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Research Briefs

IN ECONOMIC POLICY

November 7, 2018 | Number 138

High-Skill Immigration, Innovation,


and Creative Destruction
By Gaurav Khanna and Munseob Lee, University of California, San Diego

R
ecent political and academic discussions and this has implications not only for firm profits but also for
have cast light on issues related to high-skill consumer welfare. For instance, hiring more engineers and
immigration. This discourse could have far- programmers from abroad (at perhaps a lower cost) allows
reaching implications for U.S. policy, the firms to implement incremental innovations that may lead to
profitability of firms, the welfare of workers, newer products on the market. We fill this gap by studying
and the potential for innovation in the economy as a whole. the impact of H-1B workers on firm-level product realloca-
Yet, the effects of high-skill immigration on countries that tion, defined broadly as the entry of new products and the
receive migrants are theoretically ambiguous. On the one exit of outdated products.
hand, skilled migrants may increase the profitability and in- We create a new data set by combining data on H-1B
novative capacity of the firm and raise wages of native work- workers and firm production. Our H-1B data consists of pub-
ers who are complements in production. On the other hand, licly available Labor Condition Applications (LCAs). Our
migrants may crowd out domestic workers and lower the product-level data from the Nielsen Retail Scanner Data is
wages of close substitutes. combined with firm characteristics from the Compustat
What has been missing so far from this discourse is a database. Together, a combination of these data sets at the
discussion about how migrants may affect the product-mix firm-by-year level between 2006-15 allows us to comprehen-
produced by a firm and the innovation involved in creative sively examine the impact of hiring foreign workers on firm
destruction. The entry and exit of products has long been production and innovation.
seen as an important determinant of firm-level innovation Our analysis consists of a few different methods. We first
and Schumpeterian growth. Hiring high-skill workers from describe the entry and exit of products over the business
abroad may have a meaningful impact on such innovation, cycle and across a firm’s baseline propensity to hire H-1B

Editor, Jeffrey Miron, Harvard University and Cato Institute


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workers. We find that product reallocation falls precipitously the total firm employment base is strongly associated with
in times of recession and rises in periods of economic recov- reallocation rates. A 1 percent increase in the share of work-
ery. Moreover, product reallocation is strongly associated ers from certified LCAs is associated with a 5 percent in-
with the baseline propensity to hire H-1B workers: firms that crease in the reallocation rate. This association is stronger
hired H-1B workers in the first year of our LCA data are more for software workers than other occupation groups. We also
likely to consistently have high product reallocation rates see that even as future H-1B hiring does not affect current
over the business cycle. Indeed, this association is invariant reallocation rates, current H-1B hiring does affect future re-
to a firm’s research and development (R&D) expenditure, allocation rates.
size, or revenue share. R&D expenditure and revenue are no
longer strong determinants of product entry and exit after
accounting for baseline propensities to hire H-1B workers. NOTE:
We then account for firm-level characteristics that are sta- This research brief is based on Gaurav Khanna and Munseob Lee,
ble over time and for shocks that affect the economy widely. “High-Skill Immigration, Innovation, and Creative Destruction,”
We show that an increase in product reallocation is strongly in The Role of Immigrants and Foreign Students in Science, Innovation,
associated with higher firm revenue growth. and Entrepreneurship, eds. Ina Ganguli, Shulamit Kahn, Megan
We find that the number of LCAs, the number of cer- MacGarvie (Chicago: Chicago University Press, 2018), https://
tified workers, and the number of workers as a fraction of papers.nber.org/books/gang-1.

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trustees, its Sponsors, or any other person or organization. Nothing in this paper should be construed as an attempt to
aid or hinder the passage of any bill before Congress. Copyright © 2018 Cato Institute. This work by Cato Institute is
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