How Do Restrictions on High-Skilled Immigration Affect Offshoring? Evidence from the H-1B Program

Abstract

The decision to encourage or restrict high-skilled immigration has long been controversial. Advocates argue that high-skilled immigration is critical for firm competitiveness and innovation; critics argue that skilled immigrants displace native workers and drive down wages. The debate, however, has largely overlooked the secondary consequences of restrictions on high-skilled hiring of immigrants: multinational firms faced with decreased access to visas for skilled workers have an offshoring option, namely, hiring the foreign labor they need at their foreign affiliates. This paper documents the impact of restrictive high-skilled immigration policies on the offshoring of high-skilled jobs by US multinational companies using a unique matched firm-level dataset of H-1B visas and multinational firm activity and two different identification strategies. Both strategies yield the same result: that restrictions on H-1B immigration caused increases in foreign affiliate employment at both the intensive (US multinationals employed more people at their foreign affiliates) and the extensive (US multinationals opened more foreign affiliates) margins. The effects are concentrated among highly H-1B-dependent firms and R&D-intensive firms operating in offshorable services sectors, and the expansion of activity was concentrated in Canada, India, and China. The findings of the paper have important policy implications; the offshoring of jobs appears to be an unforeseen consequence of restricting skilled immigration flows. Even if H-1B immigrants displace some native workers, any policies that are motivated by concerns about the loss of native jobs should consider that these same policies have the unintended consequence of encouraging firms to offshore jobs abroad.

Keywords: high-skill immigration, offshoring, H-1B, multinational companies

JEL Classification: F16, F22, F23, O3, J61