Easing immigration restrictions for the highly skilled in developed countries portend a future of increased human capital outflows from developing countries. The myriad consequences of these developments for developing countries include the direct loss of the fiscal contributions of these highly skilled individuals. This paper analyzes the fiscal impact of this loss of talent for a developing country by examining human capital flows from India to the U.S. The escalation of the emigration of highly skilled professionals from India to the U.S is examined by surveying evidence on the changing nature of the Indian­born in the U.S. during the 1990s. The loss of talent to India during the 1990s was dramatic and highly concentrated amongst the prime­age work force, the highly educated and high earners. Depending on the method for estimating expenditures saved by the absence of these emigrants, the net fiscal loss associated with the U.S. Indian­born resident population ranges from 0.24% to 0.58% of Indian GDP in 2001.

However, it may be observed that while the brain drain seems like an extremely bleak scenario, one that may have extreme consequences for the Indian economy, it should also be seen that the knowledge sector would gain tremendously from the outflow. And while the fiscal impact is indeed quite substantial, the net gain in terms of business intelligence, human resource and finances is quite comparable.

In this report, I analyze the pros and the cons of the brain drain as well as examine the reasons for the existence of this outflow. Lastly, I state the measures that may be put in place to correct this process, and indeed hope to reverse it.

In the past few years, the immigration laws in various developed countries have been relaxed significantly. This provoked a rise in the human capital outflow from the developing countries (such as India). Clearly, this causes a direct fiscal loss to the latter countries, mainly from the loss of talent. For this section, the case studied is that of India vis-à-vis the United States.

The so-called brain drain was never more so dramatic than in the 1990s. But what made it more significant was the fact that the people moving to the US were from the highly educated, high earning prime work force.

The primary driver of such a move was a shift in the policy of the US, which had sweeping impacts in the developing world. This is exemplified by the fact that the number of Indian-born individuals in the United States in March 2001 was over one million which is nearly double the number in 1990. Moreover, half of this number belonged to the fiscally sought after 25-44 age group. 75% of them had a bachelor's degree or more and 38% had a master's degree or a doctoral degree. This compared to the fact that only 9% Indians were similarly educated gives a measure of how huge the loss is.

One could argue that the presence of a prosperous Diaspora abroad facilitates trade, investment and ideas. It also promises high returns in terms of remittances and a potential stock of high human capital returnees.

However, the loss of the best and the brightest is likely to have a rather substantial negative effect. For example, the outflow makes the country less attractive as a destination for Foreign Direct Investment or FDI. This can stunt the development of the country, which is the needed critical mass for successful high technology clusters.

The most significant change in the US Immigration Laws, was the expansion of the H1B visa program. A study conducted by the US Immigration and Naturalization Service (INS) on the number of H1B visa petitions granted suggests the likely impact on skilled Indian emigration. Of a total of 81,262 petitions approved, 43% went to Indians. 54% of these went to petitions were accounted for by computer-related occupancies with Cisco, Oracle and Motorola topping the list. The median salary of these H1Bs was $53,000 and of these 98% had a bachelor's degree or better.

Given their characteristics, the US resident Indians would typically have been substantial net contributors to the Indian tax base had they not emigrated. This can only mean that their absence imposes an even higher fiscal burden and lower spending on those left behind.

Statistics show that that while the number of Indian born individuals in 1960 was 12,296, it was over one million in 2000. The figures for countries such as the UK, Canada, and Australia are also comparable. What is worth noticing is that the dependent residents i.e. those aged less than 15 or greater than 64 are only 15%.

The average share with a bachelor's degree or more is 26.5% for the natives compared to 70.8% for the Indians. Median incomes for Indians and the natives were approximately the same in the early 1990s. However there was a rapid escalation to 40 billion in total income of 2001 US dollars. Of the Indians who came almost 33% earned twice more than the natives.

The most likely source of the positive selection is the voluntary migration of the individuals themselves. One other important observation to be made is that there is a distinct advantage given to better schools and universities. For example, 31% of the graduates of IIT Bombay are settled abroad. There is always at least a 1-2% acceptance from an already highly selective pool. This however, is not characteristic of the technology sector or just engineering graduates. 56% of the graduates from the All India Institute of Medical Sciences (AIIMS), India's premier medical institute, emigrated in the early 70s. Now the figure stands at roughly 50%.

