Discussion Paper No. 97 of 2009 on Factors Influencing Hotel Room Supply and Demand in Kenya: a Simultaneous Equations Model

Abstract

Accommodation is a key component of the tourism industry in Kenya, which has been recognized as a key sector in the economic pillar of the country’s Vision 2030. Therefore, the envisaged growth of the tourism industry in Vision 2030 has implications on the hotel sub-sector. In order to ensure that the accommodation sub-sector contributes to the goals of Vision 2030, there is need for appropriate strategies to enhance hotel room nights’ supply and demand in Kenya. This calls for re-orientation of the hotel room market with regard to capacity, quality and diversity. However, the hotel room market exists within the wider context that is influenced by factors nested in the political, economic, social, technological, environmental and legal realms. This study seeks to examine the factors that influenced hotel room nights’ supply and demand in Kenya between 1988 and 2007, using the Simultaneous Equations econometric model. Based on the Instrumental Variable- Two Stage Least Squares methodology, the empirical results show that visitor arrivals, hotel room occupancy rates, exchange rates, and law and order risk index are the key variables that significantly influence demand for hotel room nights, while previous years’ hotel room price, law and order risk index, length of stay, and the number of hotel room nights demanded, significantly influence hotel room price in the supply equation. On the basis of these findings, this study recommends policies that will focus on quality assurance in the hotel room market and tourism product development, strengthening tourism marketing and recovery strategy, maintaining law and order, developing and managing information and data in the hotel industry, and finalizing and implementing tourism legal and regulatory framework.