What Would Happen if Business Travel Stopped?

Katya Gonzalez-Willette Hello and welcome to the Growth Lab at Harvard University's weekly podcast.

Chuck McKenney With COVD-19 forcing widespread adoption of virtual communication for much of the world, some wonder if these remote business practices will become the norm. Before the pandemic, international business travel was a 1-point-5 trillion-dollar annual expense – an expense that’s increasing about 7-percent a year. Why have corporations been willing to absorb this cost when technologies such as Skype, FaceTime, Zoom, WebEx, etc., have been widely available for the better part of a decade? Growth Lab researchers have been studying this question for years. You see, the Growth Lab’s approach to development puts particular emphasis on knowhow. We're not talking about the information that exists in bo oks, computer files, graphs and algorithms. Knowhow only exists in brains, and it was very slowly from brain to brain through years of on the job, learning and interacting with experience counts. So to move knownow, you have to move brains. Now for more on the importance of moving knowhow, its relevance to business travel and some findings in our research, let's bring in our guests. Ricardo Hausmann, Director of the Growth Lab and a professor at the Harvard Kennedy School. Frank Neffke, Research Director at the Growth Lab. And Michele Coscia, Assistant Professor at the University of Copenhagen. Welcome. Can you first elaborate on the concept of moving knowhow and its role in economic growth?

Ricardo Hausmann Sure. Chuck, thanks for setting this up. The idea in our mind is that really the secret of development is the adoption of technology and technology comes in three flavors. It comes as tools, which we call also embodied knowledge. So the knowledge is in tools. It comes in the form of codes, recipes, formulas, algorithms, how to do manuals. And those come as codified knowledge. And then there is knowhow that resides as you said before, just in brains. And it moves very slowly from brain to brain. So if you want to deploy technology, it's very easy to move the tools. It's very easy to share the codes. It's very hard to move the knowhow. But we were puzzled for a long time on: How does the world get to move knowhow? And we had studied how knowhow moves between firms through workers that move from firm to firm. How knowhow moves between regions and you know, who are the entrepreneurs or the business organizations that deploy new technology and new knowhow from one region to another? And how knowhow moves between countries. And there we studied FDI and migration and so on. So we posited the idea that maybe there is a difference between moving information, call that bites, and moving brains.

Chuck McKenney So Frank, are there some other ways to move knowhow that had not yet been well studied?

Frank Neffke That's a good question. The research that Ricardo talked about that we did before typically involved people of firms moving more or less permanently to a place. So there are firms who set up new subsidiaries abroad or there are people who migrate to a new place, a new region, new country and they bring their knowhow with them. And we know that from our prior research that that is a very strong channel to transmit knowledge between places. However, from personal experience, we know also that knowledge often doesn't need permanent migration or permanent movements to be transmitted because we go to conferences and workshops all the time as academics. And there the only reason why we do that is so we can be face to face and talk to our fellow researchers across the globe. So that suggests that knowhow could actually also travel in a much shorter engagement. And firms do the same, firms and business travelers abroad at tremendous costs in terms of the money they spend on it, but also in terms of the time it takes sitting in airplanes and waiting at the airports and so on. But what was very hard was to map this movement, this trend story movement of people. Migration, there are good global statistics on migration. There are good global statistics on FDI. But there are no harmonized statistics on how many business travelers visit a place, how many business travelers move from the US to Germany, for instance, in a year, or from Germany to Austria and so on. But we actually at some point realized that business travel will leave a paper trail. And the paper trail that we thought about was the payments they make abroad. So when a business traveler travels to a foreign place, they typically take a corporate credit card with them. And if they make a payment with such corporate credit cards, that transaction is recorded. So we would see that a business traveler from the US going to Germany would pay for a restaurant bill or a hotel bill or something like that with a corporate credit card. And that way, if we had information on this, we could actually map the global business travel flows. Now, unfortunately, didn't have that information ourselves, but we were lucky that we could team up with the MasterCard Center for Inclusive Growth. What that center allowed us to do was to access aggregated and anonymized data based on information of payments that were made by corporate debits or credit cards issued in one country, but the payments were taking place in another country. So that information was enough for us to build a network of global business travel that connected countries by how many business people we estimated would be traveling from one country to another.

