Conference on Entrepreneurship and Economic Growth

Supported by the Ewing Marion Kauffman Foundation
Manuel Adelino and David T. Robinson, Organizers
October 14-15, 2016

Migrants, Ancestors, and Foreign Investments

International migrations have reached unprecedented levels, shaping an increasingly ethnically diverse and socially connected world. The economic consequences of these migrations are at the heart of fierce political debates on immigration policy, yet understanding of the economic effects of migrations remains incomplete. At the same time, local policymakers see attracting and retaining foreign direct investment (FDI) as a major goal, and technology transfers through FDI are both a conduit for technological progress abroad and a source of revenue for U.S. firms.

Research by Konrad Burchardi, Thomas Chaney, and Tarek Hassan shows that immigration and FDI are intimately related: The ethnic diversity created by migrations reaching back more than a century has a large positive causal effect on the ability of U.S. firms to engage in FDI with the historical migrants' countries of origin.

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Evaluating the causal impact of migrations on FDI is tricky: Many unobserved factors may simultaneously affect migrations, ancestry, and FDI, creating spurious correlations. For example, migrants from Sweden may have historically settled in Minneapolis because it is climatically similar to their origin country, and these climatic similarities may also drive trade, business opportunities, and investments in Sweden today. Does Minneapolis receive Swedish investments today because of the weather or because of the presence of descendants of Swedish origin?

The researchers' approach to distinguishing causation from correlation is best explained by the examples of migrations from Germany and Italy. German immigration to the U.S. peaked at the end of the 19th century when the Midwest was booming and attracting large numbers of migrants, and there is a relatively large population with German ancestry in the Midwest today. Italian immigration peaked a few decades later, at the beginning of the 20th century when the West was attracting large numbers of migrants, and there is a relatively large population with Italian ancestry in the West today.

The researchers use this interaction of time-series variation in the relative attractiveness of different destinations within the United States with the staggered arrival of migrants from different origins to instrument for the present-day distribution of ancestries. Using this approach, they document that foreign direct investment follows the paths of historical migrants as much as it follows differences in productivity, tax rates, education, and other conventional determinants of economic competitiveness: For the average U.S. county, doubling the number of individuals with ancestry from a given country of origin increases by 4 percentage points the probability that at least one firm from this U.S. county engages in FDI with that origin country, and increases by 29 percent the number of local jobs at subsidiaries of firms headquartered in that origin country.

Theory suggests three potential mechanisms that could be driving these causal effects of ancestry on FDI. The presence of individuals with a given foreign ancestry may generate a comparative advantage for local firms by (1) facilitating the flow of information, (2) providing social capital to enforce contracts where courts do not work well, or because (3) the descendants of migrants and the present-day population of origin countries may have shared tastes for consumption goods.

An array of evidence is most consistent with the first channel. The effect of ancestry on FDI is largest for countries that have better rule of law. Similarly, the effect is larger for intermediate goods than for consumption goods (weighing against the preference-based channel). The researchers also find that the effect of ancestry on FDI is largest for relationships that might be considered most associated with asymmetric information: It is largest for countries that are furthest away geographically, and in sectors that may be associated with a higher degree of information asymmetry (manufacturing vs. natural resources). In addition, the effect of ancestry on FDI is highly concave, as one might expect in a model where information asymmetry is the main friction: The first few descendants from a given origin have a significantly higher marginal impact than additional ones.

The researchers also find that the effect of ancestry on FDI is very long-lasting where migrations ranging back to 1880 have a significant effect on the patterns of FDI that exist today. Interestingly, the effect of immigration on FDI is significantly smaller for first-generation immigrants.

To illustrate the quantitative implications of their results, they calculate the effect of Chinese exclusion — the effective ban on Chinese immigration between 1882 and 1965. Absent this ban, they predict the fraction of counties in the Northeast with FDI links to China would have increased substantially.

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