Blessing or Burden? The Impact of Refugees on Businesses and the Informal Economy

Onur Altındag, Ozan Bakisy, and Sandra Rozo

Paper presented at the Research Conference on Forced Displacement 2020, co-organized by the Joint Data Center on Forced Displacement.

 

Review

The authors examine the impact of the sudden arrival of more than three million Syrian refugees on businesses 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 speakers, 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 including annual censuses of firms, labor force surveys, business registrations and trade statistics, as well as official population and migration figures from 2006 to 2015. 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 refugee inflows’ as an instrumental variable (interaction of the number of Syrians who left their country each year and the share of Arabic speaking populations in Turkish provinces in 1965).

Key findings:

  • No significant effect of refugee inflows on firms’ formal production figures (reported sales and gross output), but strong evidence of a positive effect of refugee inflows on production proxies such as oil and electricity consumption, which correct for firms’ underreporting. A one-percentage-point increase in the share of refugees to total population boosts 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, as revealed by a substantial increase in the number of new firms, especially those that include foreign partnerships. A one-percentage-point increase in the share of refugees to total population leads to 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.
  • The effects of refugee inflows are largely concentrated in the informal economy, with a net displacement of native workers. Refugees are replacing native workers in the informal labor market and reducing labor costs for firms. Among male native workers, a one-percentage-point increase in the ratio of refugees to overall population decreases the informal employment of native workers by 0.4 percentage points and decreases the number of hours they worked by 1.3 percent. Native workers also see their wages drop by 1.9 percent.
  • No evidence of significant effects of refugee inflows on firm exit, or on Turkish exports/imports.

 

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 there.
  • Fixed costs associated with initial resettlement, such as housing and setting up a new business, might be contributing 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.

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