Do immigrants create exports? Evidence from Spain

Giovanni Peri, Francisco Requena-Silvente, 26 January 2010

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People often perceive the economic consequence of immigration as an increase in the supply of unskilled labour and as increasing the demand for public goods. Neither effect – whether real or perceived – is considered as a benefit.

But immigrants bring more than their skills. Immigrants bring both knowledge of and connections with the markets, the populations and the economies of their “mother” countries. This often ignored contribution to the economic activity of the host country may help connect buyers and sellers, and help overcome hurdles to economic interactions, such as weak international legal institutions.

These are increasingly recognised by economists as key factors in promoting trade and international business.

Existing evidence on the export-creating effect of immigrants

In their seminal research Jim Rauch and Vitor Trindade (2002) analysed the importance of the international ethnic Chinese networks in promoting information exchange and trade across countries. Ethnic Chinese overseas create formal and informal associations and ties with co-ethnic Chinese groups in other countries and with their “mother” country. This establishes very valuable channels to diffuse information about business and trade opportunities and, over time, promotes economic interactions and new export markets for the host countries.

Other international ethnic networks similarly act to reduce the costs of setting up import-export business. The presence of a large community of immigrants enables companies to access information and to learn about market opportunities overseas effectively and at low cost. Sometimes the immigrants themselves set up export businesses to their countries of origin, other times they are employed or they consult for companies that intend to export there. Immigrants, one might say, have an export-creating effect, as they reduce costs of setting up successful export business to their countries of origin.

New evidence: The Spanish experience

In a new paper (Peri and Requena 2009) we present evidence from Spain during the period 1995-2008. This provides a valuable case study for several reasons.

  • First, both immigration to Spain and Spanish exports increased during the period. Immigrants increased from 1% of the Spanish population in 1995 to 10% by 2008 – the largest increase in any Western European country over this period. Trade also increased from 35% of Spanish GDP to 44% and the number of exporting firms grew from 58,000 to 100,000 over the same period.
  • Second, migration to Spain came for several different countries in Latin America (mainly from Ecuador and Colombia), Eastern Europe (mainly from Romania and Bulgaria) and North Africa (mainly from Morocco). (See Table 1.)
  • Third, as suggested by Figure 1, immigrants from particular countries tended to settle together in the same provinces. For example, immigrants from Ecuador are highly concentrated in the Mediterranean coast while those from Colombia tend to be concentrated in the North provinces.
  • Fourth, Spanish customs provide very detailed transaction-level data on exports from Spanish firms, recorded by province of origin (there are 52 provinces in Spain), by country of destination, and by type of goods (at a very detailed level of classification) for each year since 1995.

Table 1. Largest immigrant groups in Spain

Ranking in 2007
Country of
origin
Number of
immigrants
in 2007
% on
total immigrants
in 2007
Annual growth
rate of
the immigrant
group
1993-2007 (%)
Ranking
in 1993
(1)
Morocco
648735
16.3
18.9
(2)
(2)
Romania
603889
15.2
59.5
(46)
(3)
Ecuador
395808
9.9
49.5
(40)
(4)
Colombia
254301
6.4
30.2
(16)
(5)
UK
198638
5.0
8.9
(1)
(6)
Bulgaria
127058
3.2
43.7
(49)
(7)
Italy
124936
3.1
16.1
(7)
(8)
China
119859
3.0
21.7
(14)
(9)
Peru
116202
2.9
18.8
(10)
(10)
Portugal
101818
2.6
8.9
(4)
 
TOTAL
3979014
100
17.0
 

Figure 1. Percentage of foreign-born in total population by province, 2007

We combine Spanish customs data with that from the Spanish population registry on the yearly presence of immigrants by nationality and province of residence. This allows us to determine the impact of the changes of immigrant concentrations from specific countries in specific provinces on the change in exports from those provinces into the country of origin of immigrants.

