Published 26 April 2018

The effects of immigration on
economic growth – a literature study

Immigration has positive effects on productivity and economic growth. However, highly educated immigrants tend to contribute more to these effects. The literature suggests that immigrants boost Sweden’s performance in international trade but that Sweden may lose out on
some of the positive effects of immigration on innovation. In order for Sweden to remain attractive to foreign experts it might be necessary to reassess the Swedish tax relief for this group.

Skilled migration has positive effects on economic growth

The empirical literature on immigration and economic growth clearly indicates positive effects from immigration. However, because of the aggregated level of analysis in these studies they reveal little about the underlying mechanisms by which growth effects operate. Some evidence indicates that more highly educated immigrants contribute significantly more to economic growth. Immigration’s effects on growth in Sweden are estimated to have been higher than in many other OECD countries during the period 1986–2006, due to high education levels among immigrants. Although the reported education level of immigrants has remained high, in recent years a much larger share of the total number of immigrants has had an unknown or unreported education level. This contributes to uncertainty concerning the extent of future growth effects.

Sweden may lose out on immigration’s positive effects on innovation

With regards to productivity, many studies have investigated the impact of diversity on regional performance. Again, this literature reports positive effects on productivity in most cases. Notably for Denmark and the United States, a detailed finding is that local natives tend to move to more qualified jobs in response to increased immigration. However, while geographically close to Sweden, the Danish labor market works differently than the Swedish, with a higher flexibility in terms of hiring and firing characterizing its special “flexicurity” system. This means that results may not be easily generalizable to the Swedish situation.

There are also many empirical studies on the effects of immigration on innovation, typically measured using patent data. These studies have often shown that, by increasing the overall level of ethnic or cultural diversity, (skilled) immigrants contribute positively to innovation performance within regions.¹ However, empirical evidence at the regional level is lacking for the Nordic countries. On the other hand, we do find evidence at the firm level. Here, a study on Sweden finds positive effects on new-to-market (radical) innova­tions, rather than more incremental innovation. A couple of studies look at effects of immigration on innovation using the sector or branch as the level of analysis, with mixed evidence. A plausible reason is that the composition of immigrants and the technology level varies by sector. In one study using data on firm patenting in France, Germany and the UK, positive effects are found in high-tech sectors and from highly educated immi­grants.

A large range of studies analyze the impact of immigration on innovation using data at the individual level. Typically, these studies look at inventors named on patent records, i.e. at the individuals who are directly involved in the development of innovations. In the US, there is evidence that immigration of inventors has long-term positive effects on inventive activity. With regards to Europe, Northern European countries seem to be the main destination for inventors. However, the contribution of foreign inventors to inventive activity seems not to be as significant as in the US. The only large-scale study on this subject conducted in Sweden finds that immigrants are somewhat underrepresented among inventors, and that second-generation immigrants patent less than people with Swedish-born parents. This result is somewhat surprising, as in many developed countries (in particular, the US) immigrants tend to be overrepresented among workers in technology fields. Moreover, given the high level of internationalization of the Swedish economy, not least through its many multinational firms, the opposite pattern might have been expected. On the other hand, Swedish immigration policy since 1975 has not specifically targeted high-skilled immigrants.

Immigrants boost Sweden’s performance in international trade

The literature discusses two main mechanisms by which immigrants can contribute to trade – as consumers of foreign products or as employees of companies that engage in inter­national trade. Some empirical research on immigrants, in their role as consumers, focuses on effects on imports, due to preferences for products from their countries of origin. This import effect has been found to be less strong for immigrant communities in the Nordic countries than in the US and other countries. There is, instead, evidence of a positive association between the presence of emigrant communities from Sweden and Denmark and the level of exports from the country of origin to the foreign country in which these communities are based. It must be stressed that, in the literature regarding the trade effects of immigrants as consumers, there is not a strong distinction between the effect of high-skilled and low-skilled immigrants.

