structures: ‘producer-driven’ and ‘buyer-driven’ commodity
chains. The former constitute those chains where large, vertically inte-
grated transnational corporation (TNCs) internalize most aspects of
production, distribution and marketing processes. Ownership and
control by the TNC are therefore present at most, if not all, nodes in
the chain. Producer-driven GCCs are most commonly found in capital-
or technology-intensive industries such as automobiles, aircraft and
computers where barriers to entry and exit are high and economies of
scale exist (GerefŽ, 1995; GerefŽ et al., 1994).
In contrast, buyer-driven commodity chains are marked by much
more uidity and decentralization. Typically TNC-based retailers,
marketers and trading companies set up and maintain arm’s-length rela-
tionships with producers who are usually located in the Third World.
In other words, these Žrms externalize actual production and instead
concentrate on design and marketing. The TNCs seldom own any of
their own factories, and instead establish relationships with separately
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owned, but often nearly captive suppliers. These decentralized buyer-

driven chains are most commonly found in labor-intensive activities
such as apparel, footwear, toys and consumer electronics (Appelbaum
and GerefŽ, 1994; GerefŽ and Korzeniewicz, 1990). Here competition is
Žerce, technology and capital requirements are low, few entry barriers
exist, and proŽt margins – at least at the production node(s) of the chain
– are very low.
Perhaps the most innovative aspect of the GCC approach is empha-
sizing the growth of buyer-driven chains in the world economy today.
It suggests that the model of global capitalism organized around large,
integrated corporations may be obsolete in this age of globalization.
Instead, ‘hollow’ corporations may be the wave of the future. One of
the best case studies of buyer-driven commodity chains is Miguel
Korzeniewicz’s (1994) work on Nike, which is detailed here for illus-
trative purposes. He demonstrates that for a Žrm that is associated with
a tangible product, the athletic footwear giant is in many ways a shell
corporation. Only 4,000 employees work for the $3 billion company (in
1991), and almost all serve in an advertising, design or sales capacity.
Outside of design, today no Nike employee actually makes shoes.
Instead the company has established a series of exclusive production
contracts with foreign-owned producers located in the Third World.
Athletic footwear, like most buyer-driven commodity chains, is an
industry marked by the need for considerable exibility in production.
Organizing production apparatuses in this manner allows Nike to
respond rapidly to a very segmented and Žckle market where consumer
tastes and demand change quickly. This also means, however, that the
brunt of the costs and risks are borne by local producers. Flexible
production often translates into frequent lay-offs for workers, as well as
relocation of manufacturing if wage pressures grow. Nike, for instance,
has ‘relocated’ factories, through changing buying agreements, from
Japan to South Korea to Indonesia and China over the past two decades.3
The prospect of losing the Nike contract would be devastating for
owners and managers of manufacturing facilities, as captive suppliers.
The implications for the extraction of economic surplus are also clear.
Most of the material beneŽts in buyer-driven commodity chains ow to
the buyer. The unequal exchange relationship, both at the class and
regional level, therefore is made clear by GCC research.
Several conclusions may be drawn from the Nike case and applied
more broadly to buyer-driven commodity chains. First, a clear geograph-
ical division of labor exists. The more sophisticated and high value-
added activities of the production cycle, including design, marketing
and distribution, remain at the core. Manufacturing, which constitutes
mainly labor-intensive light assembly, is centered in the semi-periphery
and periphery. The extraction of economic surplus mirrors this division
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of labor. Most of the beneŽts deriving from the high wholesale and
retail mark-up in athletic shoes, apparel and toys ow to the buyers,
which concentrate on the Žnal – and by far most lucrative – nodes of
the commodity chains (GerefŽ and Korzeniewicz, 1990). Finally, at the
country level, national development patterns or production proŽles are
not simply the product of state development strategies, but instead lie
at the intersection point of global industrial structures, state policies and
international and local Žrm strategies.

II T HE C A SE F O R S ER V IC E S
While the GCC approach is promising for uncovering underlying power
and exchange relationships present in the ‘new’ global economy, its
application has mainly been conŽned to manufacturing. Service indus-
tries have thus far been all but ignored by the framework, except when
producer services are part of the larger manufacturing process.4 This is,
however, common in development studies. Services are largely invisible
and difŽcult to deŽne. In addition, their eclectic nature makes theoret-
ical generalization more difŽcult. Computer software and Žnancial
services, for example, are traditionally high value-added activities while
‘commerce’, a nondescript but often large subcategory falling under the
heading of services, may refer to near subsistence-level vending in
informal markets. A second problem is that services are often treated
as constituting separate activities from other sectors of the economy.
Many services, however, are intricately bound to other sectors of the
economy. Advances in producer services, for example, frequently
contribute to productivity gains in manufacturing. GCC approaches do
recognize this aspect of the service economy. Mapping commodity
chains involves tracing the entire transformative aspect of a product,
which usually involves a combination of manufacturing and service
activities. Services here are particularly important, especially in increas-
ingly fragmented buyer-driven chains (Rabach and Kim, 1994), but they
are only taken seriously to the extent that they add value to a good.
Consumer services are all but ignored.
The most compelling reason to study services from a development
standpoint is empirical: services are simply too large and important to
be ignored. Relatedly, globalization has signiŽcantly affected produc-
tion, ownership and trade of service activities. Perhaps the greatest
change has taken place in trade. While services were once thought to
be non-tradable due to the need for close proximity between producer
and consumer,5 today international trade in services amounts to more
than $1 trillion. While most trade in services takes place within the core,
its importance in the periphery and semi-periphery is growing (Madeley,
1992; World Bank and UNCTC, 1990). Just as trade in services has
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increased markedly in recent years, so has direct foreign investment

(DFI). By 1990, services accounted for more than half of annual DFI
ows and nearly half of the world’s DFI stock (UN, 1993). One result
has been the growing concentration of ownership by service-related
TNCs. In addition to direct investment, TNCs have expanded their inter-
national operations through non-equity agreements with local Žrms. In
short, growth in trade, investment and other transnational alliances indi-
cates that services have undergone globalization. These changes have
importants implications for our understanding of international political
economy.

