Immigrants, Industries, and Path Dependence*

Immigrants, Industries, and Path Dependence* Sebastian Ottinger UCLA This version: 30 October 2020 Download latest version here. Abstract How do locations develop and retain specialization in particular manufacturing industries? I show that European immigration to the United States affected the initial location of industries in the late 19th century, creating a spatial pattern that remained relatively stable over time. Immigrants varied in their exposure to specialized manufacturing knowledge and skills depending on their origins. The comparative advantage that came to U.S. counties “embodied” in immigrants predicts employment in disaggregated manufacturing industries in the following decades. On the predom- inantly agricultural frontier of settlement, early immigrants initially tended to migrate to counties with less employment in “their” industries. The origins of counties’ immigrants only became a source of local comparative advantage as later waves of skilled immigrants arrived and then-novel industries developed in their origins. The early establishment of firms in these industries then gave locations the first-mover advantage and shaped local manufacturing specialization. Agglomeration forces locked in industries until the present. JEL: R32,J61,O33,I25,N91. Keywords: manufacturing specialization, path dependence, U.S. manufacturing belt, migration *I am grateful to my advisors Nico Voigtländer, Paola Giuliano, Christian Dippel, and Romain Wacziarg for their invaluable guidance on this project. I would like to thank Alberto Alesina, Pol Antras, Sam Bazzi, Hoyt Bleakley, Ariel Burstein, Dora Costa, Jonathan Dingel, Dave Donaldson, Sebastian Dörr, Sebastian Edwards, Benjamin Enke, Edward Glaeser, Claudia Goldin, Walker Hanlon, Rick Hornbeck, Erik Hornung, Michela Giorcelli, Jeffrey Lin, Ed Leamer, Bob Margo, Bruno Pellegrino, Marco Testoni, Jonathan Vogel, Max Winkler, Geoffery Zheng and seminar participants at Boston University, Brown, Florida State University, Harvard, UCLA, UCLA Anderson, as well as audiences at various conferences and workshops for their helpful comments, in particular Amanda Grittner, Caglar Ozden, Morgan Raux, and Elisabeth Perlman for excellent discussions. Financial support from the Center for Global Management at UCLA Anderson is gratefully acknowledged. 1 Introduction Employment in most manufacturing industries is strongly geographically concentrated (Ellison and Glaeser, 1997; Holmes and Stevens, 2004). Why do locations specialize in particular manufacturing industries? Two approaches to explain this have been advanced and tested. One shows that natural advantages render locations suitable to specific industries. Kim(1998) provides supportive evidence for the importance of natural advantages in U.S. regional specialization, and Ellison and Glaeser(1999) argue that up to 50% of specialization may be the result of natural advantages. On the other hand, a location’s market potential, i.e., its access to consumers and producers of inputs, could induce local specialization (Harris, 1954; Krugman, 1991a). Both of these accounts have empirical content for explaining local specialization during the emergence of the U.S. manufacturing belt. Klein and Crafts(2011) show that initially, natural advantages were decisive for cities’ manufacturing specialization, while market potential became increasingly important as a determinant. However, many locations share comparable endowments in natural resources and market potential. What determined which of these became centers of a specific industry? Case studies often emphasize chance. Krugman(1991b), for instance, asserts that “the whole process of Industrializa- tion in the United States was marked by [..] stories of small accidents leading to the establishment of one or two persistent centers of production.”1 Arthur(1990) shows that these chance locations can, theoretically, shape a location’s industrial specialization over the long-run. They help select- ing among multiple equilibria, and once an industry is established in a location, agglomeration and co-agglomeration of related industries “lock-in” the industry there (Krugman, 1991a; Ellison, Glaeser, and Kerr, 2010). One of these accidents is the decision of an individual pioneer in an industry’s early stage to locate at a particular location, choosing from a set of locations sharing comparable endowment in natural resources and market potential. Empirical evidence on the con- sequences of such chance locations and the resulting path dependence at the location-industry level is scant.2 In this paper, I propose and validate a determinant of such chance locations and document their effect on employment patterns at the location-industry level. I exploit the historical context of the emergence of the U.S. manufacturing belt, which coincided with the Age of Mass Migration 1The importance of such accidents has been noticed for at least a century. For instance, reviewing 15 highly localized industries in the U.S. by 1900, the US Census Bureau(1907) remarks that market potential and natural resource endowment “in almost all cases account for localization only in its broader sense. They prescribe an industry’s possible area, but they fail to explain the most marked form of localization that within a single city or town” and highlights chance locations of individuals as a driving force in rendering few locations centers of these industries. 