Do return migrants need their social capital for entrepreneurship?

Yves Zenou, Jackline Wahba 19 August 2012

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What makes an entrepreneur? This question has been the focus of few previous studies. The rather small body of literature on this issue has put forward the importance of financial constraints in becoming an entrepreneur. Access to credit is seen as a major obstacle for entrepreneurship (e.g. Banerjee and Newman 1983). Limited personal and family savings and lack of access to credit are seen to severely limit the growth prospects of promising start-ups in developing countries. Thus, policymakers and international organisations, interested in economic development, have supported micro-credit programs in developing countries as a means to encourage entrepreneurship.

More recently, international migration has played an important role in allowing this liquidity constraint to be overcome. Temporary migration has been a conduit through which individuals have the opportunity to accumulate savings that can be used upon their return for setting up businesses (e.g. McCormick and Wahba 2001, Dustmann and Kirchkamp 2002 and Mesnard 2004).

Although physical capital is an important determinant of entrepreneurship and has been seen as an important factor by economists, there are other factors that impact on the individual's decision to set up a business. Sociologists have stressed the importance of social capital as a determinant of entrepreneurship. Entrepreneurs rely on their contacts for information and services. This is an issue that has rarely been tackled by economists - an exception is the work by Djankov et al. (2005, 2006).

Yet, several studies have examined the role of social networks in migration (e.g. Munshi 2003, McKenzie and Rapoport 2010). This literature has focused on the role played by social networks in the migration decision through reducing migration cost, for example, and in finding jobs upon arrival in the host country. However, the role played by the origin social networks in entrepreneurship has not attracted previous attention. Moreover, no one has examined the possible loss of social capital in the country of origin as a result of emigration and whether this impacts on the entrepreneurial decision upon return.

In a recent paper (Wahba and Zenou 2012) we study what makes an entrepreneur in a developing country and unravel further the role played by temporary migration in establishing micro and small enterprises. We examine whether overseas emigration result in loss of social capital which negatively affects the entrepreneurship decision, and whether this potential negative impact is compensated for by the other positive impacts of temporary migration.

How temporary migration impacts entrepreneurship

A number of explanations have been advanced concerning the ways in which temporary migration may impact entrepreneurship. First, we highlight as previous studies have done the importance of overseas savings and the positive impact this has on entrepreneurship of returnees. Secondly, we also show that temporary migration leads to human capital accumulation (new skills/ideas) which positively affect startups. On the other hand, our findings underscore the negative effects of overseas migration through weakening of weak ties in the country of origin. Using data from Egypt, we examine the determinants of entrepreneurship and whether return migrants are more likely to become entrepreneurs than non-migrants.
One important aspect of entrepreneurship and startups upon return is its potential endogeneity with the migration decision. On the one hand, migration might increase the probability of entrepreneurship but, on the other, it could be that individuals planning to be an entrepreneur are more likely to migrate. Thus, controlling for this reverse causation is important.

Return migrants are more likely than non-migrants to become entrepreneurs

Our findings suggest that entrepreneurship depends on social networks, human capital and access to credit. Although migrants may potentially lose their social capital, their accumulated savings and experience overseas overcompensate for their loss. Hence, return migrants tend to be more likely than non-migrants (stayers) to become entrepreneurs and set up businesses.

Our paper emphasises the importance of access to credit as a major obstacle facing entrepreneurs in developing countries. Thus, policies focusing on access to credit is paramount for investment and thus for economic growth and development. Schemes should be adopted to help return migrants re-integrate upon their return due to their loss of local social capital whilst overseas. Successful re-integration of return migrants is still a challenge for many labour-sending countries. Helping returnees to utilise their new learned skills and use productively their overseas savings is important in order to maximise the benefits of migration. Also, providing access to information about investment to return migrants is essential to counter balance their weaker social capital upon return.

References

Banerjee, A. and A. Newman (1993), Occupational choice and the process of development, Journal of Political Economy 101, 274{298.

Dustmann, C. and O. Kirchkamp (2002), The optimal migration duration and activity choice after remigration, Journal of Development Economics 67, 351-72.

Djankov, S., Miguel, E., Qian, Y., Roland, G. and E. Zhuravskaya (2005), Who are the entrepreneurs in Russia? Journal of the European Economic Association 3, 1-11.

Djankov, S., Qian, Y., Roland, G. and E. Zhuravskaya (2006), Who are China's entrepreneurs? American Economic Review, Papers and Proceedings 96, 348-352.

McCormick, B. and J. Wahba (2001),Overseas work experience, savings and entrepreneurship amongst returnees to LDCs," Scottish Journal of Political Economy 48,164-178.

McKenzie, D. and H. Rapoport (2010), Self-selection patterns in Mexico-US migration:The role of migration networks, Review of Economics and Statistics 92, 811-821.

Mesnard, A. (2004), "Temporary migration and capital market imperfections", Oxford Economic Papers 56, 242-62.

Wahba, Jackline and Yves Zenou, 2012 “Out of Sight, Out of Mind: Migration, Entrepreneurship and Social Capital", Regional Science and Urban Economics, forthcoming.

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Topics:  Development Migration

Tags:  entrepreneurship, migration, social capital, Egypt