Do Immigrants Attract Foreign Direct Investment from the Homeland?

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Immigration creates a lot of mixed reactions from all sides. It's complex issue, and no single study can deal with it in its full complexity. When I wrote this study, I wanted to understand two related questions. From the perspective of a firm considering making a foreign investment, is the presence of an immigration population helpful, hurtful, or irrelevant? Answering that question could help address the second: Are immigrants good or bad for the economy of the host country? Most cities or states want to attract foreign capital investments because they help create jobs and grow the local economy. They often spend billions to promote foreign investment or offer tax incentives to attract foreign investment. If having a population of immigration from country X spurs investment by firms from country X, then immigrants can be quite valuable in helping cities or states accomplish their economic goals. Using data from the U.S., this study finds such an effect. The impact of immigrants on attracting investment from their homelands appears to be stronger than the tax and other incentives offered by state governments. And the upside for firms is that, if they locate in a place with a strong immigrant population, they survive longer. The lesson? Immigration can be a win-win for foreign companies and receiving locations. So if you want to attract foreign capital to your local economy, be friendly to immigrants. After establishing that effect, the natural follow up question is "why do immigrants attract capital investments and benefit firms from their home countries through enhanced survival?" I try to explore the why in this study, and suggest one possible answer: knowledge. The process of entering a foreign country is full of uncertainty and risk for a firm, because it doesn't know the host location well and because it's hard to transfer valuable assets to a new foreign operation. Immigrants can function as a channel of knowledge transfer that helps firms overcome those difficulties. The evidence of this mechanism in my study is threefold: Immigrants are especially powerful in attracting investment by homeland firms and facilitating their survival for firms (1) with no prior experience in the U.S., (2) with highly knowledge intensive operations (high-tech firms), and (3) firms trying to locate in places with strong clusters of same-industry firms. The first result suggests immigrants can help inexperienced firms gain a foothold in the U.S. market. The second result suggests immigrants can help firms that need to transfer knowledge from the home to the host location more smoothly. And the third result suggests that immigrants can facilitate knowledge spillovers within same-industry clusters to firms from their homelands. In short, immigrants are a trusted resource to obtain valuable knowledge for firms from the same home country. Does this mean that immigrants are always good for home country firms and always good for the host country economy? Probably not always, and this is something that my subsequent studies have tried to explore and that I hope other scholars can also address.

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