As stated before, two methods are generally employed to compute the effects of the emigration. One is the purchasing power parity or PPP method. In order to estimate the fiscal losses associated with these emigrants, either one first estimates what these emigrants would have earned in India, and then integrates the resulting counterfactual distributions with details of the Indian fiscal system to estimate fiscal impacts. Two distinct methods to estimate the counterfactual earnings distributions are implemented: a translation of actual U.S. incomes in purchasing power parity terms and an income simulation based on a jointly estimated model of Indian earnings and participation in the workforce. The PPP methods indicate that the foregone income tax revenues associated with the Indian­born residents of the U.S. comprise one ­ third of current Indian individual income tax receipts. Similarly the Mincer method based on the results from the National Sample Survey for urban participation. This survey was conducted in the 1993/94, which was just before the emigration peaked i.e. just before the technology boom.

The tax losses make this process the more significant. And while the impact on the Central government and the state government maybe largely disproportionate, the losses are largely income taxes. However, in future research must focus on addressing the precision of these estimates by refining the counterfactual earnings.

Silicon Valley's workforce is among the world's most ethnically diverse. Not only do Asian and Hispanic workers dominate the low-paying, blue-collar workforce, but foreign-born scientists and engineers are increasingly visible as entrepreneurs and senior management. More than a quarter of Silicon Valley's highly skilled workers are immigrants, including tens of thousands from lands as diverse as China, Taiwan, India, the United Kingdom, Iran, Vietnam, the Philippines, Canada, and Israel.

Understandably, the rapid growth of the foreign-born workforce has evoked intense debates over U.S. immigration policy, both here and in the developing world. In the United States, discussions of the immigration of scientists and engineers have focused primarily on the extent to which foreign-born professionals displace native workers. The view from sending countries, by contrast, has been that the emigration of highly skilled personnel to the United States represents a big economic loss, a "brain drain."

Neither view is adequate in today's global economy. Far from simply replacing native workers, foreign-born engineers are starting new businesses and generating jobs and wealth at least as fast as their U.S. counterparts. And the dynamism of emerging regions in Asia and elsewhere now draws skilled immigrants homeward. Even when they choose not to return home, they are serving as middlemen linking businesses in the United States with those in distant regions.

In some parts of the world, the old dynamic of "brain drain" is giving way to one that is called "brain circulation." Most people instinctively assume that the movement of skill and talent must benefit one country at the expense of another. But thanks to brain circulation, high-skilled immigration increasingly benefits both sides. Economically speaking, it is blessed to give and to receive.

The most important benefit of this "circulation" is the transfer of information and research material to and from the developing countries. It is believed by many that this can easily outweigh the fiscal negatives. Furthermore, this knowledge is not meant for a few immigrants but to be shared by many.

Unlike traditional ethnic entrepreneurs who remain isolated in marginal, low-wage industries, Silicon Valley's new foreign-born entrepreneurs are highly educated professionals in dynamic and technologically sophisticated industries. And they have been extremely successful. By the end of the 1990s, Chinese and Indian engineers were running 29 percent of Silicon Valley's technology businesses. By 2000, these companies collectively accounted for more than $19.5 billion in sales and 72,839 jobs. And the pace of immigrant entrepreneurship has accelerated dramatically in the past decade.

Not that Silicon Valley's immigrants have abandoned their ethnic ties. Like their less-educated counterparts, Silicon Valley's high-tech immigrants rely on ethnic strategies to enhance entrepreneurial opportunities. Seeing themselves as outsiders to the mainstream technology community, foreign-born engineers and scientists in Silicon Valley have created social and professional networks to mobilize the information, know-how, skill, and capital to start technology firms. Local ethnic professional associations like the Silicon Valley Chinese Engineers Association, The Indus Entrepreneur, and the Korean IT Forum provide contacts and resources for recently arrived immigrants.

Combining elements of traditional immigrant culture with distinctly high-tech practices, these organizations simultaneously create ethnic identities within the region and aid professional networking and information exchange. These are not traditional political or lobbying groups—rather their focus is the professional and technical advancement of their members. Membership in Indian and Chinese professional associations has virtually no overlap, although the overlap within the separate communities—particularly the Chinese, with its many specialized associations—appears considerable. Yet ethnic distinctions also exist within the Chinese community. To an outsider, the Chinese American Semiconductor Professionals Association and the North American Chinese Semiconductor Association are redundant organizations. One, however, represents Taiwanese, the other Mainland, Chinese.

