Roughly 300,000 foreign-born students annually obtained visas to enrol in US graduate programmes over the last decade. This column finds that the small percentage of foreign students who remained in the US after earning master’s degrees made outsized contributions to the creation of new startups. As startups and new firms are engines of economic growth and technological innovation, the authors recommend reducing enrolment barriers while increasing access to financial grants and support for those who create local startups, and expanding policies that allow graduates to stay in the US after graduation.
From Levi Strauss & Co. – a company founded by a German immigrant whose name became synonymous with blue jeans in the 20th century – to Google, Amazon, and Uber, many of the most recognisable companies in the US were created by immigrants or children of immigrants who achieved the American Dream through successful entrepreneurship and innovation (Mishra et al. 2023). New firms are key drivers of technological innovation, which is one of the main engines of growth for the US economy. New firms and startups bring substantial, high-potential innovations to market. In the process, they contribute to employment, real output, and productivity growth in the US (Haltiwanger et al. 2016). They also tend to hire high-ability workers and frequently pay higher wages than other firms (Kolev et al. 2022). Over half of all innovative US entrepreneurs (54% of the Fortune 500, according to Forbes) hold a US graduate degree, suggesting that US universities are important generators of innovation.
The prominent role US universities play in fostering innovation is no coincidence. The US has long been home to the best universities in the world: most rankings show that US universities have represented the lion’s share of the top 10, 50, and 100 universities in the world for decades (Urquiola and McLeod 2021). Likely due to their world-renowned quality, US universities attract highly talented people from everywhere in the world, educating them for leadership roles in science, technology, and management. Over the last decade, about 300,000 foreign-born graduate students annually obtained a visa to enrol in a US graduate programme. Some stayed in the US for at least a few years after obtaining their degree.
In a new study (Beine et al. 2024), we quantify how international students who obtained a US master’s degree contributed to the creation of new startups in the US from 1999 to 2019. Our analysis includes a large representative sample of startups obtained from Crunchbase, the most comprehensive online database of startup firms in the US, and includes information on startup founders, their highest degree, and school of graduation. We combine these data with data from the international Postsecondary Education Data Set (IPEDS), which provide annual measures of the number of foreign-born and native students enrolled and graduated for each university and programme.
Using these data, for each university-master’s graduating cohort (e.g. master’s students who graduated in 2001 from MIT or in 2007 from UC Berkeley), we investigate the relationship between the frequency of startup creators within five years of graduation and the share of foreign-born master’s students in a cohort. Causally identifying this relationship is challenging as the choice of where and when to enrol in a master’s programme is not random, especially for foreign students, who consider several options. For example, enrolment decisions may be correlated across locations and over time with startup concentration (for example, universities in Silicon Valley may attract prospective master’s in engineering or business). To avoid spurious correlations between the share of foreign graduates and startup intensity, we leverage variation in out-of-state tuition fees within each university over time. In our analysis, we show that lower fees increased international student enrolment and were not correlated with pre-existing local economic conditions. Using this fee structure as an instrumental variable, we isolate enrolment increases in response to fee variations only and track their impact on the creation of new startups while excluding other potential contributing factors such as the status of the local economy.
Main findings
Our estimates imply that an additional 10,000 international master’s graduates would generate 61 additional startups by people in their master’s programmes, recorded in Crunchbase within five years of that cohort’s graduation (see Figure 1). This is significantly more than the simple average startup rate of master’s students in our sample and captures a combination of direct effect and spillover on classmates in creating startups. The result is in line with studies showing that immigrants in general, and foreign students in particular, are overrepresented among entrepreneurs in the US (Azoulay et al. 2022, Anderson 2022, Kerr 2013, Kerr and Kerr 2020). Crunchbase records tend to over-represent the more successful startups, as 98% of our sample survive at least three years. Hence, this effect is even more significant than simply adding startups, many of which do not succeed. Additionally, the increase in international students not only increased startup rates, but specifically increased the rate for highly valuable and innovative startups. Figure 1 shows that a significant boost was given to startups raising $25 million or more in capital within the first three years of creation (38 additional firms per 10,000 foreign master’s graduates) and to startups that file at least one patent in the first three years (eight additional firms per 10,000 foreign graduates).
