Global migration, ethnic diversity strengthen long-term economy of country, study finds

Public debate about the consequences of migration around the world, particularly the issues of illegal immigration to the U.S. and the ongoing flow of migrants to Europe from war-torn countries, tend to focus on the short-term economic impact like housing shortages and labor market issues.

But a new paper from the University of Chicago Booth School of Business finds that receiving migration from a foreign country has a positive long-term effect on the ability of local firms to attract investment and interact economically with the migrants’ country of origin.

In other words, having social ties and contacts with a foreign population in one’s own country makes it easier to do business in that group’s country of origin. Not all countries can do business in China or India, for instance, but having a population from those countries that has connections and understands how to get things done makes conducting business easier.

Tarek HassanIn the paper, “Migrants, Ancestors, and Foreign Investments,” by Tarek A. Hassan of Chicago Booth, Konrad Burchardi of the Institute for International Economic Studies, Stockholm, and Thomas Chaney of the Toulouse School of Economics, the researchers used 130 years of historical immigration data in the U.S. to show the positive economic effect of a diverse ancestry composition of certain U.S. counties on foreign direct investment (FDI).

“This effect on foreign direct investment operates over long periods of time, spanning generations rather than decades, and the majority of the effect of ancestry on FDI comes from second and third generation immigrants, rather than the immigrants themselves,” Hassan says. “In fact, even the earliest migrations for which we have data going back to 1880 still significantly affect FDI today.”

In effort to attract FDI, policy makers often employ tax incentives, labor force enhancements or injections of cash into regions or industries. While these conventional economic forces can be effective, the social dimension of FDI – having social ties to migrant groups—may be more important, according to the study.

“For example, doubling the number of individuals of German descent increases the number of local jobs at firms receiving investment from Germany by 29%,” Hassan says.

The study also finds that the effects of FDI are stronger if the country is farther away, meaning that the presence of small groups of people from faraway places can have an outsize economic impact.

The quality of institutions in the country of origin also plays a role in the success of FDI. The fall of the iron curtain in Europe the early 1990s is a relatively current example of this finding. After World War II, many counties, particularly in the Midwest, took in thousands of Eastern Europeans fleeing communism. Today, it is these counties that have an edge in doing business with these newly open and growing economies, creating thousands of jobs.

“It basically means that being open to a diverse set of migrants and taking in refugees has economic benefits decades down the line,” Hassan says.

The findings of this study have clear implications for immigration policy as well. A strong immigration policy would recognize the value that diverse ethnic groups can provide to the economy.

“The evolution of investment relations between the U.S. and China, for MORE instance, would have been dramatically different if Chinese immigrants had not been barred from entering the U.S. as they were between 1882 and 1965,” Hassan explains.

“Our estimates suggest that in the absence of the Chinese exclusion act, the Northeast would have received substantially more migration from China in the 19th and 20th centuries, enabling stronger economic ties today. In Massachusetts, for example, the share of counties with an FDI link to China would have increased from 43% to 69%.”