The First American Brain Drain

Baris Guzel is the kind of fellow who used to find his future in America. Not anymore.

Guzel is a 25-year-old student from Turkey working on his master’s degree in engineering management at Duke University. He and four friends plan to launch a company offering a free online tool that would allow website operators to poll their readers.

It might work, it might not. That’s what American entrepreneurship is all about. Or it used to be. Unfortunately for America, Guzel is thinking about opening his venture in Germany.

“It is hard for foreigners to get a job these days [in the US],” he explains to Business Week. “In Germany, it is easy to obtain a working visa.”

Guzel’s story says a lot about America’s future – and how you need to invest during the coming decade. It’s a brutal truth: America is losing some of its most promising entrepreneurial talent – the legions of young foreigners who come to study at US universities.

In recent years, foreign students snagged 60 percent of engineering doctorates in the United States. If you widen the pool to doctorates in engineering, mathematics, computer science, physics and economics, foreigners still accounted for 50 percent. Immigrants were CEOs or lead technologists at over 50 percent of Silicon Valley startups in the last decade. Immigrants co-founded Google, eBay, Intel, and Yahoo, among others.

Time was when these students exited the academy, they stayed stateside. Ninety-two percent of Chinese Ph.D.s in science and engineering remained in the United States for at least five years after their studies – and 85 percent of Indians.

No more. One of Guzel’s professors, Vivek Wadhwa, goes so far as to say “the United States may be experiencing the first brain drain in its history.”

In 2009, Wadhwa was among four researchers from Duke, Harvard, and Berkeley who compiled a survey of more than 1,200 foreign-born students for the Kauffman Foundation. The number of Chinese who plan to stay is now just 54 percent, while the number of Indians who expect to remain is 58 percent.

What’s more, only seven percent of Chinese students surveyed and 25 percent of Indian students believed the American economy’s best days still lay ahead. But overwhelming majorities of both Indian and Chinese students believed their home country’s best days still lay ahead.

No doubt that’s linked to their perceived job prospects. And that perception is colored by the successes their countrymen already achieved after returning home.

Wadhwa and his colleagues previously surveyed foreign students who’d already returned to their home countries. “Only 10 percent of the Indian returnees held senior management positions in the United States,” he says, “but 44 percent found jobs at this level in India. Chinese returnees went from 9 percent in senior management in the United States to 36 percent in China. Opportunities for professional advancement were considered to be better at home than in the United States by 61 percent of Indians and 70 percent of Chinese.”

P.J. Lavakare’s experience backs up those numbers. He’s an Indian “pioneer” of this migration pattern. He earned a Ph.D. from the University of Rochester on a Fulbright scholarship in 1963 and returned home to shepherd generations of young Indians through the same process. Nowadays, he says, “attractive job offers in the Indian corporate sector have given a new dimension to the mobility of Indian scholars who are now considering returning to India to take up challenging and lucrative assignments in the growing multinational sector in India.”

That is, instead of taking a low-paying job in an Indian university, they can take a relatively high-paying one at a multinational corporation.

Follow The Capital, Follow The Brains

Most Americans would have a hard time wrapping their minds around this domestic “brain drain.” The US has always been the land of opportunity… the beacon of hope… for the rest of the world. Or so we’ve grown up telling ourselves.

After all, “brain drains” are what used to happen to other countries – Warsaw Pact fossils living under Moscow’s thumb, or the soft-socialist nations of Western Europe.

But if the kind of people who helped build Google, Intel, and eBay now choose to do the same in the countries where they came from, then it pays to follow the money – and the brains. In other words, if you haven’t yet expanded your investment horizons beyond US-based companies, there’s no better time than now to start – because the Googles of tomorrow will likely be found outside American shores.

One very simple way to get started is to buy the India Fund (NYSE:IFN). It’s a closed-end mutual fund that trades just like a US stock. It gives you exposure to every facet of India’s economy, which is forecast by the World Bank to grow faster than anywhere else in 2010 – including China. You get a cross-section of the Indian economy – energy, finance, telecom – but this is an actively-managed fund that seeks to outperform the Indian market as a whole.

If you’d put money in The India Fund in the autumn of 2008 – as world markets were in full panic mode – you’d have been up 31% a year later. We anticipate much better is still to come.

You won’t want to trade in and out of this fund. Just tuck it away in your portfolio and let it ride for a few years.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning