ISSUE BRIEF: Complex U.S. Immigration System Limits Entrepreneurship, Innovation

When developing federal immigration policy, U.S. lawmakers understandably focus on how migrants impact U.S. worker wages and job opportunities. Viewed narrowly, it may be true that a job occupied by an immigrant is a job unavailable to a U.S. born individual. But in a knowledge-based economy, wages and job opportunities for U.S.-born domestic workers depend on how visa and work requirement rules improve or impede innovation, entrepreneurship, investment, and knowledge transfer. Badly constructed rules will erode each of these factors, creating lower wages and job opportunities for all Americans. Indeed, a growing body of research conducted by leading U.S. scholars finds immigrants positively impact entrepreneurship, innovation, investment, and knowledge transfer while restrictive federal immigration policies negatively impact the U.S. economy and American workers.

 Immigrants create new ventures and new jobs. Restrictive immigration policies impede these benefits. Restrictive immigration policies also lead to:

• Offshoring of existing jobs to countries like Canada.
• Loss of U.S. firms’ competitiveness due to reduced access to intellectual capital.
• A reduction of inshoring and foreign direct investment.
• Reduced cross-border collaboration and global prosperity.

Introduction

In 1987, Congress passed a joint resolution designating October 28 as National Immigrants Day. In his proclamation regarding the celebration, President Ronald Reagan quoted French-American writer J. Hector St. John de Crèvecœur who, in 1782, predicted immigrants to the United States would “one day cause great changes in the world.” Why? Because immigrants carry “with them that great mass of arts, sciences, vigor, and industry.”  

 St. John de Crèvecœur was prescient. U.S. immigrants complement rather than compete with U.S. workers and they start businesses in the United States at higher rates than native-born individuals. Immigrants, particularly high-skill immigrants, also positively contribute to the rate of foreign trade and capital investment (foreign direct investment and venture capital investment), which helps the United States and other nations.

 Immigrant contributions to the U.S. economy have been strikingly apparent during the COVID-19 pandemic. Consider the example of Eric Yuan and Zoom — the video-conferencing platform of choice as millions had to switch overnight to remote work:

 “[Zoom] has proved invaluable, yet the launch almost did not happen. Founder and CEO Eric Yuan developed the idea for virtual meetings in China … but he needed access to Silicon Valley resources to convert his vision into reality. Eight times he applied for a temporary work permit, and eight times the U.S. Department of State told him no. Finally on his ninth try, in 1997 — after two years of rejection — Yuan got his H1-B visa. He spent the next 14 years at WebEx and Cisco before striking out on his own in San Jose.”

 This story is not unique, but restrictive immigration policies make it less likely to happen in the future — at least in the United States. If they even make it to the United States at all, 20% to 50% of skilled immigrants who leave their countries seeking education or employment in another nation eventually go back home. While this reverse migration generally can have positive impacts on both the home and host countries, it means host countries, like the United States, could lose some of the world’s most promising future innovators, entrepreneurs, and change leaders. 

 What Type of Rules Reduce Entrepreneurship and Entrepreneurial Success?

In a forthcoming paper in Organization Science I co-authored with the University of Wisconsin’s Martin Ganco and the University of Southern California’s Joe Raffiee, we examine how restrictive U.S. visa policies affect employment and entrepreneurship choices of immigrant visa holders over their career lifecycles.

 These restrictive policies include:

• Optional practical training permit rules that require recently graduated visa holders to seek employment in a job that is related to the individual’s field of study.
• High fees and paperwork burdens that cause foreign graduates to sort away from early career start-up employment in favor of more established firms.
• Legal permanent residency application rules that invalidate an immigrant’s employment-based green card application if they change jobs.
• Visa rules that force migrants to remain with their employer for long periods of time.

 The Impact of Overly-Restrictive Rules on Entrepreneurship

Using information from the National Science Foundation’s Scientists and Engineers Statistical Data System (SESTAT), which tracks the careers of science and engineering graduates from U.S. universities, my coauthors and I show that immigrants are less likely than natives to enter entrepreneurship at graduation because of immigration-related work constraints.

 In addition to limiting early career entrepreneurship, overly restrictive immigration regulations drive immigrants into narrowly-focused jobs where they are less likely to hone the skills needed for later entrepreneurship. We note: 

 “[O]perating a business requires a broad portfolio of skills and so entrepreneurs will tend to be generalists — individuals with a broader breadth of human capital. … Thus, by taking individuals down a path of focused skill development, work experience in job-education match may leave individuals unequipped with the requisite array of broad skills needed to ‘wear multiple hats’ as entrepreneurs often do. This, in turn, should reduce the probability of entrepreneurial entry.”

