Why Might Innovative Immigrant Entrepreneurs Choose Developed Countries?

A Comparative Liberty-Dignity Framework

If innovative immigrant entrepreneurship is the future, identifying precisely what types of policies or institutional changes are neces­sary to attract creative immigrant entrepreneurs and capture the gains from foreign-born entrepreneurial talent is critical.

I— the Innovation function responsible for modern economic

growth, going back to the Industrial Revolution to recent times;

D— the Dignity accorded to innovators by society; D is a factor for the prevalent culture toward productive entrepreneurs, particu­larly innovators;

B— the Liberty of innovators; B stands for the liberties enjoyed by

the productive entrepreneurs in society, a factor also discussed by Adam Smith, in The Wealth of Nations (Smith 2008 [1776]), as the institutional context supporting the invisible hand effect of open and competitive markets;

R— the rent or profit for innovative activities.

The innovation function in McCloskey’s view must multiply any conven­tional neoclassical production function, F(K, eL), where K is physical capital or land; L is human capital or labor multiplied by a coefficient for the level of education and skills of the workers in the economy. McCloskey argues that for a society to achieve the highest rates of economic growth, what she calls “modern growth,” its individuals must enjoy not only the highest degree of economic freedom, or liberty, but

also the highest degree of social honor, or dignity. Modest and prominent entrepreneurs alike must be culturally and socially acknowledged for their positive contribution to the good of society as a whole. Only then may the full productive and creative capacity of society become activated, and the highest growth rates and increases in wellbeing be achieved (McCloskey 2011).

Based on McCloskey’s modern growth model presented above, I iden­tify two composite institutional dimensions at play for understanding the flows of immigrant entrepreneurship:

1. The prevailing culture, comprised of social norms, morals, and informal institutions for or against doing innovative business (i.e., the informal rules of the game, morals, and attitudes—including social praise, recognition, and admiration—toward entrepreneurs and innovators). This is where I derive McCloskey’s “D” factor from the “Innovator’s Dignity.”

2. The prevailing legal and economic-financial institutions for or against doing innovative business (i.e., the formal rules of the game about entrepreneurship)—this is where I derive McCloskey’s “B” factor, “Economic LiBerty.”

Under a comparative-institutional context, potential immigrant entrepreneurs must operate and derive their motivation primarily from weighing the institutional dimensions 1 and 2 above for both the country of origin and the potential country of destination. They must cross-examine the differences in expected long-term payoffs associated with the differences in the qualities of institutional climates specific to their countries of interest.

This chapter's conjecture is that the liberty-dignity framework presented above can explain the allocation of the global supply of innova­tive entrepreneurs across countries. Figure 6.1 illustrates this conjecture with a preliminary mapping of the expected directional flows of creative immigrant entrepreneurs on a global scale according to the framework. The direction of the flows of innovative immigrant entrepreneurs is likely from countries with lower institutional quality to countries with higher institutional quality, and from cultures with low social praise and dignity for entrepreneurs to cultures with high social praise and dignity conferred to entrepreneurs.

Today, more than ever, because of globalization and the marked decreases in the virtual distance between nations and their entrepreneurial environments, creative individuals face stronger incentives to move toward places that may foster more substantial payoffs to their talent in

Fig. 6.1 A two-dimensional representation of the direction of the flows of innovative immigrant entrepreneurs based on our Comparative Liberty-Dignity Framework

both monetary form and social form (see the High Dignity and High Liberty quadrant in Fig. 6.1).^[36]

Empirical Illustrations of the Comparative Liberty-Dignity Framework

This section develops an analysis of the strength of the link between the contexts of any two countries (one of origin, and one of destina­tion) and the direction of the potential flows of innovative immigrant entrepreneurs, with empirical illustrations of the comparative Liberty­Dignity conjecture introduced above.

