University of Plymouth PEARL https://pearl.uk Faculty of Arts and Humanities Plymouth Business School 2016-06-11 Competition for the International Pool of Talent Haupt, A http://hdl.1007/s00148-016-0601-4 Journal of Population Economics All content in PEARL is protected by copyright law. Author manuscripts are made available in accordance with publisher policies. Please cite only the published version using the details provided on the item record or document. In the absence of an open licence (e.
Creative Commons), permissions for further reuse of content should be sought from the publisher or author. Competition for the International Pool of Talent by Alexander Haupt Plymouth University, Plymouth Business School and Plymouth Graduate School of Management, Drake Circus, Plymouth PL4 8AA, United Kingdom, and CESifo, Munich, Germany e-mail: alexander.uk Tim Krieger University of Freiburg, Department of Economics, Wilhelmstr. 1b, D-79085 Freiburg, Germany, and CESifo, Munich, Germany, e-mail: tim.de Thomas Lange acatech – National Academy of Science and Engineering, Geschäftsstelle München, Hofgartenstr. 2, D-80539 Munich, Germany, e-mail: lange@acatech.de April 2016 This paper is accepted for publication in the Journal of Population Economics.
The final publica- tion is available at link.com: http://dx.1007/s00148-016-0601-4 Competition for the International Pool of Talent Alexander Haupt Tim Kriegery Thomas Langez April 2016 Abstract: Developed countries increasingly compete for a pool of talented students from developing countries. This competition induces host countries to vertically di¤erentiate their education programmes: some countries supply a higher educational quality and charge higher tuition fees, while others provide a lower quality for lower tuition fees. This paper argues that the educational quality of high-quality countries, the national tuition fees and the quality and tuition fee di¤erentials between the countries all increase as the income prospects for graduates in the developing countries catch up with the developed world and the number of international students grows. If foreign students become more likely to stay in their host country after graduation, the implications will be more ambiguous.
In particular, an increase in educational quality can be accompanied by a decline in tuition fees. Intensi…ed competition for international students does not necessarily disadvantage developing countries, since they might even bene…t from a brain gain. Keywords: Higher education; student mobility; vertical quality di¤erentiation; return migration; brain gain JEL classi…cation: I28, F22, H87 Plymouth University, Plymouth Business School and Graduate School of Management, Drake Circus, Plymouth, PL4 8AA, United Kingdom; E-Mail: alexander.uk; and CESifo, Munich, Germany. y University of Freiburg, Department of Economics, Wilhelmstr.
1b, D-79085 Freiburg, Germany; E-mail: tim.de; and CESifo, Munich, Germany. z acatech - National Academy of Science and Engineering, Geschäftsstelle München, Hofgarten- straße 2, 80539 Munich, Germany; E-Mail: lange@acatech. A foreign graduate from a local university is likely to be well-quali…ed, ‡uent in the local lingo and at ease with local customs. Countries should be vying to attract such people.
(The Economist, January 30th, 2016: 10-11.) 1 Motivation Higher education has become increasingly internationalised over the last decades. On the demand side, talented students increasingly aim at receiving an excellent education even if this requires being internationally mobile and studying abroad. In particular, many students from developing countries consider a degree from a uni- versity in a developed country as a chance to enhance their career prospects at home and abroad. On the supply side, university programmes increasingly accommodate the needs of foreign students in order to attract international talent.
As a result, the number of international students (i., students enrolled outside their country of citizenship) has grown considerably over the last thirty years. Between 2000 and 2012, the number of foreign students within OECD countries has increased from 2. Asia is by far the largest sending region. Students from China and India alone constitute 22% and 6% of the students from OECD partner countries enrolled within the OECD (OECD 2015: 359).
In the host countries, the bene…ts from foreign students are substantial. In the short run, foreign students generate additional revenues from tuition fees and posi- tive spillovers to domestic students and universities. In the long run, the acquisition of international students increases the future number of skilled workers, as many for- eign students will continue to stay in their host countries after graduation (see, e., Dreher and Poutvaara 2011; Finn 2003; Rosenzweig 2008). The OECD estimates that investing in the tertiary education of foreign students yields a net public return of more than USD 127,000 (65,000) for a man (woman) in present value terms, ac- counting for future tax revenues, social security contributions and social transfers as well as direct and indirect public costs of higher education (OECD 2015: 127).
This positive e¤ect also re‡ects the fact that during their studies foreign students acquire not only the necessary professional but also language and cultural skills which enable them to integrate into the labour market of the host country easily. Recent measures of several OECD countries to promote the access of interna- tional students to the domestic labour market indicate that countries are aware of the associated bene…ts (see, e., Chalo¤ and Lemaitre 2009). As a result, about 25% of the foreign students in the OECD member states nowadays stay upon graduation 1 in their host countries (OECD, 2011: 330). In fact, countries such as Australia, New Zealand and Japan consider attracting growing numbers of foreign students as part of a broader socio-economic development strategy (OECD 2011: 324-325).
However, the supply of talent is limited, and ability varies among international students. This gives rise to an intense competition between developed countries for the international pool of talent. Also, changes in the socio-economic environment will continue to transform this competition. Notably, the size of the pool of talent from developing countries will continue to grow over the next decades.
