Vietnamese manicurists, Korean dry cleaners, Haitian cab drivers, Gujarati motel owners. Anyone who lives in an American city can see how immigrants tend to cluster in industries along ethnic lines. Is this because they are forced to by circumstance or because they want to? And how does this clustering affect the American economy as a whole?
Harvard Business School’s William R. Kerr sets out to explore those questions, and their implications for US immigration policy, in a new working paper, Social Networks, Ethnicity, and Entrepreneurship, published through the National Bureau of Economic Research. Kerr is the MBA Class of 1975 Professor of Entrepreneurial Management.
“If your group is concentrated, you are making an extra premium over what others in the industry are making”
“Every city has a taxicab industry dominated by one ethnic group,” says Kerr, who wrote the paper with Martin Mandorff, an economist at the Swedish Competition Authority. “But there are very few facts or details to help policymakers and business leaders understand why this occurs—or whether immigrants start more businesses or create more jobs than other entrepreneurs.”
Among the possible reasons for these clusters is the idea that immigrants could be forced into them by discrimination or high barriers to enter other fields. “Many industries require certain standards be passed or degrees from accredited schools, which can be difficult for an immigrant to satisfy,” Kerr says.
On the other hand, immigrants could be clustering in certain sectors because they have a competitive advantage over native-born citizens, either by possessing special skills or by having supportive social networks in their ethnic groups that can help them navigate questions of regulations and business strategy.
Immigrants choose to specialize because of the advantage they acquire through their social networks. ©iStock/vadimguzhva
“Many immigrant groups spend a lot of time with other members of their own ethnic community,” says Kerr, who knows this firsthand—his wife is Finnish and belongs to an active expat community. “Most of my kids’ playmates are Finnish, and they have a Saturday morning school where they learn the Finnish language,” he says. “There are probably 8 to 10 organizations catering to the Finnish community in Boston.”
All that socialization can give immigrants opportunities to compare notes and ask questions on the business problems that affect entrepreneurs. “They can share insights about customer trends and help find workers to hire,” says Kerr. “They can say, ‘My convenience store is over here, and your convenience store is over there, so help me understand where you put the Twinkies.’”
DOES SOCIALIZATION LEAD TO CLUSTERING?
In order to get a handle on how much this socialization leads to clustering, Kerr and Mandorff studied US census data on immigrant groups, using the degree of intermarriage within each group as a proxy for social concentration. Canadians living in America, for example, might be as likely to marry a natural-born citizen as a fellow expat. Other ethnic groups, such as Yemenis, Punjabis, and Bangladeshis, however, have more than an 80 percent chance of marrying within their own groups. For Eritreans, the rate is basically 100 percent.
The researchers then cross-referenced this information with employment data for the largest industry clusters within each ethnic group—for example, grocery stores for Yemenis, gas stations for Punjabis, and taxicabs for Bangladeshis and Eritreans. They found that the smallest and most concentrated groups were 2.5 times more likely to cluster in the same industries. That data, however, doesn’t necessarily explain why groups are clustering—whether they are forced into specialized industries through lack of opportunity or pulled in by choice through social ties. To get at those questions, Kerr and Mandorff compared the earnings of the immigrant groups. They found that for each ethnic group’s specialized industry, every 1 percent additional concentration translated into a 0.6 percent increase in total earnings.
That provides evidence that far from clustering out of desperation or discrimination, immigrants are choosing to specialize because of the advantage they are able to acquire through their social networks.
“If your group is concentrated, you are making an extra premium over what others in the industry are making, and over what other broadly self-employed people are making,” says Kerr. “This isn’t a case of Americans disliking Yemenis and forcing them into particular industries. This is a situation in which the more we find Yemenis working together in a particular sector, the more they are earning overall.”
ENGINES OF ENTREPRENEURSHIP
Their findings support the idea of immigrants as an engine of entrepreneurship, with special advantages for excelling in certain industries.
“It does generally cast a favorable light on a more accommodating immigration policy, showing that the US economy derives extra benefits from this,” says Kerr, noting that future research building on this framework could help economists predict the effects of changes in immigration of specific ethnic groups.
“This notion that if you opened up the immigration spigot then entrepreneurship would happen everywhere is probably not true,” he says. “But if you were to adjust immigration policy and groups started to flow in, the composition of these inflows would show what sectors you might anticipate them impacting, and where a large part of this entrepreneurial activity would be happening.”