Chuck McKenney Tell us a bit what you learned from looking at these data

Frank Neffke So the first thing that we did with the data is that we had to look at what do they actually reveal about business travel. One of the things that we found quite surprising was that business travel had grown tremendously. So we looked between 2011-2016 and it grew by 40%, whereas the global economy was more or less flat in the same period. So why did people want to go abroad and travel on business? What was the most important reason that we found in the data that would explain business travel? And it turned out that business travelers do one of three things. Either they are there to set up trade relations so to export to a country, or they want to set up new establishments abroad so they do greenfield investments, or they tried to manage their existing establishments. So that is people going from the headquarters to establishments abroad to make sure that everything runs smoothly, to be up to date with the problems and the processes of these local units. When we did the numbers, it turned out that by far the most important reason why business travel was happening was that last component. So managing the business units firms owned the abroad.

Chuck McKenney Michele, how did you work with the data to reach your conclusions about business travel?

Michele Coscia To be able to make the prediction of how much knowledge a country received from business travels, we need to guess in which industry a business traveler is active. In our data, we only have the country of origin. But what we are interested in is the industry of origin. In order to make this reconstruction, we are using what we call the Principle of Maximum Ignorance. Since we do not know which specific economic establishment in a country is sending business travelers, we just assume that any establishments in the country is equally likely to have sent the business travelers. What this means is that, for instance, if 20% of the firms in Germany are car manufacturers, then we also assume that 20% of the business travelers originating from Germany are involved in the car manufacturing business

Chuck McKenney Let's dig into the findings. What did you learn from the flows of business travel in terms of its impact on countries?

Frank Neffke So now that we had an estimate of how many business travelers arrive in a country with a background from a certain industry, we knew how much relevant knowledge for each industry in a country would arrive. And the more relevant knowledge for industry arrives in the country, the faster that industry would grow and the more that industry would start exporting. And that is exactly what we found. So when we looked at the business travel at the beginning of the period in 2011, and then we analyzed how fast different industries in the recipient countries would grow over the next five, six years after these business travelers had visited the country. We found that the industries that grew fastest were exactly those industries for which we inferred there was a lot of knowledge inflow coming with the business travelers that arrived in the country. So not only that, we also found that if you received a lot of business travelers from a certain industry or that we associate it with a certain industry and you don't have that industry yet, you're more likely to start building that industry up in your country. So, for instance, take the case of Paraguay. Paraguay had a baseline probability of starting to make work clothing of about 8.6%, according to our models. But due to the business travel it received and the knowledge that was embedded in the business travel, that likelihood actually went up to 11.4%. Slovakia had a baseline probability of 1.3% of making waterproof outerwear, and that baseline went up to 5.3%. So that's about four times as large simply because of the knowledge inflow that came with the business travelers and that arrived in Slovakia.

Chuck McKenney How do you know if the business travel caused the exports and not the other way around?

Ricardo Hausmann Well, we found that business travel precedes growth in exports and productivity. So that's the first hint that it may be causal. It may not just be, you know, a correlate. It may be causal. But in order to dig even deeper and get through our referees, we have to use more sophisticated econometric tools. One of them called instrumental variables. And what we did is we looked at the consequences of differential business travel caused by different visa regimes between pairs of countries. In some countries, business travelers need no visa. They can travel freely. In other pairs of countries, there are more restrictions. So we use that as a source of variation in the intensity of business travel. And we found that that variation caused by differential visa treatments had a significant impact on exports and growth. So we think that it is actually the way in which the world deploys its knowhow and makes it available to different firms, different establishments across the world.

Chuck McKenney In your study, which countries benefited the most from business travel?

Frank Neffke So if you turn to the countries that actually benefit most, it's composed mostly of the countries that are very close to rich countries that sent most of the business travelers. And that's because the business travel network is very unequal. It is basically mostly comprised of rich countries visiting other rich countries and the developing countries have a much harder time to attach to this network, and they therefore also reap far fewer of the benefits of business travel. And in that sense, business travel, as it is right now, is a phenomenon where the rich get richer.

Ricardo Hausmann So in some sense, business travel represents another of those development divides that if you're out of the business travel network, then you're not benefiting from the flow of knowhow. And that slows your development path. There are some countries that are getting more than others - Mexico, Colombia, Peru, Chile, Argentina, South Africa, Morocco are getting more than other countries, say, like Bolivia, Ecuador, Venezuela, Nigeria, West Africa, Angola. So it's a differential effect even in developing countries. But the system is somehow one of the obstacles to a broader spread of technology across the world.