Tourism services
Perhaps the most signiŽcant problem in studying services is their eclectic
and widely varying nature. Rather than any attempt at broad general-
izations, a more useful and empirically accurate approach focuses on
individual service activities. Tourism is an obvious choice for several
reasons. First, tourism constitutes the largest service industry in the
world,6 and also accounts for the single largest item in international
trade of services.7 Recent data, reported in Table 1, show international
tourism to have been a $380 billion business by 1995. They also demon-
strate the rapid growth of global tourism in recent decades. This growth
has not been conŽned solely to the core. Linda Richter (1989) reports
that by the end of the 1980s more than 125 nations considered tourism
to be a major industry where the activity had become a primary gener-
ator of employment and foreign exchange. This is especially the case
for developing countries. While several small Third World destinations
have long been attractive to international tourists, today more than 28
percent of arrivals and 25 percent of all cross-border tourist expendi-
tures take place in developing countries (WTO, 1996). Increasingly,
governments throughout the Third World have moved aggressively to
capture part of this $95 billion market. Finally, tourism is also in the
midst of internationalization. Aside from growth in international trade
and foreign investment, the industrial organization of tourism has
changed rapidly in the past two decades. The sector has become much
more centralized and integrated at the global level. TNCs have come to
predominate in hotels, airlines, travel agencies, tour operators and
restaurant chains. Technology, especially information technology, has
also fundamentally altered the nature of the industry. For instance,
computer reservation systems (CRS) allow travelers to plan almost every
aspect of a journey at once. They also link major Žrms offering trans-
port, lodging and entertainment (Bressand, 1989; Lanvin, 1993). One
result is that the separate components of tourism have become much
more closely tied together.
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Table 1 World tourism arrivals and receipts

Arrivals Variation Receipts Variation

Year (thousands) % (US$ millions) %

1950 25,282 – 2,100 –

1960 69,320 10.6 6,867 12.6
1965 112,863 10.3 11,604 11.1
1970 165,787 8.1 17,900 9.1
1975 222,290 6.1 40,702 18.0
1980 287,787 5.3 103,535 20.7
1985 329,616 2.8 117,374 2.4
1986 340,650 3.4 142,067 21.0
1987 366,754 7.7 174,232 22.6
1988 401,710 9.5 201,540 15.7
1989 430,993 7.3 218,369 8.4
1990 459,212 6.6 264,714 21.2
1991 465,844 1.4 271,880 2.7
1992 503,258 8.0 308,745 13.6
1993 517,607 2.9 314,249 1.8
1994 545,878 5.5 345,540 10.0
1995 561,027 2.8 380,693 10.2
Source: World Tourism Organization (1996).

For these reasons, tourism is particularly appropriate as a case from

which to evaluate a GCC approach. Mapping the tourism commodity
chain, however, is particularly difŽcult for two reasons. First, the sequen-
tial and spatial nature of tourism differs from that of manufactures.
Production and consumption, for example, take place simultaneously
and in the same locale. Therefore one cannot as easily trace certain links
in the chain as taking place in one region in the world and then being
exported to another, as is the case in many buyer- and producer-driven
chains. Instead the industry is organized much more horizontally, with
identical productive and consumer links existing throughout the world.
In fact, the overwhelming majority of tourism remains domestic in
nature. International tourism – deŽned by the World Tourism
Organization (WTO) as the provision of tourism services for travelers
who cross international borders and remain for at least one night and
less than one year– accounts for 560 million arrivals and $380 million
annually (WTO, 1996), but that amounts to merely a fraction of total
tourism expenditure. What is also clear is that within international
tourism, production and consumption remain largely a First World
activity. As Table 2 demonstrates, more than 50 percent of expenditures
from international tourists take place in Europe, and combined with the
United States that Žgure increases to nearly 70 percent. All top ten
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Table 2 International tourism share by regions (1994)

Arrivals Receipts
Region (thousands) World share ($ millions) World share

Europe 329,807 60.4 173,182 50.1

Americas 107,049 19.6 95,733 27.7
East Asia/PaciŽc 76,948 14.1 61,915 17.9
Middle East 9,868 1.8 5,107 1.5
South Asia 3,946 0.7 3,166 0.9
Source: World Tourism Organization (1996).
Note: Percentages do not equal 100 due to rounding.

spenders and eight of the top ten tourism earners are First World coun-
tries (WTO, 1996).
A second difŽculty in mapping the chain is that tourism does not
technically constitute one single industry; instead, it is made up of a
series of overlapping services and goods ranging from accommodation
to selling handicrafts. The two most lucrative sub-sectors of tourism,
however – hotels and airlines8 – are services and are prime candidates
for study from a GCC framework. The problem, however, as I demon-
strate below, is that commodity chains fail to capture fully the
organizational complexities associated with the tourism ‘commodity’.

III T O U R ISM A ND C O M M OD IT Y C H A I NS
A GCC approach to tourism could emphasize one of two sets of factors.
First is a geographical focus relating back to where and why commodity
chains ‘touch down’.9 An alternative is to concentrate on organizational
or governing structure at the global level in order to highlight power
and exchange relationships. The two are not mutually exclusive but for
the sake of brevity and theoretical clarity this article is conŽned to the
latter. This focus also holds the advantage of emphasizing the develop-
mental opportunities and constraints associated with the activity through
identifying the prevailing global division of labor found within these
sub-sectors. Most global tourism expenditure is directed toward trans-
portation and lodging. As the discussion below demonstrates, the gov-
erning structures of the two sub-sectors in question here vary and neither
conforms purely to buyer-driven or producer-driven commodity chains.

