The Complexity of Outsourced Services and the Role of International Business Travel

Abstract

Face-to-face communication between international business partners is a valuable mechanism for reducing transaction costs, even in contexts where electronic communication is pervasive. This paper empirically examines whether face-to-face interactions (as measured by international business travel) have greater impacts where transaction costs are higher, e.g. where services with greater complexity are outsourced offshore. Matching data from the Survey of International Air Travelers with Bureau of Economic Analysis data on US service outsourcing, we find that international business travel has a significantly positive impact on service outsourcing, and that this impact is significantly larger for outsourcing more complex services. We further provide more evidence on the role of international business travel by showing that: (a) business travel by managers leads to relatively more outsourcing; (2) business travel by non-diasporas leads to relatively more outsourcing; (3) the role of international business travel remains the same before and after the digital revolution. All these findings are supported by IV estimation where we use leisure travel or terrorism incidents as instruments for business travel.