Research

WORKING PAPERS

 

How Do Restrictions on High-Skilled Immigration Affect Offshoring? Evidence from the H-1B Program 

 

Skilled immigration restrictions may have secondary consequences that have been largely overlooked in the immigration debate: multinational firms faced with visa constraints have an offshoring option, namely, hiring the labor they need at their foreign affiliates. If multinationals use this option, then restrictive migration policies are unlikely to have the desired effects of increasing employment of natives, but rather have the effect of offshoring jobs. Combining visa data and comprehensive data on US multinational firm activity, I find that restrictions on H-1B immigration caused foreign affiliate employment increases at the intensive and extensive margins, particularly in Canada, India, and China.

Download the most recent version here

NBER Working Paper 27538

 

Summaries: NBER Digest September 2020 Edition, Cato Institute

Press Coverage: The Wall Street Journal, Forbes, The Economist, The Washington Post, Bloomberg, Protocol, BBC, NPR MarketPlace, Marketwatch, The New York Times

 

 

“Does offshoring manufacturing harm innovation? Evidence from Taiwan” 

- with Lee Branstetter, Jong Rong Chen, and Nikolas Zolas

Policymakers, managers, management scholars, and economists have long debated the impact of the movement of manufacturing to low-wage developing countries on the innovative capacity of the offshoring firms and countries. On the one hand, offshoring can have a positive effect on home country innovation through efficiency gains and resource reallocation. On the other hand, separating the manufacturing and R&D functions of a firm could degrade the capacity of the firm to engage in some kinds of innovation. Empirical assessment of these conflicting hypotheses has been undermined by a lack of data as well as the endogeneity of changes in offshoring and changes in innovation. We shed light on this debate by studying the impact of Taiwanese high-tech companies’ decisions to offshore manufacturing to mainland China on their patenting behavior. In particular, we exploit a policy shock in Taiwan in 2001 that lifted many of the restrictions that had prohibited Taiwanese companies from legally offshoring their manufacturing to China. The response of Taiwan’s electronics and IT firms to this policy shock was rapid and substantial – a large fraction of these firms’ manufacturing operations shifted to mainland China within just a few years. Using a unique and highly granular panel dataset, combined with a 2SLS estimation strategy that leverages this exogenous policy shock, we identify the causal relationship between offshoring and innovation, and find that offshoring has a negative impact on firm innovation as measured by patents.

 

“The Effect of Fiscal Stimulus: Evidence from COVID-19”.

  • with Miguel Garza Casado, Julia Lane, David McQuown, Daniel Rich, Bruce A. Weinberg

“Policymakers, faced with different options for replacing lost earnings, have had limited evidence to inform their decisions. The current economic crisis has highlighted the need for data that are local and timely so that different fiscal policy options on local economies can be more immediately evaluated. This paper provides a framework for evaluating real-time effects of fiscal policy on local economic activity using two new sources of near real-time data. The first data source is administrative records that provide universal, weekly, information on unemployment claimants. The second data source is transaction level data on economic activity that are available on a daily basis. We use shift-share approaches, combined with these two data sources and the novel cross-county variation in the incidence of the COVID-19 supplement to Unemployment Insurance to estimate the local impact of unemployment, earnings replacement, and their interaction on economic activity. We find that higher replacement rates lead to significantly more consumer spending – even with increases in the unemployment rate – consistent with the goal of the fiscal stimulus. Our estimates suggest that, based on the latest data, eliminating the Federal Pandemic Unemployment Compensation (FPUC) supplement would lead to a 44% decline in local spending. If the FPUC supplement is reduced to $200, resulting in a reduction of the replacement rate by 44%, spending would fall by 28%. Even if the FPUC supplement is reduced to $400, the replacement rate would fall by 29% and spending would fall by 12%. Because these data are available in every state, the approach can be used to inform decision making not just in this current crisis, but also in future recessions.”

NBER Working Paper 27576

Press Coverage: Marketwatch, Yahoo Finance

 

 “Doing Frontier Innovation in Non-Traditional R&D Locations: Lessons from U.S. Multinational Firms.”

- with Lee Branstetter and J. Bradford Jensen

In recent decades, multinationals have increasingly done R&D in non-traditional R&D destinations, with especially fast growth in emerging markets. This presents a puzzle: R&D is a knowledge-intensive activity, but local knowledge sources in non-traditional locations are often far from the technological frontier. We explain this puzzle by introducing a mechanism by which foreign affiliates can develop their technical capabilities to become active contributors to the multinational’s global innovation effort: utilizing home-based inventors on foreign affiliate inventor teams to facilitate knowledge transfer. Their utilization then declines as local inventors “catch up” technologically. We also provide evidence that the R&D portfolios of multinationals within each country are frequently concentrated in multiple technical areas, so aggregating across different technology areas might hide meaningful variation in firm behavior.

NBER Working Paper No. 24453

 

“Funding and Group Structure: Unpacking the Black Box” 

- with Russel Funk, Julia Lane, Matthew B. Ross, and Raviv Murciano-Goroff

University-based science is typically produced by research groups and funded by research grants. The past thirty years have been characterized by a substantial decline in the proportion of research funded by the federal government. Although it might be expected that the decline would have negative long run effects on the organization of science: that fewer junior researchers would be trained and that the workforce would be less diverse, there is little empirical evidence to support such a hypothesis. This paper identifies three stylized facts. First, the decline in funding share is not uniform. About 50% of research groups are still consistently funded entirely through federal grants, while the other 50% “braid” non-federal and federal funding together over time. Second, in a cross-sectional analysis, fewer junior researchers are trained in groups with a higher share of non-federal funding. This result is confirmed in a dynamic panel analysis, which more rigorously controls for confounding factors. Third, in contrast to expectations, the dynamic panel analysis reveals non-federal funding is strongly correlated with higher proportions of women employed, despite language in federal funding guidelines that encourage diversity. These findings are consistent with the view that financial requirements built into federal grants for hiring post-docs and graduate students are effective in creating a workforce pipeline. However, the federal grant requirement that research groups commit to supporting diversity in hiring does not appear to have significantly changed the gender composition of the scientific workforce.