Data on Net Migration and the Liberty of Entrepreneurs

Liberty in this chapter’s comparative-institutional framework is measured by the degree of economic freedom enjoyed by individuals in a country. My argument is that the quality of economic institutions, economic liberty, matters more to innovative immigrant entrepreneurs than to the general pool of immigrants. The reality, at this time, is that measuring the flows of immigrant entrepreneurs is difficult, and not being able to obtain the precise data for the flows of creative immigrant entrepreneurs is a limi­tation of the narrative in this chapter. As an approximate solution, using Baumol’s observation that the supply of entrepreneurship is constant, I assume that, similarly, the supply of immigrant entrepreneurship is constant, as is the latent supply of innovative immigrant entrepreneurs. What varies are the contexts in terms of institutional and cultural envi­ronments across time and place. I assume, therefore, that the flow of innovative immigrant entrepreneurs is approximately proportional to the flow of immigrant entrepreneurs, which is in turn proportional to the flow of immigrants.^[37] Thus, for empirical illustration, I will use net migra­tion across countries as a proxy for the relative proportion of the flows of innovative immigrant entrepreneurs in a comparative framework.

The World Bank^[38] defines net migration as the total number of immi­grants minus the total number of emigrants, including both citizens and noncitizens. Table 6.1 presents net migration data in both absolute and relative terms as well as data on the quality of economic institutions, as measured by the Economic Freedom of the World Index (EFW), for the top fifteen and bottom fifteen countries over the 2010-2015 period.

Panel A in Table 6.1 reveals that over the 2010-2015 period, the United States was, by far, the developed country with the highest total flow of immigrants, followed by Germany, Saudi Arabia, Turkey, and Canada. In relative terms, measured as net number of migrants per 1000 people in the countr y of destination, and excluding refugee havens like Jordan, the United States is surpassed by the oil-rich Persian Gulf coun­tries, Qatar, Saudi Arabia, the United Arab Emirates, as well as Switzer­land, Australia, Canada, Germany, United Kingdom, and even Malaysia. At the opposite end, Panel B reveals the countries with negative net migration rates, where many more people are exiting than entering. Here, again, excluding countries affected by recent military conflict or political unrest, like Libya, El Salvador, and Georgia, we find Romania, Spain, Morocco, and Peru receiving the fewest immigrants net of emigrants. What prompted Romanians, for instance, to leave their home countries? What attracts migrants toward countries like the United States, Switzer­land, and Canada? As economic theory and empirical studies suggest, and by this chapter's framework, economic institutions and culture play a

Table 6.1 Net migration, population, net migration rate per 1000 people,

Panel B: Bottom 15 countries

Source: Calculations based on net migration data from the 2019 World Development Indicators (The World Bank 2019).

Economic Freedom of the World Index (EFW) averaged over the previous 30 years (ranges from 0 = Economically Unfree to 10 = Economically Free)

Fig. 6.2 Net migration rates and quality of economic institutions across top 15 and bottom 15 countries by net migration flows (2010-2015) (Source Chart and calculations are based on data from The World Bank’s World Development Indicators [The World Bank 2019], and Hugo Montesinos [2019])

fundamental role in motivating an immigrant entrepreneur’s decision to choose country A over country B.

As a measure of the quality of the economic institutions or the liberty enjoyed by entrepreneurs within a national context, I use the Economic Freedom of the World Index (EFW) published by the Fraser Institute (Gwartney et al. 2016). This index ranges from 0 (least free) to 10 (most free), and includes 42 indicators grouped in 5 main areas: (1) Government Size, (2) Legal System and Protection of Property Rights, (3) Access to Sound Money, (4) Freedom to Trade Internationally, and (5) Regulation of Credit, Labor, and Business. If higher degrees of liberty or economic freedom in a destination country are to foster immi­grant entrepreneurship, then we should observe a positive correlation between net migration rates with the EFW rankings in Table 6.1. The data presented in Table 6.1 and illustrated in Fig. 6.2 indeed support the hypothesized positive association between net migration rates, and by inference net immigrant entrepreneurship rates, and the quality of economic institutions or the degree of liberty in the country of desti­nation. Countries with better quality economic institutions are associated with higher rates of net migration. By inference, countries with better quality institutions attract more innovative immigrant entrepreneurs. Countries that rank high in terms of their 2015 EFW index (e.g., Switzer­land, the United States, the United Kingdom, Australia, and Canada, as shown in Table 6.1) also rank high in terms of their 2010-2015 net migration rates. Similarly, countries that rank low in terms of their 2015 EFW index (e.g., Romania, Morocco, India, Mexico, and the Philippines) tend to rank low in terms of their net migration rates (i.e., negative net migration rates). See Table 6.1 and Fig. 6.2.

