Quid pro quota: a cross-country study on the impacts of immigration quotas on early-stage entrepreneurship

We study the impacts of immigration quotas and immigrant eligibility restrictions on destination countries’ early-stage entrepreneurial activity. Taking advantage of cross-country variation in immigration quotas and eligibility restrictions, we find that increases in the strictness of labor migration quotas and eligibility requirements are associated with significantly less early-stage entrepreneurship in the short run. Further, we find two important sources of heterogeneity that impact our results. First, these results are driven by a connection between quotas and early-stage necessity-driven entrepreneurship—our results lose significance when adding opportunity-driven entrepreneurship to the analysis. Second, the magnitude of the relationship between quotas and early-stage entrepreneurial activity is lower when analyzing female entrepreneurship. Overall, our results suggest that immigrants clearly influence entrepreneurship positively, but the overall welfare effects on the host country of marginal increases in entrepreneurial activity associated with a relaxation of labor market restrictions are more nuanced. At the same time, our results also suggest room for immigration policy to improve the welfare of immigrants and natives. Importantly, our estimates likely act as a lower bound given that we are not able to measure impacts in the long run. Because immigrants’ participation in the labor market is often delayed by labor market restrictions after entry, estimates of the impact of quotas and other restrictions that limit entry into the host country would likely yield more negative results given a longer time horizon.