The Trade Creation Effect of Immigrants: Evidence from the Remarkable Case of Spain

There is abundant evidence that immigrant networks are associated with larger exports from the country where they settle to their countries of origin. The direction of causality of this association is less clearly established. Also, we do not know to what extent these increased exports are due to an increase in the number of exporting firms (i.e. the extensive margin of trade) or due to larger values exported by existing firm (i.e. the intensive margin). Using micro data on individual trade transactions from Spanish provinces between 1995 and 2008 and data on the stock of immigrants in those provinces by country of origin we can make progress on both fronts. The richness of our data allows us to control for a large set of fixed effects and to use an instrumental variable strategy to isolate the export creation effect of new immigrants. We are also able to quantify the impact of immigrants on the intensive and extensive margin of trade and how it varies between homogeneous, moderately differentiated and differentiated goods. Our findings can be interpreted, in the light of the Chaney (2008) gravity model, as consistent with the idea that immigrants reduce the fixed costs of trade. As implied by a decrease in fixed trade costs in that model we find that immigrants significantly increase exports (elasticity of 0.10), that the effect is almost entirely due to an increase in the extensive margin and that the effect is somewhat stronger for differentiated goods.