Migration, entrepreneurship and development: critical questions

Entrepreneurship and migration are at the very top of many national and international agendas. It is easy to see why, globally, there are probably a billion entrepreneurs (measured in terms of self-employment)¹ and more than 232 million cross-border migrants (United Nations 2013). The development impacts of both migrants and entrepreneurs are therefore likely to be substantial. For instance, migrant remittances are estimated to be around US dollar 550 billion annually (more than two times the volume of aid) (World Bank 2013), and they contribute significantly to poverty reduction in some countries (Adams and Page 2005). In the same vein, entrepreneurs invest billions and create substantial numbers of jobs. Both migration and entrepreneurship have therefore attracted attention from policymakers, donors, NGOs and others interested in their possible impacts on poverty reduction and development.

The problem is that entrepreneurship and migration policies often do more harm to the poor and to development, than good. Naudé (2010, 2011) has dealt with the relationship between entrepreneurship and development and growth, and the difficulties that well-meaning but poorly informed policies may cause. Not all entrepreneurs create sustainable or substantial jobs, most do not innovate much and substantial numbers of firms fail after only a few years. In such a context of heterogeneity, policies are often ineffective and often may have undesired outcomes. For example, easing entry restrictions for potential entrepreneurs may result in a large pool of entrepreneurs with insufficient entrepreneurial ability and skills, which in combination with asymmetric information about their skills and ability can result in a general contraction of finance from banks (who do not want to lend to entrepreneurs with poor ability) (de Meza and Webb 1987). Much scarce resources are being spent on providing training and education to prospective entrepreneurs with little, and even opposite than intended, outcomes. Often, participants of such programmes only realize what it means to be an entrepreneur during the course, and as such, their aspirations change because of this additional knowledge, even discouraging some who had initially planned to start their own business (Oosterbeek et al. 2010).

In the case of migration, poorly informed policies have also created and continue to create harm. Stricter border controls to prevent irregular migration from Africa to Europe, for example, have not stopped migration flows but instead led to a diversification of migration routes and to a much more dangerous migration journey (de Haas 2009).

At the same time, the debate on the economic development implications of migration is a long-standing and often emotional one. Recently, there has been more attention in this debate on the role of migrant entrepreneurs. They are often hailed as super-entrepreneurs with consequent high expectations for their role in business start-ups and job creation. The problem is that this may mask and even exacerbate bad immigration policies, for instance, in justifying too much of a focus on attracting certain types of migrant entrepreneurs, or training return migrants to be entrepreneurs, rather than facilitating migrants’ access to wage employment and the formal economy.

The debate on the role of migrants in entrepreneurship more broadly is in our view based on an inadequate understanding of migration and migrant entrepreneurs. Therefore, in this paper, we pose and answer three questions in this regard: (i) Are immigrants really more entrepreneurial than natives? (ii) Are migrant remittances likely to fund entrepreneurship in their home countries? (iii) Are return migrants more likely to be entrepreneurial than non-migrants? We do this in Section 2 before we then, given our answers to these three questions, ask in Section 3 whether migration matters at all for development if not through promoting entrepreneurship. And how can “super-entrepreneurs” be nurtured best, given that continued migration is likely to be a demographic fact in many parts of the world, particularly towards Europe. In Section 4, we discuss the policy implications in the latter regard. Section 5 concludes.

With the focus of this paper on the linkages between migration, entrepreneurship and development, it is important to take a step back and look at the linkages between migration and development more generally because (migrant) entrepreneurship is but one possible channel. De Haas (2010) provides a critical overview of the literature on migration and development and shows that this body of work has vacillated between pessimism and optimism over time. Based on the neoclassical theory of migration, opinion in the 1950s and 1960s was that migration had a generally positive impact on development reflecting a virtuous circle of labour mobility that would eventually even-off in the long term (Castles 2008). The Lewis and Harris-Todaro models, for example, assume out-migration from low productivity areas to be essential for rising productivity (Harris and Todaro 1970; Lewis 1954). This view changed in the 1970s and 1980s, when migration became more widely seen as being part of a vicious circle of under-development, which widened the gap between core and periphery countries. Migration was blamed for maintaining economic dependencies between rich and poor countries by causing a brain-drain from poor to rich economies. However, before the recent (2013–2016) rise in immigration to Europe (mainly as a result of conflict in the Middle East and Eastern Africa), the pendulum had started to swing back towards a more positive assessment of the development impact of migration, with notions of a brain gain being modified to account for brain circulation (Mountford 1997; Saxenian 2006; Docquier and Rapoport 2012).