Hotels
The hotel industry constitutes a unique economic activity in that it has
really become two businesses: providing hospitality services and real
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estate. The two were once combined, but became separable with the
appearance of chains. Hotels, like much of the global travel industry,
began to form a clearer organizational structure after the Second World
War. Prior to the war most hotels and motels were independent oper-
ations. Owners were operators, and they mainly catered to business
travelers (EIU, 1988). After the war, however, the industry was marked
by the growth of association through chains, and by internationaliza-
tion. Today, as Table 3 demonstrates, tourist class hotels are dominated
by TNC-oriented chains. It shows that as of 1995, nineteen of the twenty
largest Žrms, measured by number of rooms, were based in core coun-
tries. The twentieth was located in Hong Kong, a British colony until
1997. 10
Two overriding factors condition the global organization of hotel
chains: the nature of the service product itself, which creates Žrm-speciŽc
competitive advantages, and the ability to separate these advantages

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

Rank Firm Country Rooms Hotels

1 HFS, Inc.a USA 509,500 5,430

2 Holiday Inn WW USA 369,738 2,096
3 Best Western International USA 282,062 3,462
4 Accor France 268,256 2,378
5 Choice Hotels USA 249,926 2,902
6 Marriott Corp. USA 198,000 976
7 ITT Sheraton USA 129,201 414
8 Hilton Hotels Corp. USA 90,879 219
9 Promus USA 88,117 669
10 Carlson/Radisson/SAS USA 84,607 383
11 Hyatt Hotels USA 79,483 172
12 Inter-Continental UK 61,610 179
13 Hilton International UK 52,063 161
14 Forte Hotels UK 49,183 270
15 Grupo Sol Melia Spain 46,825 185
16 Club Méditerranée France 45,205 150
17 New World/Renaissance Hotels Hong Kong 45,104 140
18 Westin USA 40,074 82
19 Société du Louvre France 32,926 511
20 La Quinta Inns USA 30,000 240
Source: Hotels (1996).
Note: Country reference refers to location of hotels chain headquarters. It does not
include the locale of the parent (e.g. Holiday Inns by Britain’s Bass PLC, Westin
by the Japanese Aoki Corporation until late 1995).
a
HFS, formerly Hospitality Franchise Systems, held Ramada, Super 8, Howard Johnson,
and Days Inn brands as of 1995.

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from actual ownership. Among the most important assets hotel chains
seek to create is a reputation for quality. While this is not unique to
hotels, of course, this reputation or trust is critical in the hospitality
business: trust emerges from the nature of the hospitality product itself.
A stay in a hotel room is an ‘experience good’, meaning that unlike
most commodities, it cannot be inspected before being consumed.11
Potential customers therefore undertake extra risk in purchasing the
product and often seek ways to contain that risk. One such strategy is
to rely on Žrm reputation. In other words, trust may be embodied in a
brand name, and that name makes a particular difference in the case of
hotels. This factor initially created incentives for the formation of chains,
and also encouraged chains to expand abroad. Trust becomes especially
powerful where customers are in an unfamiliar environment such as a
foreign country. In short, most mass tourists favor a name they know.
A second deŽning feature for hotels is that strategic assets held by
Žrms may be unpackaged and separated from ownership. The result
has been expansion of hotel TNCs largely through alternatives to equity
participation, especially since the 1960s (Dunning and McQueen, 1982;
UNCTC, 1982, 1990). This feature produces signiŽcant problems for a
GCC approach as it is presently conceptualized. Most signiŽcant, neither
the producer-driven nor buyer-driven models fully capture the reality
of the organization of international hotels. Instead, the industry is woven
together through a series of contractual agreements. These resemble
buyer-driven models but contain important differences. Most important,
hotel chains primarily sell rather than buy. In buyer-driven GCCs, core
Žrms subcontract out production itself while concentrating on high
value-added activities such as design and marketing. The actual product,
however, is purchased from a supplier. Hotel chains also tend to operate
at arm’s length, but commonly enter into ‘production’ agreements
through selling or renting out their trusted name to hotel owners. It is
the owners who provide much of the hospitality product to customers
through rooms, beds and other amenities.
Again, this is not to argue that hotels have nothing in common with
buyer-driven chains and in fact this distinction between buying and
selling should not be overdrawn. Many big apparel buyers, for instance,
also engage in selling through franchising and licensing,12 and hotel
chains also buy from suppliers. In addition, individual hotel chains have
historically pursued very different strategies,13 although increasingly
most have come to concentrate on selling nodes. On the other hand,
hotel chains mainly operate through offering expertise to hotel owners
in exchange for payment. The basic distinction, then, is that hotel chains
primarily engage in selling, not only at the retail level but also to those
who contribute so much to the hospitality product, the owners of prop-
erties themselves.
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The most common forms of non-equity expansion into new markets

