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Commentary By Jorge González-Gallarza

New Evidence Shows That Immigration Helps Us All

Economics Regulatory Policy

As the immigration debate inevitably harks back to a longer-term focus on the United States’ desperate need for high-skilled foreign workers, reams of research resurface to remind us of their indispensable role in driving innovation.

Much of that past research, however, has routinely relied on measures that fail to capture the complex, wiggling nature of the innovation process. A go-to proxy for companies’ ability to produce and sell better goods, patent licenses for instance take an overly simplified picture of their innovative potential by leaving out countless minor improvements to existing products that can sometimes add up to more value than newly-patented goods.

Besides, patent grant rates are noisy because the rate of successful applications reflects the institutional fabric in which innovation occurs – mostly a compound of current law and rulings by the Court of Appeals for the Federal Circuit, the only appellate-level court with the jurisdiction to hear patent case appeals. Just this week, the court upheld the invalidation of two patents owned by BASF Corp, the world’s largest chemical producer.

On the legislative side, bills like the Computer Software Protection Act (1980) and the Semiconductor Chip Protection Act (1984) extensively codified intellectual property law in various sectors, bearing out on patenting activity to this day.

Seeking for better measures of innovation to more fully capture high-skilled immigrants’ role in it is the aim of a paper out last month by Gaurav Khanna and Munseob Lee of the University of California, San Diego.

Instead of patents granted, they focus on the entry and exit rates of products in the consumer market, as proxied by new and expired Universal Product Codes (UPCs) compiled in Nielsen Retail Scanner Data by the University of Chicago’s Center for Marketing. UPCs are a combination of a number prefix and a barcode as per GS1 global standards. The dataset pulls in barcode swipes at 35,000 stores from 90 retail chains across the US between January 2006 and December 2015, bucketed into 114 product groups and 10 major departments.

The balance of entry and exit rates, often called product reallocation, is a finer, more acute measure of innovation in the retail space on several counts.

For one thing, where patents only capture overhauls big enough to make for entirely new products, product reallocation tracks the incremental pace of innovation that improves product lines already displayed in retail shelves – a better approximation of Schumpeterian creative destruction in the retail sector. Secondly, product reallocation is shown to be strongly correlated with a firm’s revenue growth and productivity, more so than patents.

To each firm on the dataset, the authors match Department of Labor data on H1-B visa employees as shown in their Labor Condition Applications. LCAs are the sector-specific request they make for H1-B visas under annual caps and pledging the qualified foreign workers they need won’t undercut native-born substitute workers.

The authors find that at the firm and aggregate levels, H-1B LCAs strongly correlate with product reallocation. That in turn means higher revenue growth and productivity in a statistically robust way too. Getting one percentage point more LCAs approved to hire H1-B workers results in a product reallocation rate five percentage points higher.

Given the vast record of literature showing a similar link between high-skilled migration and companies’ earning of patent licenses, and the different levels of detail captured by patent data and product reallocation, Lee and Khanna’s paper add to the overwhelming evidence of migrants’ outsize contribution to innovation. By focusing on the rates at which new products make it to retail shelves and subsequently get discarded by better, cheaper, and newer products, they zoom into a more granular and detailed level of how innovation happens every day.

High-skilled migrants, the paper shows, are indispensable to every buyer’s consumption of ever-better and cheaper goods, and their footprints are in every retail product. Our lawmakers, if they are weary of hurting just about every one of their constituents, would better keep Lee and Khanna’s findings in mind next time they consider immigration fixes.

Jorge González-Gallarza is a policy associate at E21. Follow him on Twitter here

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