Face-to-Face is Essential

The impact of travel restrictions on regional headquarters

With the recent conclusion of the Two Sessions against the backdrop of the Beijing Winter Olympic games and a resurgence of COVID variants around the country, it is apparent that a U-turn on China’s zero-COVID policy is still not on the horizon. Pandemic control and prevention measures are expected to continue, raising concerns over the ongoing travel restrictions and its implications on European businesses operating in China. Stephanie Sam, communications and business manager with the European Chamber, explains the impact the closed borders have had so far on the foreign business community.

Prior to the outbreak of the pandemic, cross-border business travel between multinational companies’ (MNCs’) European headquarters (HQ) and their regional offices in China was a common occurrence. Yet, with China’s current stringent and excessive quarantine measures, which vary from province to province, it has now become an unobtainable corporate luxury. China’s outbound travel is still extremely limited with the availability of international flights down by 95 per cent compared to pre-COVID-19 levels.[1] For inbound travellers, the issue is twofold: those ‘lucky’ enough to secure a coveted flight then face the mandatory ‘14+7+7’ system that has been implemented since the start of 2021: a fortnight in centralised-hotel quarantine, followed by another week of home isolation and then seven more days of health monitoring – a lengthy and burdensome pause for a short-term business trip. For many executives, this is simply out of the question. The big issue now is: can this mass restriction on mobility remain feasible in the long-term? 

Navigating the perception gap back home

For European HQ of China-based companies, a key component of communication with their China operations is regular visits and people-to-people exchanges. With the growing uncertainty regarding the resumption of cross-border travel and the lack of transparency of what is happening on the ground, it is unsurprising that European HQ have been left frustrated, which strains the relationship between them and their China operations. Exacerbated by negative media coverage influenced by debates over the origins of the pandemic and heightened geopolitical tensions, negative perceptions about the Chinese market are at an all-time high.

Despite this, alongside the ongoing concerns over decoupling and China’s apparent shift towards self-sufficiency, foreign investors remain enthusiastic about conducting business in China due to its economic bounce-back in recent years. This is illustrated by the Chinese market seeing double-digit growth in foreign direct investment (FDI) last year, hitting over United States dollars (USD) 173 billion.[2] The European Chamber’s Business Confidence Survey 2021 findings showed that only a mere nine per cent of respondents were considering shifting investment out of China – the lowest share on record.[3] However, it is inevitable that business confidence will become increasingly shaky the longer the travel restrictions remain, potentially impacting investment decisions in the long run.

Face-to-face is essential

Whilst the implementation of video conferencing is on the rise, the benefits of face-to-face communication in fostering intercultural understanding, building cross-border relations and the exchange of knowledge cannot be replaced by even the most advanced technology. According to a global survey conducted by Harvard Business Review, 95 per cent of the 2,300 survey participants indicated that face-to-face meetings are essential to building and maintaining long term business relationships.[4] Face-to-face communication through international travel has also been found to be crucial in fostering innovation and technology transfer – both of which are essential factors in stimulating economic growth.[5] Arguably, it is the high impact of in-person meetings that deliver the level of understanding and confidence necessary to conduct business in a volatile market like China.

Impact on regional headquarters

Commonly referred to as China’s ‘gateway to the rest of the world’, and with the highest number of foreigners and the country’s largest centre for multinationals (MNCs), Shanghai has been heavily impacted by the travel restrictions. The local authorities have highlighted the priority it places on innovation by increasing the number of foreign-invested research centres to 506, up 25 in 2021 alone.[6] This indicates that the city remains a top destination for foreign investment in expanding industrial chains.

Shanghai has also demonstrated its ambition to make the ‘headquarters economy’ a key component of its economic development, with a recorded total of 831 regional headquarters (RHQ) of MNCs in Shanghai, an increase of 60 in 2021.[7]  RHQ are seen as a bridge between local subsidiaries and global corporate HQ,[8] and location preferences tend to favour cities that are geographical controlling points of the global economy, offering a strategic location for global transport and communication as well as a transparent regulatory environment.

Whilst, according to the 2011 European Chamber Asia-Pacific Headquarters Study, Shanghai was once seen as a promising hub for RHQ,[9] its attractiveness has declined over the past decade due to the ongoing effects of the travel restrictions that hinder cross-border business travel between China and the rest of the world, aggravating pre-existing difficulties with market access reforms and lack of a transparent regulatory environment. As long as travel restrictions remain, it is simply unthinkable to establish Asia-Pacific (APAC) RHQ in a location which does not allow for easy cross-border access and the free movement of employees.

