In a recent article I looked at what happens when companies can’t access the talent they need due to migration issues.  Rather than those jobs going to un- or under-employed locals, the jobs often get offshored to places where the talent exists.  This can be especially so where the founders or senior managers at the hiring firm are themselves migrants, in which case they can often turn to their homeland for talent.

It’s a phenomenon documented in a recently published paper from Wharton, which explored how firms can often base their offshored operations in locations with a high number of expats are, so, for instance, a company from Korea locate themselves where a high number of Korean diaspora are.  It’s a logical finding, but the researchers wanted to test the impact of doing this on profits.

They explored the matter along two dimensions, as they examined both subsidiaries of multinationals, and firms owned by individual foreigners, both of whom exhibited unique characteristics.  While both the multinational subsidiary and the startup benefit from co-national immigrants in terms of profitability, there were very different ways of securing those booster profits for both.

The startup only benefits from the immigrant community if the company is managed by an immigrant of the same nationality rather than a local citizen.  The subsidiary of the multinational benefits purely by virtue of being the right ‘nationality’ as a brand.

So, whereas the big multinational has a brand it can rely upon internationally, the startup really has to establish that connection, and one way of doing that is via the entrepreneur themselves.

From Russia with love

The findings emerged from an analysis of the thousands of foreign firms operating in Russia.  The country was chosen both because local businesses are required by law to post financial reports at a subsidiary level, and the country also offered a good environment to explore the essence of the issue.  With events such as the Sochi Olympics, the country experienced a large number of foreign workers coming to Russia to help with the construction of venues, so it provided a chance to see whether firms from countries such as Turkey and China, where many of the overseas workers originated from, benefited from the influx.

Perhaps unsurprisingly, firms from the same nation as the new workers did indeed experience a boost to their performance.  It’s a concept the researchers refer to as social embeddedness, which is the notion that economic transactions are seldom driven by purely economic calculations.  Instead, they’re driven by a range of social considerations.

Being the same nationality can help immigrant communities to bond and trade with one another.  The researchers were able to identify two mechanisms in particular that were important.  The first, referred to as ‘bounded solidarity’ occurs when people gain a sense that they’re in a situation together and so try and help one another out.

The other is a sense of enforceable trust, which is the sense that because of our social bond, we are less likely to want to do wrong by others of the same nationality.

These mechanisms underpin the value co-nationals can bring to a business when operating overseas, whether in terms of consuming one’s products or working for the company.  The researchers believe a couple of key takeaways emerged from their work.

“One is that you are likely to benefit from picking a place that has a high number of co-national immigrants,” they explain.  “But understand the type of firm you are. Understand that if you don’t have a pre-existing reputation, brand, marketing channels, if you’re not part of a multinational firm, of a parent firm, you’re going to need to appoint an immigrant manager to relate to the immigrant community, whereas you don’t necessarily have to do that if you’re the subsidiary of a multinational firm.”

The study underlines the importance of immigration in the diffusion and attraction of foreign capital around the world.  Not only does migration help to move capital around the world, but this paper highlights how it can help that capital be used more productively.  Organizations that do best tend to have a strong connection to their host community, and managers can play a tremendous role in helping to foster such a connection.