Market-segment targeting and long-term growth in a tourism-based economy

Academic literature on the relationship between tourism and economic growth expands steadily. This literature supports the Tourism-Led Growth Hypothesis (TLG). Although it seems obvious that tourism-led growth is possible only if a destination does not experience stagnation in demand, no previous theoretical paper addresses the crucial issue of the compatibility between TLG and the potential occurrence of a stagnation phase in the destination. The aim of this paper is to fill this gap and to provide a framework of tourism-led growth accounting for the possibility of rejuvenation strategies. A model of growth for a tourism-based economy is built following Romer (1986). Two theoretical results are obtained. Provided some conditions are satisfied, it is possible to identify a market- segment compatible with sustained growth. A stagnating destination can switch to a new market segment for which the level of welfare is higher in the long-run. The common practice that consists in upgrading the quality of supply to focus on new markets is supported as a suitable practice in order to achieve optimal welfare. Conclusions of the model are tested with real data from two Spanish archipelagos, Canary and Balearic islands. Empirical results points to clear success of the reorientation strategy in the Balearics. The case of Canary islands is controversial since the reorientation strategy was not simultaneously implemented in the territory.