Immigration Restrictions Lead to More M&A Activity, This Professor’s Research Finds

Companies that can’t find needed talent often acquire it via takeovers, says Wharton’s Exequiel Hernandez.

U.S. arrests of undocumented immigrants were up 37% this summer compared with a year ago. Illegal border crossings have slowed to a near-halt, and the labor-participation rate among foreign-born workers continues to fall. Yet, the Trump administration’s crackdown on immigration may not lead to a substantial increase in jobs for native-born workers, and could pose long-term economic challenges, says Exequiel “Zeke” Hernandez, a professor at the Wharton School of the University of Pennsylvania who specializes in research on the economic impact of immigration policies.

Hernandez co-authored new research published last month by the National Bureau of Economic Research that found companies gain needed talent through acquisitions when constraints are put on hiring skilled foreign-born workers. The new paper suggested that the native-born population can’t readily provide the talent that firms seek.

Hernandez’ research drew on data about roughly 3,900 U.S. companies that used the H-1B visa program from 2001 to 2020 to temporarily hire skilled foreign workers. The research team observed a flurry of acquisitions among companies whose exposure to immigration restrictions increased after the government’s H-1B cap was reduced in 2024. Their analysis is helpful in understanding how the U.S. economy will respond as the Trump administration continues to reduce the flow of both legal and illegal immigration.

Barron’s spoke with Hernandez, author of The Truth About Immigration, earlier this month about the wider economic implications of restricted immigration, and the tradeoff between short-term immigration challenges and longer-term benefits. An edited version of the conversation follows.

Barron’s: Your latest research on immigration focuses on what happens when constrains are put on the availability of skilled foreign workers. What did you find?

Exequiel Hernandez: The basic question that we were trying to answer was how do firms respond if they face a constraint or a limitation on hiring foreign skilled workers that they wanted to hire. Logically, there are several possibilities. But not every job can be offshored, and nor do all firms have the resources to offshore. Not everything can be automated, either. So, there is the possibility that if you can’t hire, you buy another firm.

The research found that if businesses using the H-1B program face restrictions this year on hiring skilled foreign workers, over the ensuing three years they may be expected to make significantly more acquisitions than they otherwise would have. History suggests that the response is fairly quick.

An acquisition is a big deal. You have to spend the money to buy something, and there are a lot of risks that the postmerger integration will fail. So, it isn’t obvious that a firm would respond like this to talent shortages. The trend is telling you that we are facing severe shortages of talent, not just among the immigrant labor market but in the native labor market, as well.

Could there be other explanations for the stepped-up acquisition activity? Could it be correlational but not causal?

We dug more into whether these acquisitions are a response to [labor] shortages, in this case of H-1B visa restrictions or something else. The research found causation as opposed to correlation—a super-strong causation, much more strong than we expected.

We looked at the types of deals, at the characteristics of these acquisitions. Were they really responses to talent shortages—foreign talent shortages? And we saw some remarkable things.

We know the skills and occupations of the workers that firms intended to hire. We found that the acquisitions made were much more likely to be related to [the acquisition of] those foregone skills. We found that the targets—the firms acquired—were much more likely to be in places with high levels of skilled workers, rather than low levels of skilled workers. They also tended to be smaller deals, the kind consistent with the “acqui-hire” motive.

Some recent examples of AI talent-focused acquisitions include Microsoft buying Inflection AI or OpenAI buying Multi; and Perplexity buying read.cv to gain its team.

In the past 15 months, the immigration surge has waned—even before the Trump administration began curbing immigration and escalating deportations of unauthorized immigrants. At the same time, the U.S. has experienced a rebound in mergers-and-acquisitions activity, which began in late 2024. Is this M&A surge a result of the stricter immigration policies?

It could be. It is consistent with our study. We looked for declarations from firms that their acquisitions were in response to this, but firms tend not to say so publicly. It’s too controversial.

But I also want to be clear that the recent surge in acquisitions could be related to lots of other variables. I’m not saying that visa restrictions explain 100% of it.

Are there any business sectors perhaps more primed for acqui-hire deals than others?

For anything human-capital heavy, that would be a consideration. That would be anything in technology, from artificial intelligence to computing to the biotechnology sector. Also, for service sectors that require a lot of expertise, whether consulting, banking, and maybe even some accounting and auditing-type services, skilled workers are important.

