Facts about business travel

by on January 26, 2016 at 3:16 am in Data Source, Economics, Travel | Permalink

More populous countries have more business travel in both directions, but the volume is less than proportional to their population: a country with 100% more population than another has only about 70% more business travel. This suggests that there are economies of scale in running businesses that favor large countries.

By contrast, a country with a per capita income that is 100% higher than another receives 130% more business travelers and sends 170% more people abroad. This means that business travel tends to grow more than proportionally with the level of development.

While businesspeople travel in order to trade or invest, more than half of international business travel seems to be related to the management of foreign subsidiaries. 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. Exporters also travel twice as much as importers.

That is from Ricardo Hausmann, with further interesting points.

1 Skeptic January 26, 2016 at 3:36 am

“This suggests that there are economies of scale in running businesses that favor large countries.”

Only if we assume domestic travel is cheaper than international. Not at all obvious.

2 Harun January 26, 2016 at 11:11 am

Price a one hour flight within the US vs. a flight from Taiwan to Hong Kong.

Obvious.

3 JWatts January 26, 2016 at 11:52 am

“Only if we assume domestic travel is cheaper than international. Not at all obvious. ”

I suspect that international business travel is, on average, much more expensive than domestic travel.

4 Asher January 26, 2016 at 4:17 am

“need to deploy their know-how to their different locations around the world” – another possibility is supervision costs. The boss comes over to check on the person at the cash register more often than the person at the cash register comes over to catch up with the boss.

5 Luis Pedro Coelho January 26, 2016 at 4:18 am

“More populous countries have more business travel in both directions, but the volume is less than proportional to their population: a country with 100% more population than another has only about 70% more business travel. This suggests that there are economies of scale in running businesses that favor large countries.”

Isn’t this just an artificial effect of drawing arbitrary borders? If you consider the EU as a single entity, you’ll see a lot less international business travel then if you consider it as a bunch of different countries. If the US were to split into states, the amount of international travel in the US would explode even without anything changing.

6 Axa January 26, 2016 at 7:55 am

Yup, it would be interesting to look at the statistics assuming the European Banana as a “country”.

7 rayward January 26, 2016 at 6:26 am

“While businesspeople travel in order to trade or invest, more than half of international business travel seems to be related to the management of foreign subsidiaries.” So it’s the airlines and travel agents (not to mention tax lawyers and accountants) who oppose reform of the rules (subpart F of the IRC) governing the taxation of controlled foreign corporations. Perhaps the ire of Mr. Trump and Ms. Palin should be directed at those who move operations overseas to take advantage of cheap labor and low or zero tax rates rather than the Mexicans who build our houses, maintain our landscape, and wash our dishes. Of course, that’s the main difference between left-wing populists and right-wing populists: the former blame those actually responsible for the hollowing out of the middle class and the tax base while the latter blame our little friends from south of the border. Blaming the powerless is a time-honored tradition of the right-wing.

8 TMC January 26, 2016 at 9:06 am

“that’s the main difference between left-wing populists and right-wing populists……..”

No, I’d say the right wingers are often accurate in whom they are blaming, and those who get caught throw fits in order to divert attention – sounding much like you.

9 Vaniver January 26, 2016 at 9:18 am

Note that Trump has promised to lean on Apple to get them to produce their computers in the US: http://www.cnet.com/news/trump-says-hell-force-apple-to-manufacture-in-the-us/

10 rayward January 26, 2016 at 11:37 am

Indeed, can Trump succeed (if you call it that) in consolidating left-wing populists and right-wing populists, a topic considered in a prior Cowen blog post. Perhaps Apple’s response is that all those Mexicans drove Apple out of the U.S.

11 Floccina January 26, 2016 at 2:01 pm

How is that different from:
Perhaps the ire of Mr. Sanders and Rayward should be directed at those who hire cheap Mexican labor rather than those poor souls who build our IPads, Iphones and Cars.
Silly eh? If GM or Apple was run as a charity to help employees, which seems like some people want, they would move all the jobs to the poorest countries not to the USA.
How about we let owners and consumers make their own decisions?

12 carlolspln January 26, 2016 at 3:48 pm

“How about we let owners and consumers make their own decisions?”

Because its not just their own decision, that’s why.

13 dearieme January 26, 2016 at 9:03 am

“there is almost twice the amount of travel from headquarters to subsidiaries as there is in the opposite direction.” There’s almost certainly exactly the same amount of travel in both directions, though there probably is a disparity in the direction of the first leg of the travel.

14 literally January 26, 2016 at 9:51 am

Well you’re right. In the dataset, “business travel abroad” is measured by someone taking a business credit card issued in country A, and using it in country B.

15 Sam Haysom January 26, 2016 at 12:03 pm

Not at my company. We often play a game were we send a newly hired junior executive or salesman to a foreign country and then cancel his company card. Did this study control for that?

16 Tom T. January 26, 2016 at 5:29 pm

My employer actually did that to me one time, while I was on business in Newark NJ. They claimed it was due to a fraud alert, but my director seemed a little too amused.

17 liberalarts January 26, 2016 at 9:29 am

The article floats back and forth between “business travel” and “travel abroad.” I think that he means the latter, but for reasons pointed out in the comments above, the former would be more interesting (total business travel, domestic or international) to see if that varied based on country size.

