‘Brain Drain’ or ‘Brain Exchange’: What Is the Cost When Immigrant Entrepreneurs Go Home?

In 1980, immigrant entrepreneur Vivek Wadhwa came to the United States and stayed, starting two companies that created more than a thousand American jobs. Now an academic, Wadhwa sees first hand that today’s immigrants are not following his lead. Every year he asks foreign students in his classes at Duke University how many intend to stay permanently in the United States. “It used to be that everyone raised their hand,” Wadhwa says. “Now they look at you funny. They say, ‘What does that mean?’”

For a majority of highly skilled immigrants who want to start companies, the promised land is no longer the United States, writes Wadhwa and four co-authors in a recent report from the Kauffman Foundation, a Kansas City, Mo.-based non-profit that supports research on entrepreneurship. In “The Grass Is Indeed Greener in India and China for Returnee Entrepreneurs,” the researchers surveyed 153 professionals who returned from the U.S. to India or China to start a business. They found that 72% of Indians and 81% of Chinese said the opportunities to start a company in their home countries “were better or much better” than in the United States.

Some say the flow of immigrants back home is a “brain drain” for the U.S. that calls for an immigration policy overhaul. Sending would-be entrepreneurs packing robs the United States of new companies, new jobs and long-term economic growth, they argue. Others say the pull is as strong as the push: that as economies blossom in China and India, the opportunities sprouting on native turf are simply too tempting to resist. Some experts maintain that returning immigrants don’t actually spell a net loss for the United States anyway. They see the flow as more of a “brain circulation” that benefits economies on both sides of the sea.

Wadhwa, a senior research associate at Harvard Law School and director of research at Duke’s Center for Entrepreneurship and Research Commercialization, falls on the “brain drain” end of the spectrum. “It’s not a brain drain; it’s a brain hemorrhage,” he insists. He sees the flow as a policy problem, the result of a visa system that broke down after 9/11 and the dot-com bust, stymying more than half a million skilled immigrants. Would-be entrepreneurs now wait years in “green card limbo,” stuck in jobs tied to H-1B visas that allow neither transfer nor promotion, Wadhwa notes. “Not only can you not start a company, but you are stagnant in your career.”

It’s a world away from three decades ago, when Wadhwa immigrated from India. “It took me 18 months to get a green card,” he recalls. He started his first company 15 years later — and wasn’t alone. In fact, one out of every four technology and engineering companies launched between 1995 and 2005 had at least one immigrant founder, Wadhwa discovered in a nationwide survey of more than 2,000 companies in 2007. In Silicon Valley, the number was 52%.

Immigrants would continue to start companies in the U.S. if given a better chance, Wadhwa argues. He believes the StartUp Visa Act, a proposal in Congress that would give visas to immigrants who have enough venture capital backing to start a business, would “unleash a flood of entrepreneurship.” It could create “tens of thousands [of jobs] in the short term, hundreds of thousands in the long term.” Although less than 10% of respondents in the Kauffman report said visas played a “very important” role in their decision to return home, and more than 80% claimed visa issues were “not” or “not at all” important, Wadhwa is skeptical about those responses. “People are saying they are going back because of economic opportunities, but the truth is that we’re not giving them a chance to grow deep roots.”

More Complex Than a Green Card

One of Wadhwa’s co-authors, AnnaLee Saxenian, a dean and professor in the School of Information at the University of California, Berkley, sees a number of reasons for immigrants to go back. “I believe that Chinese and Indians are returning primarily because of the new economic and professional opportunities in their home countries,” she says. “However, the challenges of getting visas, the suspicion of foreigners in the U.S. since 9/11 and the severity of the economic downturn have all served as ‘push’ factors as well.”

Wharton management professor Ethan Mollick believes an immigrant’s decision to return home is more complex than a green card. “It’s a little unfair to [characterize it as] a decision between pure policies,” says Mollick, who studies entrepreneurial startups in innovative industries. Returnees consider not only their country’s economic development, labor costs, financing, infrastructure and regulations, but also social support systems, quality of life, family connections and a myriad of other factors when deciding where to go, he says. “It’s a complicated decision.”

Sixty percent of Indians and 90% of Chinese in the Kauffman report cited economic opportunity in their home countries as a “very important factor” in their decision to return. Family ties were considered very important for 76% of Indians and 51% of Chinese. And more than 60% of Indians and 51% of Chinese said they were motivated by the idea of contributing to their home country’s economic growth.

Although the United States is “still better than anywhere else in the world by far” in terms of venture capital and business networks for startups, the rest of the world is also becoming more competitive, Mollick points out. “Everyone now realizes that startups are one of the most important keys to economic growth,” he says, noting that 62.5% of new jobs in the United States come from companies less than five years old. Many countries are building technology centers and creating incentive programs to woo high tech entrepreneurs. Chile, for example, offers a permanent visa, $30,000 in start-up capital and five years of rent for tech entrepreneurs adventurous enough to move their business down south.