Whatever their ethnicity, all these associations tend to mix socializing—over Chinese banquets, Indian dinners, or family-centered social events—with support for professional and technical advancement. Each, either explicitly or informally, offers first-generation immigrants professional contacts and networks within the local technology community. They serve as recruitment channels and provide role models of successful immigrant entrepreneurs and managers. They sponsor regular speakers and conferences whose subjects range from specialized technical and market information to how to write a business plan or manage a business. Some Chinese associations give seminars on English communication, negotiation skills, and stress management.

Furthermore and this can not be emphasized enough, there is a new culture of transnational entrepreneurship. Far beyond their role in Silicon Valley, the professional and social networks that link new immigrant entrepreneurs with each other have become global institutions that connect new immigrants with their counterparts at home. These new transnational communities provide the shared information, contacts, and trust that allow local producers to participate in an increasingly global economy.

Silicon Valley's Taiwanese engineers, for example, have built a vibrant two-way bridge connecting them with Taiwan's technology community. Their Indian counterparts have become key middlemen linking U.S. businesses to low-cost software expertise in India. These cross-Pacific networks give skilled immigrants a big edge over mainstream competitors who often lack the language skills, cultural know-how, and contacts to build business relationships in Asia. The long-distance networks are accelerating the globalization of labor markets and enhancing opportunities for entrepreneurship, investment, and trade both in the United States and in newly emerging regions in Asia.

As recently as the 1970s, only giant corporations had the resources and capabilities to grow internationally, and they did so primarily by establishing marketing offices or manufacturing plants overseas. Today, new transportation and communications technologies allow even the smallest firms to build partnerships with foreign producers to tap overseas expertise, cost-savings, and markets. Start-ups in Silicon Valley are often global actors from the day they begin operations. Many raise capital from Asian sources, others subcontract manufacturing to Taiwan or rely on software development in India, and virtually all sell their products in Asian markets.

The scarce resource in this new environment is the ability to locate foreign partners quickly and to manage complex business relationships across cultural and linguistic boundaries. The challenge is keenest in high-tech industries whose products, markets, and technologies are continually being redefined—and whose product cycles are exceptionally short. For them, first-generation immigrants like the Chinese and Indian engineers of Silicon Valley, who have the language, cultural, and technical skills to thrive in both the United States and foreign markets, are invaluable. Their social structures enable even the smallest producers to locate and maintain collaborations across long distances and gain access to Asian capital, manufacturing capabilities, skills, and markets.

These ties have measurable economic benefits. For every 1 percent increase in the number of first-generation immigrants from a given country, for example, California's exports to that country go up nearly 0.5 percent. The effect is especially pronounced in the Asia-Pacific where, all other things being equal, California exports nearly four times more than it exports to comparable countries elsewhere in the world.

Clearly there are many international linkages that are created due to a diverse business culture in any developed country. Furthermore, the respect and importance that these few individuals gain benefits the entire country of their origin. They contribute roughly to India's bulging $70 billion foreign exchange (forex) resources. The huge network of IITians alone that encompasses the globe is worth 30 billion US dollars.

For a long time, South Asia had an information black hole. This hole is being filled by the advent of new technologies like the Internet, which induce globalization and aid tremendously in the dissemination of information. The coverage and the importance of the Asian businesses has increased manifold over the years due to the immigration. Simon Cartledge who produced a study on this so-called Bamboo Network, argues that - "[in future] whom you know will matter less than what you know".

However, what needs to be addressed is not that we have a problem but the identification of the causes of the problem. Corruption is always suggested as the major cause. However, that is a tired topic and while probably being the root cause, will take time to be rooted out. What can be attacked more immediately is the problem that most of the research conducted by eminent and intelligent Indians is not often given its due. This lack of appreciation compels them to seek appreciation from other places where it is snapped up eagerly and encouraged with better work conditions. Thus, there is a need for vast improvement in the infrastructure and facilities.

Should these be implemented, we will not need to encourage them to stay. So much so, that it will not just correct the process but maybe even reverse the brain drain.