 What Happens When Immigrants Have More Freedom?

My coauthors and I show that when the immigration-related work constraints are relaxed, immigrants are more likely than comparable natives to found incorporated employer firms.

 Take the story of Jyoti Bansal who came to the United States on an H-1B visa. He said, “I waited seven years for my employment-based green card, and I wanted to leave my job and start a new company, but couldn’t.” Once Bansal won his green card, he could pursue his dreams of entrepreneurship. He founded AppDynamics, which is now valued at $1.9 billion and employs more than 900 people.

 Numerous other studies indicate restrictive immigration rules can deter innovative, high-skill immigrants from remaining in the United States and reduce the flow of intellectual capital, scholarship, and investment.

 Harsh Immigration Rules Contribute to Offshoring

Skilled workers are important to firms’ productive and innovative processes and are a critical resource that helps determine competitive advantage. The first choice of these firms is to use home-grown talent. The second option is to import global talent. But when the home country immigration system becomes more restrictive, these firms turn to a third option: offshoring.

 In a July 2020 National Bureau of Economic Research article, Britta Glennon at the Wharton School of Business says H-1B policies have already caused multinational firms to shift tens of thousands of jobs overseas. In direct response to stringent U.S. restrictions, in fact, she found firms were more likely to open new foreign affiliates (especially research and development-intensive foreign affiliates) and to create jobs overseas. China, India, and Canada have benefited the most from the United States’ blunder. As Glennon wrote in a Brookings Institution article, Duolingo and Boston Consulting Group are just two of the companies that, instead of contending with the United States’ increasingly restrictive visa rules, threatened to move jobs to Canada or elsewhere.

 The phenomenon likely will only grow worse as countries like Canada implement policies that explicitly aim to lure foreign workers away from the United States. Indeed, Prithwiraj Choudhury, whose work is discussed below, has noted a Canadian startup, MobSquad, “was founded in response to the growing regulatory challenges for migrant technology workers in the U.S.” by facilitating those workers’ moves to Canada. The United States’ restrictive immigration laws are not only driving workers overseas, they are leading to the creation of startups that facilitate offshoring. 

 Offshoring has important implications for U.S. innovative capacity. As Glennon notes, skilled immigrants have been shown to have outsized impacts on innovation in the host country, and if skilled foreign-born workers are at a U.S. firm’s foreign affiliate instead of in the United States, those benefits will go to another country.

 Reducing Intellectual Capital in the United States

As Harvard’s Prithwiraj Choudhury writes in an Academy of Management article, “The extent to which visa regulations restrict global mobility is so significant … that the negative economic effects of visa regulations dwarf those of regulatory restrictions on trade or capital flows.” Visa regulations inhibit the mobility of foreign students, scientists, academics, and other workers. Choudhury argues:

 “In addition to directly preventing mobility, visa regulations can also inject uncertainty into the lives of individuals who engage, or intend to engage, in geographic mobility. … This uncertainty may lead people to change their mobility intentions, whether in their initial selection of destination or in prompting return migration or onward migration.”

 Choudhury also finds that, contrary to the prevailing assumption that skilled migrants resemble local knowledge workers (and therefore displace them), skilled ethnic migrants can differ from locals with regard to the knowledge they bring to a host firm and country. Choudhury documents that first generation immigrants impact U.S. innovation through two channels – knowledge transfer and knowledge recombination. The knowledge recombination channel is especially salient since it drives new-to-the-world innovation — even new culinary developments in the United States.

 Choudhury cites a 2013 Review of Economics and Statistics article by Colgate University scholars Takao Kao and Chad Sparber who found that, after H-1B visa caps were reduced to 65,000 annually in 2004, the quality of international students applying for visas into the United States fell. This outcome not only reduces the power of intellectual capital coming into the United States — it harms native born students. Kato and Sparber write, “Lower-quality foreign born students would directly affect the classroom experience for domestic students, whose education is often enriched by the presence of motivated, well-prepared, and diverse international classmates. Universities and their students therefore suffer an immediate welfare loss due to restrictive immigration policy.”

 In an October 2018 National Bureau of Economic Research paper, Boston University’s Shulamit Kahn and Megan MacGarvie found that the number of Chinese and Indian STEM doctoral students who remain in the United States has fallen in recent years due to delays in applications to obtain permanent residency. Chinese students are particularly sensitive to these delays. Even more problematic are visa caps. The scholars write, “The per-country permanent visa cap affects a large share of STEM PhDs who are disproportionately found in fields of study that have been crucial in stimulating U.S. economic growth yet enroll relatively few natives.”

 The United States needs these individuals because the number of American citizens obtaining PhDs in STEM fields is overall “much smaller than the total number of U.S.-trained STEM PhDs demanded by U.S. employers.” Americans, for example, are much less likely to study electrical and computer engineering.

