Blessing or burden? Impacts of refugees on businesses and the informal economy

OnurAltındağ, OzanBakış and Sandra V.Rozoc

Journal of Development Economics



The authors examine the impact of the sudden arrival of more than three million Syrian refugees on the behavior of firms in Turkey. This case is useful to investigate causal effects because: (a) the timing and scale of the refugee inflow were exogenous to economic conditions in Turkey; and (b) refugees clustered in regions with a higher share of Arabic peakers, leading to substantial geographic variation in exposure to refugee inflows. The vast majority of Syrian refugees work in the informal labor market, mostly in low-wage jobs in
agriculture, construction, manufacturing, and service industries.

The analysis is based on data from multiple sources covering the period 2006 to 2015, including annual censuses of firms, labor force surveys, business registrations and trade statistics, and official population and migration figures. The authors also draw on findings from face-to-face interviews with business owners and refugees. The authors employ an instrumented difference-in-differences approach that exploits province-year variation in refugee inflows, accounting for the endogeneity between firm outcomes and refugee inflows using ‘predicted inflows’ as an instrumental variable (interaction of the annual number of individuals who left Syria and the historical distribution of Arabic-speaking populations in Turkey in 1965).

Key findings:

  •  No significant effect of refugee inflows on production figures reported by firms (reported sales and gross output for accounting purposes), but strong evidence of a positive effect of refugee inflows on production proxies such as oil and electricity consumption, which correct for firms’ underreporting and account for informal economic activity. A one-percentage-point increase in the share of refugees to total population boosted firms’ electricity and oil consumption by 4.3 percent. These effects are stronger for smaller firms and those in construction and hospitality.
  • Refugee inflows had a positive impact on firm creation, especially those with foreign ownership. A one-percentage point increase in the share of refugees to total population led to a 1.5 percentage point increase in the number of firms and a 6.3 percentage point increase in the number of firms with foreign partnership. A significant proportion of new firms were established by Syrians partnering with Turkish citizens to overcome barriers to market entry.
  • Refugees are replacing native workers in the informal labor market, thereby increasing the competition for low-wage jobs and potentially reducing labor costs for firms. Among native male workers (who account for 75 percent of the employed labor force in the sample), a one-percentage-point increase in refugees in  the overall population decreases the likelihood of overall employment by 0.3 percentage points, driven by the loss of employment in the informal labor market. Those who stay employed experience a 0.4 percent marginal increase in their wages and work longer hours.
  • No evidence of significant effects of refugee inflows on firm exit, or on Turkish exports/imports.

Overall, the findings suggest that larger refugee inflows have a positive impact on local businesses and firm creation, which are largely concentrated in the informal economy, while reducing employment of native workers in the informal labor market.

The authors suggest several mechanisms for these results including:

  • The likelihood of permanently leaving their original location might have induced refugees to bring most of their accumulated wealth to the host country and to invest it.
  • Fixed costs associated with initial resettlement, such as housing and establishing a new business, might contribute to the positive shock, especially in the construction sector.
  • Aid provided to refugee settlement locations by the Turkish government, international governments, and NGOs is mainly supplied by local firms, which might contribute to increased firm output.
  • Reduced labor costs due to the informal hiring of refugees might contribute to the local production boom in refugee-hosting areas.