for hotels have been through management contracts and franchising.14
Each is contractually based, and results in a fee being paid to the chain
by the owner of the hotel. Franchise agreements vary, but usually
include use of the chain’s name, trademark and other services such as
access to a toll-free reservation system in return for a Žxed fee along
with other percentage-based charges. The chain normally provides addi-
tional operating expertise, often in the form of manuals and other
information, while requiring the individual hotel to maintain certain
standards.15 In management contracts, responsibility for various aspects
of operation of the hotel fall to the chain itself.
Standard management contracts usually contain the following fees to
be paid to the chain:
l basic fee: usually a percentage of total revenue from all departments,
ranging from 3 to 7 percent of revenue;
l incentive fee: usually 8–20 percent of ‘adjusted’ gross operating proŽt;
l marketing fee: commonly 1 percent of total sales, sometimes waived
internationally;
l reservation fee: linked to CRS, these vary widely, and can be
percentage- or at-rate-based.16
Management contracts have become more common and standardized
over the past twenty years. One executive of a chain indicated that ‘it
is joked that if you take the cover page off a management contract you
can’t tell the difference between one company’s and another’.17 Franchise
agreements, which are usually geographically based and contain the
right to use a trademark, often a reservation system, and some technical
support, are somewhat similar. One chain receives the following fran-
chising fees: 4–5 percent of gross room sales, a 2.5 percent marketing
fee and $11 per reservation through the chain’s CRS.18 Finally, these
agreements may be much broader in scope, for example in the form of
‘master franchises’. Here the rights to the company name may be rented
on a regional or national basis. In Mexico, for instance, Holiday Inn once
granted a master franchise for the entire country to a local operator.19
By expanding globally through these means, today many hotel chains
may in fact only be called chains in the sense of loose associations.20
Some share only a name and single, centralized toll-free telephone
number. From the standpoint of the hotel chains, however, the terms of
the franchising or management agreements are usually quite lucrative:
they are generally short in duration, fees paid to the TNC tend to be
based on gross receipts rather than proŽts, and costs associated with
required remodeling or redecorating generally fall to the owners.21
Although individual Žrm strategies vary, Žrms are generally strati-
Žed by reputation for quality and prestige and similar chains tend to
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pursue similar global strategies. This is another feature that hotels hold
in common with many buyer-driven chains, as is demonstrated by
GerefŽ (1994). Among hotels, the more up-scale chains tend to take a
more ‘hands on’ approach through management contracts, where most
aspects of hotel operation are either in direct control of, or are closely
watched by, the chain in an effort to ensure the highest quality. In
contrast, budget-oriented hotels are usually franchised by the chain and
daily operations are monitored only periodically and at arm’s length
through such mechanisms as surprise inspections. Another strategy that
has become more widespread in recent years is multiple branding by
chains in order to accommodate the rapidly segmenting hospitality
market. Marriott, for example, now offers nine different brands that
range from luxury to economy class.
The most signiŽcant work on the structure of TNCs in the international
hotel sector has been done by Dunning and McQueen (1982; UNCTC,
1982). Their research shows that the accommodation sector is becoming
increasingly concentrated as chains expand worldwide. Moreover, since
the 1970s the chains have accelerated non-equity-based expansion, espe-
cially into developing areas. Exactly where these GCCs have touched
down may be traced to a number of factors, including Žrm strategy, tourist
demand, individual state policy, political instability and even local crime
rates. The form of expansion, however, is more the product of the industry
characteristics and resulting Žrm strategy, speciŽcally the shift toward
favoring non-equity participation. Again, these patterns of expansion for
hotel chains hold certain commonalities with buyer-driven commodity
chains. For example, as a result of these contractual alternatives, TNCs
have been able to skip over barriers to DFI in the semi-periphery and
periphery (Witt et al., 1991). More often, however, unpackaging strategic
assets has been the favored strategy of chains regardless of state policy
toward DFI in the host country. More important for the hotel chain is
exibility and avoiding the high initial capital outlays associated with
construction of new hotels or purchase of existing ones. The frequent
result is control of individual hotels by TNCs with little or no sunken
costs or signiŽcant risk to the parent Žrm. Moreover, chains do not
simply concentrate on the most lucrative and least competitive links in the
production chain; in some ways they produce little outside of the promise
to maintain their own reputation for reliability.
In many ways power and control held by hotel TNCs is tighter than in
buyer-driven chains. Because the name recognition factor is so important
in hotels, especially to masses of foreign, middle-class tourists who seek
to contain their own risk, nations outside the core have little choice but to
deal with TNC chains when attempting to promote tourism as an export.
As a result, the chains occupy the most lucrative links of the commodity
chain while simultaneously minimizing their own risk. Meanwhile much
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 COMMODITY CHA INS, SERVICES AND DEVELOPMENT

of the capital is supplied by peripheral governments, in the form of infra-

structure and tax holidays,22 and private investors who own hotels.
Although there is evidence that some local Žrms have been able to move
up the export ladder from hotel owners to operators and franchisers, First
World-based TNCs continue to occupy most of the top rungs.23

Airlines
Air transport resembles other technologically sophisticated and capital-
intensive sectors. Capital and technology requirements create high entry
barriers. Start-up costs are high due to the need for expensive equip-
ment and a skilled labor force. In addition, production is fairly inexible
in the short term, although it may be adjusted in the medium and long
term. As a result, excess capacity is frequently a problem. Economies of
scale exist, but Žxed costs are also high and tend to contain a cyclical
spike reecting the cost of updating equipment (O’Connor, 1989;
Morrison and Winston, 1995; Petzinger, 1995). Finally the nature of
production means that all commercial passenger aviation is regulated
in some way, if only for scheduling, air trafŽc control, maintaining take-
off and landing slots, gates at airports or general safety. All of these
factors suggest that the industry would be marked by oligopolistic
competition, and, more important for purposes here, that structurally it
would resemble other producer-driven commodity chains.
In fact most markets – that is individual routes – are conŽned to a
few producers, but the international division of labor for commercial air
service is more the product of international governance and regulation
than industry characteristics. Because of high costs combined with the
unique and strategic nature of air transport, Žrms have been the subject
of tight domestic and international controls that have produced signif-
icant amounts of state ownership, simultaneous national oligopolies and
controlled international competition.
International air transport is uniquely strategic in several ways:
whether carrying humans, mail or other cargo, the Žrms, equipment and
people not only reach borders (as in shipping) but penetrate what has
come to be recognized as sovereign air space controlled by nation-states.
Because national defense routinely involves the monitoring of air space,
governments require that commercial air patterns be easily identiŽable
and regularized. National defense concerns have also led governments
to pay particular attention to the air transport industry. Governments
tend to favor developing some type of national carrier or carriers, in
part due to the added reserve capacity for moving troops and materiel
in times of national defense needs, and in part for the spillover effects.24
The movement of considerable numbers of people also involves safety
concerns and invites international and domestic regulation. Finally, the
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 ARTICLES