The ‘expat exodus’

The pandemic sent shockwaves through industries and economies across the world, but perhaps the greatest impact has been on a more personal level – uncertainty and loss of connection. The ‘corporate Armageddon’[10] has not only affected business confidence but also left companies operating in China facing a mass ‘expat exodus’ as pandemic-induced restrictions leave foreign employees unable to reunite with family and friends overseas for over two years.  This has resulted in a war for talent on two fronts – maintaining the competitiveness of China (Shanghai in particular) in attracting foreign talent, as well as retaining the current China-based foreign nationals who are growing increasingly wary of their everyday reality trapped in China.

The temporary logic of zero-COVID relies on an approach of unending emergency with severely restricted international travel, mass testing and intrusive large-scale lockdowns,[11] which is not sustainable in the long run. The impact of COVID-19’s blow to business travel is expected to linger for years to come, but the challenge now is for China to bolster confidence through gradual opening-up measures. Only through the resumption of business travel will foreign direct investment be facilitated and innovation boosted through people-to-people exchanges, thereby guaranteeing long-term economic recovery and maintaining Shanghai’s key role in China’s internationalisation plans in becoming a hub for regional APAC headquarters.

[1] Chen, Guang; Phillips, Matthew; Saxon, Steve; Yu, Jackey, China’s uneven travel recovery: Long road to international travel furthers domestic opportunities, McKinsey, 30th August 2021, viewed 6th March 2022, <https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/chinas-uneven-travel-recovery-long-road-to-international-travel-furthers-domestic-opportunities>

[2] Zeng, Ziyi, Expert: China remains a place of opportunities for foreign investment, CGTN, 7th March 2022, viewed 9th March 2022, <https://news.cgtn.com/news/2022-03-07/Expert-China-remains-a-place-of-opportunities-for-foreign-investment-18cT8mGFyGQ/share_amp.html>

[3] European Business in China Business Confidence Survey 2021, European Union Chamber of Commerce in China, 2021 <https://www.europeanchamber.com.cn/en/publications-business-confidence-survey>

[4] Managing Across Distance in Today’s Economic Climate: The Value of Face-to-Face Communication, Harvard Business Review, 20th April 2016, viewed 2nd March 2022, < https://hbr.org/resources/pdfs/comm/british-airways/hbras_ba_report_web.pdf>

[5]  Hovhannisyan, Nune; Keller, Wolfgang, International Business Travel And Innovation: Face-To-Face Is Crucial, VoxEU, 20th April 2010, viewed 1st March 2022 < https://voxeu.org/article/international-business-travel-and-innovation-face-face-crucial>

[6] Huaxia, Shanghai Home to 831 Regional Multinational Headquarters, Xinhua, 23rd January 2022, viewed 3rd March 2022 <http://www.xinhuanet.com/english/20220123/b009d1f3e1c4429ba46f5e64bb1d23f3/c.html>

[7] Huaxia, Shanghai Home to 831 Regional Multinational Headquarters, Xinhua, 23rd January 2022, viewed 3rd March 2022 <http://www.xinhuanet.com/english/20220123/b009d1f3e1c4429ba46f5e64bb1d23f3/c.html>

[8] Mahnke, Volker; Ambos, Björn; Nell, Phillip; Hobdari, Bersant, 2012, How Do Regional Headquarters Influence Corporate Decisions in Networked MNCs?, Journal of International Management, vol. 18, pp. 293–301, viewed 4th March 2022, <https://doi.org/10.1016/j.intman.2012.04.001>

[9] European Business in China Asia-Pacific Headquarters Study 2011, European Chamber, 2011, <https://www.europeanchamber.com.cn/en/publications-asia-pacific-headquarters-study>

[10] Kinder, Tabby; Lewis, Leo; Mitchell, Tom; Riordan, Primrose; Chan, Ho-him; Zero-COVID policies threaten Hong Kong’s place in the world, Financial Times, 15th January 2022, viewed 6th March 2022 <https://www.ft.com/content/dd81844a-31a6-48de-9de5-235ade24c3b5>

[11] Morisson, J Stephen;  Kennedy, Scott; Huang Yanzhong; China May Move Beyond Zero-COVID. That Could Benefit Us All.’ Center for Strategic and International Studies, 9th February 2022, viewed 5th March 2022 <https://www.csis.org/analysis/china-may-move-beyond-zero-COVID-could-benefit-us-all>