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«Prithwiraj Choudhury Harvard Business School Tarun Khanna Harvard Business School October 2013 ABSTRACT High ability individuals can be constrained ...»

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The Role of Firms in Fostering Within Country Migration

Evidence from a Natural Experiment in India1

Prithwiraj Choudhury

Harvard Business School

Tarun Khanna

Harvard Business School

October 2013

ABSTRACT

High ability individuals can be constrained from commensurate employment opportunities due to

their geographic location. In the face of physical, informational and social barriers to migration,

firms with nation-wide hiring practices can benefit from facilitating the migration of high ability individuals from low employment districts to regions with better employment opportunities. We exploit a natural experiment within an Indian technology firm where the pre-existence of a talent allocation protocol allows us to isolate the relation between an employee’s prior home town/village and subsequent performance within the firm. Using unique personnel data for entry level undergraduates and leveraging the fact that the assignment of an employee to one of many technology centers within the firm is uncorrelated to observable characteristics of the employee, we find that employees hired from low employment districts (remote employees) out-perform their non-remote counterparts in the short term. They continue to outperform their non-remote counterparts in the long term once we control for the distance of migration. As a possible explanation of our result, we test for selection and find that employees hired from low employment districts outperform their non-remote counterparts in standardized verbal and logical tests at the recruitment stage. To explain why the firm might be more likely to select high ability individuals from remote districts, we additionally conduct a survey of randomly selected urban and rural colleges and document statistically significant differences in employment opportunities for rural and urban graduates. Our survey results also indicate that not every firm follows the policy of hiring from low-employment districts.

The authors would like to thank seminar participants at Duke, Harvard Business School, the International Economic Association (IEA) meetings in 2011 in Beijing, INSEAD, NYU Stern School of Business, Washington University St. Louis, Wharton and the World Bank DECTI seminar for their comments on a previous draft.

I. INTRODUCTION

The influence of firms in shaping human capital and labor markets has been long studied by economists (Baker, Gibbs and Holmstrom, 1994). Using personnel data collected from firms, economists have conducted several productivity studies that document how hiring, training and human resources management policies of the firm shape the development of human capital (Bartel, Ichniowski and Shaw, 2004). However, firms are notably absent from the literature on migration. To quote Kerr, Kerr and Lincoln (2013; page 5), “firms are mostly absent from the literature on the impact of immigration.” The authors also argue that “this approach seems quite incomplete for skilled migration” given that firms play an active role in the migration of the skilled workers, in the context of U.S. and other countries.

In this paper, we posit that in the absence of roads, air connectivity, information and other relevant “infrastructure”, nationwide hiring by large firms can facilitate efficient within country migration patterns. Firms with nationwide hiring practices can select high ability individuals from geographically remote areas and can benefit from such hiring practices. If employees hired from remote locations outperform employees recruited from non-remote locations, then this could plausibly lead to positive rents for the firm in question.

We leverage a natural experiment within a large technology firm in India and report several interesting results. Individuals hired from low-employment districts (‘remote’ employees) outperform non-remote employees in the short term. In the longer term individuals hired from low-employment districts continue to outperform employees hired from non-remote locations, once we control for the distance of migration.

To offer a possible explanation of our result, we test for selection. We use standardized test scores in logical and verbal ability during recruitment and provide evidence that employees hired from low-employment districts outperform their non-remote counterparts on standardized verbal and logical ability tests at the point of recruitment.

Our empirical setting and identification strategy exploits a natural experiment within one of India’s largest software multinationals, employing greater than 120,000 people worldwide.

The Indian technology firm in question (“INDTECH”) has made significant investments in nationwide hiring and recruits talent from over 250 colleges in India. Several of these colleges are in low employment districts of India. After four months of induction training, the firm then randomly allocates talent it recruits from across the country – including from remote districts across its projects executed in its development centers serving global clients from locations across India. This randomization is done so that the end customers of the firm, which are mostly U.S. based firms, are indifferent among the particular INDTECH center that executes their project. This protocol helps us address several endogeneity concerns. As an example, randomization implies that employees are not systematically assigned to centers close to their hometowns. If this was not the case, then employees coming from remote areas would be assigned a remote development center and their performance ratings would have been downward-biased because of the distance from the larger knowledge centers and because of missing out on agglomeration economies.





To conduct the empirical analysis, we collect unique personnel data for undergraduates hired by INDTECH, anonymized not to reveal names of individuals. The data collected includes details about the school district, college district, assigned technology center, grades received during training, short and long term performance data and attrition data for individual employees. To test for whether or not the firm selects high ability employees from remote districts, we further collected data of the standardized test scores of logical and verbal ability at the recruitment stage for each employee and find evidence of the same. Our interviews with managers at the focal firm indicate that for high ability individuals from remote areas, joining the firm is among their top career choices; while high ability individuals from the larger cities have several other competing career choices.

To further augment our analysis and to establish why INDTECH might be more likely to select high quality individuals in remote districts, we conducted a survey where 11 randomly selected urban and rural engineering colleges participated in a telephonic interview with questions related to the nature of firms hiring from such colleges and the salaries offered by the firms. Analysis of the survey data confirms large, statistically significant differences in salaries for students graduating from urban and rural colleges. The survey also indicates that not every technology firm follows the policy of hiring from remote districts. Multinational technology firms in our survey sample mostly hire from urban colleges and INDTECH has a unique policy of hiring from rural colleges. Interviews conducted with INDTECH confirm the higher costs of hiring from rural colleges that includes the costs of travel, and the higher search costs in finding talent from rural colleges.

