Why restrictive immigration may be bad for U.S. entrepreneurship

UOMA Beauty is less than two years old, but its founder and Nigerian native Sharon Chuter has already commanded attention from her billionaire cosmetic competitors. Belgian fashion designer Diane von Fürstenberg created the wrap dress in the 1970s, marking a milestone in U.S. fashion. The Burmese and Chinese Cherng family is the mind behind food court staple Panda Express — which in 2019 employed 39,000 people. And Google wouldn’t be Google without Russian-born Sergey Brin.

Immigrant entrepreneurs have shaped the American economy for centuries, and they continue to do so today. A recent count estimates 17% of the U.S. workforce is comprised of immigrants.

And while there’s a sense that “immigrant entrepreneurship is quantitatively important,” said MIT Sloan professor of managementPierre Azoulay, the White House has criticized immigrants for their alleged negative impact on the U.S. labor and wage markets.

But a new study from Azoulay and co-researches Benjamin Jones, J. Daniel Kim, and Javier Miranda, finds that when it comes to entrepreneurship in America, “immigrants appear to be more entrepreneurial than the native-born, and their firms create a lot of jobs."

Not only are immigrants 80% more likely to start a business than those born in the U.S., the number of jobs created by these immigrant-founded firms is 42% higher than native-born founded firms, relative to each population.

“The fact that the numbers are what they are, at least should make you worry that if you close the country to immigration and if you make the life of immigrants harder than it needs to be once they're here, it makes it plausible that this might have negative repercussions on entrepreneurship writ large, and for job creation,” Azoulay said.

The rate of entrepreneurship

To study the impact of immigration on entrepreneurship, the researchers analyzed three datasets, which represent more than 1 million businesses.

• U.S. census data and W-2 tax records for startups with at least one employee that were founded between 2005-2010 and survived for five years. The founder or founding team was identified on earnings and classified as either U.S.-born or immigrant based on country of birth.
• The 2012 Survey of Business Owners, which provided gender, ethnicity, race, and veteran status of business owners. Firms were included regardless of number of owners, but must have had at least one founder among the top four owners, and could have no more than 10,000 employees.
• The 2017 edition of Fortune 500, which included the year of incorporation, founder names, and immigration status.

Neither identifying information for the immigrants’ birth countries nor second-generation immigrants were considered for this particular study.

The researchers also considered three different definitions when labeling firms as native-founded or immigrant-founded. One labeled the company an immigrant firm if anyone on the founding team was an immigrant. Another way counted the business as an immigrant firm if the “lead” — the highest-paid person on the founding team or the owner-worker with the highest ownership share — was an immigrant. The third definition pooled the businesses in a particular size range and counted them as native-founded or immigrant-founded based on the share of each founding team member’s designation.

Regardless of the way Azoulay and his co-researchers defined immigrant and non-immigrant firms, and across the different datasets and firm sizes, the result was the same: The rate of immigrant-founded firms per immigrant was higher than the rate of native-founded firms among U.S.-born entrepreneurs.

“The rate of entrepreneurship looking at the 2005-2010 period shows that 0.83% of immigrants in the workforce start a firm over this period, compared to 0.46% of native-born individuals in the workforce,” the researchers write. “Immigrants thus exhibit a 80% higher entrance rate into entrepreneurship. Moreover, immigrants start more firms of every size. They do not just start many small firms, but produce a firm size distribution that looks very similar to native-born entrepreneurs.”

It was also in this analysis of the census and W-2 data that the researchers found that the total number of jobs created by immigrant founders was 42% higher than U.S.-born entrepreneurs, relative to each population.  

Within the Survey of Business Owner data, the estimated rate of entrepreneurship was 7.25% for immigrants compared to 4.03% for native-born individuals, according to the paper.

For the Fortune 500 dataset, the researchers divided the firms into those with less than 30,000 employees; firms with 30,000-100,000 employees; and firms with more than 100,000 employees.

“Overall, the Fortune 500 findings indicate that the results extend to the very largest U.S. businesses and to founding behavior over a broader sweep of U.S. business history,” the paper states.

Uncounted immigrants in the U.S.

Determining how likely an immigrant is to start a company depends on an accurate count of the number of immigrants in the U.S. The number of immigrants living illegally in the United States is uncertain, though the Department of Homeland Security estimated the number at 12 million people in 2015.

While there is disagreement about the true number, Azoulay said estimates only differ by about 1 million or 2 million people. While that is a big number, it would require a miscount of an additional 10 million people living illegally in the country to throw off the results of the entrepreneurship study, he said.

“There is no evidence that immigration could be understated by anything close to this magnitude,” the researchers write.

Other findings

Among other things the researchers found when comparing immigration and entrepreneurship, was that immigrant-founded firms paid approximately the same wage compared to native-founded firms.

Azoulay and his co-researchers also learned that companies with immigrant founders were 35% more likely to hold a patent than firms with no immigrant founder. That holds true for all sizes of firms, especially larger ones.

Azoulay said while the study isn’t a causal one, it might prompt immigration restrictionists to reconsider policy recommendations that could have a negative impact on entrepreneurship and job creation.

“You might say if [immigrant founders] were not here, those firms would have been founded by native born [entrepreneurs] — maybe,” Azoulay said. “Our results do not allow to refute that view, but are you really willing to bet on such a replacement? This seems like a big gamble on our future economic health.”