Most of the countries that have a high quality of economic insti­tutions are typically OECD, developed countries, or economies that have recently undergone significant liberal economic reforms. Overall, I conclude that liberty seems to matter to immigrants because several of the countries with the highest rates of net migration are also among the coun­tries with the highest degree of economic freedom. Creative immigrant entrepreneurs, as a subset of the global supply of immigrants, are indi­viduals for whom the quality economic institutions should matter even more.

Data on Net Migration and Dignity for Entrepreneurs

Dignity, in the comparative-institutional framework of this chapter, repre­sents the degree of cultural support in the form of social praise and acknowledgment enjoyed by entrepreneurs in a country. My argument is that the quality of the cultural and social-moral norms and attitudes toward entrepreneurship and innovations matters to innovative immigrant entrepreneurs. Dignity or social praise matters to creative entrepreneurs more than it does to the general pool of entrepreneurs and immi­grants. To illustrate the dignity of entrepreneurs, I consider five different measures of culture and social-moral norms toward entrepreneurship and innovation in society. Four measures come from the Global Entrepreneur­ship Monitor's 2017/2018 Annual Report (Global Entrepreneurship Monitor 2018), while the fifth measure comes from Hofstede's study on national cultural dimensions (Hofstede 2001).

Do countries experiencing the most net flows of immigrants also have societies with high praise and enthusiasm for entrepreneurs and entrepreneurship as a career choice? Conversely, do countries experiencing the least flows of net immigrants also have societies with low praise and enthusiasm for entrepreneurs and entrepreneurship as a career choice? To answer these questions, I consider the following variables from the Global Entrepreneurship Monitor (GEM):

1. High Status to Successful Entrepreneurs Rate, measuring “the percentage of 18-64 years old in the population who agree with the statement that in their country, successful entrepreneurs receive a high status”;

2. Entrepreneurship as a Good Career Choice Rate, measuring “the percentage of 18-64 years old in the population who agree with the statement that in their country, most people consider starting a business as a desirable career choice”;

3. Innovation, measuring “the percentage of those involved in Total Entrepreneurial Activity who indicate that their product or service is new to at least some customers AND that few/no businesses offer the same product”;

4. Cultural and Social Norms Toward Entrepreneurship, measuring “the extent to which social and cultural norms encourage or allow actions leading to new business methods or activities that can potentially increase personal wealth and income.”

Table 6.2 summarizes the GEM statistics for the top 15 (panels A and C) and bottom 15 (panels B and D) countries according to the rate of population with favorable answers to the survey questions on (1) the high status to successful entrepreneurs (panels A and B) and (2) entrepreneurship as a desirable career choice (panels C and D).

Panel A of Table 6.2 includes four highest recipients of net migrants from the top 15 countries listed in Table 6.1: The United States, the United Kingdom, South Africa, and the United Arab Emirates. Panel B of Table 6.2 also includes four countries from among the 15 countries with the lowest net migration rates: Peru, India, Mexico, Spain. The differ­ences could be partially attributed to measurement error and could be better understood by investigating the meaning of the phrase “successful entrepreneurs” across societies, along with other unobserved factors.

In terms of entrepreneurship as a desirable career choice, Panel C includes three of the top 15 countries in Table 6.1: Malaysia, Saudi Arabia, and South Africa, while Panel D comprises four of the bottom 15 countries in Table 6.1: Spain, India, Mexico, and Iran.

Table 6.2 High status to successful entrepreneurs, and perception of entrepreneurship as a good career choice, top 15 and bottom 15 countries (2017)

Entrepreneurship based on GEM Survey Data, Report 2017/2018.

Table 6.3 presents data on two more GEM alternative measures rele­vant to the national culture toward entrepreneurship and innovation worth investigating: the perception of cultural and social norms, and the perception of business innovation.

Measuring the local culture toward entrepreneurship using GEM's social and cultural norms survey results, we find five of the top 15 coun­tries in Table 6.3 overlapping with the top 15 highest recipients of net migrant flows in the world (Table 6.1). We can see a similar overlap in terms of the perception of innovativeness among active businesses and net migration rates. Comparing and contrasting the bottom 15 countries in terms of social and cultural norms and innovativeness, the overlap is small.