Surprising results

We argue that there is evidence of an export-creation effect of immigrants in Spain so that part of the increase in exports was caused by immigrants themselves. Through business and social networks, expatriates increase the diffusion of information and reduce the cost of doing business with their “mother” country. The presence of immigrants has increased the number of exporting Spanish firms, has promoted exports of sophisticated manufacturing goods and has increased exports with countries “culturally” different from Spain. This is an important and rarely considered benefit from immigration for the host country.

We find that doubling the number of immigrants from a certain country in a province leads to an increase of the export values from the destination province to the country of the immigrants’ origin by around 10%. For several nationalities the number of immigrants increased by factors of 10 to 15, during this period. Our estimates suggest these increases would be associated with a 100-150% increase of exports to home countries. But we can say more.

As we can measure how much of the total volume of exports from a Spanish province is due to each exporting firm we can decompose the increase of total exports into the increase in the exported value by individual firm and the increase in the number of exporting firms.

We find that 80 to 100% of the export increase is due to new exporting firms rather than to larger volume exported by the existing firms. This is very much in line with the interpretation that ethnic networks reduce costs of setting up exporting business so that a larger number of Spanish firms can profitably access and export in those markets.

What type of exports? What type of barriers?

We also find that the type of exports that benefited most from the presence of immigrant networks were those of sophisticated manufacturing good, such as chemicals, machinery or vehicles, called “differentiated goods” because they come in many brands and varieties.

On the other hand, more basic commodities, such as mineral and agricultural products, that are usually traded in bulk and not very differentiated, experienced less of a positive export effect.

As sophisticated goods often require accompanying services, such as assistance, warranty, and repair, they would benefit more from the existence of a stable network of connections between the exporting firms and the market. The immigrant network establishes such a lasting relation, channelling and sharing information and trust.

We also find that the effect of immigrants in promoting exports from Spain was the strongest towards those countries that are culturally more different from Spain and with low levels of development. In particular, trade from a Spanish province to African countries was very strongly affected by the presence of immigrants from those countries. A doubling in the size of the immigrant community produced an increase of 17% in exports.

On the other hand, exports from Spain to Latin American countries, which were relatively large already in 1995, have not been affected by the inflow of Latin immigrants. Latin American countries share with Spain the language and many cultural traits such as TV programs, magazines, news stations, etc. Hence access to information on local markets, local demand and local institutions can be much easier for Spanish entrepreneurs even without going through the immigrant network. In general immigrant networks make more of a difference for export to those countries that present more severe information and language barriers for the exporters.

Effects of the recession

As Spain plunged into recession in 2009 the inflow of immigrants has slowed drastically and many foreign nationals have returned to their home countries after losing their jobs. Such outflow – or lack of inflow – of immigrants is sometimes seen as an automatic stabiliser of the economy as it reduces the supply of labour when demand decreases (possibly reducing unemployment). But an indirect effect of this could be to reduce business for Spanish exporters. Such a negative impact on export may actually exacerbate the negative effect of recession on GDP.

While rarely considered, the impact of immigrant networks on export seems very prevalent in other countries as well (as shown by Gould, 1994, for the US, Head and Ries, 1998, for Canada and by several other studies) and should be considered a gain for the receiving country.

References

Gould, David (1994), "Immigrant Links to the Home Country: Empirical Implications for U.S. Bilateral Trade Flows", The Review of Economics and Statistics, 76(2): 302-316.

Head, Keith and John Ries (1998), "Immigration and trade creation: econometric evidence from Canada", Canadian Journal of Economics, 31(1), 47--62.

Rauch, James R., and Vitor Trindade (2002) "Ethnic Chinese Networks In International Trade", The Review of Economics and Statistics, 84(1), 116--130.

Peri, Giovanni and Francisco Requena (2009) “The Trade Creation Effect of Immigrants: Evidence from the Remarkable Case of Spain”, NBER Working Paper # 15625, November.

Topics: International trade, Migration
Tags: exports, immigration, Spain

Giovanni Peri
Professor of Economics at the University of California, Davis
Associate Professor of Economics at the University of Valencia, Spain

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