The Export Promoting Effect of Emigration: Evidence from Denmark

• Date: 01 November 2014
• DOI: http://doi.org/10.1111/rode.12112
• Published date: 01 November 2014
• Author: Sanne Hiller

The Export Promoting Effect of Emigration:

Evidence from Denmark

Sanne Hiller*

Abstract

Ethnic networks exhibit the potential to lower barriers to trade. The paper identifies the export-promoting

effect of emigration on the firm-level using Danish data for the year 2001. Accounting for taste similarity,

self-selection and unobserved heterogeneity, three main findings are established. First, the elasticity of

manufacturing exports to emigration is robust and of similar size as the effect of immigration. Secondly,

only immigration encourages market entry but not emigration, suggesting that variable cost reductions and

demand for home-country products are the driving force of emigrant network effects. Thirdly, benefits

from emigration accrue exclusively to low-productivity firms.

1. Motivation

Denmark is confronted with a small but persistent outflow of high-skilled workers.

This phenomenon is perceived as harmful owing to a general shortage in supply of

high-skilled labor, a lack of high-skilled immigration of similar size and due to compo-

sition effects on the labor market in particular since it is taking place simultaneously

with low-skilled immigration. As an Organisation for Economic Co-operation and

Development (OECD) report calls it: Denmark is subject to a “clear brain drain”

(OECD, 2008, p. 40). Potentially emigration may compensate the brain loss by easing

export activities on international markets. A longstanding empirical literature pio-

neered by Gould (1994) has assessed the nexus between trade and migration, thereby

establishing a positive link. The empirical literature has been analyzed in a meta-

analysis by Genc et al. (2011). Some additional studies include Peri and Requena

(2010), Felbermayr and Jung (2009), Bandyopadhyay et al. (2008), White (2007),

Combes et al. (2005), Girma and Yu (2002). In their influential paper, Rauch and

Trindade (2002) study the trade promoting effect of Chinese networks. This study has

been subsequently extended by Felbermayr et al. (2010) to cover multiple ethnic

networks.

To our best knowledge, this paper pioneers the use of firm-level data with export

destinations to assess whether expatriate communities boost exports. From an inter-

national perspective, the case of Denmark is of particular interest, because the Danish

network has been found to exhibit the largest trade promoting effect among

European countries (Felbermayr et al., 2010). We contribute to the existing literat-

ure in three regards. First, we provide reliable estimates of the trade response to

* Hiller: Ruhr-University Bochum, Universitätsstraße 150, 44801 Bochum, Germany and Aarhus Univer-

sity. Tel: +49 (0) 234 32 28829; E-mail: sanne.hiller@rub.de. The author wishes to thank an anonymous

referee, Tor Eriksson, Gabriel Felbermayr, Holger Görg, Christian Gormsen, Benjamin Jung, Robinson

Kruse, James Markusen, Philipp Meinen, Nina Neubecker, Philipp Schröder, Valdemar Smith and Farid

Toubal for helpful suggestions, and Christian Bjørnskov for data provision. Financial support from the

Solar foundation and hospitality of the Rotman School of Management, University of Toronto, is gratefully

acknowledged.

Review of Development Economics, 18(4), 693–708, 2014

DOI:10.1111/rode.12112

© 2014 John Wiley & Sons Ltd

international labor movements. The reliability stems from exclusion of confounding

factors unobserved at higher levels of aggregation, like unobserved heterogeneity on

the firm-level and self-selection into exporting. Secondly, this paper is among the pio-

neers of papers that have independently emerged assessing the trade–migration nexus

at the firm-level (Hatzigeorgiou and Lodefalk, 2011; Koenig, 2009). We use publicly

available migration data that is internationally comparable to encourage replication

with other firm-level datasets. Third, we provide new insights on the relative impor-

tance of emigrant and immigrant networks and allow for insights whether they matter

differently for export entry or volume, or both. This in turn opens up for conclusions

about the channels of influence of ethnic networks.

Earlier theoretical and empirical literature has elaborated ample channels through

which international labor movements can affect trade. First, emigrants may be prone

to consume home country products as argued by Head and Ries (1998) or to use

intermediate inputs which originate from their home country. Secondly, they may be

more aware of business opportunities owing to preferential information on their

home market, thereby their presence abroad may alleviate matching between buyers

and sellers as emphasized by Gould (1994) and Rauch and Casella (2002). In the same

spirit, they could lower marketing cost in the foreign country, because lower-cost

communication within the expatriate community abroad could lead to easier access to

more consumers along the lines of Arkolakis (2010). Third, they may provide trust

and confidence in international transactions in an environment that is characterized

by incomplete contracts owing to their ability to sanction opportunistic behavior

(Greif, 1989; Greif, 1993). Rauch (2001) provides a comprehensive review on the lit-

erature on networks and trade. On the contrary, the relation between the labor

outflow and trade may also be substitutional rather than complementary. If emigrants

carry technological knowledge and specific working skills abroad, where they enter

the labor force or engage in entrepreneurial activities, they may modify the structure

of production towards a substitution of previously imported goods and thereby

reduce exports.

Guided by theoretical work on the determinants of exporting (Melitz, 2003;

Jørgensen and Schröder, 2008), we parsimoniously control for export determinants

other than emigration and establish a robust effect of emigration on Danish firm-level

exports. Thus, we confirm the earlier finding that migration fosters trade on the basis

of a micro-level data set. In some more detail, we find that a 10% increase in the emi-

grant stock increases Danish manufacturing exports to this country by 1.16%. This

effect coexists with the export promoting effect of immigration with an elasticity of

0.670%. Importantly, this emigration effect stems from an estimation that explicitly

models similarity between Denmark and the country of destination by including

measures of generalized trust, importance of religion, communist past and the politi-

cal system. Moreover, we find that only firms with low productivity benefit from emi-

grant networks.

2. Descriptive Statistics

Our data set combines Danish firm-level data with macroeconomic variables in order

to assess how emigration affects manufacturing exports. The availability of emigrant

stock data allows a cross-sectional analysis for the year 2001.1The emigrant stock is

defined by the foreign-born principle from the perspective of the receiving country,

i.e. every person who was born in Denmark and resides permanently in the new host

country counts as a Danish emigrant (Parsons et al., 2007). This concept thus includes

694 Sanne Hiller

© 2014 John Wiley & Sons Ltd