Migrant Business Networks and FDI



He was born in Thailand, lives in South Africa and carries a UK passport. But Jag Johal, chief
executive of investment firm CBA Capital Partners, has undeniable ties to India.

“I speak Hindi and Punjabi. My parents live in Delhi. I visit at least once a year,” said Mr Johal.

“There are a lot of people like me.”

Financial Times Asia-Pacific, January 9 2007

[T]he Indian diaspora has created a large, increasingly wealthy and influential ethnic community in the UK,
the Middle East and the US. A major source of remittances and investment inflows, these Indians abroad who
earn an average of $35,000 annually are responsible for about 20 per cent of foreign direct investment into the
country.

Financial Times Asia-Pacific, May 29 2007

I. Introduction

The Indian, Chinese, Italian, Irish, Jewish, Spanish are some of the many diasporas that have
spread around the world during the past centuries and decades and recently have fallen under the
attention of scholars, journalists and institutions. They are now seen as possible engines of the
exchanges of goods, capital and knowledge that normally take place between countries.

The recent economic literature hypothesizes that the international networks of migrants may
improve the exchanges between their countries of origin and destination by providing information,
matching and referral services that the market and the price system may fail to supply (Rauch and
Casella, 2003). The failure is more likely to occur as countries differ more, in their relative
endowments of capital and labor (Rauch and Casella, 2003; Rauch and Trindade, 2002) or in their
institutions, culture and social norms (Girma and Yu, 2002; Dunlevy, 2006). Differences manifest
themselves in informal barriers that obstruct the international economic exchanges and immigrants,
by bringing with them customs, attitudes and social rules of their countries of origin and
information on business opportunities, lower these barriers.

The empirical research on networks has focused especially on the relations between
migration and trade. A partial list of these studies includes Gould (1994), Head and Ries (1998),
Rauch (2001), Wagner, Head and Ries (2002), Girma and Yu (2002). A few recent studies have
considered the impact of networks on the foreign direct investments of countries (FDI); among
them, Gao (2003), Tong (2005), Buch
et al. (2006), Murat and Pistoresi (2006). Kugler and
Rapoport (2005, 2006), Javorcik et al. (2006), and Docquier and Lodigiani (2006) focus especially
on the relations between FDI skilled and unskilled migration.

The present paper consider the interactions between migration and the bilateral FDI of four
European countries, Germany, Italy, France and the U.K. In the first place, it analyses whether
immigrants in these countries, and also emigrants in the case of Italy, have a positive influence on
the bilateral FDI between each of the four countries and several partner economies. In the second
place, following the evidence found by Kugler and Rapoport (2005, 2006), Javorcik et al. (2006),
and Docquier and Lodigiani (2006) we study whether the networks of skilled and unskilled
immigrants have different impacts on foreign direct investments. This distinction between higher



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