How Restricting Skilled Immigration Could Spur Offshoring

high-skilled immigration

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Wharton's Britta Glennon discusses her research on the impact of restricting visas for high-skilled immigrants.

The federal government has long allowed American companies to offer temporary employment to highly skilled foreign workers through its controversial H-1B visa program. Proponents believe the program gives firms a competitive edge in pursuit of innovation, while critics contend it pushes aside American workers in favor of immigrants. The H1-B Reform Act of 2004 capped the number of visas available and prompted other changes. Wharton management professor Britta Glennon used data from that policy change to examine how the restrictions affect offshoring, which is the practice of hiring foreign labor through foreign offices. Glennon spoke to Knowledge@Wharton about her forthcoming paper, How Do Restrictions on High-Skilled Immigration Affect Offshoring? Evidence from the H-1B Program.” (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: The paper focuses on an often overlooked aspect of the debate about high-skilled immigration. Can you explain that?

Britta Glennon: Usually, when we talk about skilled immigration in the media or even in the broader academic literature, people tend to focus on the impact on the wages or the jobs of American workers. They also tend to focus on innovation outcomes of firms. That is usually how the debate is framed: Does skilled immigration take American jobs, or does it improve innovation?

What I look at in my paper is that there is this unforeseen additional consequence that has been completely left out of the debate, which is that U.S. multinational firms have this alternative choice. If they can’t get the skilled immigrants that they want in the U.S., they can just hire them abroad at one of their foreign affiliates. If it’s true that they are just going to hire skilled immigrants elsewhere, then those policies restricting them can backfire.

Knowledge@Wharton: How did you test this?

Glennon: I exploited a policy change in 2004 that heavily restricted H-1B visas and looked at what happened before and after that change. What I saw was that there was this huge growth in foreign affiliate employment after that policy occurred. In other words, once U.S. firms felt really constrained in terms of how many skilled immigrants they could hire, they then started rapidly increasing employment at their foreign affiliates in response.

“Once U.S. firms felt really constrained in terms of how many skilled immigrants they could hire, they then started rapidly increasing employment at their foreign affiliates.”

Knowledge@Wharton: They weren’t going back and hiring more people who already lived here. Instead, they were looking at locations offsite and hiring people there. Was that foreign offices of the firm, other companies that they had a partnership with, or both?

Glennon: I only am able to look at foreign affiliates of the company. However, there are a lot of angles that I am not able to explore that I would like to explore in future work. One of those could be partnerships. Perhaps rather than hiring more people at their foreign affiliate, they could instead contract out to a foreign firm.

Knowledge@Wharton: Were there particular types of companies or industries that were more likely to do this?

Glennon: You do see average effects overall, but you see the strongest effects in R&D intensive software IT firms, and particularly in areas where you could offshore the services. Not all services can be offshored, so those are the firms that you see it the most strongly in.

Knowledge@Wharton: Were there particular countries that saw the biggest increase in foreign hiring, or was it across the board?

Glennon: The three countries where you saw the biggest increases were Canada, India and China. Now, there is likely a different mechanism happening there. For example, with India and China, that is where the bulk of H-1B visas go to, so you can view it as [companies] going straight to where the talent is. They are just opening up a foreign affiliate in China or India, hiring local talent there.

In Canada, however, it’s a little bit of a different story, which is that it could be the exact same worker, perhaps an Indian or Chinese worker who was denied an H-1B visa in the U.S., and they could just hire them instead in Canada because Canada has much less restrictive immigration policies.

Knowledge@Wharton: Your results show that not only did this decrease in H-1B visas increase offshoring, it also had some significant impacts on innovation. Could you talk about those?

Glennon: I think a lot of times when people think about H-1B visas, they are worried that they are not actually high-skilled workers. Maybe it’s software, but it’s not very innovative software. It’s like back-end software. One of the things I wanted to test was, were the jobs that were moving abroad in innovative areas where you would actually be really concerned about that job going abroad? If you are really interested in the spillover effects that come from innovative work happening in the U.S., if that is happening abroad instead, then that has serious policy implications.

What I found was there was an increase in foreign affiliate patenting in response to restrictions on skilled immigration as well. That tends to indicate that it wasn’t just these lower-level jobs moving abroad; it was skilled, innovative types of jobs that were going abroad.

“Skilled immigration restrictions may not actually give more jobs to American workers and, in fact, may accelerate firms moving abroad.”

Knowledge@Wharton: One thing you mentioned in the paper is if these workers are never able to move here, then the innovation is happening wherever they do end up. But you find that the innovation might actually not be happening at all.

Glennon: That is also a possibility. I haven’t been able to show that part definitively yet, but it is very possible that some firms, once they are not able to do it in the U.S., just kind of give up on that activity and shift to something else.

Knowledge@Wharton: You looked at a policy change from 2004, but this is still a huge part of the immigration debate. What are the key implications here both for companies and policymakers, especially as the 2020 election heats up?

Glennon: I think, No. 1, skilled immigration restrictions may not actually give more jobs to American workers and, in fact, may accelerate firms moving abroad. Often the same people who are critics of immigration are also critics of offshore manufacturing, so they are actually causing the very thing that they are worried about.

I think, just policy-wise, skilled immigrants are a good thing. If you are going to try to restrict them, there are going to be some unforeseen consequences, so you should be aware of those unforeseen consequences when making policies. For businesses, I just think that it is an example of how firms can get around artificial constraints. Firms are really creative in the way that they can rearrange their operations and get around these constraints. This is one example of that. Based on some interviews with firms, I suspect that even firms who haven’t offshored yet are now considering doing so as H-1B policies get more and more restrictive. And under the current administration they have gotten much more restrictive.

Knowledge@Wharton: What is next for this research?

Glennon: I would really like to explore some of the other strategies that firms use in response to skilled immigration restrictions. This is one of many possible responses. For example, domestic firms don’t have this option, so what do they do? Perhaps they form more partnerships with universities or nonprofits because they don’t have the same H-1B restrictions. Perhaps they shift into more capital-intensive industries because they can’t get the labor they need. Perhaps they contract out to a foreign firm. Perhaps they fail. There are a lot of alternative strategies that firms could be using in response to these skilled immigration restrictions, and I would really like to build out that full picture and understand the full range of responses that firms can have.

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"How Restricting Skilled Immigration Could Spur Offshoring." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 23 September, 2019. Web. 17 October, 2019 <https://knowledge.wharton.upenn.edu/article/high-skilled-immigration-off-shoring/>

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accessed October 17, 2019. https://knowledge.wharton.upenn.edu/article/high-skilled-immigration-off-shoring/


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