US Depends on Immigrant Entrepreneurs

Immigration has perhaps always been a controversial political issue. Proponents talk about attracting ‘the best and the brightest’, while others worry that immigrants are mostly attracted by welfare benefits or will take jobs from low-skilled native workers. Despite the controversy, many US policy-makers evidently believe that immigrants are an important driver of new business start-ups, as new policies and programs are created to attract entrepreneurs into the US. At least part of the immigration controversy stems from limited available data that could be used to identify immigrant contributions to the US economy. Our work attempts to fill that gap with a novel database and analysis approach.

From earlier research we know that foreign-born inhabitants in many countries are more likely to start firms than natives, and that differences also exist across groups of immigrants. Few studies exist, however, that can follow these immigrants and their firms over time to characterize their survival and growth. In our paper  'Immigrant Entrepreneurship', we combine several restricted-access US Census Bureau data sets to create a unique longitudinal data platform covering 1992-2008 and a large number of states. We are able to describe differences in the types of businesses initially formed by immigrants and their medium-term growth patterns. We also consider these outcomes with respect to the immigrant age at arrival to the United States.

Our data platform centers around the Longitudinal Employer-Household Dynamics (LEHD) database, the primary employer-employee data in the US. The LEHD includes employees of all private-sector firms in the United States, with some person level demographics and quarterly compensation. We merge the LEHD with the Longitudinal Business Database (LBD) to obtain details of the employment growth dynamics of these firms, and the long-form 2000 Census of Population and Housing that includes detailed individual and household level information.

We then identify individuals by their immigrant status and analyze their entry into entrepreneurship at age 25-55. We define an entrepreneur to be someone who is a top three earner within the LEHD firm during the first year that the company was established. In our data, immigrants account for a quarter of US entrepreneurs, with their share increasing since 1995. They similarly represent 25% of new employees in our sample firms, with this share also increasing significantly in 1995-2008. These numbers are well above the overall immigrant population share (about 13 % in 2010).

We next study the hiring pattern of immigrant- vs native-founded firms both during short and medium run. In our sample, the average immigrant-founded firm initially hires 4.4 workers, whereas the average native-founded firm starts somewhat larger at 7.0 workers. Firms founded by a mixed team (where both types of founders are present) tend to be even larger, with an average first year size of 16.9 workers. These employment numbers provide an important starting point as they signal the relative impact of each group to overall employment.

Our main contribution is the focus on firm dynamics over time. For example, we examine employment growth over time and firm closure rates over short and medium-run horizons. Immigrant entrepreneurs seem to face greater volatility of all outcomes. Their firms are less likely to survive over a 3-year horizon but conditional on survival they also tend to grow faster and keep growing faster also over a 6-year horizon (in terms of payroll and number of establishments). When accounting for firm location and industry immigrant-founded firms are actually more likely to survive than their native counterparts. Their employment growth is greater but payroll growth smaller, indicating that the jobs they create may provide a lower wage compared to native-founded firms.

We also compare firm growth dynamics of immigrants who arrived to the United States as children versus those arriving as adults. We find that immigrants who arrive as children tend to start larger firms, will have lower firm closure rates and a greater probability of eventually reaching a larger firm size. We believe that these data have a lot of promise in giving detailed answers to many of the pressing policy questions, helping us to gain a fuller picture of immigrant economic contributions.

Sari Pekkala Kerr is an economist and a senior research scientist at Wellesley College. William Kerr is a Professor at Harvard Business School.