The face of innovation

The high costs of international travel – and the recent Icelandic volcano – have raised important questions about the value of short-term cross-border labour movements, specifically business travel. In the world of the Internet, e-mail, and video conferencing, why is business travel still so prevalent?

Recent surveys show that business executives prefer face-to-face communication over other means of communication, as it plays a pivotal role in negotiating deals, selling products, and building long-term relationships with clients and co-workers.

It is no surprise, then, that face-to-face communication is particularly important for technology transfer, since technology tends to be tacit and not easily codifiable. "Being there” to demonstrate technology in person and share technological knowledge face-to-face can be especially beneficial when there are language and cultural barriers. A number of studies have documented the importance of personal connections for international technology transfer but, there is still little evidence on what is the impact of international business travel on innovation. Our research fills this gap.

International travel as a conduit of technology transfer

International travel is one of several channels through which international technology transfer can take place. Travel can help facilitate exchange of information and transfer of ideas. Specifically, international business travel may link travellers familiar with foreign technology with domestic entrepreneurs and foster domestic innovation.

We are analysing the impact of business travel from the US to other countries. The key idea is that since the US is among the world's technology leaders in most fields, business travellers from the US will possess cutting edge technological knowledge which inventors in foreign countries might access when US business travellers fly overseas. Even though the US Department of Commerce data that we are employing does not reveal the specific knowledge of each traveller, we capture broad differences in this dimension by incorporating the US state from where the traveller comes from (for example, high-patenting California versus low-patenting Wyoming) into the analysis.

Our research shows that international business travel from the US to about 75 countries for the years 1993 to 2003 had a positive impact on these countries' rate of innovation, as measured by patenting, above and beyond technology transfer through international trade and foreign direct investment (FDI). Moreover, the effect of US business travellers on innovation is stronger for patents which have US co-inventors, which is plausible because these travellers may in fact be the inventors themselves.

To identify the causal impact of business travel on innovation, we adopt the following strategy. First, we control for various other factors that may also affect a country's patenting, which includes its level of development, its size, as well as the country's R&D spending. We also account for international technology diffusion through FDI and trade.

To address the possibility of reverse causation, where innovation triggers business travel from the US, we employ a control function – essentially the residual from a regression of business on leisure travel. Intuitively, business and leisure travel are affected by many of the same factors (size of the economy, travel costs between countries, etc), however leisure travellers have no business interests and do not convey technological knowledge. Times when a country receives extraordinarily high numbers of business travellers relative to leisure travellers are most likely those when the country experiences technological breakthroughs that may actually attract US business travellers, which would generate a bias in our analysis. However, by including the control function explicitly as a regressor, we are able to eliminate this bias from our results.

What is the economic importance of international business travel for innovation? The size of our estimates suggests that a 10% increase in business travellers from the US is associated with 1% higher greater patent applications in the US. Take the two Latin American countries Colombia and Honduras, for example. Inventors from Colombia patent more than inventors from Honduras, and consistent with our analysis, there is also a higher number of US business travellers going to Colombia than to Honduras. If, counterfactually, Honduras would receive the same number of US business travellers as Colombia usually does, our estimates suggest that, all else equal, Honduras's patenting would increase by about 4 patents per year. This increase accounts for almost two-thirds of the actual difference in the patenting rates between Colombia and Honduras that we see in the data. We conclude from this that the impact of international business travel is an economically important determinant of a country's rate of innovation.

Conclusions

International business travel is shown to play an important role for domestic innovation. Our analysis uncovers a new set of policy implications by showing that limits to cross-border movements, in particular visa and other requirements, might carry substantial costs. Moreover, the finding that business travel fosters innovation indicates that there might be additional benefits from the liberalisation of international passenger air travel in terms of a higher rate of innovation in the world.

Originally published on www.VoxEU.org. Reproduced with permission.