oligopolistic nature of the industry invites government attention. All of

these factors have played a role in producing the rather unique devel-
opment of the international airline industry during the last Žfty years.
Airlines, quite simply, are not like other industries. This is especially
the case internationally where trade and investment are closely regu-
lated. Commercial airlines must seek special permission resulting from
government negotiations in order to serve a foreign country. Investment
historically has been even more limited. Unlike most industries where
TNCs may enter for the purpose of serving the domestic market, this
practice is all but prohibited in commercial air service. These two factors
make airlines unique compared not only to hotels and other services,
but also with respect to most other economic activities.
Tight regulation has been the norm for international air transport since
its inception early this century. International commercial air travel has
been governed by a Žfty-year-old system of rules and norms created at
the Chicago Convention in 1944 (Jönsson, 1981; Doganis, 1993). The
convention was called primarily in order to Žnd a way to govern the
growing air transport sector and produced the so-called third and fourth
freedom rights that today allow for international air trafŽc.25 The existing
system reects the fact that in addition to carrying out business, many
airline companies in effect serve the role of showing the national ag
abroad. Globally, in fact, many airlines are partially or fully owned by
national governments.
The two most signiŽcant regulations emerging from Chicago were
(and are) cabotage and bilateral air agreements. Cabotage, which existed
earlier but was legitimized at the Chicago Convention, prohibits foreign
carriers from serving solely domestic routes. While pure cabotage has
been chipped away at since, it continues today and forms the economic
basis for the existence of domestic airlines in most countries in the
world.26 Bilaterals, also known as Air Service Agreements (ASAs), refer
to the two-country negotiated agreements that govern all air transport
between nations.27 The pacts, which legally hold the status of treaties,
set the routes, frequencies, capacities and fares for airlines traveling
between the two countries. Without a bilateral agreement, no commer-
cial air transport takes place between any given two countries. One of
the most important early bilaterals was made between the United States
and Britain, stemming from negotiations held in Bermuda in 1946. Other
similar agreements, known as Bermuda-types, have followed and are
characterized by being more liberal than other bilaterals in that they
usually leave many of the details over ight frequency and passenger
capacity to the principal airlines involved, subject to government
approval.28 Even though air transport has grown phenomenally since
1944, bilaterals continue to govern air transport, and more than 1,800
exist today (Findlay, 1990).
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 COMMODITY CHA INS, SERVICES AND DEVELOPMENT

While the Chicago Convention and the resulting practice of bilateral

ASAs distinguish air transport from many other services, three other
developments since then have also heavily inuenced the industry. First,
common government practice severely limits foreign investment in
domestic airlines. Again, this results mainly from national security
concerns and a desire to show the ag abroad. Second, the International
Air Transport Association (IATA), an airline trade association, was
formed shortly after the close of the Chicago Convention and quickly
gained the ability to set international fares. This was especially the case
in Bermuda-type agreements, which left such details to the airlines
involved (Sochor, 1991; Golich, 1990). As a result, pricing for interna-
tional ights followed a strict regulatory regimen: fares were set by
IATA members ying speciŽc routes, which had themselves been deter-
mined by individual governments, stemming from the terms negotiated
in ASAs. Frequently airlines agreed to share revenues on routes, as well
as other aspects of providing service (e.g. ground crews, catering, etc.).
This classic cartel arrangement lasted for thirty years and only began
to break down due to the Žnal development, deregulation. The dereg-
ulation of the US market in 1978 brought with it pressure for inter-
national liberalization. The US government, representing several of the
strongest private carriers and holding the key to the largest domestic
airline market in the world, used both assets to renegotiate several bilat-
erals on more liberal terms. Other nations subsequently followed suit.29
Gradually the ability of the IATA to set international rates deteriorated
as a result of competitive pressure.30 In the last decade liberalization has
accelerated throughout the globe, with the United States taking the lead
through pursuing new bilateral agreements with several key nations
within Europe and the western hemisphere.
The impact of the postwar bilateral system is subject to some debate.
Unlike other transportation sectors such as shipping, for instance, open
registries or ying ‘ags of convenience’ are not an option and one likely
result has been that the safety record of air travel has been compara-
tively strong. Yet by lying outside of the GATT/WTO, air transport has
also been among the most protected industries in the world (Findlay,
1990; Golich, 1990). As a result, commercial carriers operate in a unique
environment: as Golich (1990) and others have pointed out, on the one
hand they are international businesses that form strategies based on
proŽt maximization. On the other, ownership often includes govern-
ment participation, operations take place in a heavily regulated market,
and at times airlines become embroiled in foreign policy disputes.31
From a GCC standpoint commercial air transport should conform to
a producer-driven model due to its capital- and technology-intensive
nature, the existence of high entry barriers and the tendency toward
oligopoly, and in fact this is the case. What the model does not explain
137
 ARTICLES

