Migrants, Ancestors and Investment

We use 130 years of data on historical migrations to the US to show a causal effect of the composition of foreign ancestry of U.S. counties on foreign direct investment (FDI) sent and received by firms within these counties. To isolate the causal effect of ancestry on FDI, we build a simple reduced form model of migrations: migrations from a foreign country towards a US county at a given time depend on (i) the total emigration from that foreign country at that time, a push factor, (ii) the total immigration into that US county at that time, a pull factor, and (iii) the presence of an existing migrant community from that foreign country, a recursive factor. Variations in the timing of the push and pull factors over 130 years induce plausibly exogenous variations in the ethnic composition of US counties. We find that the presence of residents with ancestry from a given foreign country in a US county increases the probability that at least one local firm invests in that country significantly, and increases the number of jobs at domestic recipients of FDI from that country. The size of these effects increases with the ethnic diversity of the local population and the quality of institutions of the origin country.