IMF Working Papers

High emigration rates are a challenge in the Western Balkans. High emigration rates might lead to inadequate skilled labor and affect firm creation, capital formation, and economic convergence. The 2021 North Macedonia census reveals that more than 12.4% of North Macedonians live abroad. To assess the consequences, we estimate the impact of emigration on the number of firms and capital formation. Business dynamics can affect emigration reversely. To alleviate the endogeneity bias, we use a shift-share instrument with the historical diaspora networks and destination countries’ GDP growth rate as a source of exogenous variations. Our results show that (1) In the short run, a 1 percentage point increase in the emigration rate leads to a 2.91% decrease in the number of firms in the area of origin; (2) The long-run effects of emigration on the number of firms are less negative than the short-run impacts; (3) Emigration mainly reduces the number of micro and small firms; (4) Emigration affects the number of firms and capital formation more in the industrial sector than the other sectors, through the skilled labor shortage channel. This paper contributes to the literature on emigration and provides implications and policy considerations for developing countries, where high emigration rates are prevalent.