well, however, is the existence of national carriers rather than core-based

dominant carriers throughout the world. Producer-driven chains are
commonly marked by oligopolistic competition among mainly core-
based TNCs throughout the globe. Participation in the semi-periphery
and periphery is frequently conŽned to work in wholly owned
subsidiaries or sourcing within lower and less lucrative links in the
commodity chain. Within airlines, however, most countries possess their
own airline industry where airline TNCs are all but precluded from the
domestic market and have less than an overwhelming share of inter-
national trafŽc. This is due mainly to the strategic nature of the industry
– and its broad recognition as such by most governments – and in prac-
tical terms directly results from cabotage and ASAs.
To be sure, deregulation and privatization have produced important
changes of late. Legal and regulatory restrictions continue to limit both
cabotage rights for international carriers and majority foreign owner-
ship in most countries, but airlines have engaged in alternative
strategies. Many integrated with other tourism activities, especially
hotels, travel agencies and car rental Žrms, at a fairly early stage.32 More
recently several airlines have also pursued a series of strategic alliances
that include cross investment and ight coordination through code
sharing. Code sharing, which links passengers ying on more than one
airline, has recently grown among domestic feeder airlines with major
carriers in the USA but also frequently links separate airlines in different
countries. A passenger buying a Royal Dutch KLM ticket to South
Bend, Indiana, from Rotterdam, for example, may be channeled into
Northwest’s hub at Detroit and then own Northwest on the Žnal leg,
where KLM has no landing rights. The ticket itself, however, shows the
passenger traveling via KLM throughout. Code sharing is a response to
limitations on both foreign investment and cabotage.33
Finally, many compete through CRSs. CRSs display routes and fares
for travel agents and others who book travel and they also carry infor-
mation on hotels, car rentals and other tourist-related services. All major
CRS systems are owned by airlines or airline groups. AMR, for example,
the parent of American Airlines, also owns SABRE, the most widely
utilized CRS in the world. When a travel agent uses the SABRE reser-
vation system to book a passenger ight on United Airlines, for instance,
United pays a fee to SABRE. In recent years SABRE has been the most
proŽtable division in the company.34 Frequently they have been associ-
ated with screen bias, where the parent service provider is displayed
more prominently than competitors. Whether CRS expansion is a means
of cooperation or competition is a question of some debate but it is clear
it is a major source of gaining market share and proŽt for carriers. By
1988 the US Department of Transportation calculated that domestic CRSs
earned proŽts of more than $1 billion (Lundberg et al., 1995).
138
 COMMODITY CHA INS, SERVICES AND DEVELOPMENT

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

Table 4 World’s largest scheduled airlines, 1995 (scheduled passenger

kilometers own, domestic and international)

Rank Airline Country Killometers (million)

1 United Airlines USA 179,499

2 American Airlines USA 165,247
3 Delta Air Lines USA 136,962
4 Northwest Airlines USA 100,603
5 British Airways UK 93,860
6 Japan Airlines Japan 68,114
7 Lufthansa Germany 61,602
8 USAirways USA 60,538
9 Continental USA 57,131
10 Qantas Australia 51,870
11 Air France France 49,524
12 Singapore Airlines Singapore 48,400
13 KLM Netherlands 44,458
14 All Nippon Airways Japan 42,855
15 TWA USA 40,074
16 Cathay PaciŽc Hong Kong (China) 35,323
17 Korean Air Lines South Korea 33,782
18 Alitalia Italy 31,748
19 Thai Airways Thailand 27,053
20 Air Canada Canada 26,341
Source: IATA (1996).

139
 ARTICLES

IV C O N C LU SI ON S
One of the primary claims made by commodity chains research is that
identiŽcation of buyer-driven governance structures demonstrates a new
decentralizing tendency within global capitalism. Attention to services,
however, suggests that decentralization is not completely new and that
it takes on more than one form. The two primary sub-industries asso-
ciated with tourism present clear challenges to current commodity
chains theorizing. The organizational or governance structure associated
with each economic activity varies from the two typologies – producer
driven and buyer driven – proposed by the approach. By no means does
this challenge the general validity of the GCC framework. Instead the
point here is to argue for broadening the approach.
Doing so requires attention to the alternative organizational structures
that exist in global industries today. The lesson stemming from airlines
is relatively simple and straightforward: there is a necessity for paying
greater attention to state intervention at a global level in shaping industry
characteristics. Although present GCC theorizing would accurately
predict the form of the airline commodity chain, it would be less
successful in addressing its substantive nature, especially the wide-
spread survival of national Žrms outside of the core. Too often, a
commodity chain governing structure is posited from industry charac-
teristics alone. State policy is addressed, but mainly to argue why nodes
of a chain touch down where they do. In airlines, however, nothing
about the global organization of the industry can be understood without
acknowledging the legacy of the Chicago Convention. In this case, state
action, from both a multilateral and a bilateral standpoint, has shaped
the fundamental nature of the industry over the past Žfty years.
Hotels present a greater challenge in that the organization of the
industry differs from either producer- or buyer-driven chains. It contains
certain commonalities with the latter but constitutes a third variation –
or one that subsumes buyer-driven chains – that might best be called
contract-driven chains. The key difference is that hotel chains primarily
sell rather than buy, and what they sell is frequently an intangible asset.
Again similarities exist between contract and buyer-driven chains. Most
important, as with buyer-driven chains, this organization places a high
premium on exibility and many activities formerly internal to Žrms
are now externalized (GerefŽ et al., 1994). Moreover, core Žrms tend to
concentrate on the high-value activities within the chain. Many of the
developmental prospects and power relationships between buyer-driven
and contract-driven chains are therefore similar: proŽts tend to accrue
mainly to core Žrms, and producers frequently Žnd themselves in a
captive position. Again, however, power may be even more totalizing
in the case at hand. Because tourism is ultimately an experience, and
140
 COMMODITY CHA INS, SERVICES AND DEVELOPMENT

because international airlines and hotel chains often provide the

marketing of that experience in the home country, the TNCs in essence
gain control over deŽning the destination (Lanfant, 1980). Sun and sea
destinations, which are very common in peripheral countries, are partic-
ularly vulnerable because of easy substitutability.
As globalization proceeds and capitalism takes on increasingly com-
plex and varying forms, developmental possibilities in the semi-
periphery and periphery will undoubtedly be altered. GCCs amount to a
fresh and particularly useful approach in this sense, but the perspective
needs to expand to account for the many forms that global capitalism
takes today. Two Žnal points emerge from the analysis here. First,
industry studies provide a rich empirical basis for generating mid-level
theoretical contributions. As such greater attention is warranted to
organizational features surrounding different economic activities at the
international level and their implications for development. Second, ser-
vice activities in particular demand greater attention, both within com-
modity chains approaches and development studies more generally.
Their eclectic nature, which is documented in the two cases summarized
above, is testament to the increasing complexity of global capitalism
today, one that is reshaping developmental possibilities and limitations
for much of the world.

