How Do Restrictions on High-Skilled Immigration Affect Offshoring? Evidence from the H-1B Program (Job Market Paper)
The decision to encourage or restrict high-skilled immigration has long been controversial. Advocates argue that high-skilled immigration is critical for firm competitiveness and innovation; critics argue that skilled immigrants displace native workers and drive down wages. The debate, however, has largely overlooked the secondary consequences of restrictions on high-skilled hiring of immigrants: multinational firms faced with decreased access to visas for skilled workers have an offshoring option, namely, hiring the foreign labor they need at their foreign affiliates. This paper documents the impact of restrictive high-skilled immigration policies on the globalization of high-skilled activity by US MNCs. I use a unique matched firm-level dataset of H-1B visas and multinational firm activity and two different identification strategies to examine three key questions about that impact. First, do restrictions on H-1B visas result in increased foreign affiliate activity? Second, how does any impact differ across firms, industries, and countries? Finally, do these restrictions also affect the location of innovative activity? Both strategies yield the same result: that restrictions on H-1B immigration caused increases in foreign affiliate activity at both the intensive (US multinationals employed more people at their foreign affiliates) and the extensive (US multinationals opened more foreign affiliates conducting R&D) margins. The effects are concentrated among highly H-1B-dependent firms and R&D-intensive firms operating in offshorable services sectors. Restrictions also caused increases in foreign R&D and foreign patenting, suggesting that there was also a change in the location of innovative activity.
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Wall Street Journal. “Real Time Economics: Can the U.S. and China Strike a Trade Deal?” 30 November 2018.
“Does offshoring manufacturing harm innovation in the home country? Evidence from Taiwan”
- with Lee Branstetter, Jong Rong Chen, Chih Hai Yang, 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.
“Knowledge transfer abroad: The role of US inventors within global R&D networks.”
- with Lee Branstetter and J. Bradford Jensen
The location of US multinational foreign R&D has shifted significantly to include emerging markets in addition to traditional Western R&D hubs, resulting in two challenges for multinationals: (1) how to transfer knowledge across geographic distances, and (2) how to facilitate learning when local knowledge sources in given technological areas are inadequate. This paper argues that to overcome these challenges, multinationals utilize home country inventors on foreign affiliate inventor teams – and in particular on teams in locations with insufficiently specialized local knowledge stocks – to facilitate knowledge transfer. Empirical analysis of a comprehensive dataset of US multinational R&D and patenting activity provides robust support for this argument. The findings have important implications for understanding how countries can gain expertise in technical areas and how poor countries can escape the knowledge trap, and they provide insight into management of increasingly dispersed multinational global R&D networks, particularly in locations with relatively unspecialized local inventors.
NBER Working Paper No. 24453
“Money for Something: The Links between Research Funding and Innovation”
- with Julia Lane and Ridhima Sodhi
Federal research funding to universities is often based on a desire to stimulate innovation – so that they spend taxpayer money for “something”. There is growing understanding of the need to change the structure of research funding in order to do so; less is known about the effectiveness of different organizational structures. Yet, as Jones has pointed out, increasing the efficiency with which we transfer knowledge from one generation to the next could have important implications for innovation and productivity growth. In this paper we use new data to examine how the main organizational structure used to train the next generation of scientists and inventors – teams funded by research grants – leads to innovative activity as measured by patents.
SSRN Working Paper
“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
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 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.