Authors: Nikolaj Malchow-Møller (University of Southern Denmark), Jakob R. Munch (University of Copenhagen), and Jan Rose Skaksen (Copenhagen Business School)
Publisher: IZA (Institute for the Study of Labor) Discussion Paper No. 6001
Date Published: October 2011
Hiring even a few highly trained and talented foreigners can significantly increase a firm’s productivity and export activities, this paper finds, giving such firms an edge over local rivals and helping them level the playing field in their competition with multinationals.
Despite general barriers to foreign labor, many countries welcome highly qualified immigrants. Firms face substantial costs in finding the right foreign workers and integrating them into their culture. But, the authors reason, if the foreign workers’ knowledge of international markets can complement the contributions of native employees, the overall performance of the firm should improve. And this improved productivity, in the form of higher profits, should, over time, be reflected in higher wages — especially for the highly skilled employees who are the hardest to replace and most responsible for the improvements.
This Denmark-based study — among the first to assess the impact on firm performance of so-called foreign experts, that is, key employees such as managers and engineers — finds that those assumptions are valid. Even in a high-income, well-developed economy like Denmark’s, definite gains result from bringing in foreign experts: Productivity, exports, and wages are all likely to go up, the authors conclude.
The researchers analyzed data on the total Danish population of workers and firms for the years 1995 through 2007. They integrated demographic information — including education and wages for employees as well as sales and export volumes for firms — from several government agencies. Denmark serves as a good case study because it is one of a number of countries to offer special tax breaks to foreign workers with sufficiently high qualifications. (Among other things, such workers needed to have a monthly salary in 2007 above €8,800 [about US$12,000] to qualify for the breaks.) Italy, Spain, Sweden, and the Netherlands have similar programs.
The main suppliers of foreign experts to Danish companies are its neighbors, Germany and Sweden, followed by the United Kingdom and the United States. A relatively low number of employees in Denmark qualify as foreign experts — there were just 1,700 in 2007. Most are hired in the service sector; only 25 percent are employed in manufacturing. Fewer than 600 of the approximately 20,000 firms in the study, or less than 3 percent, employed foreign experts in 2007.
The researchers compared the positions held by foreign and domestic experts, the latter group defined as native employees who earn more than the level required of foreign workers to qualify for the tax breaks. Not surprisingly, both foreign and domestic experts are employed in advanced managerial, professional, and technical positions — however, foreign experts are slightly more concentrated in the top spots, consistent with their earning slightly higher wages than domestic experts despite similarities in age and gender.
Because the data set doesn’t contain numbers on capital that would allow the researchers to calculate total productivity at the firm level, they focused instead on wages as an indirect way of measuring productivity. One advantage of this approach, they write, is that wages are measured with much more precision.
After controlling for factors such as firm size, industry differences, and external events that affect productivity, the researchers compared the change in performance between firms that hire foreign experts and those that don’t. They found that the presence of foreign experts tends to track with an increase in the wages of highly skilled domestic workers but has a negligible impact on low-skilled employees. This jibes with the idea that extra profits are more likely to be diverted to the group of highly skilled workers who are hardest to replace and who have the strongest working relationships with their similarly skilled foreign counterparts.
“As we find that foreign experts actually increase firm-specific wages, it is a strong indication that these experts also affect the underlying productivity of the firms,” the authors write.
The average wage levels in these firms “increase significantly by 2.4 percent in the third year following the employment of a foreign expert,” the authors write. The percentage of medium-skilled workers declines as the share of higher-skilled workers increases, reflecting a fundamental shift in the composition of a firm’s workforce. Overall, employment tends to decrease and sales to increase after firms hire a foreign expert, a combination of effects that also suggests productivity is boosted.
A major reason firms may benefit from hiring foreign workers is their special knowledge about international markets. This is confirmed in the study, which found that the hiring of foreign experts raises the probability that a firm will begin to export goods or services in the year following the hiring by 2.7 percentage points. For those firms that are already in the export market, the level and intensity of exporting activities increases by about 1.5 percent in each of the three years following a foreign expert’s arrival.
Hiring even a limited number of foreign experts may have a significant impact on the productivity and profitability of a firm. Given their special knowledge of foreign markets, these highly skilled employees also lead their companies to export more.