The Remedy to America’s Stalled Startup Activity: Immigration Reform

22 Jan The Remedy to America’s Stalled Startup Activity: Immigration Reform

Would immigration reform really boost American entrepreneurship rates? With President Obama’s executive action on immigration, stagnant rates of business creation, and new legislative proposals aimed at recruiting immigrant entrepreneurs, this seems like a salient question to ask.

Pick up almost any academic paper on immigrant entrepreneurship and you will find a sentence that says something like this: A substantial body of research finds that immigrants have higher rates of business ownership than native-born Americans. The data, from varying government sources, are incontestable—immigrants have higher rates of entrepreneurship than natives, and more recent research has found those rates to be diverging. Entrepreneurship among immigrants is increasing, and decreasing among the native-born.

True, the immigrant share of the population and the labor force has been rising over the same period that rates of business creation have been flat or falling. This, however, is a spurious correlation, and anyway ignores the volume of business creation: Until the Great Recession, the annual number of new businesses had been rising every decade, right in line with a rising immigrant population.

Here are some facts:

• The immigrant share of the self-employed has more than doubledsince 1980, and immigrants have higher representation among business owners than in the general labor force. The business creation rate is also higher for immigrants.
• As recently as 2013, immigrants started 430 businesses per 100,000 people; native-born Americans started 250.

• Immigrants have a higher business ownership rate than natives: 10.5 percent versus 9.3 percent. They hire fewer employees and have smaller revenues, but immigrant-owned businesses are more likely to export and generally have higher shares of exports.
• Immigrants comprise roughly one-quarter of new entrepreneurs in the United States, and that share has consistently risen over time. By comparison, less than one-fifth of the labor force is comprised of immigrants.
• Businesses started by immigrants follow the “up or out” pattern that economist John Haltiwanger has found characterizes young firms in general—they fail more often, but when they survive, tend to grow faster.
• While people may often associate immigrant entrepreneurs with low-wage jobs, such as restaurant and shop owners, there is a substantial presence of immigrants in high-skilled jobs in high-tech sectors.
• Conditional on the level of educational attainment, immigrants aremore likely than natives to start a business with more than 10 employees, which suggests that “immigrants have a niche in start-ups based on technical knowledge” requiring an advanced degree. This applies particularly to those who came to the United States as students.

It is extremely difficult to argue with the preponderance of the research literature on immigrant entrepreneurship. But, because immigrants remain a minority (less than 20 percent of the population), just as a matter of numbers, attracting more immigrants to the United States would not necessarily raise the aggregate rate of business creation. Yet that observation is not an argument against immigration or immigrant entrepreneurs; it’s just a statement about numbers. In other words, the decline of the overall entrepreneurship rate cannot be blamed on immigrants.

In fact, recent trends underscore the importance of finding ways to attract more immigrant entrepreneurs. New business creation has not yet recovered from the Great Recession, and falling rates reflect less entrepreneurial activity among native-born Americans. More immigration is one of the best ways to counteract stagnant entrepreneurship.

Other countries recognize this and, because business ownership is also high among immigrants in developed nations, they are establishing new programs to attract more immigrant entrepreneurs. Australia, Canada, Spain, Germany, the Netherlands, Italy, Israel, and the United Kingdom have all established startup visas for this purpose. One of the most innovative programs in the world, Start-Up Chile, has shown very promising effects not only in attracting entrepreneurs from around the world but also in the benefits to native entrepreneurs.

The importance of immigrant entrepreneurs to economic vitality has not been lost on states and cities around the country, many of which are starting to do more and more to welcome them. Massachusetts, for example, has found a clever way of using the university exemption from the H-1B visa cap to recruit immigrant entrepreneurs. At the federal level, the newly introduced Startup Act proposes to create an American startup visa.

More can always be done, of course—and much more research is needed—including figuring out ways to retain more foreign-born students and provide additional resources for those who do choose to start companies. Immigrants start new businesses at higher rates than native-born Americans: Welcoming more of them will increase economic dynamism and job creation.