investors relatively to countries of origin of immigrants, πt* = (Zt*,MtU*,MtS*), hence
*' *'
πU < 0, πS < 0.
As discussed above, the business networks of skilled migrants are more likely than the low-
killed ones to have a significant impact on the bilateral FDI of countries. Investments abroad are
complex and risky operations with substantial set up costs, which are more likely to be undertaken
by skilled individuals. The relation between the above derivatives can therefore assumed to be
∏S I >∏^uj , skilled networks have a stronger impact on the origin country’s risk factor than low
skilled migrants.2
Together, the direct and indirect effects, will determine the new equilibrium levels of wages
of the less developed country, w*, as well as those of kt* and ofKt* . As a direct effect, the migration
of skilled workers widens the gap between the level of human capital of the developed economy
and that of the developing one. It also increases the gap between the equilibrium capital to labor
ratio and the one between wages. The long run stock of capital increases in the rich economy (A and
Lt increase in (6)) and it decreases in the developing one (A* and L*t decrease in (6*)). Hence, other
things equal, the migration of the skilled favours the accumulation of capital in the developed
economy and has the opposite effect on the less developed one. This is the “brain drain” effect of
migration, which damages poor countries.
The indirect effects are that skilled networks of migrants lower the risk factor related to the
country of origin, πt* . When the impact on πt* is strong enough, it can counterweigh the depressing
effects of the brain drain. In this case, the overall effect of the skilled migration on the developing
economy, in particular on the inflows of capital from abroad, are positive. In equations (4*) to (6*)
w*, kt* and Kt* increase as a consequence of the lower πt* .3 In the real world the network effect may
add up to other possible consequences of the skilled migration that also counteract the brain drain,
such as remittances, return migration or improved individual’s investments in education in the
sending countries.
The emigration of unskilled workers has ambiguous effects on both the developed and
developing economies. The direct effects on the developing economy are that the average level of
human capital increases HU*' > 0 but L*t decreases. From (4*) and (5*) the equilibrium capital per
2 This assumption is not necessary for the results of the model.
3 Taking the derivatives in (6*) of K* with respect to L*, A* and π*, the condition for having an improvement in K* is
* - A Lα
that π* decreases sufficiently for the following inequality to hold: πt < r H--;----.
t αA* + L* α