Recent theorizing on migration and development is based on the New Economics of Labour Migration (NELM) and livelihood approaches (de Haas 2010) which take a more holistic view of migration and development. Different aspects of migration, such as the role of diasporas,³ have surfaced, and migrants are seen as agents of development, leading to more nuanced research. For instance, migration has been established to have brain-drain effects only for some of the poorest countries (Di Maria and Stryszowski 2009; Beine et al. 2008). In addition, new evidence suggests that out-migration of highly skilled individuals has substantial benefits, mainly for “the migrants themselves, who benefit through massive gains in income and through greater human capital” (Gibson and McKenzie 2012: 371). Migration has also been found to contribute to raising living standards of those left behind (Acosta et al. 2007; Adams 1991, 2004, 2006; Adams and Page 2003, 2005; Itzigsohn 1995; Taylor et al. 2005) as well as increased human capital, brain gain and better return to human capital investments (Mountford 1997; Stark and Wang 2002).

The role of remittances has been the subject of special scrutiny given their sheer volume. Remittances have significant welfare impacts on countries with large out-migration, for example, Jamaica and El Salvador (Di Giovanni et al. 2015), although this is more the case when low-skilled individuals migrate than in the case of higher-skilled migrants, who tend to remit less in per capita terms (Adams 2009).⁴ Remittances can also facilitate increases in household spending on education (Acosta et al. 2007; Cox Edwards and Ureta 2003), health services (Hildebrandt and McKenzie 2005; Mansuri 2007) and savings or investments (de Haas 2005). There is, however, no conclusive evidence that remittances unambiguously promote macroeconomic growth (Yang 2011).

Others have argued that out-migration does not only lead to higher levels of trade (Egger et al. 2012; Fairlie and Lofstrom 2013; Rauch and Trindade 2002) and FDI (Kugler and Rapoport 2011) to developing countries but also contributes to development through “social remittances.” “Social remittances are the ideas, behaviours, identities, and social capital that flow from receiving- to sending-country communities” (Levitt 1998: 927). They can be transferred to the origin country through modern communication methods such as telephone, internet and mail, through migrants’ temporary return visits to their origin country or through permanent return. Migrants transfer their know-how and skills to family members or friends living in the origin country, and this knowledge can then be utilized by individuals or households in the home country.

In this context, Docquier et al. (2016) and Spilimbergo (2009) show that the level of emigration is related to political developments in the home country. Migrants can contribute to the diffusion of democratic values and norms either directly upon return or through contacts with relatives or indirectly through social networks connecting the diasporas with groups in the origin country (Docquier et al. 2016). Some have even argued that return migrants can increase the demand for political accountability and so improve governance in their home countries (Batista and Vincente 2011). However, the opposite can also hold; Stel (2013) for instance finds that in the case of the Lebanese diaspora, migrants often play an active role in entrenching political power in their home country.

We can conclude this section by stating that even though migrant entrepreneurs are not super-entrepreneurs, migration as a process can positively impact development in both sending and receiving countries through many other channels. The entrepreneurial behaviour of migrants and migrant households is only one of the channels through which migration may affect economic growth. Because economic growth and development in itself affect entrepreneurship (entrepreneurship is endogenous to development), this has to be taken into account in policies that aim to maximize the potential of migrant entrepreneurs. In the following section, we discuss how policies for migration and migrant entrepreneurship may be improved.

Migration has the potential to contribute to development. But not all individuals and all countries benefit automatically from migration: There is much country and individual heterogeneity in migration-development outcomes. In this respect, de Haas (2010) has cautioned against simplified assumptions about the relationship between migration and development. He points out that there “is no automatic mechanism by which international migration leads to development” (de Haas 2010: 240). This means that policies may matter very much in migration and, moreover, that migration policies may do much harm to development by distorting outcomes. Because of the nature of the public and policy debates on migration (characterized very often by a high degree of subjectivity), the need for an automatic mechanism of development through migration has concentrated attention in recent years on the role on migrants as entrepreneurs and facilitators of entrepreneurship.