At the same time, the share of international students who stay in their host country after graduation (i., the ‘stay rate’) is very likely to change too. Finally, major sending countries, such as China and India, will continue to catch up with the developed countries and provide better income prospects for graduates who return to these countries. The aim of our paper is to analyse the competition between developed countries for the pool of talent from developing countries and its implications. In particular, we explore how the aforementioned changes in the socio-economic environment will alter the outcome of this international competition.
This analysis will not only provide some hints about future trends in the developed countries, but also shed new light on the discussion of brain drain and brain gain. To this end, we apply a model with duopolistic competition and vertical product di¤erentiation.1 Two developed countries compete for a pool of students from de- veloping countries by non-cooperatively setting educational quality and tuition fees. They aim at maximising their net bene…ts from educating foreign students, which includes future tax payments of those who continue to stay in the host country. In equilibrium, one country o¤ers a high-quality education at high tuition fees and attracts the brightest students, while the other country provides a lower educational quality at low tuition fees and receives the less talented students.
More interestingly, educational quality, tuition fees and the allocation of students respond sensitively to changes in the socio-economic environment, i., to changes in the size of the talent pool, the stay rate and the income prospects for graduates who return to their home countries in the developing world. All three changes un- ambiguously increase the quality of education in the high-quality country and widen the quality gap between the two host countries. In contrast, the conclusions about tuition fees are less clear-cut. Both an enlarged pool of talent and enhanced income prospects for returning graduates raise the tuition fees in the two countries and the 1 Models of oligopolistic competition with vertically di¤erentiated products are frequently used in the literature on industrial economics., Gabszewicz and Thisse (1979) and Shaked and Sutton (1982) for seminal papers and section 4.4 of this paper for a further discussion.
2 tuition fee di¤erential. A higher stay rate of foreign students after graduation leads to ambiguous results. In this case, the tuition fees in both countries and the tuition fee di¤erential can decline. Finally, a higher stay rate implies that a larger share of international students end up in the high-quality country.
By contrast, in the case of rising income prospects for graduates in the developing world, and only in this case, the allocation of students can shift in favour of the low-quality country. As a further important point, this paper stresses a new mechanism that causes a brain gain in the context of inter-country competition. In our basic model, the policy responses of the developed countries to an increase in the stay rate and the size of the talent pool unambiguously yield a qualitative brain gain, as the average human capital of the returning graduates increases. However, a larger stay rate also leads to a quantitative brain drain, as fewer students return to the developing regions.
Our concept of competition goes beyond the notion of mere inter-university com- petition for students. Rather, we consider governments as pivotal actors in the inter- national competition for the pool of talent. As already mentioned above, countries such as Australia, New Zealand and Japan consider higher education policies that at- tract foreign talent as an explicit part of their socio-economic strategy. New Zealand, for instance, raised the quality of higher education and, in 2005, reduced the tuition fees for foreign students to become more competitive (OECD 2011: 325).
While governments can directly regulate tuition fees and in‡uence the educa- tional quality of public universities, they might …nd directing private universities more di¢cult, depending on the precise institutional circumstances. In the absence of public universities, competition between completely ‘uncontrolled’ private univer- sities indeed yields some results that di¤er from our conclusions above, as we will argue. However, as long as public universities exist, the presence of completely ‘un- controlled’ private universities need not invalidate our conclusions, as our account of the case of domestic competition between public and private universities will highlight. Finally, we explore whether, and to what extent, distinguishing between investments in speci…c educational quality, which is to the bene…t of international students only, and general educational quality, which is to the bene…t of both do- mestic and international students, drives our results.
Our analysis contributes to the literature on higher education policy and interna- tional competition for mobile students. For instance, Del Rey (2001) concludes that when international students return to their home countries after graduation, gov- ernments tend to underinvest in educational quality to discourage foreign students from free-riding on the domestic systems. Demange and Fenge (2010) argue that in- ternational competition for students leads to ine¢cient levels of educational quality, 3 as attracting foreign students who partly continue to stay in the host country after graduation implies a negative externality for the country of origin.2 Our contribu- tion di¤ers from these two papers in three ways. Firstly, we analyse competition in both tuition fees and quality of education, while both other papers consider qual- ity competition only.3 Expanding the policy space allows us to show, for instance, that quality levels and tuition fees can move in opposite directions if the stay rate of foreign students after graduation increases.
Secondly, we analyse how the non- cooperative quality levels and tuition fees vary with changes in the socio-economic environment, while the papers referred to above focus on exploring the welfare prop- erties of non-cooperative equilibria. Thirdly, considering explicitly a pool of students from developing countries, we can derive some conclusions about the impact of in- ternational competition for talent on brain drain and brain gain. Kemnitz (2007a) analyses how di¤erent funding schemes and di¤erent degrees of university autonomy a¤ect the competition between universities. He applies a model with vertical product di¤erentiation in which tuition fees and educational quality are endogenously determined, similar to the one we use.
However, he considers a closed economy, while we focus on international competition for students.
