Immigrant entrepreneurship and employment growth in the US

Sari Pekkala Kerr, William Kerr 10 August 2016

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Immigration is among the hottest and most divisive topics in politics today. US presidential hopefuls Hilary Clinton and Donald Trump embody the discord surrounding these issues – Trump’s rhetoric states that immigrants replace and hurt American workers, while Clinton is often quick to point out that immigrants are essential to starting businesses that put Americans to work. Moreover, many local and regional governments seek to attract immigrant entrepreneurs to their areas through programmes like the Thrive competition in New York City and the Office of New Americans in Chicago. While economists have made headway towards measuring the immigrant contribution to entrepreneurship and economic growth, these data are only now getting to the point where facts can begin to replace speculation in these debates.

Previous work regarding immigrant entrepreneurship has shown that rates of business ownership are higher amongst the foreign-born than natives in many developed countries, including the US, the UK, Canada, and Australia.1 Hunt (2011) finds that skilled immigrants start firms with greater frequency than comparable natives, and that those initially arriving on a study or work visa were more likely to start a firm than those arriving for family reunification. In the high-tech sector, Saxenian (1999, 2002) observed that up to a quarter of firms were founded or being run by immigrants in Silicon Valley in the 1980s and 1990s, although some have argued that the contribution of immigrants to high-tech entrepreneurship has been overstated (Hart and Acs 2011).

The need for improved estimates regarding immigrant contributions to new firms remains, as well as the growth profiles and business activities of these created ventures. We construct a data platform using restricted access Census Bureau datasets to explore differences in the types of businesses initially formed by immigrants and their medium-term growth patterns, while also examining the relationship of these outcomes to an immigrants’ age at arrival to the US. In a new paper, we provide extensive details on the empirical platform created, along with suggestions for future enhancements (Kerr and Kerr 2016).

Our novel data set expands on previous contributions in three primary ways. First, whereas existing work tends to be cross-sectional and focused on a specific skill population, our data platform provides consistent estimates of immigrant entrepreneurship over a long duration (1995 – 2008) and across many skill levels, covering firms from ‘Main Street’ businesses to Silicon Valley VC-backed firms. Second, we can characterise deeply and reliably the employment and growth dynamics among immigrant-led businesses compared to those founded by natives. Finally, we can separate immigrant entrepreneurs by their age of immigration into the US, which helps to provide useful guidance for policy.

Data platform

The Longitudinal Employer-Household Dynamics (LEHD) database is the centrepiece of our platform. Built from state unemployment insurance filings, the LEHD identifies the employees of each private-sector firm in the US and their quarterly compensation. These data are combined with the Longitudinal Business Database (LBD), which analyses employment growth dynamics of new firms, long-form records of the 2000 Census of Population and Housing containing additional individual and household level traits, and external data sets identifying companies that have undergone an IPO or received VC backing. We provide comparisons to the Survey of Business Owners (SBO), a nationally representative survey conducted by the Census Bureau, as well as to the Current Population Survey (CPS).

With these sources we construct a tailored dataset for the analysis of immigrant status and entry into entrepreneurship, first focusing on dynamics over time. We retain for each individual their primary source of employment during the year (i.e. the job from which the person obtains the majority of their earnings according to the LEHD), and restrict our sample to focus on entrepreneurial activity in the peak employment years of each person’s working life, staying away from retirement decisions and non-primary employment sources. An entrepreneur is defined as a top three earner within an LEHD firm during the first year that the single-unit company was established.

Trends in entrepreneurship

Immigrants account for around a quarter of US entrepreneurs, and this share has been increasing since 1995. Figure 1 shows that on a relative basis, immigrants make up around 24% of entrepreneurs and new employees of our sample firms, increasing dramatically over the sample period (by over 10%), while a more modest growth has taken place in the immigrant share of initial employees (around 5%).

Figure 1 LEHD immigrant entrepreneurship trends

Notes: Sample includes 11 states present in the LEHD by 1992: CA, CO, FL, ID, IL, LA, MD, NC, OR, WA, and WI. New firms are defined through the LBD and retain their entering status for the first three years of the firm's life. Entrepreneurs are defined as top three initial earners in business.

An important area of study is the hiring pattern of immigrant-founded versus native-founded firms, as it has considerable implications for each group’s contribution to overall employment. Among our sample, the average initial employment for firms founded by immigrants exclusively is 4.4 workers, compared to 7.0 workers for firms launched exclusively by natives. When both types of founders are present (i.e. ‘mixed founder team’), the average is 16.9 workers. On this front, our data match the broad levels and patterns of the employer firms in the SBO sample, and produces similar differences in typical sizes between immigrant and native firms.2 Our LEHD-based trends are verified alongside comparable samples prepared from the CPS data from the NBER.  