Finally, we also find that employees from low employment districts appear disproportionately to use the firm as a platform to further education and join a master’s degree program.

As one possible explanation of our result, we test for selection. We build on the models of selection in the migration literature. Borjas (1994) and Young (2013) are two such models that provide a possible theoretical explanation for our results. The refugee sorting model of Borjas (1994) is based on the Roy (1951) model of self-selection of workers and identifies theoretical conditions under which migrants have below average earnings in the source country but end up in the upper tail of the earnings distribution in the host country. In a recent paper, Young (2013) provides evidence that the large gap between urban and rural living standards in developing countries accounts for much of the inequality within those countries and is attributable to selection based upon unobserved skill and within country migration. Our empirical analysis tests whether or not hiring by firms of migrants from remote areas within the country involves selection based on ability and whether or not high ability employees out-perform their nonremote counterparts in the short-term and in the long-term.

Over the past few decades, the economics literature on migration has focused on international migration and much of the recent literature studies relatively low skilled Mexican immigrants and their impact on the U.S. labor market. A notable exception here is the recent paper by Young (2013). However, the disproportionate focus of the prior migration literature in studying international migration and on a single dyad of countries (U.S., Mexico) overlooks the widespread within-country migration happening in several developing countries. To quote Zhao (1999), “the migration of rural labor to urban areas in China since the mid-1980s has created the largest labor flow in world history.” (Zhao 1999, page 281) Zhao estimates that the number of rural migrants in urban areas in China in the mid-1990s was around 50 million. In comparison, to quote Borjas (1994), the number of legal immigrants coming into the U.S. between 1981-1990 was 7.3 million (Borjas, 1994; Table 1, page 1668) and in the year 1986, the Border Patrol in the U.S. apprehended 1.8 million illegal aliens (Borjas 1994; page 1669).

Our results help bridge this gap in the migration literature by studying the role of firms in the context of within country migration. Here, we are also motivated by the literature that documents physical, social and informational barriers to migration and employment opportunities for individuals in developing countries (Jensen, 2012; Banerjee et al, 2007). In the face of such barriers to migration, large firms with wide-spread national hiring might be particularly relevant in facilitating within country migration. Given the potential higher costs of hiring from remote districts, the firm will only do so if individuals hired from remote districts are more productive, i.e. they out-perform their non-remote counterparts.

In addition to informing the literature on migration, our results have policy implications for India, reportedly the ‘youngest’ country (of appreciable size) in the world, where there is much hope of a demographic dividend and equivalent fear of what we might term a ‘demographic albatross’ that might result if burgeoning youth pools are unemployed and unemployable. Our findings also have implications for other large developing countries like China which has seen widespread within country migration and an increase over the last two decades in economic disparity across regions (Yang, 2002).

Our work also has relevance for developed countries like the United States and has a philosophical connection to the “moving to opportunity” experiments conducted in Boston by Katz, Kling and Liebman (2001). In the past decade or so, labor economists have documented the polarization of the U.S. labor market (Autor, Katz and Kearney, 2006) and in recent work, Moretti (2010) has identified large differences in worker earnings for “observationally similar workers” based on the location of the individual. In his new book, Moretti states that “your salary depends more on where you live than on your resume”, (Moretti, 2012; page 88). Given this, even in the U.S., hiring practices of firms could have policy implications for efficient within country migration.

The rest of the paper proceeds as follows. In the next section, we summarize our theoretical antecedents w.r.t. the positive selection of migrants, the barriers to migration in developing countries and the incentives of firms to facilitate migration. Section III describes our empirical setting and the natural experiment. We report the descriptive statistics in Section IV and our econometric specifications and results in Section V. Section VI concludes.

II. THEORY We posit that firms with nation-wide hiring practices can facilitate high ability individuals overcome barriers to migration and can move them from low employment districts to areas with high employment opportunities. We also posit that despite the higher costs of hiring from remote regions, firms can benefit from such hiring if high ability employees hired from remote regions outperform their non-remote counterparts. The thread of our theorizing is well captured by a quote from Yap (1976) – “Firms maximize profits, and individuals maximize utility. However, because of institutional constraints, noneconomic motivations, government policies and imperfect information, factor price differentials between sectors exist and are only gradually reduced over time. Migration between sectors is a means of equalizing factor returns…however, neither migration, nor any equilibrating force is strong enough to eliminate imbalances instantaneously.” (Yap, 1976, page 122) We build on theoretical antecedents from the literature in economics on migration, development and personnel economics. We first summarize the selection models of migrants.

Two possible theoretical models that are relevant to our work are the refugee sorting model from Borjas (1994) and the recent within-country migration and inequality model of Young (2013).

We next summarize the literature that outlines the physical, informational and social barriers to employment opportunities in developing countries. Finally we summarize the literature in personnel economics that outlines the role of hiring, training and human resource practices of firms in shaping human capital and labor markets.



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