An individual’s decision to become an entrepreneur or not has been studied by economists as an occupational choice. In empirically studying this occupational choice, the evidence tends to suggest that the occupational choices of migrants are not significantly different from those of non-migrants. Both migrants and non-migrants would be more or less likely to be entrepreneurs as a result of their individual characteristics (schooling, experience), household or community level factors (size of household, cultural background), institutional determinants (access to finance) and the business environment. Based on existing evidence, it therefore does not seem like migrant entrepreneurs face significant other challenges than non-migrants—apart from discrimination.

Migrant entrepreneurs, like migrants in general, suffer from various forms of discrimination (Jansen et al. 2003; Zhou 2004). Bruder and Räthke-Döppner (2008) mention that migrants often face discrimination in formal labour markets, which then drives them into (necessity) self-employment. This can be due to structural discrimination (the need for a visa for example); taste discrimination (when employers prefer not to employ workers of a certain ethnicity due to, amongst others, racial or ethnic stereo-typing and language barriers) and statistical discrimination (when employers and job seekers have asymmetrical information about their quality) (Bruder and Räthke-Döppner, 2008). Rising xenophobia has been found to push disproportionate numbers of migrants with limited English proficiency into self-employment in the USA (Mora and Davila 2007). That discrimination and xenophobia foster self-employment amongst migrants is thus acknowledged. Hence, entrepreneurship can be used as a way to circumvent these obstacles (OECD 2010) and for migrants to overcome social exclusion and integrate better with their host community (Constant et al. 2007) as well as a way to improve their socioeconomic mobility (Zhou 2004).

A number of studies have attempted to quantify the impact of labour market discrimination on the occupational choices of migrants in China, where legal discrimination, through for instance the Hukou system,⁵ is well known. Frijters et al. (2011) find that if there would be no discrimination against migrants in urban China, the number of self-employed migrants would fall by 16 %, a significant proportion. Thus, when they have a choice, migrants may often prefer wage employment to being self-employed. This conclusion is supported by the empirical patterns of migrant self-employment in the OECD (OECD 2010) as well as studies from, e.g., Germany which find that it is more likely for less educated migrants to be self-employed than for higher educated migrants (Constant and Zimmermann 2006).

Migrants also face discrimination in consumer markets, which in turn creates a demand for the goods and services migrant entrepreneurs can provide, often in ethnic enclaves (Jansen et al. 2003). Hence, ethnic enclaves often act as a pull factor for migrants to enter into self-employment (Price and Chacko 2009). Finally, migrant entrepreneurs themselves do face discrimination, especially when trying to gain access to finance (Zhang 2008).

As a result, migrant entrepreneurs may be very vulnerable to external shocks because they are often in entrepreneurship due to a lack access to wage employment (Brixy et al. 2013). In other words, they are necessity entrepreneurs (Constant and Zimmermann 2006). Moreover, they often have access only to types of businesses, e.g. in trade and services, which are more exposed to external economic shocks (OECD 2010). The GEM study could not find evidence across 69 countries that migrants are more likely to be necessity entrepreneurs than non-migrants (Vorderwülbecke 2012). This does, however, not mean that it is not the case; certainly, the finding that migrant entrepreneurs often perform worse than non-migrants may suggest they indeed face more difficulties (Neville et al. 2014).

It should be stressed that a selection of migrant entrepreneurs occurs before migrants even enter the host country. As the link between migration and entrepreneurship receives more attention by policymakers, a growing number of countries are introducing specific policy measures for this group. As immigrant entrepreneurs are a heterogeneous group running different types of businesses, policies should ideally be equally diverse in order not to exclude potential future entrepreneurs (Collins 2003). However, considering policies currently implemented, it is evident that the diversity of this population is not addressed. While overall, the share of immigrants entering a country on an entrepreneur visa is relatively small, the bulk of immigrant entrepreneurs does not qualify for this type of visa, likely due to a lack of capital and experience, and usually enters the country through another channel. Some of these migrants might still come with the intention of starting their own business.

Particularly amongst highly skilled immigrants, there may also be people with high entrepreneurial ability. In some cases, however, policy hinders the implementation of entrepreneurial activities. Migrants entering on a work visa, for example, may not be allowed to start a business while on this specific visa. This may be a waste of their potential contribution to the local economy. An example from The Netherlands is that of “knowledge migrants” who are only allowed to work for their current employer. They are not allowed to start their own business next to this employment while on a knowledge migrant visa. At the same time, it is common for academics to start their own (consultancy) business next to their university work; this type of entrepreneurship is, however, restricted in the case of The Netherlands (Marchand and Siegel 2015).