We examine firm dynamics by considering employment growth and closure rates, observing greater volatility of outcomes for immigrant entrepreneurs. In tabulations and basic regressions, we find that immigrant firms are less likely to survive over a three-year horizon, but experience greater growth in employment when they do survive. Over a six-year horizon, they become more associated with higher payroll and establishment counts, but these are second-order to employment outcomes. Much of this volatility appears to come through the way in which immigrant entrepreneurs choose locations and industries. When these features are accounted for, immigrant entrepreneurs are more likely to survive than their native peers and modestly more likely to experience employment growth, with payroll growth under-performing comparable native-founded firms. Overall, our findings suggest that immigrant entrepreneurs experience greater volatility when taking into account industry and city choice. This somewhat mimics the up-or-out dynamics of young firm growth described in Haltiwanger et al. (2013) – they fail more frequently, but immigrant-founded firms that persist experience greater employment growth compared to their native counterparts.

Finally, we provide a breakdown of these growth dynamics by the age of immigration to the US. Immigrants coming to the US as children are more likely to start larger firms, and are generally associated with better outcomes in terms of lower closure rates and higher representation among the larger size categories. This last analysis is preliminary and mostly undertaken to study the potential of the data for observing differences along traits identifiable from the 2000 Census match. This matching will be a fruitful lever for policy analysis going forward.

References

Borjas, G (1986), “The Self-Employment Experience of Immigrants”, Journal of Human Resources, 21, 487-506

Clark, K, and S Drinkwater (2000), “Pushed Out or Pulled In? Self-employment Among Ethnic Minorities in England and Wales”, Labour Economics, 7 (5), 603-628

Clark, K, and S Drinkwater (2006), “Changing Patterns of Ethnic Minority Self Employment in Britain: Evidence from Census Microdata”, IZA Discussion Papers 2495, Institute for the Study of Labor

Fairlie, R W (2013), “Minority and Immigrant Entrepreneurs: Access to Financial Capital”, in A F Constant, and K F Zimmermann (eds.), International Handbook on the Economics of Migration, Edward Elgar, Cheltenham UK.

Fairlie, R W, J Zissimopoulos, and H A Krashinsky (2010), “The International Asian Business Success Story: A Comparison of Chinese, Indian, and Other Asian Businesses in the United States, Canada, and United Kingdom”, In J Lernerand, and A Schoar (eds.), International Differences in Entrepreneurship, University of Chicago Press and NBER, 179-208

Haltiwanger, J, R Jarmin, and J Miranda (2013), “Who Creates Jobs? Small vs. Large vs. Young”, Review of Economics and Statistics, 95 (2), 347-361

Hart, D M, and Z J Acs (2011), “High-Tech Immigrant Entrepreneurship in the United States”, Economic Development Quarterly, 25 (2), 116-129

Hunt, J (2011), “Which Immigrants are Most Innovative and Entrepreneurial? Distinctions by Entry Visa”, Journal of Labor Economics, 29 (3), 417-457

Kerr, S P, and W Kerr (2016), “Immigrant Entrepreneurship”, NBER Working Paper 22385

Lofstrom, M (2002), “Labor Market Assimilation and the Self-Employment Decision of Immigrant Entrepreneurs”, Journal of Population Economics, 15 (1), 83-114

Saxenian, A (1999), “Silicon Valley's New Immigrant Entrepreneurs”, San Francisco: Public Policy Institute of California

Saxenian, A (2002), “Silicon Valley's New Immigrant High-Growth Entrepreneurs”, Economic Development Quarterly, 16, 20-31

Schuetze, H J, and H Antecol (2007), “Immigration, Entrepreneurship and the Venture Start-Up Process. The Life Cycle of Entrepreneurial Ventures”, In S Parker (ed.), International Handbook Series on Entrepreneurship, vol. 3, Springer, New York

Endnotes

[1] Studies include Borjas (1986), Lofstrom (2002), Clark and Drinkwater (2000, 2006), Schuetze and Antecol (2007), and Fairlie et al. (2010).

[2] Fairlie (2013) finds from the 2007 SBO that for firms hiring outside employees, the average number of employees is 8 in established immigrant-owned businesses and 12 in native-owned businesses.

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Topics:  Migration Productivity and Innovation

Tags:  immigration, employment, productivity, entrepreneurship, US

Economist and Senior Research Scientist at the Wellesley Centers for Women (WCW), Wellesley College

Professor at Harvard Business School

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