18 chuck martel January 26, 2016 at 9:54 am

With the incredible advances in communication technology why should so much travel be necessary at all? A business man in Topeka can carry on a discussion with a factory manager in China at the speed of light by any number of means without leaving his mistress’ apartment. Obviously, business travel is in many instances a perk that’s subsidized by shareholders and taxpayers. Politicians visit exotic locales to promote trade and their bureaucrat underlings congregate in uncomfortable spots like Las Vegas for advice on constructing more confusing forms. If the expenses of this travel were the responsibility of the individuals concerned it wouldn’t take place. As usual, it’s easy to spend other people’s money.

19 maros.urbanec January 28, 2016 at 1:14 am

Exactly. Somehow, there is a huge necessity for face to face talks at exquisite locations like Malaysia, New Zealand or Costa Rica. As for Bangladesh, Nigeria or Pakistan, for undisclosed reasons, Skype is just fine.

20 Bill January 26, 2016 at 10:33 am

This can be an effect of the citizenship basis of US taxation. US companies are reluctant to station expat employees abroad to manage subs and affiliates because either they or their employees become subject to double taxation (don’t say, oh yes but there are bi-lateral tax treaties that remove that — if you believe that the bi-lateral treaties, where they exist, remove double taxation, you just haven’t lived abroad). Usually the company picks up the tab for double taxation via “tax equalization” — this transfers the burden from the employee to the company, but can become exponentially expensive to the company via “tax gross ups”.
In my experience, I was the only expat stationed in various posts abroad for my company, but European and Asian competitors had dozens. So we had a lot of people flying over from NY for various purposes. Our competitors handled this with their expats. We had more travel, they had more expats. It didn’t cost them nearly as much as it did us to have expats. My company was typical of other American companies, so as far as my experience goes, this was an American vs. European and Asian difference.

21 Ricardo January 26, 2016 at 11:02 am

“(don’t say, oh yes but there are bi-lateral tax treaties that remove that — if you believe that the bi-lateral treaties, where they exist, remove double taxation, you just haven’t lived abroad)”

Just to be clear, you are almost certainly talking about SS and Medicare taxes withheld by a U.S. entity or U.S. subsidiary for an expat employee not based in a country that has a “totalization” agreement. That is where things can get pretty tricky, although not for many Western European countries or Japan which have totalization agreements in place which exempt U.S. citizen employees from SS or Medicare tax liability.

Individual income tax liability is straightforward for expat employees who are based full-time outside the U.S. The first $100,800 is exempt from U.S. taxation and the amount past $100,800 that is owed to the IRS can be reduced through either the foreign tax credit or by taking advantage of any relevant tax treaties.

22 Bill January 26, 2016 at 2:03 pm

Nope, I wasn’t even thinking about SS and Medicare — though these can involve double taxation under certain circumstances. Not to mention the NIIT. The estate and gift tax treaty can lead to massive problems too, especially if you die while abroad (as several of my colleagues did) but I wasn’t thinking about that either.

I was just thinking about the income tax treaties — and it’s true for some people, especially those making 101 K or less, (how many expat managers are there in this category?) it wouldn’t matter. Though I don’t recall at which level allowances such as housing costs come in, if you have an apartment in an expensive city that might be included in your salary, or trips home or kids’ schools, etc. — but I really don’t remember how this part of it works.

Anyway, for those making more, yes the treaty can “reduce” the double taxation (i.e., there is double taxation!), but if the individual also has investment income (for which the company may or may not indemnify the employee, almost always not) then he can wind up paying the highest marginal rate for each category of income to each country (or countries) with no offset from one category to the other. And the foreign tax credit itself is a very limited credit — based on a sourcing ratio for each kind of income. So, for, example, if you’re in France and you have a modest but non-negligible investment income from the US you might be paying an *effective* rate of 45% on your investment income and only be able to offset the tax against a fraction of, say, 15% of US tax on the same income.

We could go into these details forever. My point is that taxation is highly dissuasive for US companies to send personnel abroad, and highly dissuasive for the employee.

23 Harun January 26, 2016 at 4:49 pm

I once was liable for taxes in 3 countries in one year, and I was small potatoes.

24 JB January 26, 2016 at 9:30 pm

“Though I don’t recall at which level allowances such as housing costs come in, if you have an apartment in an expensive city that might be included in your salary, or trips home or kids’ schools, etc. — but I really don’t remember how this part of it works.”

I am currently working on a compliance audit related to this, and yes it is complicated beyond belief. The answer to any questions about this are “Maybe, here go read this 35-page government legalese document which summarizes a 350-page government legalese document, the answer is somewhere in there.” That’s why the tax accountants make the big bucks.

25 Bill January 26, 2016 at 2:48 pm

Ah, Ricardo, since I can see you know about this stuff — I made a mistake; if, in the hypo I made, the employee had US source investment income and were living in France then he or she would not be subject to double taxation on the investment income if it were US source, but he or she would be subject to the highest rates on salary income (but might be anyway).

On the other hand, if the investment income were not US source (if the employee had the temerity to invest in any country other than the US) then my original comment would apply. But this is unique to France, it would not be the case in, say, Italy. In Italy (or most other countries other than UK or some Commonwealth countries) it wouldn’t matter what the source was, there wouldn’t be a local tax credit for US source investment income — of course investment income might be tax free, but that’s not a case of *double* taxation.

The point remains — Americans are at a huge disadvantage in managing their branches, subsidiaries and (if relevant) affiliates abroad compared to every other country. The complexity and expense — both for the company and for the employee — are highly dissuasive.

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