Five reasons why immigrants make great entrepreneurs

20 February 2017

Some of the biggest and most successful companies in the world were set up by immigrants, like Google. Christian Stadler, Professor of Strategic Management, reveals why such a high percentage of immigrants go on to become entrepreneurs.

No sooner had Donald Trump emerged victorious in the US Presidential election than he made an executive order banning travel from certain countries thrusting immigration into the spotlight once again. In Europe, the migrant crisis is also on top of the political agenda. Unfortunately, most of the rhetoric focuses on ‘benefit fraud’, ‘stealing jobs from locals’, and ‘keeping immigrants out’.  A story less often told: welcoming migrants might be one of the most effective ways to stimulate entrepreneurship.

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Tesla’s Elon Musk, WhatsApp’s Jan Koum, and Google’s Sergey Brin are prominent immigrant entrepreneurs and while they are exceptional, their path is not an exception. A study by the Partnership for a New American Economy found that 18 per cent of the largest companies in the US were started by immigrants. A further 22 per cent were founded by children of immigrants.

These statistics are startling, bearing in mind that the foreign population in the US has averaged 10.5 per cent since 1850. It means that you are much more likely to be a successful entrepreneur if you were born abroad. To most people, this comes as a surprise. After all, immigrants often struggle with the language, have limited knowledge of local rules and regulations, and face obstacles citizens don’t. But here are five reasons why immigrants make great entrepreneurs. 

1 Identifying new niche markets

Competing in existing markets is tough for start-ups. So most successful entrepreneurs try to identify new niche markets. Immigrants are particularly good at that.

Take Jason Njoku, a Nigerian who came to the UK to study. When his mother wanted to watch some movies from home he noticed that accessing Nollywood movies online was not as straightforward as he thought. He decided to solve the problem and flew back to Lagos to obtain an online license directly from the producers.

In a first step, he created a successful YouTube channel. Gaining widespread media coverage, he was then able to secure US venture capital of $8 million to start his own website iROKOtv. Today Njoku is recognised as a pioneer of African tech start-ups. While the company hopes to serve the Nigerian market as well, the core customers are still the Nigerian diaspora, a market of at least five million people.

Google founders Sergery Brin
Google it: Immigrant Sergey Brin (right) with Larry Page and Eric Schmidt in a self-driving car

Being part of a separate community, immigrants understand potential niches which are typically underserved. Some of them eventually go mainstream. Amadeo Giannini, who was raised by Italian parents in the US, for example, was aware how difficult it was to get loans for immigrants and started Bank of Italy, later named Bank of America. Last year the bank employed 233,000 people and had revenues of $85 billion.

Serving existing customers differently

Another option for entrepreneurs to succeed is to provide more appealing offers to existing markets and customers.

Louis Krubich, the Russian-born founder of Malka Media, a company offering video production and digital marketing, said in a recent interview that he cannot relate to the tone or feel of American culture in the 1960s and 1970s as he grew up on Russian cartoons and TV shows. Potentially this can be a big problem when discussing ideas with clients! But rather than seeing it as a disadvantage, this gave him an opportunity to think differently, an attribute highly valued by his clients.

The advantage of immigrants: they don’t need to stretch themselves to think out of the box. They are different by definition.

Connecting markets

Even established companies struggle to internationalise successfully. Immigrant entrepreneurs often succeed because they leverage their ability to connect markets.

When Chris Folayan studied in the US, friends and relatives often asked him to bring specific products when he went home to Nigeria for a visit. He saw the business opportunity and started MallForAfrica, helping Africans to buy US and UK products. It grew into a multimillion-dollar enterprise, with more than seven billion items for sale.

An even more extreme example is businesses operating in locations where others can’t. Hawala is an informal money transfer system often run by Somalis. It ensures that millions of remittances sent by immigrants safely reach home. No money is physically moved or exchanged, keeping transaction costs low. In some of the places where agents operate legal enforcement is not an option. So instead they rely on trust. Settlement of debts between Hawala brokers can come at a later time and also in the form of properties, services or goods. The system only works as agents can rely on an established honour system in the Somali community.

Accessing distinct networks

Access to money and connections are crucial, possibly the most defining attribute of entrepreneurs. While most immigrants do not spring from wealthy families, they can rely on networks not accessible to outsiders. That helps them to negotiate contracts and hire loyal employees.

Particularly in the early stages, entrepreneurs have limited proof that their idea will work. Here the trust and kinship felt among immigrants can provide vital support. It is difficult to imagine for example, that Njoku would have been able to negotiate with Nollywood producers had he been an outsider. Without the contacts back home, he would not have had a product to deliver to the Nigerian diaspora.

Immigrant networks can also help entrepreneurs to find loyal employees. Initially, they might rely on family members but the advantage reaches far beyond the cliché of the small corner shop.

Century Homecare is a fast growing healthcare provider in Massachusetts, US, founded by James Murage and Julius Kihumba, both originally from Kenya. One of the biggest challenges in this industry is to find qualified nurses. Nursing is a popular profession among immigrants. It is also an industry where 40 per cent of immigrants working at US hospitals say their wages, benefits or shift assignments are worse than those given to American colleagues.

Here Murage and Kihumba have a natural advantage, particularly in the Kenyan community. As Kihumba pointed out in an interview, they are mindful that nurses are very mobile and ready to move on if Century Homecare does not deliver its side of the bargain. This means that they invest heavily in smart technologies which make the life of nurses easier, and cover tuition fees for some. But before you can even ‘sell’ to the nurses you need to be able to approach them.

Embracing risk

Entrepreneurial activities and migration have something in common: the outcome is uncertain. Both will try to add up potential costs and benefits but in the end, they are prepared to make a leap of faith.

For migrants, it is reasonable to assume that they know their home country better than their potential host country. Leaving family and friends behind to seek better opportunities abroad is an indication that they are prepared to engage in activities which have the potential to improve their income even if the outcomes are hard to predict. Empirical evidence is scarce as it is hard to control for all potential factors that motivate migrants, like escaping a war.

To avoid such measurement issues David Jaeger, Thomas Dohmen, Armin Falk, David Huffman, Uwe Sunde, and Holger Bonin use data from the German Socio-Economic Panel to study within-country migration. Their study shows that migrants display a higher willingness to take on risk. As moving to another country encompasses even greater unknowns we can assume that the same (probably higher) willingness to take on risk will be displayed by immigrants.

In short, immigrants are a self-selected group of risk takers. The uncertainty associated with starting a business is less of a deterrent for them.

What that means for politicians

The big question for politicians: Can you win elections despite being pro-immigration? In the US, at least, I would rely on Bill Clinton’s phrase "‘it’s the economy stupid". Immigrant-founded companies among the largest companies in the US alone employ 3.6 million people and generate revenues of $1.7 trillion. An inspiring story worth telling. 

Read the original article at Forbes.

Christian Stadler teaches Strategic Advantage and Strategy and Practice on the Executive MBA, which is also taught part-time at WBS London at The Shard.

He also teaches on the Doctorate in Business Administration.

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