‘Tap the potential of immigrant entrepreneurs’

Sweden could learn a lot from Canada and the UK when it comes to leveraging the power of entrepreneurship to help integrate immigrants, writes Nima Sanandaji of the Captus think tank.

The Swedish welfare state is far from successful when it comes to integrating immigrants into its economy.

Among first generation immigrants from non-industrialized countries, less than half of adults are active in the labour market. Welfare dependency is also nine times higher among this group compared to the rest of society.

High taxes, generous welfare benefits, strong labour unions, and labour market regulations trap people in welfare dependency. This is true even for highly educated and motivated groups of immigrants.

For example, those who made up the early waves of Iraqi immigrants to Sweden were five to ten times more likely to hold a PhD degree than native Swedes. Even so, among Iraqis who gained permanent residency between 1987 and 1991, only 13 percent of the women and 23 percent of the men were employed in 1995.

By comparison, the unemployment rate among the foreign born UK and Canada is half of that in Sweden. Part of the explanation lies in more flexible labour markets and a system which offers greater rewards for working than for relying on government handouts.

Another important factor is that immigrant entrepreneurs are far more successful in the UK and Canada compared to in Sweden. Successful immigrant entrepreneurs can in turn create jobs and opportunities for social mobility for members of their surrounding communities.

Many immigrants in Sweden come from cultures that emphasize entrepreneurship and thus often have a greater desire to start up and expand businesses than native Swedes. But while it is more common for immigrants to start up businesses and they often spend more time on average developing their business ideas, the life span of immigrant businesses is shorter than that of businesses run by Swedes and their incomes are often considerably lower.

As a result immigrant-run small businesses are somewhat less common than those run by Swedes and many immigrants who run their own business do so since the only alternative is unemployment. For example, half of the female immigrants from Iran who start up businesses in Sweden would otherwise be unemployed.

In the UK, the situation is quite different. Minorities from India, Pakistan and Bangladesh were early in establishing businesses in retailing and food-services. Over time, immigrant businesses have established themselves in many different fields, ranging from technology to manufacturing and services. Basically, all ethnic minorities in the UK are more likely than the average Brit to run a business.

The share of minorities running businesses is two thirds higher than that of white Brits. Among Indian and Pakistani immigrants, the likelihood of running a business is twice as high compared to white Brits; among black African immigrants the liklihood is three times as high. Studies also show that minority businesses in the UK play an important role in vitalizing inner city areas otherwise characterized by unemployment and stagnation.

The argument is not that integration works perfectly in the UK, or that the nation is totally free of the welfare dependency so predominant in Sweden. Integration remains a challenge in the UK as well. However, a greater share of immigrants can support themselves and their families through occupation because the country provides more open, unfettered opportunities for entrepreneurial activity.

Canada provides yet another example of successful immigrant entrapreneurship. Almost a fifth of the Canadian population is foreign-born, with a majority hailing from Asia. Integration in Canada is often successful in part due to selectivity on the part of Canadian officials when it comes to whom is allowed to enter the country, but also because immigrant businesses are prosperous.

The share of immigrants active in starting or running a company is some 60 percent higher compared to native Canadians. Historically immigrants to Canada have not just caught up to the income levels of native Canadians – they have often times surpassed them.

Business opportunities and entrepreneurial activity in general are greater in the UK and in Canada compared to in Sweden. Both countries put a greater emphasis on fostering a healthy business climate.

Fewer regulations stand in the way of those starting up businesses and successful businesspeople are subjected to lower taxes. It is perhaps not surprising then, that a greater share of the population of the UK and of Canada start up businesses compared to Sweden.

What is worth noting is that immigrants in the UK and Canada are more likely to run businesses even when compared to the native born in respective country. In Sweden the percentage of immigrants running a business is even lower that the already low figures for native Swedes.

Clearly, immigrant businesses are particularly sensitive to the differences in business climate in Sweden compared to the UK and Canada. But why?

International studies show that immigrant entrepreneurs find it more difficult to adjust to regulations and red tape compared to native entrepreneurs. In Sweden, four out of ten foreign-born businesspeople claim that regulations and bureaucracy have impaired the growth of their businesses.

The Swedish Agency for Economic and Regional Growth (Nutek) says that, “It is likely that actions [aimed at simplifying laws and regulations] are particularly important for individuals born in foreign countries and for recently-arrived immigrants when it comes to simplifying entrepreneurship.”

Research from the UK shows that deregulation implemented during the Thatcher era did much to stimulate the development of immigrant businesses, whereas programmes which simply spent public money on helping immigrant businesses had a very limited effect, if any.

Unfortunately, not only in Sweden but in many, if not all western societies, there is a tendency to turn to government intervention, regulation, and public spending to help marginalized groups.

A widespread belief seems to be that only some groups can take care of themselves, whilst others must rely on government aid. Often these measures have a long-lasting, negative impact, leading to welfare dependency, diminished work ethic, and the creation of social tensions between various groups.

A far better way of helping marginalized groups – in this case immigrants – is to open up rigid systems so that it becomes more accessible to reach social mobility through hard work and entrepreneurship. Such a policy does not weigh on taxpayers but rather leads to improved finances. It does not create dependency on the public but rather promotes self reliance.

Nima Sanandaji is president of the Swedish think tank Captus and has written a report for Sweden’s Federation of Private Enterprises (Företagarna).