2Bleakley and Lin(2012) and Allen and Donaldson(2018) study path dependence of economic activity at the location level. Davis and Weinstein(2008) show that after their destruction during World War II, Japanese cities’ industrial specialization remained unaffected. While this points to the possibility of a single unique equilibrium for county-industry location, it is not definite evidence of it, as the shock might have been too small for an established, already locked-in and coordinated, system of location-industries to switch between equilibria. 1 from 1850 to 1920. Throughout this period, European immigrants, trained in particular manufacturing industries, brought their knowledge, skills, and entrepreneurial spirit to counties all across the United States. The Midwest, settled between 1800 and 1890 became one of the world’s manufacturing powerhouse, with highly pronounced regional patterns of specialization. Immigrants contributed to local industrial development in various ways. They provided their skilled labor and (often) tacit knowledge to existing establishments, induced others to set up shop there, or became entrepreneurs themselves.3 I proxy for the potential embodied in a county’s early immigrants to affect local employment patterns themselves or attract later immigrants doing so. The proxy results from the combination of two data sources. For each of 13 European origin countries,4 I multiply their population in counties settled in 1850 with their origin country’s comparative advantage in forty-nine manufacturing industries, revealed in imports to the United States in 1909.5 Summing these up at the county-industry level yields a measure, which I refer to as “immigrant specialization” in the remainder. The main finding of the paper is that immigrant specialization is a strong predictor of county- industry employment across manufacturing industries and U.S. counties in 1910. I control for possible confounders flexibly in cross-sectional regressions at the county-industry level by intro- ducing fixed effects at the county and industry level. Immigrant specialization is a highly signifi- cant predictor of county-industry employment in 1910. The association is sizable. In the preferred specification, additionally controlling for the initial county-industry employment of 1850, dou- bling immigrant specialization increases county-industry employment in 1910 by four percent. The baseline association is stronger in faster-growing industries, in particular in the then-novel industries associated with the First and Second Industrial Revolution. In these industries in their early stages, European immigrants had valuable skills, such that one would expect their legacy on county-industry employment patterns to be greater. The baseline association is particularly strong for German immigrants. Accompanied by its unification, Germany industrialized in the second half of the 19th century, and became an international manufacturing powerhouse in then-novel industries, such as chemical or electrical manufacturing. Consequently, the baseline is particularly strong for German immigrants in these industries. Immigrant specialization is empirically distinct from other determinants of county-industry 3With the recent availability of historical patenting data, research has confirmed the role of immigrants in shifting aggregate and local innovative activity in the U.S. (Akcigit, Grigsby, and Nicholas, 2017; Peters, Arkolakis, and Kyoung Lee, 2018). 4These 13 origins are Ireland, Germany, the United Kingdom, France, Sweden & Norway, Switzerland, the Nether- lands, Italy, Spain, Portugal, Austria-Hungary, Belgium, and Russia. Immigrants from these origins account for 92% of all immigrants to the U.S. in 1850 and 72% in 1910. 5This draws on the insight of Balassa(1965) that a country’s comparative advantage reveals itself in its specialization in trade. The data comes from Treasury reports listing imports into the U.S. by trade partner and traded good. In robustness checks, I employ U.S. import data of 1851 and 1881 to calculate the manufacturing specialization of European origins, and data

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