 

 

 

 

BOOK CHAPTERS

 

“The IT Revolution and the Globalization of R&D.” Chapter in NBER book Innovation Policy and the Economy 2019, Volume 19. Josh Lerner and Scott Stern, editors. University of Chicago Press.

- with Lee Branstetter and J. Bradford Jensen

Since the 1990s, R&D has not only become less geographically concentrated, but there has been especially fast growth in less developed emerging markets like China and India. One of the distinguishing features of the R&D globalization phenomenon is its concentration within the software/IT domain. The increase in foreign R&D on the firm side has been largely concentrated within software and IT-intensive multinationals. This concentration is mirrored on the country side; new R&D destinations such as India, China, and Israel look very different in the types of innovative activity being done there than older R&D destinations such as Germany, France, the UK, Canada, and Japan. In this paper we will document three important phenomena: (1) the globalization of R& D by US MNCs, (2) the growing importance of software and IT to firm innovation, and (3) the rise of new R&D hubs, and the differences in the type of activity done there. We argue that the shortage in software/IT-related human capital resulting from the large IT- and software-biased shift in innovation drove US MNCs abroad, and particularly drove them abroad to “new hubs” with large quantities of STEM workers who possessed IT and software skills. Our findings support the view that the globalization of US multinational R&D has reinforced the technological leadership of US-based firms in the information technology domain and that multinationals’ ability to access an increasingly global talent base could support a high rate of innovation even in the presence of the rising (human) resource cost of frontier R&D.

NBER Working Paper No. 24707

Featured in:

Bloomberg. “Watch What Happens When You Push Away Skilled Immigrants”. 24 July 2018.

Carnegie Mellon University. "Analysis chronicles changes in US investment." ScienceDaily. ScienceDaily, 6 August 2018. 

ZDNet. “US companies continue to look overseas for tech talent.” 20 August 2018.

VoxEU. “The IT Revolution and the Globalization of R&D.” 21 August 2018.

CIO Dive. “Demand is driving companies to push IT, software R&D overseas.” 22 August 2018.

 

“The Weighty Manufacturing Sector: Transforming Raw Materials into Physical Goods.” Chapter in NBER book The Role of Innovation and Entrepreneurship in Economic Growth. Aaron Chatterji and Scott Stern, editors. Forthcoming.

- with Erica R.H. Fuchs, Christophe Combemale, and Kate S. Whitefoot

The manufacturing sector encompasses a diverse set of industries that are involved in the transformation of raw materials into physical goods. Over the last two decades, the U.S.’s manufacturing value added (MVA) has slightly grown, however, the U.S.’s percentage of global MVA has declined due to China’s exponential rise. Likewise, in contrast to net employment in the U.S. economy, which has increased, net employment in manufacturing (while growing slightly since 2010) is significantly lower than in the 1980s. As a whole, the manufacturing sector involves higher value added per capita employed, a greater proportion of the labor force with education at the high school level or below while having on average higher wages for that labor force, higher industry spending on R&D, and fewer private equity/ venture capital deals financing new ventures than non-manufacturing industries such as services (including software). The U.S.’s relatively high R&D spending on manufacturing (66% of industrial R&D) and comparatively low manufacturing value added (14%) is at least in part due to the globalization of manufacturing facilities in the last decade. The above said, drawing implications from sector-wide trends can be misleading because of the variation in these indicators across sub-sectors. At the five-digit NAICS code level, the top sources of employment are animal processing, aerospace products, and printing (on various materials including textile, metal, plastics); the top sources of revenue are petroleum refineries and automotive; and the top source of R&D spending is pharmaceuticals. Considering the sector’s diversity will be critical to understanding productivity and labor outcome effects, and appropriate policy responses, if any.

NBER Working Paper

 

“The New Global Invention Machine: A Look Inside the R&D Networks of U.S. Multinationals” Chapter in Brookings Multinational Corporations in a Changing Global Economy. Fritz Foley, David Wessel, and James Himes, editors. Forthcoming.

- with Lee Branstetter and J. Bradford Jensen

We present evidence showing that US multinational firms are creating a global division of R&D labor akin to global value chains in goods production, where activities are located in regions where production is most efficient. We argue that this system, properly managed, brings global benefits by increasing the innovative capacity of the global economy.  These benefits may become increasingly important in the context of a global innovation slowdown many experts believe is already underway.  Unfortunately, policy trends in the U.S. and elsewhere complicate the operation and increase the risks associated with this globalization of R&D.

 

POLICY BRIEFS and OP-EDs

 

“The Importance of doing our BIT: The Economic Potential of a U.S.- China Bilateral Investment Treaty”

- with Lee Branstetter and J. Bradford Jensen. Chapter 10 in Posen, A. and Ha, J., (eds.), U.S.-China Cooperation in a Changing Global Economy, Peterson Institute Policy Brief 17-1, January 2017.

“The Rise of Global Innovation by US Multinationals Poses Risks and Opportunities”

- with Lee Branstetter and J. Bradford Jensen. Peterson Institute Policy Brief 19-9, June 2019.

“Why the Trump administration’s anti-immigration policies are the United States’ loss and the rest of the world’s gain”.

  • Brookings Blog. 20 July 2020.