Grounded: COVID-19 and the new normal in business travel

“It will be possible, in that age, perhaps only 50 years from now, for a man to conduct his business from Tahiti or Bali just as well as he could from London.” - Arthur C. Clarke, 1964

By Aditya Rau and Arturo Franco

At the 1964 World’s Fair, British futurist Sir Arthur C. Clarke predicted that 50 years later, work would no longer require one’s physical presence. Fast-forward to 2020. The era of virtual conference rooms is finally upon us. Yet, at least until 2019, business travel had been growing at an average rate of six percent per year since 2010. To put that in perspective, that’s twice the rate of global economic growth. How might we explain this?

First, business travel makes for better business. Studies in the Harvard Business Review and Forbes show that face-to-face communication plays a pivotal role in negotiating deals, selling products and building long-term relationships with clients and co-workers. Second, business travel is an economic engine. In 2019, spending on business travel reached $1.4 trillion, close to 2% of global GDP. It also makes up about one-fifth of the direct economic contribution of the global travel and tourism industry, which itself employs one in every ten people on earth.

There remains a more essential reason for continuing to move brains around the world. As part of an ongoing research collaboration between the Mastercard Center for Inclusive Growth and Harvard University’s Center for International Development’s Growth Lab, we have learned that business travel plays a key part in the process of knowledge transfer between countries; a process that might not be easily replicated via digital means.

Leveraging anonymous transaction insights provided by Mastercard, Growth Lab researchers found a direct link between a country’s incoming business travel and the growth of new and existing industries. The complete findings –recently published in Nature– reinforced the hypothesis that moving knowhow (the tacit knowledge accumulated and transferred from brain to brain through a long process of imitation, repetition and feedback) is critical to economic growth.

As they drafted their paper last year, Growth Lab researchers grappled with a hypothetical question: what would happen to economic growth if international business travel were to shut down completely? Their estimate: global GDP would shrink by more than 17 percent. As we now know, their hypothesis would quickly be tested.

Early in March 2020, the World Health Organization declared that the spread of COVID-19 constituted a global pandemic. With new health and travel advisories in place, travel-related industries began to feel the toll. Global events and conferences were cancelled: the World Bank and IMF Spring meetings went virtual, the annual SXSW festival –estimated to bring $356 million to Austin’s economy– was shunned.

Then came the Great Lockdown. With no one on the move, the global business travel market is now predicted to see a loss of $800 billion this year. These are just the short-term effects of the virus’ rapid spread. The new research from Harvard also raises concerns about the long-term economic implications of the international travel restrictions.

Innovation and productivity

In the long term, reduced international business travel can reduce technological transfers that increase productivity, affect the rate of innovation, and ultimately deter economic growth, particularly in places that need it the most. The longer businesses keep employees grounded, the higher the cost.

Business travel helps train people in ways that we can’t mimic online and prepare them for jobs that do not yet exist. According to Harvard Professor Ricardo Hausmann, who is also Director of the Growth Lab, this requires the diffusion of tacit knowledge – knowledge acquired mostly through learning by doing. “As Malcom Gladwell argues in his book Outliers, it can take 10,000 hours of practice to become good at something. Faced with the difficulty of moving know-how from brain to brain, people long ago figured out that it was just much easier to move the brains,” writes Hausmann. But “how [can you] create and mobilize coherent teams of people in new economic activities if the requisite tacit knowledge is missing” because people are no longer on the move?

To make his point, Hausmann considers that the launch of new industries in German and Swedish cities have been made possible because of the entry of established entrepreneurs and skilled workers into new markets, not through the hiring of locals without relevant industry experience. In the absence of business travel, the diffusion of tacit knowledge is minimized. And the innovation needed to spur productivity, which in turn brings economic growth and wage gains, is absent.

The launch of new industries in German and Swedish cities have been made possible because of the entry of established entrepreneurs and skilled workers into new markets, not through the hiring of locals without relevant industry experience.

 “International business travel is shown to play an important role for domestic innovation,” writes Wolfgang Keller, Director of the McGuire Center for International Economics. He goes on to argue that “…limits to cross-border movements, in particular visa and other requirements, might carry substantial costs.” The productivity and economic growth impact of business travel has been estimated to equal almost half that obtained by investing in research and development (R&D). Let’s do the simple math: in the United States, expenditure on R&D totaled US $511 billion, representing 2.74% of GDP. Get rid of business travel and the economic implications are startling. This and similar findings have helped policymakers to view short-term mobility as a strategic mechanism to drive productivity enhancements and foster economic growth.

Which countries will be most affected?

As with previous recessions and external shocks to the economy, the impact of a decrease in business-related trips will differ between countries. Thanks to the Growth Lab’s researchers, we now know that more populous countries have more business travel in both directions. However, the volume of travel is less than proportional to their population. “A country with 100% more population than another has only about 70% more business travel,” writes Hausmann. “This suggests there are economies of scale in running businesses that favor large countries.”

In addition, business travel tends to grow more than proportionally with a country’s level of development. “The global economy is increasingly characterized by global firms, which need to deploy their know-how to their different locations around the world. The data show that there is almost twice the amount of travel from headquarters to subsidiaries as there is in the opposite direction,” notes Hausmann. Indeed, the countries that account for the most travel abroad, controlling for population, are all in Western Europe: Germany, Denmark, Belgium, Norway, and the Netherlands.

This might mean that as the number of travel restrictions increases, the capacity of global firms to meaningfully invest and scale operations in developing economies will decrease. This, in turn, will hamper the prospects for economic growth in developing economies. And, simultaneously, it limits the ability of global firms in developed economies to take advantage of opportunities for reverse innovation.

The data show that there is almost twice the amount of travel from headquarters to subsidiaries as there is in the opposite direction. Exporters also travel twice as much as importers

The research also notes that countries in the developing world differ substantially in the amount of business travel they receive: South Africa, Bulgaria, Morocco, and Mauritius receive much more know-how than countries at similar levels of development such as Peru, Colombia, Chile, Indonesia, or Sri Lanka. This suggests a significant distribution in the economic impact of reduced business travel across developing economies.

What does this mean for inclusive growth?

For more than 50 years, we have held the notion that as communication technologies became widely accessible, they would make the world smaller. Until very recently, the evidence pointed in the opposite direction. Indeed, we have seen a growing number of business travelers moving around the globe. Business travel has not just powered global economic growth. It has enabled the diffusion and acquisition of tacit knowledge needed to spur innovation and increase productivity. How? Because of how the brain works. “Conference calls have trouble replicating the intricacy of human conscious and unconscious group interactions that are critical to solve problems and accomplish tasks,” believes Hausmann.

COVID-19 has upended the spread of knowhow we once took for granted. While many of us have found it possible to be just as productive while working from home –if not more– this does not hold true across all activities. Hausmann considers the work of a development bank, where the ability to put together infrastructure projects demands a physical presence to build structures, repair equipment or improve operations. When you note that the poor state of infrastructure in sub-Saharan Africa cut business productivity by as much as 40%, the consequence of this physical absence becomes clear.

If we are heading towards a new normal when it comes to how –and where– we are doing business, then this demands rapid innovation to move tacit knowledge around the globe. This helps to advance the innovation needed to spur productivity within the destination country in which know-how regularly arrives; whether developed or developing. If we continue to find ourselves grounded, what does this innovation look like? How will people come to know what they need to know? We invite your ideas.