In a new paper titled, “Finding a Home away from Home: Effects of Immigrants on Firms’ Foreign Location Choice and Performance,” Wharton management professor Exequiel Hernandez examines the relationship between immigrants and the foreign expansion of companies from their home countries.
Knowledge at Wharton asked Hernandez to summarize his research and discuss its implications for businesses, employees and investors.
An edited transcript of the conversation follows.
Knowledge at Wharton: Zeke, please briefly describe your research.
Exequiel Hernandez: In my research, I wanted to study the effect that immigrants have on the internationalization process of firms from their home countries. So, for example, think of a firm from Japan or Brazil [that is] planning to invest in a country like the United States. Do they pick a location where there are Brazilian or Japanese immigrants? And if they do, is that actually a good choice for their performance? And assuming that I find those effects, why are they happening? What is it that the immigrants are providing?
To answer those questions, I gathered some data on the investments of firms from 27 countries into the United States from 1998 to 2003. Then I tracked the performance of those investments for several years after.
Knowledge at Wharton: What are the key takeaways of your research?
Hernandez: There are three key takeaways. The first one is that there is indeed an effect that immigrants have on the location choices of firms: If a firm was going to choose a state within the U.S., it was much more likely to choose a state that had more, rather than fewer, immigrants from its home country.
“If you’re a manager, the most obvious implication is that the diaspora can be an asset as you go abroad. It can help you pick a good location and perform well [there].”
The second is that if I analyzed the survival or the longevity of those investments — whether they continued as a going concern — the presence of immigrants was a really strong predictor of the likelihood of success.
And the third one is that those two effects that I just mentioned are especially strong for firms that have some kind of knowledge related need. So, think of first time investors in the U.S. who don’t know how to do business here. Immigrants seem to be very helpful for those firms. Or a firm that’s in a high tech industry or needs to transfer knowledge from its home country into the U.S. — same thing. Immigrants had a strong effect on those types of firms. It seems to be that the driver here is some kind of knowledge or information that the diaspora network is helping these firms obtain.
Knowledge at Wharton: Did anything about your research surprise you?
Hernandez: The biggest surprise was actually the strength of the findings and how robust they were. If you think about the effect of immigrants, you might think there could be an effect, but that it would be trivial. Actually, however, the effect of immigrants on both location choice and survival was much stronger than the effect of other things that we typically think of as important for firms.
So, think of government incentives — say a tax incentive or something that the government is trying to do to attract foreign investors – or the presence of other firms from the same industry so that the firm can, say, obtain knowledge when it goes to that foreign location. Those things mattered. But they mattered significantly less than the effect of immigrants. I was surprised by that.
Knowledge at Wharton: What are the practical implications of your research?
Hernandez: I think there are practical implications for several groups here. For instance, if you’re a manager, the most obvious implication is that the diaspora can be an asset as you go abroad. It can help you pick a good location and perform well in that location. For example, if you are a manager of a high tech firm and you want to take your technology abroad — you want to do research and development abroad — you may be able to hire someone from the diaspora. Let’s say that you’re a firm that needs to find a supplier in the foreign location. The diaspora might refer you to a useful supplier [who] might give you information or knowledge that is useful as you go abroad.
If you’re a policy maker, I think there are also some implications in the sense that we don’t typically think of immigrants as being part of the package that firms are looking for when they go abroad. So, if you’re trying to attract foreign investment, the question [local officials should ask themselves] is, “How friendly is my place to immigrants? Is it a place that is open to letting foreign people come?” And that might allow you to bring foreign capital. And, of course, it has a huge implication as well if you’re doing immigration policy. We typically don’t think of immigrants as affecting foreign capital. The implication [of the research] is that they do.
Knowledge at Wharton: Could you give some specific examples that illustrate your research?
Hernandez: There are several examples of firms that have done this, either by luck or intentionally. One of the oldest and most well-known is Honda. Honda decided to come into California in the 1950s to sell motorcycles. One of the main reasons they decided to this is because there was a Japanese diaspora that was in California and might be able to help connect them to resources.
More recently, for instance, there is a firm from Spain called Freixenet, in the wine industry. Several years ago, they were approached by a Spanish immigrant living in Australia who made them aware that Australia might actually be a really good place to sell their product because there was a culture of wine growing in that country. They did, and this very immigrant became their first distributor in Australia. That’s an example of even coming up with the opportunity because of the diaspora.
And to me, one [example] that’s very interesting that was part of the motivation for this study is that if I asked you what the fastest-growing fast food chain in the United States is, you wouldn’t probably know that it’s a firm from Guatemala, of all places. It’s called Pollo Campero, and it’s a competitor to Kentucky Fried Chicken. They have actually broken records in terms of growth and even sales within a year in a store. Their strategy has been essentially to just follow the Hispanic diaspora in the United States. So, they started in California. They’ve expanded very rapidly. They’re in most states now. And when you look at where they locate their operations, it’s all in neighborhoods that have a high density of Hispanic immigrants.
These would all be examples of the diaspora somehow helping provide information, support and resources, or functioning as customers and helping firms be successful abroad.
“There are several examples of firms that have done this, either by luck or intentionally. One of the oldest and most well-known is Honda.”