 One reason that these PhD students are giving up and going home is that the scientific environment, and job prospects, are improving in their home countries. Rather than be stuck in a single job in the United States while waiting for a green card, they can move back home and advance in their field of study more quickly. Kahn and MacGarvie also discussed this brain drain in a January 2016 Research Policy paper examining Fulbright Scholars.

 Adverse Impact on Inshoring, Foreign Direct Investment

Restrictive immigration policies not only contribute to U.S. firms establishing or sending jobs overseas, a reduction in the development of a robust immigrant presence in the United States can hurt the success of international firms who establish operations in the United States.

 Immigration reduces the traditional barriers that make cross-border investment difficult and risky. It serves as a channel of information and trust that makes it easier for investors to identify investment opportunities. It also makes it easier for them to learn how to do business successfully in foreign locations.

 Exequiel Hernandez at the Wharton School of Business has explored how the presence of immigrants in a country can improve foreign firms’ chances of successful global expansion. As Hernandez explained in a 2014 Administrative Science Quarterly paper, when Honda was exploring where to establish its first subsidiary in the United States in 1959, “Managers explicitly selected Los Angeles because there was ‘a large … Japanese community’ that they believed could be helpful in the process of expanding into a new market.”

 The probability that a foreign firm will succeed in the United States “increases with the concentration of same-nationality immigration,” Hernandez says. The reason is that immigrants help increase trust in cross-border investments. Other research by Hernandez published in the Academy of Management Journal also indicates that robust immigrant communities contribute to foreign firms’ U.S. success, particularly in areas that lack strong institutional supports. In a March 2020 Organization Science paper Hernandez illustrates that when firms invest abroad in locations where co-national immigrants live, they are more profitable.

 Foreign capital is critical to funding the innovations and infrastructure that keep a country competitive. The United States has long been the biggest sender and receiver of capital across borders, but it faces significant threats to this status, including from the imposition of restrictive immigration policies.

 Immigration Increases Global Prosperity

Scholars have found that students, scientists, and workers who return to their home countries positively contribute to the economic growth in those counties. Migration to and from a host country contributes to global prosperity — an important goal of U.S. foreign and international development policy. 

 In a September 2014 Administrative Science Quarterly paper, Dan Wang at Columbia University Graduate School of Business provides evidence that immigration produces organizational change and stimulates entrepreneurial activity in both host and home countries. And in a March 2020 Strategic Entrepreneurship Journal article, Wang explains that even short-term access to resources and knowledge in the United States improves migrants’ entrepreneurial tendencies. His study of J-1 visa holders, who must return to their home country after a short period of time, suggests that these individuals are able to leverage their knowledge, skills, and social capital from their time in the United States to found firms in their home countries.

 In an April 2021 Strategic Management Journal paper, Wharton’s Hernandez and Sarath Balachandran at the London Business School highlight how immigrant entrepreneurs help U.S. venture capital (VC) firms identify potential investments in immigrant entrepreneurs’ homelands. Venture capital firms rely on intimate knowledge from their social networks to improve the odds that their investments will become profitable. The VC community is relatively small, however. Tight social networks mean firms often are competing for the same deals in the United States or in more developed countries. As a result, many are looking abroad for potential investments.

 Investing in a foreign firm is more daunting, and the odds of success are far lower. But, odds rise if a firm has a robust network of U.S. immigrant entrepreneurs (particularly first-generation immigrants) to which to turn. Hernandez and Balachandran write,

 “Over time, the process of investing in startups led by immigrants leads some VC firms to accumulate more information and connections to opportunities for investments in foreign countries than other VCs who happened to not be exposed to immigrant entrepreneurs. The more exposed firms can better screen potential foreign opportunities for quality — one of the critical inputs to VC success.”  

 Conclusion and Policy Recommendations

Comprehensive reform of the U.S. immigration system would lead to higher U.S. economic growth, more startup creation and innovation, and better work opportunities for native residents. In the meantime, policymakers can also focus on more incremental changes that will result in reduced offshoring of jobs and more high-skill immigrants staying in the United States to start firms and create jobs.

 Policymakers should:

• Reform optional practical training permit rules to allow for more flexibility.
• Reduce high fees and paperwork burdens that cause foreign graduates to sort away from early career start-up employment in favor of more established firms.
• Award employment-based green cards based on skills and qualifications and remove the requirement for employment sponsorship.
• Soften visa rules that compel migrants to remain with their employer for an extended period of time.
• Enact legislation, like the StartUp Visa Act, that would establish visa programs and rules that allow for startup and entrepreneurial activity.