Volume 18, Number 8
Research by Paul Beamish shows that companies need to keep an eye on travel time when setting up new subsidiaries.
Several years ago Air Canada introduced a new service between Toronto and Beijing. The route, which crossed the North Pole, eliminated the need for a stop and shaved some seven hours off the average travel time.
Ivey professor Paul Beamish, Canada Research Chair in International Management, has made the trip on a number of occasions. "This flight makes a huge difference," he says. "We're all willing to absorb a certain wear and tear in travelling, but there's a tipping point at which we say 'I'm just not going to do this.'"
Business people know intuitively that travelling can be a huge drain on productivity. Yet there is no empirical research to show how travel times affect the bottom line. Beamish and Kevin Boeh, a former PhD student and now a professor at Pacific Lutheran University School of Business, decided to measure the impact of travel times on the location and performance of subsidiaries. "One of the big themes in international business is foreign direct investment - should you invest, where should you invest, and which entry mode should you use when you invest," says Beamish. "The literature doesn't talk much about what we call the hassle factors of doing business."
In a June 2012 article in the Journal of International Business Studies, Beamish and Boeh studied a sample of 1,200 Japanese multinationals with subsidiaries in the U.S., over a 13-year period. To establish travel times, they took a door-to-door approach, carefully calculating time on the ground, including taxi, bus and train, wait times for connecting flights, and time in the air.
They found that travel time has a significant impact on the profitability of subsidiaries, their location and relocation, and leadership turnover. The mean travel time between Japanese headquarters and their U.S. subsidiaries was about 16 hours, which the researchers found to be a "tipping point." For example, they found that a subsidiary 17 hours away - an hour over the mean travel time - was 7 percent less likely to be profitable than a division that's an hour closer.
The research was careful not to confuse travel time with distance. Some locations might be closer in distance to headquarters, yet are longer in travel time because of connecting flights. Boeh and Beamish give the example of Lexington, Kentucky, and Houston, Texas. Both cities are about the same distance away from Tokyo, but the trip to Lexington takes three hours longer. Beamish and Boeh found that, everything else being equal, a Japanese subsidiary in Lexington was about 25 percent less likely to be profitable than one in Houston.
Successful multinationals tend to choose cities and physical sites that are within striking distance of a major airport, says Beamish. Their study shows that companies that choose destinations for subsidiaries beyond 16 hours from headquarters are more likely to relocate. One additional hour of travel increased the likelihood of relocation by 11 percent.
Many people wrongly assume that travel time is just a minor inconvenience, and underestimate the productivity loss and stress on managers. "Walking between gates, waiting for connecting flights, boarding and getting off, collecting luggage - this is nothing but down time, and it's gone forever," says Beamish. Their study found a strong link between overall travel time and manager satisfaction. General managers of subsidiaries that were farther than 16 hours from headquarters experienced 23 percent more turnover.
This research has important implications for managers who are involved in making foreign investment decisions. When choosing where to locate a subsidiary, managers should argue for a more accessible location. If a subsidiary already exists and is difficult to reach, managers can influence the question of whether it should remain or be relocated.
The study also has important implications for those involved in local economic development, including the size of local airports. "This research really underscores the importance for policy makers in various cities to think about travel time in attracting and retaining foreign investment," says Beamish. "Subsidiaries move for a variety of reasons, and the reality is that this is one of them."
As someone who travels frequently, Beamish wasn't surprised by the results of the study. "Nobody ever gets on a flight saying I hope it's delayed by two hours, or I hope they take a routing that takes me six hours longer to get there," he says. "The moral of the story is that travel time matters hugely to business people."