The Economics Of Sports: Value Add or Hype?

By Kabir Rampal
11C
13

Introduction:

Sport began as a leisure time activity. In the 20th century however it became a social
phenomenon for the masses. In industrial countries sport has developed into its own
economic branch contributing about two percent to gross domestic product (GDP).

Sports, as a sector of economic activity, spans medical treatment and rehabilitation,

research and development, sports tourism, sales and trade of sport products,
construction and maintenance of sports venues, organization of sports events,
franchising and marketing and advertising. It also creates various job and business
opportunities (e.g., engineers and developers, coaches and sport doctors, sport
journalists and commentators, retailers of sports goods and equipment, etc.). It is also
part of the increasingly important leisure industry and as such, has broader benefits
such as boosting productivity, individual and community development as well as
reducing the burden of ill health on society. Additionally, it has far reaching implications
on the global economy due to its close association with other sectors including
education, real estate, and tourism.

There have been conflicting views on the actual impact of the sporting industry on a
country’s / global economy, especially in the developing countries. There is an
argument that whether countries have other needs to be fulfilled that are more important
to the people. We just have to think back to the graffiti sprayed on a stadium wall at the
1986 World Cup in Mexico: “No queremos goles, queremos frijoles.” (“We don’t want
goals, we want beans”).

Value of the sports industry Globally

Using economic impact methodology, which is largely developed around the estimated number
of spectators visiting an event from outside the local region, and the amount those visitors
spend on accommodation, food, entertainment, etc.; the estimated size of the global sports
industry is $620 billion today. The sports industry today spans the field of play—from the food
and memorabilia stands at the stadium, to media rights and sponsorships. The many
participants in this market are competing for a bigger slice of the pie. This includes infrastructure
construction, sporting goods, licensed products, and live sports events.

Live sports events in particular offer a compelling proposition to different industry participants—
from free-to-air broadcasters seeking viewers and advertising revenues and pay-TV
broadcasters looking for loyal subscribers, to sponsors moving away from traditional media,
event organizers, athletes, and spectators.

The global sports industry is growing much faster than national gross domestic product (GDP)
rates around the world.1 And the global sports value chain—its size, makeup and revenues—
has significant growth prospects for the future.

The industry also gives rise to other smaller industries like sports tourism and the sports event
market, both extremely profitable and both extremely valuable to the economy. Sports tourism
generated $14.6 billion in tax revenues in 2019, with $6.8 billion accruing to state and local
governments, clearly showing that the industry has a massive positive impact on the local
economies.

For example in Europe, The sports sector accounts for 1,76% of the European Gross Value
Added (GVA = Gross Domestic Product + subsidies – (direct, sales) taxes), that means that it
contributes more to the economy than agriculture, forestry, and fisheries combined. Converted
to € that is about €175 billion

In addition to the revenue, the sports industry directly brings into the economy, it also generates
employment. When it comes to sport jobs, the labour market of sport-related employment
represents 2,12 % of the total employment in Europe, which are round about 4,5 million sport
job employees. The European Commission also states that the sport sector has proved to be
especially resilient during economy crisis, which makes it even more important for the European
economy and attractive to job seekers.

Playing sports has become its own market because of non-profit associations or private
enterprises that offer all sorts of services from simple personal instruction to a subscription in a
fitness centre. There is also a significant market for sports events through broadcasting and
sponsorship
rights to ticket sales. These three markets – sports activities, sports equipment, and sports
events – interact to set the wheels in motion for an economic development which cannot

be ignored and which creates a growing economic sector. In addition to the creation of new
sources of income at different levels, sport can also

have indirect economic consequences. Only a few studies have been made about the economic
impacts that sport projects have on less developed countries. Independent economic studies
were performed in North America to determine if professional sports teams and their arenas had
any economic impact on the region in which they were located. Nearly all the studies showed
that there was no real impact on the economy. Taking this into account we must be cautious in
analyzing the direct economic effects of sport projects. To obtain a real evaluation, we must
remember the value of their economic benefits as well as their environmental and social
benefits. In most cases, there is a lack of ex-post studies and cost-benefit analysis in developed
countries too. Such analysis would inform the public authorities and potential donors of the
usefulness and durability of subsidies as well as donations to sports.
Objectives:

1) Should the financing of sports stadiums be done privately or publicly through an analysis
of stadium financing and its repercussions in the United States and Olympic Stadiums
throughout the world.
2) The impact of sports and the subsequent industry on a country’s economy with a case
study on the economic models of franchise sports in India
Literature Review:

1) Pierro, Jeffrey, “The Impact of Professional Sports Franchises on Local

Economies”: While owners justify using taxpayer’s money for the construction of new
sports stadiums in areas citing the profitability it will have for the city as a whole, in most
studies conducted, they create very little long term employment and don’t add much to
the state’s economy. In most cases, it has been found that using government funds to
fund municipal projects and using private financing for the construction of sports
stadiums is more beneficial for the state’s economy and is able to create long-term
employment. 70% of the stadiums in the United States are publicly financed and cities
are issuing hundreds of millions of dollars of bonds to subsidize these facilities and using
certain taxes to pay off their debt. Unrealistic revenue projections and skyrocketing
construction costs are making it very difficult for a sports facility to generate enough cash
to pay the debt of these sports mega structures. Case studies, regression analysis, and
Econometric Valuations have all pointed to the same point; sports stadiums and
infrastructure should be funded by private organisations and not by taxpayers’s money.

It also speaks on the positive impact the sports industry has on the cities it’s located in
as well as the country as a whole due to the employment it generates not just in its own
sector but also resultant sectors like tourism, real estate, merchandising etc. It considers
various analysis that have been done which prove that on the whole the industry is of
great value to a country’s GDP and is especially important for the grassroot development
of sport.

2) Mcbride, James, and Manno, Melissa “The Economics of Hosting the Olympic
Games”: The costs of hosting the Olympics have skyrocketed, while the economic
benefits are far from clear. Large government expenditure for the construction of the
infrastructure required for these sporting events, which broadly consists of Roads,
Airports, Hotels, The Olympic Village, and the Stadiums for a variety of sports, and a
lack of return on investment is leaving Olympic hosts with mountains of debt. The
maintenance of these stadiums lead to a constant expense for years to come after the
Olympics have been held and there is no income generated from these stadiums. The
lack of income being generated from these stadiums in addition to their high cost of
maintenance and up-keep is turning them into massive debt traps for governments.

3) Bhogadi, Chandralekha “The Economics of the IPL”: While considering how sports
franchise leagues positively impact a country’s economy, it talks about how the Indian
Premier League has vast positive implications on India’s economy. Looking at the macro
implications, it The most prominent macro aspect is the contribution of IPL to the size of
India’s GDP pie as highlighted by the KPMG survey. It was also brought to light that
during IPL season, there was a significant rise in tourism with a large number of
international visitors and the employment generation during these months owing to a
huge demand for staff members. This includes demand for medical teams for every
team, club-specific cheerleaders, coaches, stadium employees, security and so on. In
short, it generates a vast number of employment opportunities across various sectors.
Another important highlight of the same study was the upliftment of tier-2 cities because
of media exposure. Tier-2 cities are investing more in the city’s infrastructure and
development benefits from IPL’s media exposure, and see a rise in tourism-related
activities which can generate greater revenues for the city. At a micro level, the IPL
generates a lot of revenue through sponsorship, ticket sales, and advertisement and
broadcasting rights. In fact, the IPL has signed a five-year contract worth $2.55 billion,
with a $510 million annual fee, for its worldwide broadcasting and digital rights with Star
India.