How smoking bans could lead to the death of the tobacco industry

Stubbed out. shutterstock.com

Smoking bans have been introduced in numerous countries around the world, following the incontrovertible link that’s been made between smoking and cancer. The World Health Organisation estimates that over 6m people a year will die from smoking related illnesses each year and thousands more suffer from the effects of secondhand smoke. This has led to more than 170 countries signing the World Health Organization’s Framework Convention on Tobacco Control, a treaty that commits them to introduce comprehensive smoking bans.

A natural consequence of smoking bans has been a decline in smoking in countries implementing them. Within one year of a ban on smoking in all enclosed work places being introduced in the UK, for example, 400,000 people quit smoking. But these kinds of bans have also had a surprising consequence for the tobacco industry.

It has long been believed that tobacco firms based in countries with smoking bans would start targeting markets without bans. By and large these are poorer countries, which also provide new markets for big Western tobacco companies. But our recent research shows that this is not the case.

In fact, smoking ban legislation has led to a decline in the way that tobacco firms expand internationally. We studied 141 companies across 20 countries over a ten-year period, seeking to explain patterns of foreign direct investment (FDI). We found that FDI in the tobacco industry is widespread, and that 53 tobacco companies engaged in FDI, with 26 investing in countries with some form of smoking ban. Many of their new target countries were among the poorest.

However, we also found that smoking bans at home reduce the likelihood of companies internationalising. Not only did bans affect their cash flow, and therefore reduce their funds for international expansion, there was another reason at play, too.

Increasingly common. shutterstock.com

It seems that tobacco companies are sensitive to their public profiles and, as they seek new working relationships with governments and battles over issues such as plain packaging and intellectual property, do not want to be seen to be exploiting the poorest countries. Smoking bans often reflect a negative political mood within their home country toward tobacco and so investing in poorer countries to make up for dwindling sales at home may seem exploitative and would be bad for their PR.

Swelling tide

Those that have tried to increase their FDI, however, have sometimes struggled against the swelling tide of legislation against smoking. India, for example, has banned foreign direct investment in cigarette manufacturing, with its government contending that, as a signatory to the Framework Convention on Tobacco Control, it had the responsibility to reduce consumption.

Instead of investing overseas, tobacco companies seem to be diversifying into new products. FDI in the tobacco processing sector requires a lot of capital, operating at large scale. As such, a decline in revenues seriously adversely affects their ability to invest.

As a result, the field has been cleared for companies who don’t have bans where they are based. Their internationalisation will not be so critically appraised at home and they have the resources to fund expansion. We saw signs of this in our study, which raises the prospect of the sector being dominated by a few countries who don’t have bans or public opprobrium toward smoking.

China, for example, has recently introduced a smoking ban in public spaces, but the ban has numerous exemptions, including restaurants, bars, hotels and airports. Historically, it has seen growth in domestic sales of more than 4% a year, along with increased internationalisation of its tobacco industry, particularly in Asia and Africa.

China’s new smoking ban does not include all public spaces. EPA/Bill Smith

Equally, tobacco companies from EU countries with only limited bans, or where bans have less impact due to weather, such as France and Italy, continue to see internationalisation of their tobacco firms.

So the flip side of the decline of some big tobacco companies is that it does leave the field open to firms based in countries without a ban. This could be more detrimental to their citizens’ health. Big firms in the UK and US, for example, have argued that such firms are less regulated and produce lower quality products, which exacerbates the health effects of smoking. In Indonesia, local products are a mixture of tobacco and cloves, which many people locally believe to be more healthy, though typically this simply leads to them smoking more.

Ultimately, smoking bans reflect society’s attitude toward smoking. The decline in FDI by firms that are based in countries with a ban shows how they are influenced by changing norms. As they are enforced with growing conviction around the world, this may ultimately lead to the death of the industry. Until then, the companies in countries that do not have effective bans will see their profits rise.