Explaining low self-employment rates among foreign-born STEM graduates: Why start a business if it doesn’t pay?

by Ariel West 
(June 8, 2017 at 2:01 pm)

Economics and Legal Studies associate professor John Winters

According to analysis of the American Community Survey, foreign-born college graduates in the science, technology, engineering and mathematics (STEM) field have much lower self-employment rates compared to foreign graduates of other majors. Why aren’t these technologically and scientifically-minded people starting new companies?

Oklahoma State University associate professor of economics and legal studies John Winters and co-author Zhengyu Cai from Southwestern University of Finance and Economics were also curious, as individuals who immigrate to a developed country are generally thought to be more entrepreneurial. One partial yet important explanation is earning differences between STEM and non-STEM fields: employed STEM graduates make a lot more money.

“Only about eight percent of foreign-born STEM graduates own their own businesses compared to 11.3 percent of foreign non-STEM graduates,” Winters said. “We wanted to try to explain this… so we started by documenting that foreign-born STEM graduates, on average, earn much higher in paid employment than their non-STEM counterparts.”

The pair did some analysis and compared earnings differences across different college majors for foreign-born graduates. On average, STEM graduates made more money being employed compared to self-employed STEM graduates, but they also made more money than employed non-STEM graduates and self-employed non-STEM graduates. Simply, STEM graduates have less financial motivation to pursue self-employment.

“We find that earnings differences explain a considerable portion of this self-employment difference between STEM and non-STEM graduates,” Winters said. “Specifically, higher earnings in paid employment accounts for more than 40 percent of the differing self-employment rates between foreign-born STEM graduates and non-STEM graduates. This is only a partial explanation, but a pretty important part of the explanation… there are certainly some other factors that might be at play here.

Winters suggests that future research should observe people transitioning into and out of self-employment and documenting the earnings differences before and after the transition.

“Both STEM and self-employment are independently important ingredients for economic growth and prosperity,” Winters said. “Both play major roles in driving innovation. However, our study documents that foreign-born STEM workers are not especially entrepreneurial in part because they don’t have to be. Many of them prefer the comfort and security from paid employment and the high salaries that they can earn.”

There’s not necessarily a policy solution needed for the low self-employment rate for STEM graduates. We’re more concerned that the non-STEM graduates on average do quite poorly in self-employment, which may reflect some sort of selection into self-employment out of necessity or due to limited options in the paid labor market. Some foreign non-STEM graduates have skills that don’t translate well to the American labor market, perhaps because of language, culture, or employer uncertainty about foreign university credentials.”

The research article, “Self-employment differentials among foreign-born STEM and non-STEM workers,” was accepted for publication in the Journal of Business Venturing. To view the research article, visit http://www.sciencedirect.com/science/article/pii/S0883902616300556.