Immigration is the key to emerging markets becoming innovation hubs

In 2019, the World Intellectual Property Organization (WIPO) reported that China alone accounted for almost half of all the world’s patent filings, with India also registering impressive increases in global patent production. “Asia has become a global hub for innovation,” declared WIPO Director General Francis Gurry.

Just a few decades ago, emerging markets constituted a negligible share of global patent production. But ever since, multinational enterprises (MNEs) started to conduct innovation more globally. By 2018, according to the U.S. Bureau of Economic Analysis (BEA), the 20-year growth rate of research and development (R&D) activities of U.S. MNEs in foreign countries—estimated to be 6 percent—exceeded the growth rate of R&D within the U.S., estimated at 4 percent. What explains this important shift? Our answer, based on our latest research paper, is human mobility.

Figure 1 shows the patents filed by inventors in the 15 countries that constitute the study’s sample. Inventors in countries such as Japan and Germany—the leaders in patent production among that group—filed roughly 80 percent of all patents in the sample in 1995. In 2015, their share halved, while inventors in emerging markets such as China, India, Taiwan, and South Korea, represented a much larger share of patents in 2015 than what they did in 1995.

Figure 1. The share of global patents in selected countries

Source: Human Mobility and the Globalization of Knowledge Production: Causal Evidence from Multinational Enterprises

We document that human mobility is an important driver of this pattern. We do so by investigating whether and to what extent innovation outcomes of multinational corporations (MNCs) change following immigration reforms that ease or harden barriers for migration into a country. Our study relies on a new dataset that we compiled with the exhaustive list of business-related migration reforms adopted in 15 countries over the period from 1990 to 2016, which we match with the patenting activities of over 30,000 subsidiaries of multinational corporations that perform innovation.

Our main results show that pro-business migration reforms significantly increase the number of patents filed by the MNC within a country, while the opposite is true for policies deterring business-related migration. Negative reforms also decrease the quality of the patents filed across several criteria. Further, we show that negative migration reforms significantly decrease the share of global patents filed by subsidiaries in the country that implemented such policies, and that this effect is stronger for the historical leaders in global knowledge production: Japan, the United Kingdom, and Germany. On the contrary, positive migration reforms substantially increase the share of global patents filed in countries with low initial shares of knowledge production. This finding suggests that policies affecting human mobility have contributed to the observed shift in the geography of innovation towards emerging markets.

Figures 2a and 2b visualize back-of-the-envelope calculations based on our main findings. In particular, without positive migration reforms, the countries in our sample would have produced 45 percent fewer patents by the end of the period, while without negative reforms they would have produced 17 percent more patents than we observe. They also reveal that in the absence of migration reforms, the share of global innovation produced by emerging markets would have grown from 5 percent to only 20 percent between 1990 and 2015, instead of reaching 50 percent as we observe in the data.

Figure 2a. Predicted trends in total patents

Figure 2b. Predicted trends in countries with low initial invention shares

Source: Human Mobility and the Globalization of Knowledge Production: Causal Evidence from Multinational Enterprises

Our findings provide strong evidence that inventor mobility causally facilitates MNEs’ global production of inventions and shifts the geography of patenting production, carrying important policy implications. In particular, the severe asymmetry in the effects associated with positive and negative reforms underlines how policies deterring human capital mobility are heavily detrimental to local and global knowledge production and might be hard to reverse through subsequent improvements.

Thus, whether the slowdown in international mobility was caused by the COVID-19 global pandemic, or by countries enacting reforms that deter immigration, it is the world that will pay the cost in terms of much less innovation—one of the most important drivers of economic growth and prosperity—in the years to come. To reverse the trend, more immigration, not less, is the answer.