Net Migration Rates, Economic Freedom, and Cultural Norms Toward Entrepreneurship

Mapping together the key variables examined so far can help us visu­alize if indeed the data pattern supports the liberty-dignity conjecture. To illustrate the full picture of the framework with data, Fig. 6.3 shows, in a bubble chart, the relationship between (a) net migration rates per 1000 people, (b) economic institutions, and (c) cultural and social norms toward entrepreneurship. The bubble chart is a multidimensional repre­sentation of the relationship between the three variables. The cultural and social norms are depicted on the vertical axis representing one dimension. The economic institutions are depicted on the horizontal axis repre­senting a second dimension. The net migration rate per 1000 people in a specific country is depicted by the size of the bubbles, representing yet a third dimension. Because net migration rates are negative for coun­tries with a lower number of immigrants compared to emigrants, the data was split in two: the red bubbles represent countries with positive net migration rates, while the green bubbles represent countries with negative net migration rates. To a degree, the color of the bubbles represents the fourth dimension in this chart. By recreating Fig. 6.3 in different years, one could see the evolution (or persistence) of the illustrated pattern and even visualize a fifth dimension (time). Doing so would also serve as an empirical robustness check for the liberty-dignity framework in understanding the flows of innovative immigrant entrepreneurs.

If the Liberty-Dignity conjecture is to be supported empirically, the bubble chart should illustrate patterns in favor of the critical directions

Table 6.3 Innovation, and cultural and social norms based on GEM survey data. Top 15 and bottom 15 countries (2017)

Source GEM Data (Global Entrepreneurship Monitor 2018)

Fig. 6.3 Net migration rates (2010-2015), economic freedom of the world (2016), and cultural and social norms towards entrepreneurship (2017) (Source Calculations and illustration are based on data from The World Bank [2019], The Fraser Institute [Gwartney et al. 2016], and The Global Entrepreneurship Monitor [2018])

preliminarily mapped in Fig. 6.1. Taking note of the apparent outliers, like Lebanon, a country receiving many more refugees from the coun­tries with conflict in the region, we see two clear patterns supporting the conjecture: (a) most countries with positive net migration rates (red bubbles) are located in the upper-right corner of the chart, in the High Liberty-High Dignity corner with the highest degrees of both economic freedom and socio-cultural support toward entrepreneurs; and (b) most countries with negative net migration rates (green bubbles) are located mostly closer to the lower-left corner of the chart, in the Low Liberty- Low Dignity corner, with the lowest degrees of economic freedom and low to mediocre levels of socio-cultural support for entrepreneurs. Accounting for other possible outliers, like Argentina, we could provide sensible explanations based on the country's history, macroeconomic characteristics, and events in its proximity. For example, Argentina's Gross Domestic Product per capita is relatively high compared to other coun­tries in South America. Second, Argentina continues to receive relatively high numbers of refugees, given the ongoing political and humanitarian crisis in Venezuela. Addressing other outliers would require a case by case approach, subject to future advancements of this study. Overall, the data seem to support the Liberty-Dignity conjecture of this chapter that migrant entrepreneurs, particularly innovative migrant entrepreneurs, as a subset of net migrants, are more likely to move toward destinations with high degrees of economic freedom and societal support toward of their talents, aspirations, and the novelties and opportunities they generate.

Although the patterns in the data visualized are promising, we must acknowledge the limitations and possible biases in measurements due to the differences in data sources, assumptions, and data gathering method­ologies. Further investigations are necessary to be able to derive more definitive conclusions. For example, in future advancements of the rela­tionships in this study, a way to mitigate some of the unexplained outliers would be to investigate alternative or complementary proxies for the social praise or dignity conferred to entrepreneurs in society. For example, three of Geert Hofstede's six cultural dimensions (Hofstede 2001) that may apply to entrepreneurship and innovation are (1) individualism, defined as the extent to which people feel independent, as opposed to being interdependent as members of larger wholes, (2) long-term orien­tation, dealing with change, and (3) uncertainty avoidance, defined as dealing with a society's tolerance for uncertainty and ambiguity. Similarly, instead of the EFW, the World Bank's Ease of Doing Business Index could be used as a proxy for liberty.

Despite the potential limitations, this framework could help explain the allocation of the global supply of innovative entrepreneurs of the last century (1920-2020) and help inform predictions about the flows of creative minds in the future. Given the recent transportation­communication revolution (Connors et al. 2020), the allocation of the global supply of creative entrepreneurs is expected to happen faster and more efficiently. The underlying implication of this trend is the increasing necessity of inclusive policies, institutions, and culture, to capitalize on the growth-propelling power of the most productive and innovative individuals in the world.