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

1 For a discussion of similarities and differences between GCC and world-

systems perspectives see GerefŽ (1995).
2 This section relies signiŽcantly on Appelbaum and GerefŽ (1994) and GerefŽ
(1995).
3 See Korzeniewicz (1994), which points out that sites of production are not
solely driven by wage rates. Instead Nike has returned to South Korea for
production of some shoes for the up-scale market due to better quality
control. Consistent with emphasizing exibility, currently the company has
contractual agreements with Žrms in several Asian countries in order to give
it a menu of options for manufacturing.
4 I am aware of just two exceptions: Rabach and Kim (1994), and Korzeniewicz
and Pitts (1995). The former mainly addresses producer services. While the
latter also uses GCCs to study tourism, the approach here may be distin-
guished for reasons detailed below.
5 Jagdish Bhagwati (1987) refers to this as the ‘haircut’ view of services: you
can’t get a haircut long distance. He and others increasingly eschew such a
strict conception of the tradability of services. Nevertheless, conceptual and
deŽnitional problems remain. Gibbs (1987: 87) contends, for instance, that
the concept of trade in services was ‘invented for negotiating purposes and
141
 ARTICLES

has become a category ex post facto’. Snape (1990: 5) deŽnes trade in services
as ‘the supply by residents in one country to demanders resident in another
country of services that are not incorporated in goods (other than in the
paper, Žlm, disks and the like used to record and transfer the service)’.
6 Tourism trade results from residents of one country visiting another country
and consuming services. The World Tourism Organization (WTO) deŽnes
a tourist not by purpose of travel but by length of stay: those visitors who
stay in another country for more than one night but less than a year are
classiŽed as tourists. Less than twenty-four-hour stays are listed as excur-
sions. Christine Richter (1987) argues that by the year 2000 leisure and
tourism are expected to be the single largest economic activity (measured
in dollar terms) in the world economy. Enloe (1989), citing the WTO, makes
the same claim. Linda Richter (1989) argues that tourism already constitutes
the largest industry in the world. Also see Greenwood (1992).
7 Again, deŽnitional problems plague measurement of tourism trade. Riddle
(1986), using statistics from a US government study, reports the largest
service category is ‘other services’, a residual category that includes compo-
nents ranging from various producer services to remittances from migrant
workers. Trade in tourism is listed separately under ‘travel’ in international
statistics. For a discussion of measurement of trade in tourist services that
argues for expanding the category, see Baretje (1982) and C. Richter (1987).
8 It should be noted that airlines are not traditionally included in tourism
expenditure statistics but instead are grouped with the transportation sector.
They are excluded, for instance, from ofŽcial WTO statistics. Clearly,
however, hotels, airlines and tour operators make up the three largest
components of tourism. In this sense I am following other tourism
researchers who adopt a political economy approach, such as Britton (1982)
and Lea (1988).
9 This is utilized by Korzeniewicz and Pitts (1995) in their study of tourism
in Mexico. Their spatial concentration is even more pronounced in that they
focus on one new resort area, Huatulco. The approach here differs but in
my view is complementary to theirs.
10 Only one Third World chain is found among the top Žfty. Dusit
Thani/Kempinski, based in Bangkok, Thailand, ranked thirty-Žfth in 1995.
See Hotels (1996).
11 Experience goods contrast with ‘search goods’, which can be inspected or
examined before purchase (Dunning and McQueen, 1982; Witt et al., 1991).
Experience goods are common, if not unique, to services.
12 I am indebted to an anonymous reviewer for emphasizing this point to me.
13 Marriott and Sheraton, for instance, held a long-time preference for actual
ownership of hotels while other chains such as Hyatt, Best Western, Holiday
Inn and Ramada have pursued non-equity expansion. See note 20, below.
14 Dunning and McQueen (1982) argue that often TNCs are involved in a
combination of ways. Some, for example, have a small amount of equity
while operating the hotel through a management contract. They categorize
four alternatives of expansion: ownership, leasing agreements, management
contracts and franchising. Witt et al. (1991) identify ten different strategies.
They also discuss more general methods of operation for tourism Žrms,
including franchising. Technically a franchise is a particular form of licensing
agreement that involves a trademark (brand name) and almost always a
geographical-based right to sell under that trademark. Franchising may also
involve access to more technical expertise that can make it difŽcult to distin-
guish from the management contract category of Dunning and McQueen.
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 COMMODITY CHA INS, SERVICES AND DEVELOPMENT

15 These can range from accounting procedures to requirements on the

frequency of cleaning a swimming pool. They are often enforced by unan-
nounced inspections (UNCTC, 1982). Ramada, for example, includes several
different categories of hotels based upon a point system relating to minimum
quality standards. Those standards are enforced by two surprise visits a
year, and from the resulting scores properties may move up and down
through the different categories (and price structures) or, in the worst-case
scenario, face expulsion (New York Times, 1995).
16 Author interview, Regional Vice-President of US-based hotel TNC, May 1995.
17 ibid.
18 Author interview, Vice-President for Development, US-based hotel TNC,
May 1995.
19 Author interview, public and private sector ofŽcials, July–August 1992,
Mexico City. Granting master franchises is a favored strategy, especially
among mid-priced chains expanding in developing nations (New York Times,
1995a).
20 Hyatt Hotels Corp, for example, owns no hotels. It manages more than 150
hotels and resorts worldwide, including one on the campus of the
McDonald’s Corporation’s famed Hamburger University near Chicago (Los
Angeles Times, 1994). According to the UNCTC (1990), 100 percent of Best
Western’s hotels took the form of non-equity (franchised, licensed or
management contract) agreements, while other chains such as Holiday Inn,
Ramada, Trusthouse Forte and Howard Johnson all exceeded 85 percent.
The Marriott Corporation expanded aggressively in the 1980s, growing from
seventy-Žve to 539 hotels, mainly by building hotels to its own speciŽca-
tions, selling them to investors, and then managing them. Ultimately,
however, it found itself owning several of the properties and carried more
than $3 billion in debt. In 1993 Marriott split into two companies: one owns
the real estate (and most of the debt), while the other provides hotel services
(Forbes, 1995).
21 Author interviews, private and public sector ofŽcials, Mexico City, July 1992;
author interview, international hotel chain vice-president, May 1995; Ascher
(1985). Major physical alterations usually require owner consent, but many
contracts stipulate that this should not be withheld ‘unreasonably’. Chains
also usually favor large-scale, capital-intensive luxury hotels. Ascher (1985:
44–5) points out that from the standpoint of the chain, hotels that offer fewer
than 300 rooms are seldom proŽtable, and chains will often push for 600–700
rooms or more. Finally, the contracts often contain escape clauses for the
TNC (UNCTC, 1982).
22 One government tourism ofŽcial in Mexico, for instance, summarized
management contracts as ‘very poor for the owners, and very good for the
operators’. Author interview, Mexican public sector ofŽcial, July 1992.
Despite this, the state Žnanced the construction of Žve major resorts during
the last twenty-Žve years, including Cancún and Ixtapa. In addition to infra-
structure, public money went to hotel ownership and offers of preferential
Žnancing to private hotel investors. Finally, state ofŽcials there relaxed regu-
lations in order to make it easier for foreign chains to operate in Mexico.
23 Again the Mexican case is instructive. There two domestic Žrms, Posadas
de México and Situr, each moved from simple ownership in partnership
with TNCs into hotel management and franchising. Today the former is the
largest hotelier in the country, markets its own brand, and operates hotels
in the United States and Venezuela. On the other hand, Table 3 demon-
strates that hotel management remains a largely First World business.
143
 ARTICLES

