Fewer layovers, better-connected airports, more firm growth

Waiting in an airport for a connecting flight is often tedious. A new study by MIT researchers shows it’s bad for business, too.Looking at air travel and multinational firm formation over a 30-year period, the researchers measured how much a strong network of airline connections matters for economic growth. They found that multinational firms are more likely to locate their subsidiaries in cities they can reach with direct flights, and that this trend is particularly pronounced in knowledge industries. The degree to which a city is embedded within a larger network of high-use flights matters notably for business expansion too.The team examined 142 countries over the period from 1993 through 2023 and concluded that pairs of cities reachable only by flights with one stopover had 20 percent fewer multinational firm subsidiaries than cities with direct flights. If two changes of planes were needed to connect cities, they had 34 percent fewer subsidiaries. That equates to 1.8 percent and 3.0 percent fewer new firms per year, respectively.“What we found is how much it matters for a city to be embedded within the global air transportation network,” says Ambra Amico, an MIT researcher and co-author of a new paper detailing the study’s results. “And we also highlight the importance of this for knowledge-intensive business sectors.”Siqi Zheng, an MIT professor and co-author of the paper, adds: “We found a very strong empirical result about the relationship of parent and subsidiary firms, and how much connectivity matters. The important role that connectivity plays to facilitate face-to-face interactions, build trust, and reduce information asymmetry between such firms is crucial.”The paper, “Air Connectivity Boosts Urban Attractiveness for Global Firms,” is published today in Nature Cities.The co-authors are Amico, a postdoc at the MIT-Singapore Alliance for Research and Technology (SMART); Fabio Duarte, associate director of MIT’s Senseable City Lab; Wen-Chi Liao, a visiting associate professor at the MIT Center for Real Estate (CRE) and an associate professor at NUS Business School at the National University of Singapore; and Zheng, the STL Champion Professor of Urban and Real Estate Sustainability at CRE and MIT’s Department of Urban Studies and Planning.The study analyzes 7.5 million firms in 800 cities with airports, comprising a total of over 400,000 international flight routes. The research focused only on multinational firms, and thus international flights, excluding domestic flights in large countries.To conduct the analysis and build their new database, the researchers used flight data from the International Civil Aviation Organization as well as firm data from the Orbis database, run by Moody’s, which has company data for over 469 million firms globally. That includes ownership data, allowing the researchers to track relationships between companies. The study included firms located within 37 miles (60 kilometers) of an airport, and accounted for additional factors influencing new-firm location, including city size.By analyzing industry types, the researchers observed that air connectivity matters relatively more in knowledge industries, such as finance, where face-to-face activity seems to matter more. Alternately, a knowledge-industry firm with auditors periodically showing up to conduct work can lower costs by being more reachable.“We were fascinated by the heterogenity across industries,” Liao says. “The results are intuitive, but it surprised us that the pattern is so consistent. If the nature of the industy requires face-to-face interaction, air connectivity matters more.” By contrast, for manufacturing, he notes, road infrastructure and ocean shipping will matter relatively more.To be sure, there are multiple ways to define how connected a city is within the global air transportation network, and the study examines how specific measures relate to firm growth. One measure is what the paper calls “degree centrality,” or how many other places a city is connected to by direct flights. Over a 10-year period, a 10 percent increase in a city’s degree centrality leads to a 4.3 percent increase in the number of subsidiaries located there.However, another kind of connectedness is even more strongly associated with subsidiary growth. It’s not just how many cities one place is linked to, but in turn, how many direct connections those linked cities themselves have. This turns out to be the strongest predictor of subsidiary growth.“What matters is not just how many neighbor [directly linked] cities you have,” Duarte says. “It’s important to choose strategically which ones you’re connected to, as well. If you tell me who you are connected to, I tell you how successful your city will be.”Intriguingly, the relationship between direct flights and multinational firm growth patterns has held up throughout the 30-year study period, despite the rise of teleconferencing, the Covid-19 pandemic, shifts in global growth, and other factors.“There is consistency across a 30-year period, which is not something to underestimate,” Amico says. “We needed face-to-face interaction 30 years ago, 20 years ago, and 10 years ago, and we need it now, despite all the big changes we have seen.”Indeed, Zheng adds, “Ironically, I think even with trade and geopolitical frictions, it’s more and more important to have face-to-face interactions to build trust for global trade and business. You still need to reach an actual place and see your business partners, so air connectivity really influences how global business copes with global uncertainties.”The research was supported by the National Research Foundation of Singapore within the Office of the Prime Minister of Singapore, under its Campus for Research Excellence and Technological Enterprise program, and the MIT Asia Real Estate Initiative.