Is the U.S. in Danger of Losing Immigrant Entrepreneurs?

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Wharton's David Hsu and immigration attorney Cyrus D. Mehta discuss the International Entrepreneur Rule.

A decision by the Trump administration to delay and possibly rescind an Obama-era rule could cause the U.S. to fall behind other countries in attracting immigrant entrepreneurs who bring investments and create jobs, experts say.

The so-called International Entrepreneur Rule that the Obama administration introduced in August 2016 aimed to grant parole visas for up to five years to qualified immigrant entrepreneurs. The rule was set to take effect on July 17, but a week before that, the Department of Homeland Security (DHS), which oversees the program, announced that its effective date has been delayed until March 14, 2018. That move follows a memo the Trump administration issued in January that froze all new regulations pending reviews.

In continuing with the rule, the potential upsides in investments and jobs more than offset any downsides, including the possibility of fraud and of people attempting to game the system by creating shell companies, according to Wharton management professor David Hsu and immigration attorney Cyrus D. Mehta of Cyrus D. Mehta & Partners, an immigration law firm in New York City. The DHS had in January estimated that 2,940 immigrant entrepreneurs potentially would be eligible annually for visas under the International Entrepreneur Rule.

The requirements immigrant entrepreneurs must meet to qualify on a case-by-case basis are also stiff, Hsu and Mehta pointed out. In order to qualify, foreign entrepreneurs must have raised at least $250,000 in startup capital and received at least $100,000 in U.S. government grants, in addition to bringing “significant public benefit” to the U.S. such as the potential for rapid growth and job creation.

The freeze and the likely elimination of the rule have drawn criticism from Silicon Valley and other technology leaders. “At some level, this is all about how do we create American companies, American jobs and be globally competitive, and in that context, what role can immigration play,” Microsoft CEO Satya Nadella told CNN in a recent interview.

Hsu and Mehta discussed the potential fallout from the elimination of the rule on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Here are five takeaways from their discussion:

U.S. competitiveness will be hurt: “A lot of immigrants have dreams and they want to start their own business and make it big in the U.S.,” said Mehta, referring to the people he encounters in his practice. “This was one pathway for immigrants to do so, and by not having it and freezing it, we are being less competitive. America needs to realize that it is not the only game in town. There are other countries that want to compete, and we need to be up there — and we are not, unfortunately, by freezing this rule.”

“I am hard pressed to find some downsides associated with this rule, particularly within the context of a very competitive international landscape for talented entrepreneurs.” –Cyrus D. Mehta

Hsu noted that countries like Canada, France and Argentina have provisions that lower the barriers for immigrant entrepreneurs. Immigrants make up about 12% of the U.S. working population, he added. Among STEM (science, technology, engineering and math) workers, immigrants make up 24% of bachelors and 47% of doctorates, he continued. “So [immigrant entrepreneurs] are punching above their weight in the talent pool for the workforce that we desire in the U.S.,” he said. He pointed to one much-cited statistic: foreign-born entrepreneurs make up about half the founders in the so-called “billion dollar club” of startups that are worth at least a billion dollars each.

Direct hit on high-growth entrepreneurs: High-growth entrepreneurs are likely to be most impacted if the rule is rescinded, said Hsu. “There was no need to put it on a freeze,” said Mehta, adding that it affects only a small number of high-growth entrepreneurs. Also, it does not give such entrepreneurs a red carpet to permanent residency or citizenship – they would have to qualify for those like every other applicant, he noted. “The impact would be astounding to the U.S., assuming that any of these businesses would grow and become a Google or something equivalent to that,” he said. He noted that Google and Tesla were founded by immigrants.

Little or no downsides: According to Hsu, the case to continue with the rule is stronger than concerns about the potential downsides. “I am hard pressed to find some downsides associated with this rule, particularly within the context of a very competitive international landscape for talented entrepreneurs,” he said.

First, Hsu weighed the possibility of a “crowding-out effect,” where foreign-born entrepreneurs with more privileges bestowed by the rule could edge out native entrepreneurs. “But I am not so sure that this zero-sum mentality applies well to the startup entrepreneur setting in that ideas are dime-a-dozen, and the execution of business ideas into real businesses that are growth-oriented is not a trivial thing,” he said.

Secondly, it is possible that immigrant entrepreneurs are offered “the wrong incentives,” Hsu noted. “Maybe there are entrepreneurs who are trying to game the system, such as by cooking their books a little bit, and play shell games (or create shell companies that have little or no assets and are typically vehicles for tax fraud) in order to stay in the country.” He concluded while there is a cost attached to the governance in applying the rules, the government could get its act right and attract bona fide entrepreneurs.

Mehta pointed out that the immigration authorities typically bring intense scrutiny to such cases, and often raise “pointed questions through requests for evidence” that immigration lawyers find challenging to respond to.

Potential “game-changing” upsides: According to Mehta, even if the rule applied to a small group of entrepreneurs, the upside could be big. He noted that not all students graduating from MBA programs could raise the $250,000. Besides, a great number of students have dreams and ideas and need much less money to found a startup, he added. “For example, Facebook was conjured up in a Harvard dorm,” he said.

“You only need a very small number of big hits to activate an ecosystem, and they could be game-changing.” –David Hsu

“Even if this program applied to a small group of entrepreneurs, just imagine the upside if one of these companies was successful and became something like a Google that would benefit the U.S. and could create paradigm shifts with regard to how we view the world and how we create jobs and the like,” Mehta noted.

Added Hsu: “You only need a very small number of big hits to activate an ecosystem – and they could be game-changing.”

Creative use of parole powers: According to Mehta, in launching the International Entrepreneur Rule, the Obama administration “tried to use its parole authority creatively” in attempting to lure foreign entrepreneurs. Traditionally, presidents have used their parole authority in select cases such as admitting refugees or witnesses in highly sensitive cases into the U.S., he explained. “The rule would have benefitted foreign entrepreneurs in a big way because we don’t really have a startup visa in our immigration act,” he said. “It is a disappointment that the Trump administration has delayed this rule with the possibility of eliminating it.”

Despite lobbying against the move, Mehta said he expects the Trump administration to rescind the rule, because it does not favor the use of the parole authority “in such a broad and creative manner.” He said he hoped the U.S. Congress would pass a startup visa act. “But because immigration is such a politicized issue, we [will] either get a whole package [of measures] or nothing at all,” he said.

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"Is the U.S. in Danger of Losing Immigrant Entrepreneurs?." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 21 July, 2017. Web. 13 December, 2017 <http://knowledge.wharton.upenn.edu/article/the-impact-of-repealing-the-international-entrepreneur-rule/>

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Is the U.S. in Danger of Losing Immigrant Entrepreneurs?. Knowledge@Wharton (2017, July 21). Retrieved from http://knowledge.wharton.upenn.edu/article/the-impact-of-repealing-the-international-entrepreneur-rule/

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