Friday, January 04, 2013

Cleveland Is Dying

Brain drain is the first step towards brain circulation. What good is brain circulation (i.e. return migration)? Three conclusions from empirical research:

We find that:
  • When individuals with foreign experience join the board of a company, the firm’s valuation improves;
  • Its total factor productivity increases; and
  • In the subsequent years, the firm’s profitability increases.
We also show that these improvements in performance are accompanied by changes in corporate policies that are generally set by the board:
  • Firms’ propensity to manage earnings decreases and CEO turnover following low profits increases, indicating that corporate governance improves
  • Among the firms that make mergers and acquisitions, the ones with board members with foreign experience are more likely to make an international merger or acquisition.
This suggests that these firms are able to access a broader range of investment opportunities. Similarly, firms with board members with foreign experience are able to access more sources of external financing, as they are more likely to engage a foreign investor when raising capital through private placements than other firms without directors with foreign experience.

Third, firms that hire directors with foreign experience start exporting more.

Putting a return migrant instead of a local on the company board is better for the business. I conducted return migration focus groups for Global Cleveland. Many participants expressed frustration with the lack of opportunities. The networks of power were parochial. Locals only. Too much social capital was (still is) killing Cleveland.

Return migrants are social capital rich, outside of their hometown. These networks could serve as a catalyst for entrepreneurship and economic development in Cleveland if the community would do a better job of recognizing the value of this talent pool. A good place to start is stopping with the population obsession. People develop, not places.

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