Estefania Santacreu-Vasut, Professor of Economics at ESSEC Business School, and Kensuke Teshima of ITAM, Mexico, share their research into the role of expatriates in the transfer of technology within multinational companies* and tackle the possible impact of proposed anti-migrant policies.
*Santacreu-Vasut, Estefania & Teshima, Kensuke, 2016. “Foreign employees as channel for technology transfer: Evidence from MNC’s subsidiaries in Mexico,” Journal of Development Economics, vol. 122(C)
How much would a country’s companies lose if an increase in barriers to the movement of highly-skilled workers materialized? What would the consequences be of such policies in economic terms? And what countries or regions would face the biggest costs?
In a world of globalization that we have now taken for granted, we suddenly find ourselves in the center of an unexpected upheaval: anti-globalization. Whether the anti-globalization sentiment that materialized in 2016 with Donald Trump’s election and Brexit will continue in 2017 remains to be seen, especially with the upcoming French Presidential election. And regardless of whether Marine Le Pen is elected or not, it is clear that her political rhetoric is based on promoting anti-globalization policies as a solution to economic distress.
One of the most publicized aspects of the anti-globalization movement involves anti-migrant discourse, especially concerning the inflows of low skilled foreign workers and of refugees. Indeed, a less publicized aspect that may well be part of anti-migration policies ahead concerns highly skilled workers. Indeed, in early January and before President-elect Donald Trump took office, Republican lawmaker Darrell Issa declared plans to introduce a bill to restrict conditions for entering the US under the U.S. H-1B visa, used by US firms to attract skilled workers and students.
In France, Marine Le Pen’s programs have recurrently pointed a finger at the costs of migration, never its benefits. These measures, if taken on either side of the Atlantic, could lead to a protectionist spiral where trading partners, such as Mexico, retaliate by tightening American worker inflows. At the European level, a potential tightening of visa policies in France could not only detrimentally impact trade with the rest of the world but also within Europe.
Turning off the flow
Restricting the movement of people across countries can influence the economy at several levels – the movement of goods, services and capital, as well as worker movements per se. When borders are open, foreign investment flows across countries allowing multinational companies to operate abroad.
For example, Mexico has benefited from such investments which have encouraged the country’s export competitiveness. To a great extent, these gains are due to the flows of technology and knowledge that have materialized within multinationals and that, in short, lead to the transmission of ideas and technology to the countries where they operate. Despite the progress in information and communication technologies, such flows are boosted by the presence of highly skilled foreign workers and managers in the recipient country. The reason is that, in part, these ideas and knowledge are tacit and hard to be codified. The flow of people, therefore, is tightly linked to technology and capital flows.
Hey, Joe: Way down in Mexico
Professors Santacreu-Vasut and Teshima’s research took data regarding multinational company operations in Mexico that showed that not only is expenditure on technology transfer twice as much in firms hiring expatriates, but that the probability of transferring technology is also double if the company has at least one expatriate in its workforce. Why then, despite the positive correlation, did more than half the multinationals surveyed choose not to employ expats?
Former research explains this by the fact that while expatriates may be beneficial for transferring technology, they are costly in other dimensions, one of the recurring costs being the difficult adaptation of expatriates to the local environment. However, the research carried out by Santacreu-Vasut and Teshima adds to this by modeling the conditions under which expatriates facilitate the transfer of technology and thus contribute to technology and capital flows between countries.
By studying a specific company’s decision to hire either an expatriate or native in the role of manager in the Mexican subsidiary of the multinational, several conclusions were drawn: firstly, that the expatriate is more efficient at transferring technology, since she or he knows the company. On the other hand, the expatriate has greater difficulty in dealing with local suppliers.
Indeed, the advantage of the expatriate seems to be dependent depends on two factors: the technological intensity of the company and the institutional environment of the area in which the multinational is located (i.e. in certain states in Mexico, the respect of contracts and the legal system can be more or less efficient).
This gives some interesting findings. Where institutional quality is low, the advantage of hiring native manager in relation to the expatriate is greater. However, in environments where institutional quality goes to very low, relying on local suppliers is so costly that the multinational does not rely on local labor and the advantage of the native manager disappears.
All this points to the conclusion that multinationals tend to recruit expatriate workers in extreme institutional environments – of very high or very low quality – and that in these two types of environments the expatriate indeed facilitates the transfer of technology. When the quality of the environment is average, the advantage in managing local resources the local manager has outweighs the disadvantage in terms of technological transfer and the native manager is recruited.
This benefit, however, carries a cost in terms of technology transfer which decreases because the native worker is less efficient. Restrictive visa policies would, by hardening the hiring of expatriates, have dire consequences for the competitiveness of the Mexican industrial fabric, and such impact would be concentrated in certain states.
And wider afield: The States, UK and France
The research carried out by Professors Santacreu-Vasut and Teshima also have relevance beyond the Mexican borders, in particular for the US, the UK and France, since the role of expatriates can be analyzed according to the specific institutional environments of each country. The United States, France and the United Kingdom are characterized by high levels of institutional quality and are net recipients of world talent. The adoption of restrictive policies on the immigration of skilled workers would, in this context, reduce the transfer of technology and possibly erode the competitiveness of their companies and economies.
Their analysis also suggests that restricting highly-skilled worker flows would make it difficult for a country like the United Kingdom to benefit from trade and technology exchanges with the rest of Europe, and in turn limit the flow of skilled workers since such flows are complementary.
Finally, the risk of institutional deterioration that the Trump administration might pose (as recently put forward by Larry Summers), coupled with the tightening of visa policies, could contribute to an even more significant deterioration, since not only would it be more costly to attract foreign talent, expatriates would be less effective in managing relations with the American institutional and political environment, thereby diminishing the incentives of US companies to hire them.
Finally, both these reasons would contribute to an even greater deterioration in American competitiveness through a reduction of technology flows. Whether France’s forthcoming election will follow suit remains uncertain and will partly depend not only on whether citizens are able to see the visible but also the invisible consequences of anti-globalization.
By kind permission of ESSEC Knowledge
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