More brain drain, less entrepreneurship

More and more Italians, especially young people, are leaving the country. If we consider the latest pre-Covid numbers, in 2019 there were 122,000 Italians registered as residents abroad. We estimate that the actual outflows of Italians are 2.6 times higher than those officially recorded. This is equivalent to the country losing a city the size of Bari every year. A Bari made up mainly of young people, with a high level of education, innovators and entrepreneurs. To give a crude image of this migratory emergency, if emigrants had left Italy on a boat, in 2019 we would have seen a boat with 6,110 Italians leaving every week. However, the attention of Italian media and politics seems focused on a much smaller migratory inflow, namely in the same year, thee 220 immigrants a week who crossed the Mediterranean and landed on the Italian coast.

The consequences of this emigration are not well known, nor studied. In the long run, emigration could be beneficial for growth thanks to return migration, the exchange of ideas and international trade, remittances and the incentive to invest in human capital in the country of origin. However, if those who emigrate are among the brightest in the workforce or are particularly entrepreneurial, emigration could reduce the country's growth potential and depress employment. Demographic forces could also depress business creation, if many young people leave the country: recent research shows that aging countries have declining business creation. Which of the two forces prevails, at least in the short run?
There are several hurdles in establishing a cause and effect between emigration and business creation. The main one is reverse causality: given that people often emigrate in response to unfavorable economic conditions, fewer new businesses and less job creation may be the cause, and not the effect, of emigration. In a recent work, we have established a causal link between emigration and entrepreneurship by considering the variation of factors that attract people abroad, but do not depend on local economic conditions. An important factor of attraction is the presence of a historical network of fellow citizens of the municipality of origin in the country of destination, who provide information and support to look for job or business opportunities upon arrival. A second important determining factor is the economic status of the destination country compared to other potential destinations. The interaction between these two variables allows us to construct a measure of the forces of attraction for each Italian municipality, which is hardly correlated with current local economic conditions.

According to our estimates, for every 1,000 emigrants between 2008 and 2015, circa 36 fewer businesses were created per year. This flight of entrepreneurs is particularly strong for businesses created by people under the age of 45 and for innovative startups.
A decomposition exercise shows that only 36% of the total flight of firms is due to the simple effect of population reduction, while 7% is due to the fact that emigrants are younger than average and 10% to their higher educational level. The remaining 47% of the flight effect of firms is due to the fact that, regardless of age and education, Italian emigrants are much more likely to be entrepreneurs than the average population.
Migratory flows affect the country of origin through various channels. Most of the recent economic literature has emphasized the potential positive spillover for residents, including rising wages and the rebalancing of labor markets if emigration occurs from countries with high unemployment to countries with low unemployment. This research study highlights a new channel surprisingly overlooked by the literature, namely the depressing effect that emigration has on business creation. We also underline that the demographic channel is important, especially if the younger and more educated generations are leading the emigration. In a country like Italy, where economic growth is extremely slow, the average level of education is low and population is aging is quickly, high emigration rates can trigger a potential downward spiral that could exacerbate economic stagnation.