July 20, 2020 7:10PM

We’ll Do Anything for American Innovation, But We Won’t Do That

It seems that everywhere you turn these days you’ll find someone in Washington lamenting the collapse of American innovation and industrial output, and, naturally, proposing his own industrial policy to solve the alleged problems. This includes both President Trump and Democratic challenger Joe Biden, both of whom have promised all sorts of subsidies, protectionism and procurement mandates intended to reinvigorate the American industrial base and restore U.S. innovation supremacy. What these plans have mostly failed to emphasize, however, is how freer markets – especially the liberalization of U.S. trade and immigration restrictions – might help to achieve key industrial innovation objectives (without messy and costly central planning) or how they’ve been harmed by past U.S. government restrictions.

A new NBER Working Paper from Wharton’s Britta Glennon adds to a growing body of literature showing just how wrong‐​headed the candidates’ omission of these free market policies might very well be. In particular, Glennon shows that past U.S. restrictions on high‐​skilled immigration (implemented through caps on H1-B nonimmigrant visas) resulted not in an increase in hiring American workers but instead in a substantial offshoring of multinational corporation (MNC) jobs and R&D activities to these companies’ affiliates in more welcoming countries. Perhaps even more concerning, given recent events at home and abroad, Glennon shows that one of the biggest beneficiaries of these U.S. immigration restrictions was China, and that U.S. firms doing the most R&D offshored the most jobs.

Glennon’s conclusions are worth quoting at length (emphasis mine and citations omitted):

[F]oreign affiliate employment increased as a direct response to increasingly stringent restrictions on H-1B visas. This effect is driven on the extensive and intensive margins; firms were more likely to open foreign affiliates in new countries in response, and employment increased at existing foreign affiliates. The effect is strongest among R&D-intensive firms in industries where services could more easily be offshored. The effect was somewhat geographically concentrated: foreign affiliate employment increased both in countries like India and China with large quantities of high‐​skilled human capital and in countries like Canada with more relaxed high‐​skilled immigration policies and closer geographic proximity. These empirical results also are supported by interviews with US multinational firms and an immigration lawyer.

Despite the outsized role that multinational firms play in the economy – for example, US multinational firms are responsible for 80% of US R&D and employ about ¼ of US private employees – policy debates surrounding immigration have largely overlooked the fact that multinational companies faced with decreased access to visas for skilled workers have an offshoring option, namely, hiring the foreign labor they need at their foreign affiliates. This is the first paper to provide evidence that multinational firms do in fact utilize this option – both at the extensive and the intensive margin – and to examine the relationship between foreign affiliate employees and immigrants, in contrast to the relationship between immigrants and native‐​born workers.

The results have important implications for understanding how multinational firms respond to artificial constraints on resources and how they globally re‐​distribute those resources. The results also have important policy implications; the offshoring of jobs appears to be an unforeseen consequence of restricting skilled immigration flows. Even if H-1B immigrants displace some native workers, any policies that are motivated by concerns about the loss of native jobs should consider that policies aimed at reducing immigration have the unintended consequence of encouraging firms to offshore jobs abroad.

The finding that skilled foreign‐​born workers will be hired at foreign affiliates rather than in the US also has important implications for the innovative capacity of the US. Skilled immigrants have been shown to have outsized impacts on innovation in the host country through spillovers. The spatial diffusion of these spillovers disappears with distance since innovative spillovers are geographically localized. From a nationalistic perspective, this is problematic; if skilled foreign‐​born workers are at a US firm’s foreign affiliate instead of in the US, the innovative spillovers that they generate will go to another country instead. Furthermore, the finding that immigrants often are not equally innovative outside the United States has even wider welfare implications. In short, restrictive H-1B policies could not only be exporting more jobs and businesses to countries like Canada [me: and China], but they also could be causing the U.S.’s innovative capacity to fall behind….

Vice President Biden, to his credit, has elsewhere supported “expanding the number of high‐​skilled visas and eliminating the limits on employment‐​based visas by country” in order to boost “American innovation and competitiveness.” Hopefully the Team Biden folks writing the campaign’s immigration plans can talk some sense into their colleagues writing the industrial policy plans, and perhaps even explain how freer access to all global resources – whether high‐​skilled labor or essential goods like steel and machinery – can boost American companies’ innovation, output and global competitiveness while simultaneously denying potential adversaries those same advantages. As Glennon notes, multinational corporations that drive American R&D have other production options abroad, and they’ll use those options when misguided U.S. policies push them to do so.

Unfortunately, President Trump’s longstanding aversion to increased immigration or freer trade – and recent Trump administration efforts to restrict those things even further – provide little opportunity for similar liberalization hopes in the coming weeks or during any second Trump term. To paraphrase a great American poet, they’ll do anything to boost American innovation (or to counter China’s rise), but they won’t do that.