Monday, April 7, 2008

Economic Arguments for Abandoning H1B Visas

Supporters of America’s H1B visa system argue that firms such as Microsoft and Google (both opposed to the existing system) should simply send these jobs overseas by expanding their current operations in places like China and India. The problem with this argument is that it does not follow economic logic.

There are several economic factors that influence the ongoing development of technology-based industries in the United States. These factors further support the position that the H1B Visa system should be significantly restructured (or abandoned altogether).

1. Agglomeration Economics – As firms in related industries (“clusters”) work in relative proximity to each other, several positive effects are felt:

--> The overall cost of production is reduced because of the increased competition of suppliers and the greater number of firms consuming production inputs. This includes such items as laboratory equipment, software, hardware and other necessary production inputs to developing new technologies .

--> There is an increase in the number of innovations through implicitly shared knowledge.

--> Positive externalities develop - that is - the number of “knowledge spillovers” occur.

These economies of scale and externalities cannot be artificially manufactured by establishing a research park in a foreign country. Economic clusters are complicated organisms that have evolved over time. The organic systems resulted from years in response to market dynamics and locational factors.

2. Labor is not the only factor of economic production. Capital – meaning machinery and related technical equipment - is also a major factor. (Together, Capital and Labor compose the basis of the Cobb-Douglas Production Function upon which economists such as Robert Solow, Greg Mankiw, and Paul Romer have based parts of their research.)

Collect a labor pool of scientists with PhDs from the best universities in world and put them together in Siberia with no research and testing equipment. Their output of new innovations will fall to negligible levels. This basic fact creates another significant advantage to economies such as the United States, and more specifically places like Silicon Valley, that have an inherent base of both private, public, and education sector research and development facilities.

3. Enforceable property rights legislation and intellectual property protection in the United States support research and development better than other developing nations. Countries such as China have a well-documented global reputation for poor enforcement of patent and copyright laws. The ability to develop a new technology and maintain a monopoly on their innovation and idea provides the necessary for profit-maximizing firms to operate. Economies that do not protect a firm’s ability to maximize its profit are not adequate environments for technology firms to effectively operate.

4. And finally, the proximity to a market where the developing firm will be likely to sell whatever technologies it develops plays a role. Technological innovations are likely to be adopted and integrated into the world’s most developed economies first, then eventually trickle down to lesser developed economies. Because firms seek to minimize costs and maximize profits, it makes good business sense to develop technologies in countries where these technologies will be purchased and utilized.

The United States’ comparative advantage in technology industries requires that it be supported the best and brightest global minds regardless of the individual’s country of origin. Without such support, our economy runs the risk of unintentionally developing other “technology clusters” manned by scientists and researchers in other countries. The end result could be the loss of our comparative advantage and our leadership position as the world’s innovator.

The single best solution to maintain our technological leadership is to leverage the privilege of living and working in the United States to attract foreign workers. This labor competition will also pressure the domestic workforce to increase its knowledge and capabilities, resulting in a more effective, innovative labor force.


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