Support networks for entrepreneurs are also starting to move overseas, points out Gavin Cassar, a Wharton accounting professor and an editor at the Journal of Business Venturing, a scholarly journal about entrepreneurship. Historically, the United States has been a magnet for talent, in part because it has a structure for successful startups — complete with lawyers, accountants, venture capitalists, angel investors and a regulatory framework that helps deals get done. But as immigrant entrepreneurs begin to move back home and the economy in the U.S. struggles, venture capitalists in the U.S. have become more willing to invest overseas. On top of that, immigrants with deep pockets or experience in venture capital are starting to pursue deals in their home countries, bringing some of the support structure back with them. “In the last five to 10 years, the cost benefits have certainly shifted” back to immigrants’ home countries, Cassar says. “The disadvantages of operating in these countries are starting to go away.”

Another possible “pull factor” for immigrants: Startup founders may be more likely to partner with venture capitalists of their own ethnicity than those with complementary professional expertise, according to new research from Wharton management professor David Hsu. “We like to deal with people much like ourselves,” says Hsu, whose research analyzed various characteristics of startup founders and venture capitalists in an attempt to measure why they paired up. Hsu looked at a number of factors behind each match, including gender and alma mater. “It turns out that there’s a lot based on: ‘Are we both Indian’ or ‘Are we both Chinese.’” In the Kauffman report, 19% of Chinese companies and 5% of Indian companies obtained venture capital. Most of the companies (73% of Chinese and 86% of Indian) were funded by personal savings.

Knowledge Exchanges

Hsu says he is “hesitant to make a strong statement” about the policy implications of the Kauffman report because it’s not certain that returnees who start businesses back home would have been able to bring the same amount of value to the U.S. market. He points to Charles Zhang, founder of Sohu.com, as an example. One of China’s first returnee entrepreneurs who came back to China after getting a PhD from Boston’s MIT, Zhang established the Chinese language search engine and portal in the early 1990s when China’s Internet landscape was just emerging. The company now employs thousands and brought in record revenues of $174.4 million in the first quarter of 2011, according to the company’s unaudited first quarter results. “It’s not clear that there would have been the same value created if he had started it here,” says Hsu. Similar sites in the United States were already well established when Zhang went back to China to start his venture — and some Silicon Valley startups later imploded after the dot-com bubble burst. “You can’t just look at any performance metric on one side and say, on a one-to-one basis, [that] we’ve lost that. There’s a completely different set of circumstances.”

Even if immigrants do return to their home countries, the United States may benefit from the long distance relationship, according to research on networks and alliances by Wharton management professor Lori Rosenkopf. Through the analysis of patent citations, Rosenkopf has studied how knowledge flows between firms when engineers move from one to another. The assumption used to be that if an engineer left a firm, all of his talent and knowledge went with him to the new company. But the person doesn’t really take away all of his brainpower, Rosenkopf found. “He goes to the new place and maintains his social connections with the old firm, and in doing so creates an exchange,” she says. Noticing that engineers at both firms often cited work by their old colleagues in patent applications, Rosenkopf concluded that engineers in a sense continued to work together, and both firms benefited. She also found that the further the move, the greater the exchange. “When people move further to different regions, the effect of learning is actually greater,” she notes.

Although Rosenkopf has not studied the knowledge flow of immigrants, her research on networks and alliances indicates that a move of immigrants back home could result in an increasing exchange between countries. The Kauffman report shows that returning entrepreneurs place a high value on maintaining ties with the United States: 84% of Indians and 81% of Chinese said they maintained at least monthly contact with family and friends in the United States; 66% of Indians and 55% of Chinese kept in touch with former colleagues in the U.S.; and over the previous two years, Indian and Chinese returnees traveled to the United States or abroad for work on average 2.5 and 4.3 times, respectively.

Kauffman report co-author Huiyao Wang doesn’t see the migration as a problem for the United States because he believes it is the beginning of a long-term exchange. “I would not say this is a brain drain from the U.S. I would call it a talent movement,” says Wang, a visiting fellow at Harvard’s Kennedy School of Government and the director general of Beijing-based Center for China and Globalization. Wang calls today’s migration patterns the “third wave” of globalization: First countries traded goods, then they traded capital — and now they are trading talent. Many Chinese entrepreneurs have already come back to the U.S. by listing their companies on the NASDAQ and using American attorneys, accountants and communications firms, Wang points out. “Government policy should facilitate that talent flow,” says Wang. “In this kind of globalized world, there should be more talent exchange.” The Chinese call returnees “sea turtles” or haigui, a homonym that sounds like “coming back from overseas.” Wang says a better term might now be haiou, or seagull — because it flies back and forth.

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