Chuck McKenney Michele, how can people explore the data and your findings to learn more about this research?

Michele Coscia If you want to interact with our research, there are many ways you can do that, depending on your level of bravery when it comes to analyzing data. The first thing you can do is to go to the website of the Growth Lab. We created a Web page where you can read a text explaining our findings and our methodology and you can see different visualizations that will allow you to understand the data better. For instance, you can see the network of global business travelers and you can see the local effects that Frank was talking about, the fact that this network of global business travels is very well clustered geographically. . Another thing you can see is an  interactive visualization that allows you to understand the effects of the disappearance of business travelers originating from a specific country. You can select a country, for instance, Japan, Italy or the United States, and the map will show you which are the countries that will be harmed the most if that country of origin will stop sending business travelers. At a deeper level, you can also access data that we use to make these inferences. This data is being hosted by the MasterCard Center for Inclusive Growth. And these are versions of the data that are manipulated in order to preserve the anonymity and the data confidentiality of our data sources. But they still allow you to reconstruct our observers effect.

Chuck McKenney In light of the COVID-19 pandemic, business travel has come to a screeching halt. What does this mean for the global diffusion of knowhow moving forward?

Frank Neffke So at the end of this statistical analysis, what we had in mind was to ask the question, what would happen if a particular country in the world from one day to the next would stop sending business travelers abroad? By how much would other countries be hurt by that? And by how much would the global economy be hurt by this exclusion of business travel from one particular origin? And we call that the outgoing knowledge index. So for Germany, which is the biggest contributor to the global knowledge diffusion through business travel, according to our study, that was close to 5%. So if Germany stopped sending business travelers abroad, we estimate that the global economy might shrink by up to 5%. We looked at what happened if a single country stops sending business travelers abroad, what we never imagined with that, the entire world would stop traveling. This, according to our estimates, if we extrapolate from what we see from a single country, would have a detrimental effect to the flow of knowledge and the capacity of firms to manage their subsidiaries abroad.

Chuck McKenney Could the negative effects of COVID-19 on business travel be mitigated by digital alternatives to travel? 

Frank Neffke Now, we've all been living for a while now with the alternatives to business travel. We are doing this podcast over Zoom. We have a number of meetings on Skype. We are using Slack. We are trying to connect in digital means as well as we can. To what extent this actually will work and to what extent this is a good alternative for business travel remains to be seen. Mind you, these technologies existed in the period that we were studying. We started in 2011. Skype was around, a number of platforms to work remotely and collaborate remotely were available. But firms still chose to travel. So the question is, now that we're all in a new world where we are so used to connecting through digital means. Does that mean that we also have learned how to connect to one another without business trouble? Or will we see long term adverse effects of this stop the global business trouble in the near future?

Ricardo Hausmann I think this point just raised by Frank about the world without business travel is something that we have not thought enough about. There are many ways in which organizations have structured themselves to maximize the impact of the knowledge that they have. Whether it's a company that knows how to do something and is trying to figure out how to do it in other countries. And that's foreign direct investment. Or whether it's consulting firms the McKinsey's, the BCG's, the Bain's of this world that possess a certain capacity, knowledge, problem-solving capacities that they deploy internationally. So suddenly you have all of this business travel being shut down. Well, part of it cannot be substituted by Zoom, part of it would require to go see, verify, etc. And that is probably slowing down certain forms of business organizations. So in many industries, for example, there is some competition between locally controlled firms and international firms. Well, maybe the margin of competition of those industries will change. Maybe if your access to this global knowhow in your corporate network is no longer available to you, maybe you are not as competitive vis a vis your local competition as you used to be. So this may lead to different forms of business organization. On the other hand, the things that can be done through teleworking. Right, so that the activities that can be done through Zoom. Well, maybe if you can do it from home, you can do it from abroad. That may open up new avenues for internationalization in tasks that can now be done more remotely than we thought they could be done before. So I think that the shock to a global economy may be more significant than we think. Many negative impacts in things that used to require business travel that is now impeded. But maybe the technological solutions may have differential effects on some activities vis a vis of the others.

Chuck McKenney Thank you all for taking the time to discuss your latest research, and you can explore this work at: www.growthlab.cid.harvard.edu/business-travel.