Knowledge at Wharton: Are there other areas your research applies to?
Hernandez: There are other areas to think about. Perhaps the best way is to flip the question on its head and ask, “To which firms or industries might this not apply?” This study was a multi-industry study. So, it seems to generalize to multiple industries. I think, though, that this is less relevant for an industry where scale or just pure capital or size is more important, [or] that’s not a very knowledge dependent industry. Perhaps there is not much that the immigrants can provide you. I mean, any benefit you get will be just from the sheer size and scale of your operation. So, I don’t think that it would apply to that kind of setting.
Knowledge at Wharton: Is there anything happening in the news today or any issues that are being debated, either in Congress or on the government or local government levels, that are relevant to your research? Is there something that is especially applicable in today’s economy, today’s global marketplace that is relevant here?
Hernandez: There are a lot of relevant things happening. In some ways, that was what motivated me to do the research — just looking around and seeing, for instance, the raging debate we have about immigration policy. There is lots of disagreement. I think that this would be relevant to say, “Look, we’re talking about whether immigrants come and consume all our resources. Do they take our jobs?” Another question would be, “Well, can they help us attract foreign capital?” And in as much as that is a desirable outcome, I think that it should be part of the immigration debate even though [my research paper] wasn’t written from a policy standpoint. But I think that there are at least some facts here that are relevant for policy makers.
The other thing that we see is a lot of foreign countries being open, such as China, India and Brazil. There is a lot of interest in investing in those places. But these are tricky countries to go into, and there are spectacular failures reported in the media. Perhaps the diaspora can be very helpful in tackling those countries. The reverse is also true. We see multi-nationals — we call them the “emerging giants” — coming out of countries like China and India. Perhaps part of the explanation for their success is they tend to be the countries that have actually sent out large diasporas in the last few decades.
Knowledge at Wharton: Has your research dispelled any misconceptions about your topic, about immigration or about foreign companies moving into other places?
Hernandez: It might be a little presumptuous to think that single handedly I’ve dispelled a misperception. But if I had to pick one that I would like to dispel – it is that immigrants simply come and consume all resources and don’t add anything to an economy. I think we just haven’t thought much about their role in attracting foreign capital. So, I would hope that would be part of the debate.
I think there is another misperception – a sense that the world is flat, that information travels freely, without any constraints. If that were true, immigrants shouldn’t matter in the investment choices of firms. Yet they do. So, social and formal networks seem to play a pretty big role in foreign investment. I think this goes beyond just immigrants. There are other types of formal and informal networks that firms rely on. And these are really important to the internationalization process of firms. And so, I think that we can’t be naive about this sense that the world is just sort of flat and that personal relationships don’t matter.
“Another question would be, ‘Can [immigrants] help us attract foreign capital?’”
Knowledge at Wharton: How is your research different from other research done in this field?
Hernandez: This isn’t the first study to establish a correlation or a relationship between immigration and trade or investment. There are some studies at the country level that have established this and even a few at the firm level. I think what this study adds that is new is a few things.
First, it is actually showing how firms strategically respond to immigrants. There wasn’t much of a sense of, “Would firms actually pick to do this or is this a spurious correlation?” The sense that this paper gives is that this is actually an intentional choice. Not only that, but it’s actually a choice that affects performance in a positive way. We didn’t know — or at least nobody had proved — the effect on performance.
The other thing I think it adds is a sense of why this is happening. So, this could happen for a lot of different reasons. It could just be, for instance, that places that happen to attract immigrants are also attractive to foreign firms. This tries to show a little more causally that information and knowledge is why this is happening, that immigrants somehow help firms tap into local knowledge or refer firms to say, suppliers or buyers, and that there is some kind of informational intermediary between the firms and resources in the location. This study didn’t fully rule out all possible alternative explanations, so there is still room for research to explore whether this is a truly casual relationship.
Knowledge at Wharton: Are you planning to do further research in this area?
Hernandez: Yes, the issue of immigration is an important part of my research agenda. I have a few ongoing projects and several new ones in mind. I will tell you about three of them.
One of them has to do with what might be the down sides of a strategy relying on immigrants. This study talks about the benefits. What I looked at as a performance outcome was survival. But if you think about it, immigrants typically represent a really small sliver of the local population. So, you might be stuck in a really small niche, and you might not be able to grow and target the broader population because the immigrants either have very different tastes or provide you biased information. So I’m planning a study that looks at the tradeoff between survival and growth when you go to a place where there’s a strong diaspora.
Another study actually tries to answer the question of whether, when you establish a foreign subsidiary, it is good to have it managed by a local or by an immigrant. What are some of the tradeoffs? That’s a study I am doing with a colleague at Duke University.
And then there’s a third study with a colleague from the University of Michigan. What we’re trying to do is look at the reverse phenomenon and think, “What’s the effect of firms coming in to a foreign location, and what effect do they have on immigrants?” Specifically, we want to ask, “Does the foreign investment cause immigrants to be more entrepreneurial or less entrepreneurial?” Because we know that immigrants typically have a high rate of entrepreneurship. But does the foreign investment — [for example,] a firm from their home country — make them more likely to start a new firm or more likely to maybe go work for that firm and not be an entrepreneur? So, we’re trying to think of those effects, too.