Figure 1 Effect of 10,000 extra foreign master’s graduates on number of US startups
Note: Calculations based on the coefficients in columns (3), (5), (6), (7) of Table 4 in Beine et al. (2023) and on the average master’s cohort size of 658 students, of which 65 are foreign students.
Spillovers for native US entrepreneurs
After establishing this overall effect, we take steps to analyse the channels driving this increased startup rate. While we have a precise measure of international students in each master’s cohort, we use imputed measures of whether a founder is more likely of foreign or native origin using founders’ first and last names from Crunchbase. This algorithm (taken from the website forbears.com) uses the distribution of names across the world to establish the foreign- or native-born status of US startup founders. In the US, more than in other countries, this method may overestimate the number of foreign-born given the large presence of a second and third generation of immigrants. Nevertheless, we decompose the impact of having a higher share of foreign master’s students in a class on increased entrepreneurialism of people with foreign-origin names, a likely combination of first and higher generation immigrants, and those with US-origin names (likely US natives). We find that between 30 to 45% of the additional startup firms generated by a larger share of international students were founded or co-founded by those of US origin. This group, likely consisting of US-born individuals, may have increased their propensity to start a company by interacting with international students, who bring different ideas and a stronger inclination for business startups. Their presence might also help to establish more international connections, which may help new companies with founders of US origin. While significant entrepreneurial spillovers from immigrants and emigrants have been found in previous studies of other countries (e.g. Anelli et al. 2023 for Italy), this is the first paper to find such a result in the US context.
University quality sparks local innovation
The high quality of US university master’s programmes was certainly a driving factor in both attracting talented international students and encouraging innovative startups after graduation. The highest entrepreneurial potential among master’s graduates overall came from those graduating from R1-R2 research universities (i.e. those more focused on research and offering master’s and PhD programmes), especially in STEM fields. Nevertheless, foreign students’ graduation in non-STEM fields also has a strong impact on startup creation.
International master’s students at research-intensive institutions increased the number of startups among their own cohort by an even higher rate. This is likely due to these universities attracting the most talented students globally. While graduates of master’s programmes in business represent the largest share of total startup entrepreneurs, graduates from programmes in computer science, physical, biological, and biomedical sciences are also large contributors to startup creation.
Most of these new startups (97%) are in the same state as the university where students received their master’s degrees. This means that high-quality universities generate a very high added value for local communities by attracting international talent and retaining some of their firm-creation potential locally. This result sheds new light on the positive impact of universities on innovation (Stuen et al. 2012).
Policies to keep talent in the US
These numbers are particularly impressive in the light of the fact that only a small percentage of foreign students with a US master’s degree stay in the US after graduation. In an earlier study (Beine et al. 2023), we found that due to visa and immigration restrictions, only 20% of international US master’s graduates stay and work in the country for at least two years. Some return home, while others leave for countries with more open immigration policies for highly skilled workers, such as Canada or Australia. The direct effect on creating startups in the US would likely be even larger if more international master’s students were allowed to stay in the US.
The increased cost of studying in the US as well as the restrictions on the number of graduates able to stay – due to limitations on H1-B visas and lack of other visas or permanent resident opportunities – may reduce the inflow of these students and limit the entrepreneurial benefits found in this study. Those already significant benefits from foreign master’s students suggest that the US government and top universities could take several steps to retain talented graduates in order to benefit further from foreign students’ entrepreneurial ventures. Reducing enrolment barriers, increasing access to financial grants and support for those who create local startups, supporting/expanding policies that allow graduates to stay in the US after graduation by extending the Optional Practical Training visa to the self-employed, and expanding the time and reach of international entrepreneurial visas could all have large effects in helping to maintain and reinforce US leadership in business and innovation.
Source : VOXeu
