The Effects of Immigration on Capital Inflow

Abstract

In this theoretical paper, we study the relationship between immigration and capital inflow. We apply the idea of Helpman (1984) in explaining that physical capital movement occurs to bring about factor price equalization across countries when international trade alone cannot. Based on the Heckscher-Ohlin model, the Edgeworth Box is used in our static analysis. We find that immigrants may increase or decrease capital inflow. This is because immigrants increase labor supply. They may also depress the domestic wage. Consequently, firms substitute labor for capital and this lowers capital inflow. On the other hand, an increase in labor supply through immigration raises the marginal product of capital and thus the return on investments. Higher returns on capital attract capital inflow. The increase in capital inflow may in turn eliminate the impacts of immigration on factor returns. This suggests the need for future empirical studies of migration and labor market outcomes to control for endogenous capital movements.