Do Foreign Experts Increase the Productivity of Domestic Firms?

• Author: Jakob Roland Munch,Nikolaj Malchow‐Møller,Jan Rose Skaksen
• DOI: http://doi.org/10.1111/sjoe.12286
• Date: 01 April 2019
• Published date: 01 April 2019

Scand. J. of Economics 121(2), 517–546, 2019

DOI: 10.1111/sjoe.12286

Do Foreign Experts Increase the

Productivity of Domestic Firms?*

Nikolaj Malchow-Møller

University of Southern Denmark, DK-5230 Odense M, Denmark

nmm@sam.sdu.dk

Jakob Roland Munch

University of Copenhagen, DK-1017 Copenhagen K, Denmark

jakob.roland.munch@econ.ku.dk

Jan Rose Skaksen

ROCKWOOL FoundationResearch Unit, DK-1307 Copenhagen K, Denmark

jrs@rff.dk

Abstract

While most countries welcome (and some even subsidize) high-skilled immigrants, there is very

limited evidence of their importance for domestic firms. To guide our empirical analysis, we

first set up a simple theoretical model to show how foreign experts can affect the productivity

and wages of domestic firms. Using matched worker–firm data from Denmark and a matching

difference-in-differences approach, we then find that firms that hire foreign experts instead of

domestic experts become more productive, in the sense that they payhigher wages to high-skilled

co-workers.

Keywords: immigrants; matching difference-in-differences; STEM workers

JEL classification:F22; J24; J31; J61; L2

I. Introduction

It has long been recognized that certain types of workers, notably

science, technology, engineering, and mathematics (STEM) workers, can

be particularly important for productivity growth (e.g., Jones, 1995, 2002).

Furthermore, immigration can be an important source of STEM workers in

an economy. For example, Peri et al. (2015) have found that the inflow of

foreign STEM workers explains between 30 and 50 percent of the aggregate

productivity growth in the United States between 1990 and 2010.

*Financial support from the Rockwool Foundation and the NORFACE research program is

gratefully acknowledged. We thank participants at the conference on International Trade: Firms

and Workersheld at the University of Nottingham, the EALE/SOLE University College London,

the ESWC Shanghai, the ESPE Hangzhou, and seminar participants at the Universities ofAarhus

and Copenhagen for helpful comments.

C

The editors of The Scandinavian Journal of Economics 2017.

518 Do foreign experts increase the productivity of domestic firms?

Similar to the literature on STEM workers, in this paper, we start from

the observation that certain types of workers can be particularly important

for productivity growth. However, in contrast to the literature on STEM

workers, our focus is on whether foreign experts are even more important

for productivity growth than domestic experts. Furthermore, we do not

restrict our attention to STEM workers, but we consider a broader group

of workers with potential expert skills, including managerial skills at the

highest level.

The importance of foreign experts for the performance of firms

is also interesting from a policy point of view. Despite widespread

restrictions on international migration of labor, most countries welcome

highly qualified immigrants. Some countries even subsidize immigrants if

their qualifications are sufficiently high. For example, in Denmark, Italy,

the Netherlands, Spain, and Sweden, foreign workers with sufficiently high

qualifications are offered special tax breaks. Therefore, it is both important

and relevant to investigate whether these experts are indeed valuable for

the host countries.

In our empirical analysis, we employ a matched worker–firm

longitudinal dataset, which covers the total Danish population of workers

and private firms for the years 1995–2007. We define foreign experts as

employees eligible for reduced taxation under the Danish “Tax scheme for

foreign researchers and key employees”. Using a matching difference-in-

differences (MDID) approach, we find evidence that firms become more

productive when hiring foreign experts compared to firms that hire only

domestic experts.

Lazear (1999) has previously argued that a firm can become more

productive when using foreign labor if the foreign workers have information

that is complementary to that of the native workers. For this to be the case,

the information sets of foreign and native workers should be disjoint but

relevant to each other. This information complementarity might play a role

for all types of labor, but it is likely to be most important among high-

skilled workers where specialized knowledge plays an important role. In

this paper, therefore, we restrict attention to a relatively small group of

immigrant workers: the foreign experts.

In the literature, there are several models that feature strong

complementarities between different types of inputs. One is the so-called

O-Ring theory by Kremer (1993), where the productivity of workers in

some tasks increases greatly with the productivity of workers in other tasks.

With the purpose of guiding our subsequent empirical analysis, we extend

the O-Ring theory to the case of expert workers, using the ideas from

Lazear (1999). Our model shows how a limited number of foreign experts

in a firm can have a profound impact on the realized total factor productivity

(TFP) and profitability of the firm. Furthermore, if wages are firm-specific

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The editors of The Scandinavian Journal of Economics 2017.