Innovation and Immigration: Insights from a Placement Policy

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Jahn, Vera; Steinhardt, Max Friedrich Working Paper Innovation and immigration: Insights from a placement policy Diskussionspapier, No. 164 Provided in Cooperation with: Fächergruppe Volkswirtschaftslehre, Helmut-Schmidt-Universität (HSU) Suggested Citation: Jahn, Vera; Steinhardt, Max Friedrich (2016) : Innovation and immigration: Insights from a placement policy, Diskussionspapier, No. 164, Helmut-Schmidt-Universität - Universität der Bundeswehr Hamburg, Fächergruppe Volkswirtschaftslehre, Hamburg This Version is available at: http://hdl.handle.net/10419/146084 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Diskussionspapierreihe Working Paper Series INNOVATION AND IMMIGRATION – INSIGHTS FROM A PLACEMENT POLICY VERA JAHN MAX FRIEDRICH STEINHARDT Nr./ No. 164 FEBRUARY 2016 Department of Economics Fächergruppe Volkswirtschaftslehre Autoren / Authors Vera Jahn (corresponding author) Helmut-Schmidt-University Hamburg Faculty of Economics and Social Sciences [email protected] Max Friedrich Steinhardt Helmut-Schmidt-University Hamburg Faculty of Economics and Social Sciences [email protected] Redaktion / Editors Helmut Schmidt Universität Hamburg / Helmut Schmidt University Hamburg Fächergruppe Volkswirtschaftslehre / Department of Economics Eine elektronische Version des Diskussionspapiers ist auf folgender Internetseite zu finden / An elec- tronic version of the paper may be downloaded from the homepage: http://fgvwl.hsu-hh.de/wp-vwl Koordinator / Coordinator Ralf Dewenter [email protected] Helmut Schmidt Universität Hamburg / Helmut Schmidt University Hamburg Fächergruppe Volkswirtschaftslehre / Department of Economics Diskussionspapier Nr. 164 Working Paper No. 164 Innovation and Immigration – Insights from a Placement Policy Vera Jahn Max Friedrich Steinhardt Zusammenfassung / Abstract The paper examines the impact of immigration on innovation. We exploit an immigrant placement policy which took place during the early nineties in Germany when large numbers of so called ethnic Germans entered the country. This allows us to overcome the potential bias of endogenous location decisions and to estimate how regional inflows of ethnic Germans affected patent applications over time. Although the majority of ethnic German inflows was unskilled, we do not find any evidence of a negative impact on innovations. Instead, our panel estimates suggest that immigration had no or even a positive impact on innovations. JEL-Klassifikation / JEL-Classification: F22, O32, R11 Schlagworte / Keywords: Innovation, Immigration, Ethnic Germans, Quasi-experimental setting We would like to thank Michael Berlemann, Felix FitzRoy as well as seminar participants at the Hel- mut Schmidt University for useful comments. We thank Jens Ruhose and Albrecht Glitz for providing us with data on ethnic German inflows. 1. Introduction Currently Western European states are experiencing massive inflows of refugees and immigrants from South-Eastern Europe and the Middle East. While anti-immigrant opposition grows and calls for restrictive immigration and asylum policies are getting louder (The Economist 2015), German business leaders and politicians, like Chancellor Angela Merkel, are trying to promote the economic benefits of immigration (The New York Times 2015). One popular pro-immigration argument used is that immigration can promote economic growth through innovations. Potential channels are knowledge transfer, technology adoption, capital accumulation and cultural diversity. Although there is a growing literature on the link between immigration and innovation, the empirical evidence on its causal relationship is relatively scarce and the findings are mixed (see for example Hunt and Gauthier-Loiselle 2010, Bratti and Conti 2014, Lee 2015). One reason for this is the methodological challenge of endogenous location decisions of immigrants. In principle, immigrants tend to move to those regions that offer favorable labor market opportunities like high wages and low unemployment. These regions are likely to be characterized by disproportional high levels of innovation. Any analysis which does not properly address this endogeneity problem will produce (upward) biased estimates. In this paper, we overcome the potential bias of endogenous location decisions by exploiting a unique placement policy of immigrants in Germany in the nineties of the last century.1 During this time, Germany was experiencing large inflows of immigrants of German origin from Eastern Europe and the territory of the former Soviet Union. These immigrants did not have the opportunity to choose their preferred area of settlement, but were instead allocated to regions within Germany. We make use of this quasi-experimental regional inflows of mostly unskilled immigrants to estimate the causal impact of immigration on innovation. In particular, we run panel regressions to analyze how changes in the concentration of ethnic Germans in German regions affected patent applications over time. To the best of our knowledge, this is the first attempt to provide evidence on the link between immigration and innovation by taking advantage of a placement policy. 1 The placement policy was already used to study the impact of immigration on labor market outcomes (Glitz 2012) and crime (Piopiunik and Ruhose 2015). 2 The paper is organized as follows. In Section 2, we describe the immigration of ethnic Germans, the aforementioned placement policy and the data used in the empirical exercise. In Section 3, we present our main results on the impact of immigration on innovations. Section 4 concludes the paper. 2. The immigration of Ethnic Germans Ethnic German immigrants, also known as Aussiedler, are descendants of Germans who migrated to Poland, Romania and other Eastern European and Asian states in the 18th and 19th century. After expulsion and escape between 1944 and 1949, more than 4 million ethnic Germans remained living in Eastern Europe in 1950 (Bade 1993). In the following years, most of them continued to live outside post-war Germany, since remigration to Germany was heavily regulated in the communist regimes. Towards the end of the Cold War, travel restrictions were removed, causing an enormous migration to Germany. The immigration wave reached its peak in 1990 with nearly 397,000 ethnic Germans and their descendants arriving in Germany (Worbs et al. 2013). The skill structure of ethnic Germans was characterized by a u-shaped pattern. While the majority of Aussiedler were lower skilled, the share of skilled migrants was higher than the share of Aussiedler with medium skills (Glitz 2012). Faced with these massive inflows in the early nineties, the German government introduced a number of policy changes. In 1990, the government implemented a new admission system requiring ethnic Germans to register in their country of residence (Worbs et al. 2013). In 1993 the government limited the inflows by establishing yearly quotas of about 225,000 immigrants (Glitz 2012). In the same year, a law imposed restrictions on all ethnic Germans living outside the former territory of the Soviet Union. In fact, Aussiedler from the former Soviet Union were the only group allowed continue to immigrate to Germany without testifying that they face serious disadvantages in their host countries due to their German ethnicity. As a consequence, about 95 percent of all Aussiedler arriving in Germany from 1993 onwards emigrated from the former Soviet Union (Worbs et al. 2013). Most important for the identification strategy of this paper was a placement policy implemented in 1989.2 It allocated arriving Aussiedler to German regions in order to ensure a relatively even regional distribution of ethnic Germans.3 This should ensure to distribute the financial burden across regions and facilitate integration of ethnic 2 Assigned Place of Residence Act (Wohnortzuweisungsgesetz). 3 In few cases allocation was not binding if Aussiedler could prove to have sufficient housing space and a source of permanent income to make a living (Glitz 2012). 3 Germans. In the first years, the allocation was not binding, leading many immigrants to leave their assigned regions and predominantly move to urban regions (Mammey and Swiaczny 2001). Seven heavily affected regions from Lower Saxony released the so-called Gifhorn Declaration demanding a more even distribution of Aussiedler across regions.4 As a consequence,

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