I wouldn’t expect such acquisitions to be as important in sectors that are more about scale and physical assets. In a sector such as oil and gas, it’s less likely you would see this sort of acquisition trend.

What are some other unintended economic consequences of restrictive immigration policies?

That is an important question because we tend to think about immigration only as a source of labor. But empirical evidence tells us that there are several ways immigrants contribute to an economy. One is labor, or talent. But immigrants also attract investment and provide innovation, and consume and pay taxes.

Immigration across countries greases the wheels of cross-border investment. Many immigrants, whether they enter the U.S. on H-1B or other kinds of visas, have a disproportionately high rate of entrepreneurship. They start businesses. So, whether it is through foreign investment or entrepreneurship, you get more investment in the economy. When you’re restricting these flows of immigration, you are choking off the networks of trust and information that make the attraction of foreign investment possible.

Can the current AI boom and automation offset the potential economic drag from immigration curbs?

That is a $1 trillion question. Immigrants do a lot of work, both blue-collar and white-collar, that can’t be replaced by technology. Good examples would be in medicine, healthcare, elder care, and household care, where a lot of the work has an emotional component.

A lot of these new technologies are going to create jobs we can’t imagine today that need to be done by humans. If we don’t have the people, we won’t be able to pounce on the job opportunities those new technologies bring.

Japan historically has had a strict immigration system. Is that a viable model for the U.S.?

It isn’t even workable for Japan. Japan has been trying to automate its way out of its population crisis forever. Yet in the past five to 10 years, it is one of the countries that has most desperately tried to implement guest-worker programs because the Japanese realize they can’t automate their way out of everything.

If you think of immigrants as labor only, you are misstating the point. At a minimum, immigrants are also consumers. So, even if you could fill all your labor needs with non-immigrants and robots, but you have a shrinking population, who is going to buy the stuff you are producing? Who is going to pay taxes to fund entitlement programs that are popular?

You are really looking at both the supply and the demand sides of the economy. People aren’t just labor inputs into a production function; they are the very thing that makes the economic pie grow.

The size of the national debt and deficit is a concern for many Americans. How does limiting immigration play into this equation?

The national debt is a function of income minus borrowings and interest costs. Immigration will be essential to manage our national debt. We are borrowing and spending at such high levels that even keeping current immigration levels isn’t going to be enough.

We have a spending problem more than an income problem. But our income problem would be much bigger without immigration.

Many municipal leaders—mayors and governors—talk about the challenging cost of immigrants to their communities. But economists always seem to extoll the long-term economic benefits of immigration. Who is right?

Both sides have a point. The discrepancy in viewpoints stems from two things—short run versus long run, and local versus federal.

When the governor of Texas says the state is unfairly bearing the brunt of all these new border crossers, he has a point. When you get large inflows in a short amount of time to one focal point, it overwhelms the short-term budgets of the jurisdiction, whether it’s a city, a county, or a state. Based on the data, first-generation immigrants consume a bit more at the local level in public services than they pay in income taxes. It isn’t a lot, but on average it has a slightly negative fiscal effect.

But that’s short run and local. In the long run, when you look over the lifetime of an immigrant, his children, and even his grandchildren, the fiscal return on investment is very high because what the children and grandchildren of immigrants are paying into local taxes is more than double what it costs that local jurisdiction to welcome the immigrants, so to speak.

A 2016 study by the National Academies of Sciences, Engineering, and Medicine estimated the average immigrant contributes a net present value of $259,000 to federal, state, and local governments. That’s a huge number that adds up to more than $10 trillion in taxes when you add up all immigrants over the period of the study.

Research from Michael Clemens, an economist at George Mason University, also shows that firms benefit and profit from hiring immigrants—and they pay corporate taxes on those profits. Once you account for the corporate tax increase because of the profits immigrants generate, then you get positive effects from immigration, fiscally speaking, and you get them right away. And that is true for all immigrants, not just high-income, educated immigrants. Even a low-education immigrant has a net positive fiscal effect because of the increase in corporate taxes.

Still, the mayor of El Paso will likely be long gone before the grandchildren of those immigrants are paying their income taxes. So, a conversation we should be having is how to balance that.

Thanks, Zeke.

Write to Megan Leonhardt at megan.leonhardt@barrons.com