A larger foreign-born population can have many significant benefits for the domestic economy, even though some still argue it puts increased strain on public spending and the existing domestic workforce in its quest to find employment.
In foreign direct investment (FDI) terms, our analysis shows that countries with higher levels of foreign-born population tend to receive higher volumes of foreign investment.
Larger foreign-born population, more foreign investment
Comparing migrant data from the UN Department of Economic and Social Affairs with our greenfield FDI project database we can infer a positive, statistically significant relationship between higher levels of foreign-born population and increased levels of inward FDI.
The chart below shows the migrant stock as a proportion of each country’s population in 2020 (latest available data) and the number of inbound greenfield FDI projects per one million people recorded between 2019 and 2021. The trendline shows that, generally, when a country has a larger foreign-born population, it tends to receive more FDI (per one million people).
The relationship can be attributable to several factors. First, migrants typically move countries to seek better opportunities, which means they often move to locations that are more prosperous in the first place. In turn, larger countries are typically more attractive to foreign investors and receive more FDI. The potential large customer pool is a key FDI driver. Additionally, a large concentration of a foreign community may make a foreign investor feel more welcomed: the 'home away from home' effect. Also, in most cases, foreigners entering a country bring with them valuable skill sets. With talent a key driver of FDI, investors are keen to locate to areas that have high levels of talent accessibility.
Large states with more foreign-born residents attract more FDI
In the US, the larger states of California, Florida, New York and Texas each have large foreign-born populations. They are also the largest recipients of US inbound foreign investment. Although there are a few outliers, states with a higher number of foreign-born residents tend to receive more FDI. Hawaii, for example, has a relatively large foreign-born population but a low volume of FDI. This is due to geographic remoteness more than anything else.
There are even some insights in terms of where in the world migrants originate and the sources of FDI into these states. Although Europe is the primary FDI source market for each of the four top US states, it is not the principal migrant source.
However, in Florida three-quarters of its foreign-born population were born in South America. This correlates to a higher-than-average proportion of inward investment from Latin America. Just over 8% of Florida’s inbound FDI came from Latin America. To put it into context, the proportion of FDI from Latin America going into California, New York and Texas amounted to around 1% for each state.
Similarly, 40% of California’s foreign-born population originated from Asia. In analysing its inward FDI, more than one-third (35.1%) came from Asia-Pacific. This proportion is significantly higher compared with Florida (14%), New York (18.8%) and Texas (26.9%).
New York (15.8%) and Florida (9.8%) had a higher proportion of European migrants (15.8%) than California and Texas. They also had higher proportions of inward FDI from Europe (both 64.1%).
Although there are many other factors that are driving FDI – market size being the primary influence – there does appear to be some correlation between a relatively larger foreign-born community and inward investment from that region.
How is Brexit impacting the UK?
Between 2011 and 2015, the number of UK residents born in the EU (but outside the UK) grew by 24%. This is much higher than the growth rate post-Brexit. Between 2016 and 2020, growth in EU-born UK residents was flat, going up by only 0.03%. The Covid-19 pandemic may have caused some people to return to their home country, but it is certainly not the overarching factor in the flat growth. Using the latest available migrant data, the UK has experienced three annual periods of declining EU-born residents. During the same period, the number of non-UK and non-EU UK residents has increased.
At the same time, UK inward investment flows have been unstable. Around the time of the Brexit vote in 2016, the UK was the recipient of more than 2,000 FDI projects (new investments, expansions and mergers and acquisitions) each year. However, since 2016–17, the UK has been on a relatively consistent downward trend. In 2021–22, the UK’s investment promotion agency recorded 1,589 inbound projects. This is 30% lower than the number recorded in 2016–17.
Incidentally, the UK is also experiencing a peak in its number of job vacancies. Lower-paid jobs in the country had tended to be filled by foreign EU nationals. Although the UK is grappling with inflationary pressures, which are hampering its economy, it is unsurprising that job vacancies are peaking (and not being filled) when the flow of EU nationals into the UK is stalling.
Migrants can help solve company problems
With environmental, social and governance a key boardroom topic, companies may look to expand in locations that offer access to a wider breadth of talent.
Migrants also help fill any skills gaps that may exist within an economy, be those highly skilled jobs (such as medical professions) where perhaps there is not an adequate supply of domestic workers to fulfil the country’s needs, or lower-skilled jobs (for example, retail) where there is less appetite from local workers. This shows how foreign workers can fill employment gaps quickly and keep a country's economy moving.
In addition to expanding the labour supply, migrants can also expand the demand for labour via spending money in the domestic economy, driving up consumer demand.
Finally, from an investment promotion perspective, rising to become (and remain) an international investment hub is much easier when the location has an international workforce at its disposal.