3 Mechanisms through which migration could stimulate trade
Following Gould (1994), most authors postulate two mechanisms through which migration could stimulate trade between the host and origin countries: “transaction cost” effects, and “immigrant preference” effects.
3.1 Transaction cost effects
Migrants are expected to stimulate trade by lowering transaction costs. There are two related sets of reasons why immigrants might face lower transaction costs for trade with their country of origin. The first is that immigrants have superior knowledge of home country markets, languages, business practices, laws, and other matters related to trade. The second is that migrants may be able to participate in international networks, as exemplified by the networks of ethnic Chinese (Rauch and Trindade 2002). These networks can be conduits of information, and can deter opportunistic behaviour.
Transaction cost effects are generally expected to stimulate both exports and imports. Most authors argue that migrants’ informational advantages are more important for differentiated goods than for homogenous goods, because of the greater information problems involved in the trade of differentiated goods. Most authors also argue that the trade-stimulating effect of migration is greatest when the host and origin countries have very different institutions, languages and cultures, and when alternative sources of information and contract enforcement are lacking, since this is when the special skills or migrants are most needed.
3.2 Immigrant preference effects
Immigrants are assumed to demand certain goods produced in their home countries, or similar to those produced in their home countries. These preferences are expected to boost imports to the host country but not exports from the host country. The effect is assumed to be more marked for differentiated goods than for homogenous goods. Some authors note that there may be a countervailing “immigrant substitution” effect. If there are sufficient immigrants in a country, these immigrants may begin to produce goods themselves rather than importing them (Dunlevey and Hutchison 1999, Girma and Yu 2000).
