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Give Me Your Tired, Your Poor, Your Entrepreneurs

Wednesday, March 17, 2010

Immigrant rates of self-employment vary widely across countries of origin.

Some people argue that immigrants to the United States are more likely than the native-born to become entrepreneurs, and that to enhance entrepreneurial activity America needs to bring in more immigrants. For instance, Jonathan Ortmans, president of the Public Forum Institute, wrote on the Kauffman Foundation blog, “Evidence shows that immigrants start a disproportionately high number of new U.S. firms.”

Others counter that the data don’t show that pattern and that we should not change public policy toward immigration on the basis of these data.

It turns out that who is more likely to be an entrepreneur—the foreign- or native-born—depends a lot on what you measure and when you look at it.

Immigrants are more likely to start a business and stop being entrepreneurs.

According to data from the 2008 Global Entrepreneur Monitor Report (GEM) for the United States, when entrepreneurship is measured as starting a new business, immigrants appear more entrepreneurial than the native-born. But when entrepreneurship is measured as owning a more mature business, the native-born score higher. The GEM figures show that immigrants have a slightly higher rate of “total entrepreneurial activity”—a composite of the share of the population that is either “actively planning a new venture” or is an owner-manager of a business of between 4 and 42 months old—than the native-born (9.43 versus 8.81 percent). However, the native-born have a higher “percentage of individuals in a population who have set up businesses that they continue to own and manage and who have paid wages or salaries for more than 42 months”: 7.90 for the native-born as compared to 6.74 for immigrants.

This difference might exist because immigrants are more likely to start a business and stop being entrepreneurs, resulting in a smaller percentage of them who are running businesses that are more than 42 months old. When the GEM researchers measured the percentage of the population “selling, shutting down or otherwise discontinuing an owner-management relationship with the business,” they found that immigrants are more likely to discontinue a business than the native-born (5.12 versus 4.00 percent).

The data from two major government agencies tasked with measuring the labor force show differences in who is more entrepreneurial, immigrants or the native-born.

Economist Rob Fairlie of the University of California at Santa Cruz finds similar patterns, writing “immigrants move into and out of business ownership at much higher rates than nonimmigrants.” After taking into account the effect of other factors, he estimates that immigrants are “30 percent more likely to start businesses each month than are nonimmigrants.”

The kind of self-employment you measure also matters in figuring out whether immigrants or the native-born are more entrepreneurial. According to data from the Bureau of Labor Statistics (BLS), in 2009, immigrants had a higher unincorporated self-employment rate than the native-born (7.4 percent versus 7.0 percent), but incorporated self-employment rates were higher for the native-born than for immigrants, 3.9 percent versus 3.8 percent.

The differences in who is more entrepreneurial don’t just result from the difference in measuring, starting, and owning a business or whether you are thinking about incorporated or unincorporated self-employment. They also depend on whose data you examine. For instance, Fairlie reported the 2000 census shows that “9.7 percent of immigrants own a business as compared to 9.5 percent of the U.S.-born work force.” Yet in that very same year, the BLS data show that the unincorporated self-employment rate of immigrants was 6.6 percent, while that of the native-born was 7.6 percent. So the data from two major government agencies tasked with measuring the labor force show differences in who is more entrepreneurial, immigrants or the native-born, at least in some years.

In 2009, immigrants had a higher unincorporated self-employment rate than the native-born, but incorporated self-employment rates were higher for the native-born than for immigrants.

Moreover, the numbers from 2000 may not even be relevant anymore. Back when I was researching my book Illusions of Entrepreneurship in 2005 and 2006, the most up-to-date review of self-employment was an article by BLS researcher Steve Hipple. His review showed clearly that the self-employment rate was higher for the native-born. He writes that in 2003 “the self-employment rate for U.S. citizens was 7.6 percent, compared with 6.7 percent for the foreign-born.”

But those numbers aren’t true anymore. In the figure below, I chart the immigrant and native-born unincorporated self-employment rate. As you can see from the chart, the immigrant self-employment rate became higher than the native-born rate in 2007.