24 Some claim there is a broader posturing incentive of ying the national ag.
In the United States airlines that y international routes are also subject to
having planes temporarily seized by the government in times of emergency.
This took place during the Gulf War as commercial planes were used for
troop movement.
25 For a summary of the freedoms of the air, see OECD (1993).
26 The primary manner in which foreign airlines serve domestic routes is
through continuation services. This allows point-to-point service within a
country as long as the ight originates or terminates in the home country
of the carrier. As a result American Airlines, for example, offers Mexico
City–Acapulco service on a route that originates in Dallas–Ft Worth.
27 Bilateral accords were clearly a second-best option after the failure to reach
a multilateral agreement at Chicago. The convention was marked by what
Sochor (1991) calls ‘aviation competition’ between the United States and
Great Britain, the two leading nations in terms of airlines at the time. The
United States, which had a strong domestic private airline industry, favored
an open skies policy. Britain called for an international regulatory body with
broad powers in setting standards, routes and prices. In the end neither got
what it wanted. Open skies was defeated and although the conference
produced the International Civil Aviation Organization, a UN body, it has
almost no enforcement power. For more on the politics of the Chicago
Convention see Sochor (1991), Doganis (1993), Jönsson (1981), Golich (1990).
28 Bilaterals emerged from Article I of the Chicago Convention, which held that
air space above a country is sovereign territory and therefore requires state
authorization for foreign ights. The Žrst Bermuda agreement was replaced
by a more liberal bilateral (Bermuda II) in 1977. Similar, if even more liberal,
agreements today are commonly referred to as ‘open skies’ agreements.
29 On US deregulation see Vietor (1994) and Morrison and Winston (1995).
Between 1977 and 1980 the USA successfully renegotiated bilaterals with
Žfteen countries, and several more were completed by 1985 (Sochor, 1991;
Doganis, 1993).
30 While debate continues over the costs and beneŽts of domestic deregula-
tion and international liberalization, Sochor (1991) argues that the one clear
loser has been the IATA. In the past, governments almost always ratiŽed
the fares set by the organization. As competitive pressures increased IATA
rate making has largely been dismantled. The USA played a central role in
the demise of the IATA cartel, Žrst threatening to subject it to domestic
antitrust laws and second threatening withdrawal. See Golich (1990) and de
Murias (1989).
31 Recent examples include the Gulf War, which resulted in a sharp drop in
demand for air transport, and Haiti, in which commercial air service to the
island was halted as part of the effort to restore ousted President Jean
Bertrand Aristide. US policy makers also withdrew landing rights for the
Yugoslav national airline early in the Balkan war. More generally see Golich
(1990) and de Murias (1989).
32 Most big US carriers have owned hotels at one point or another, although
almost all subsequently sold them off. Today most hotel ownership by
airlines is conŽned to other AIC carriers. Integration strategies varied and
were inuenced by deregulation in 1978. American Airlines, for example,
expanded horizontally and vertically before deregulation (owning, for
example, Flagship and Loews hotels through its Sky Chef’s subsidiary) and
then streamlined as deregulation approached. United Airlines expanded
vertically both before and after deregulation, eventually buying Westin and
144
 COMMODITY CHA INS, SERVICES AND DEVELOPMENT

Hilton International hotel chains along with the Hertz rental car corpora-
tion. This strategy fell apart in 1987 and each was sold. Other international
carriers, such as SAS (Intercontinental), Air France (Meridien), KLM (Golden
Tulip) and Japan Airlines (Nikko), have also become involved in hotels. The
German airline Lufthansa has established charter and tour operator compa-
nies in its home market and elsewhere in Europe (Feldman, 1987; Bull, 1991).
33 In the United States, for instance, foreign investment in airlines is limited
to a 25 percent equity stake since the 1958 Federal Aviation Act. Among the
emerging partnerships have been British Airways and United Airlines,
United and Lufthansa, KLM and Northwest, British Airways and
USAirways, American Airlines and Canadian Airlines International, and
British Airways and Qantas. Most recently British Airways and American
proposed an alliance in 1996. Many of these involve some cross investment.
Airlines also raise money through international capital markets and trade
on foreign stock exchanges. In 1991 Air France had an equity stake in twelve
airlines, KLM in seven (Johnson, 1993; Feldman, 1987; Lundberg et al., 1995).
34 On the major CRS systems in the world see Morrison and Winston (1995)
and Feldman (1987).

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