The literature that analyses the effects of immigrants as employees shows that the firms where they are employed start to trade more with their countries of origin. This is in line with the intuition that immigrants’ knowledge of their home countries helps to facilitate trade networks. Studies using Swedish data have found that skilled immigrant employees are effective in boosting export performance. The impact of immigrants on exports is usually only found to affect exports to their specific countries of origin. However, recent studies have shown that, by boosting the productivity of firms, skilled immigrants have allowed French firms to increase their productivity and, hence, boost exports in general (not only to specific destinations). Another study from Denmark suggests that a diverse (skilled) workforce allows Danish firms to increase their general ability to manage different cultures, norms, and institutions, and hence improve their export performance to different countries simultaneously.

Our review indicates that it is possible to divide the impact of immigrant employees on companies’ trade performance in two broad categories. The first involves a decreased cost of trade that arises from countries of origin-specific knowledge that (mainly skilled) immigrant employees bring to their firms. This can be labelled a “cost-based strategy”. A reason why firms hire immigrants could be that it provides access to relevant knowledge about foreign markets at a relatively low price. As shown by existing studies, this know­ledge could also be accessed by firms through the hiring of managers with sales experience in specific foreign markets. However that may be a more expensive strategy. Hence, hiring an immigrant to boost a firm’s exports to a specific country is a strategy that is particularly well suited for firms with limited financial and organizational resources (small or relatively low-productive firms).

The second channel suggests that skilled immigration can affect trade in another way: allowing for a more “global mindset” among its workforce as a result of ethnic diversity. Having a workforce, and especially a management team, with a heterogeneous and culturally unbiased mindset can strongly facilitate the international performance of companies. In this respect, skilled immigration would affect a firm’s performance, not through the cost channel, but rather as an additional factor that cannot otherwise be accessed on the market, and which might provide firms with a very competitive asset for their international activities. Altogether, this suggests that firms’ strategies should have a central role in analyses that aim to understand the impact of immigration on trade, especially where skilled migration is concerned. Firms are not simply passive recipients of a foreign workforce, but actively seek individuals with competencies that can be used to access international markets.

Lack of evaluations targeting the effects of the Swedish foreign expert tax

With respect to policy, it is possible to differentiate between studies that analyze taxes broadly, and tax schemes aimed at foreign skilled workers, studies that look at the impact of different visa policies (mainly US-based literature), and others that have focused on the impact of European integration. Concerning tax level, one study has found that mobile and highly motivated individuals are sensitive to international differences in taxes, and the effects of such are illustrated by the positive effects of large marginal tax cuts in Denmark (early 1990s) and the United States (early 1980s) on inventor immigration. With regards to tax schemes, a foreign expert tax subsidy was introduced in Denmark in 1992 and a different version in Sweden in 2001. For Denmark, the evidence suggests that the subsidy attracted qualified foreign workers, and it led to a positive effect on the productivity of the firms who hired them, possibly because of its rule-based, simple-to-understand construc­tion. For Sweden, no proper academic studies on the subsidy exist, not least because of the lack of data, but its impact seems to have been lower. This could be because applying for it was initially complicated, and the 2012 amendment requires too high of an income to be accessible by large numbers of experts. Evidence on the free labor market brought about by European integration shows mixed results for European countries. Consistent with the compressed income structure and Sweden’s progressive tax system, a short-term effect of European integration was an increase in the share of low-skilled immigrants in the 1990s.

In summary

Summing up, the literature on the effects of immigrants on economic growth, productivity, innovation, and trade is generally positive. Concerning innovation and productivity, fairly little research exists with respect to the case of Sweden, and clearly much more could be done. Conversely, there is already well-grounded evidence on the positive impact of immigrants on Swedish firms’ trade performance. One conclusion from the literature review is that most of these positive effects come from highly educated immigrants. Compared to other countries (especially Anglo-Saxon countries like the US or the UK), Sweden has not been targeting the highly educated. It must also be stressed that the tax system may have a negative impact on the possibility to attract individuals at the upper end of the skill distribution scale. In this respect, the Swedish tax incentive scheme for “foreign experts” may be a move in the right direction. However, in order for Sweden to remain attractive to foreign experts it might be necessary to reassess the design of this tax incentive.

¹ The term skilled migrant is generally used in the literature to refer to migrants with a certain level of competence or occupation. However, data on “skills” is usually missing and therefore most studies use education data to proxy for skills.

Title
The effects of immigration on economic growth – a literature study

Serial number
PM 2018:07

Reference number
2017/054

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