Shane A

Moreover, this change isn’t an artifact of including agriculture in the measure of unincorporated self-employment. Back in 2003, non-agricultural self-employment rates were 6.9 percent for native-born and 6.7 percent for foreign-born, but in 2009, the numbers were 6.5 percent for native-born and 7.4 percent for foreign-born.

Now let me add another wrinkle that comes from considering both the effect of time and the type of self-employment. The figure below shows the incorporated self-employment rate for immigrants and the native-born from 1996 through 2009. The native-born incorporated self-employment rate went from being lower than the immigrant self-employment rate from 1996–1999 to being higher from 2000–2009. By contrast, the figure above showed that the immigrant unincorporated self-employment rate went from being lower than the native-born unincorporated self-employment rate from 1996-2005 to being higher from 2007-2009.

Shane B

There are two other reasons to think that differences between immigrants and native-born people in their tendency to be entrepreneurs shouldn’t form the basis for government policy towards entrepreneurship. The first is the size of the difference between the two groups, which the GEM data indicate is small. The higher rate for immigrants in the process of starting a business or who have a young business translates to only a few more entrepreneurs.

Differences between immigrants and native-born people in their tendency to be entrepreneurs shouldn’t form the basis for government policy towards entrepreneurship or immigration.

Finally, the differences in self-employment rates of immigrants across countries of origin strongly suggest that being an immigrant per se is not what accounts for the differences in rates of self-employment between immigrants and the native-born. BLS data show that the total self-employment rate (incorporated plus unincorporated) for immigrants was 11.4 percent in 2008. But the bottom eight countries of origin (Northern Ireland, Azerbaijan, Antigua and Barbuda, St. Kitts-Nevis, St. Vincent and the Grenadines, Algeria, Cameroon, and Samoa) had self-employment rates of zero, and the next two, Latvia and Tanzania, were only 1 percent and 1.5 percent, respectively. By contrast, the top ten countries of origin (Bermuda, Kuwait, Cyprus, St. Lucia, New Zealand, South Korea, Slovakia, Greece, Uruguay, and Georgia) all had self-employment rates exceeding 30 percent.

If we look only at incorporated self-employment, we see the same kind of variance. The average rate of incorporated self-employment for immigrants in 2008 was 3.9 percent. But immigrants from 24 countries (Northern Ireland, Azerbaijan, St. Kitts-Nevis, St. Vincent and the Grenadines, Algeria, Cameroon, Samoa, Latvia, Tanzania, Tonga, Somalia, Sri Lanka, Bosnia and Herzegovina, Bahamas, Kosovo, Fiji, Uzbekistan, Macedonia, Azores, Grenada, Paraguay, Finland, and Bermuda) had a zero rate of incorporated self-employment. By contrast, the top ten countries (New Zealand, Greece, Kuwait, Croatia, Zimbabwe, St. Lucia, Iran, Syria, Georgia, and Eritrea) in terms of incorporated self-employment had rates ranging from 14.0 to 28.6 percent.

In 2009, immigrants had a higher unincorporated self-employment rate than the native-born, but incorporated self-employment rates were higher for the native-born than for immigrants.

This wide variance in self-employment rates across countries suggests that the argument that immigrants have a unifying set of characteristics that make them more likely to be entrepreneurs than the native-born—perhaps the work ethic, gumption, or willingness to take risks ascribed to them by many authors—is flawed. Immigrant rates of self-employment are too different across countries of origin for the explanation for any differences between immigrant and native-born self-employment to be the result of “the immigrant experience.”

While we might benefit from policies to make it easier for certain immigrants to start businesses in this country, all of this suggests that the differences in entrepreneurial activity between immigrants and the native-born population shouldn’t be the basis for justifying public policy toward entrepreneurship or immigration.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University. The author recently released a book from Oxford University Press: Born Entrepreneurs, Born Leaders: How Your Genes Affect Your Work Life.

FURTHER READING: Shane has also written “The Genetics of Job Choice,” “From Start-up to Stop: The Recession and Entrepreneurship,” and “Will Small Businesses Stop Offering Health Insurance If Reform Passes?” The American Enterprise Institute’s Alan Viard and Amy Roden discuss “Big Business: The Other Engine of Economic Growth.” Watch the event “Is Capitalism Worth Saving?”

Image by Rob Green/Bergman Group.

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