When looking at return migrants and entrepreneurship, it can be observed that policies and programmes are also sometimes developed based on overly positive assumptions. An example of this is the fact that increasingly voluntary return programmes contain entrepreneurship components of different format. Some simply provide in-kind or financial support, while others also offer training. The fact that this support is often given to people with no prior experience in running a business and may be even no interest in doing so can in this context be seen as a form of positive discrimination. It is, however, the case that evaluations of such programmes are largely lacking. In order to increase the efficiency and effectiveness of such programmes, more evidence is therefore needed.

Overall, it can be seen that there are several factors that on the one hand drive migrants into entrepreneurship, such as the discrimination on the labour market, while on the other hand, access to finance and policies often hinder potential entrepreneurs to put their plans into action and play the role that many expect of them. Other policies and programmes drive migrants into entrepreneurship that are not necessarily suited for this.

Migration can be an important mechanism for raising the welfare of individuals and households in both sending and receiving countries. One way is through the entrepreneurial activities of migrants and their families. Based on the theoretical notion that migrants, like entrepreneurs, tend to be less risk averse, they are often seen as super-entrepreneurs. We argued in this paper that the discussion on the linkages between migration and entrepreneurship need however to be more nuanced. We cast doubt on three stylized facts or beliefs on migration and entrepreneurship namely that (i) migrants are more entrepreneurial than natives, (ii) migrant remittances can fund start-ups in the countries of origin and (iii) return migration can bring valuable entrepreneurial skills to developing home countries. Considering the empirical evidence, none of these are robust beliefs.

In fact, the evidence is mixed on the question whether immigrants are more likely to be self-employed than natives as well as whether immigrant entrepreneurs outperform their native counterparts. For policies to indeed support the promotion of migrant super-entrepreneurs, policymakers and scholars need to first better understand the broader relationship between migration and development, and entrepreneurship and development, as this indicates that migrants often make a more substantial impact on development not as entrepreneurs, but as employees, and that the success of those who do select into entrepreneurship does critically depend on the state of the economy (-ies) in which they are embedded.

In this respect, it needs to be reiterated that immigrants most often face discrimination in their destination country. This may either prevent potential entrepreneurs from actively pursuing business activities or drive immigrants into necessity entrepreneurship that may otherwise prefer wage employment. Non-discrimination policies, addressing stereotyping and prejudging of immigrants would be beneficial in order to ensure maximization of productivity and the contributions of migrants to the local economy. Not all discrimination stems from active resistance against foreigners. Typically, immigrants face more difficulties in obtaining credit than their native counterparts, especially forced migrants who have left all their assets and networks behind. This type of bias against migrant entrepreneurship is more difficult, although not impossible, to address with policy. Such policies should for instance take into account that if migrants need to rebuild their collateral and assets, and invest in the local economy, a long-term vision and commitment to the host country is needed. Without longer-term residence permits and integration measures, it is unlikely to happen though.

Given that migrant entrepreneurs have not been proven to be super-entrepreneurs in this paper and given that there is a significant demand for low-skilled workers in most advanced economies, particularly in Europe (de Haas 2009) (including a structural demand for more workers in general, given declines in population growth⁶), imposing policies based on the view of migrants as super-entrepreneurs is likely to be sub-optimal. The costs of misunderstanding the potential of migrant entrepreneurs, or raising immigration barriers, and of not doing more to allow their integration into wage employment, is thus likely to be costly.

In conclusion, the message is that not all migrants are entrepreneurs and that different kinds of migrants are much more likely to end up in entrepreneurship, with different success rates. More research along these lines is therefore necessary, so that the dialogue is not so much on migration and entrepreneurship, but rather on, for example, highly skilled migrants and entrepreneurship, forced return migrants and entrepreneurship, or immigrants and necessity versus opportunity entrepreneurship. Different kinds of migration as well as different kinds of entrepreneurship ultimately also have different implications for development. Further research along these lines is therefore needed in order to fully understand the dynamics guiding the interactions between migration, entrepreneurship and development.