The impact of cultural diversity on firm innovation: evidence from Dutch micro‐data

Are Culturally Diverse Firms
More Innovative?
Ceren Ozgen1, Peter Nijkamp2 and Jacques Poot3
1,2 VU University, Amsterdam; 3University of Waikato, New Zealand
Theoretical Background

Romer 1990, JPE: “Technological advances come from things that people do.”

Ideas vs Human capital

Ideas are nonrival (can be used simultaneously everywhere), while human capital is not…

Human capital = education + ability (Human capital turns ideas into outputs).

Current era of extensive circulation of ideas; and extensive circulation of human
capital
→ Migration as a mechanism

SUPPLY SIDE: The knowledge transferred by migrants is necessarily selective and
distinctive: Not everybody is migrating; not every migrant is the same (Borjas 2000,
Williams 2007)

DEMAND SIDE: This transferability is contingent on the production conditions
(organisational culture, labour market structure, legislation) = Defines receptivity at
the destination (and extend of barriers)

Follows


Romer 1990, Borjas 2000, Jones and Romer 2011 (ideas, institutions, population and human
capital matter more than Kaldor’s facts on physical capital and growth)
→ endogenous tech. change, skill-selective migration, migrant diversity and innovation.
Migration Literature

Small number of papers discussing within firm effects of migrants (e.g. Lee & Nathan
2010 in London ). The available literature offers 2 main streams of research:

1st branch: Effect of foreign entrepreneurs/students/inventors on innovations (Faggian
and McCann 2009; Kerr 2009; Kerr and Lincoln 2008; Hunt and Gauthier-Loiselle
2008; Zucker and Darby 2007)

2nd branch: Effect of migrant externalities from diverse regions on
innovations/productivity (Ozgen et al. 2011, Niebuhr 2010, Mazzolari and Neumark
2009, Sudekum 2009, Ottavaino and Peri 2005)

3rd branch: A significant policy quest.; Are there some productivity enhancing
externalities gained from within firms diversity?
3
What Do Multinationals Say?
Forbes, Aug 2011
FORBESInsights:
Diverse and inclusive
workforce is crucial to
encouraging
different perspectives
and ideas that drive
innovation
Strong convincement on positive externalities of diversity:
Out-of-the box thinking matters!
Possible ways of interaction-knowledge
exchange within firms
Decomposing the Concept of Diversity

Exposure
Exposure to foreigners:
(Degree of potential contact)


Scale of others


Scale of foreigners:
Share of foreigners
Composition of foreigners


Co-location index
Diversity of the workforce:
Diversity (Fract.) index
Richness

Variety of others in a firm:
Unique number of birthplaces
Description of the Data

This study combines 3 confidential high-quality firm/individual level micro-datasets obtained
from Statistics Netherlands
a. Tax Records (SSB_Banen) – 10 million obs.
b. Community Innovation Survey (CIS 3.5-CIS 4.5), (Survey + Census for 50+ empl.
firms) about 11000 observations in each period.
c. Dutch Municipality registrations (GBA) – 16 million obs.
CIS is a regular snapshot of infrastructure /inputs /outputs /obstacles for innovation and firms

Our Dataset is a panel linked employee-employer dataset (LEED) :

CIS_SSB
: obtain the actual number of employees per firm per location

CIS_SSB_GBA
: obtain the actual number of foreign employees per firm + their charac.
6
Methodology I: Data and Estimation Technique
Sample Information for the Panel Dataset:

Total number of firms
:
5 590

Total number of employees
: about 1 million employees

Total number of foreign employees : 105 587 (~11% of employees in the sample)

A 2-wave panel data of a sample from 2000 to 2006:
Pr(Innovate)it = f(Firms charac., Regional features, Employee charac.)it
+ ui + error termit

Pr(Innovate) :

Firm is an innovator

New products/services are introduced

New processes are introduced
7
Covariates

1. Firms characteristics:




2. Regional features:




Market structure
Competition
22 Macro-sector FE
(firms/jobs per municipality)
(firms/km2)
3. Employee characteristics:





Firm size
(lnfirmsize)
Obstacles to innovation (lack of personnel)
Firms’ opennes to change (internal organizational changes wrt third parties)
Background measures (birthplace)
Skills of employees
Youthfulness of employees (demographics)
Diversity measures
4.Time FE
Methodology II-Diversity Measures
∑foreigni /employeesi

Scale: Shfori =

Composition: Divi =
N
1  s
j 1

Richness: Uniquei =
2
ji
N
U
j
ji
i: firm,
j birthplaces
Some Definitions in the Micro-datasets:
(Simple definitions-highly complex procedures)

Firm: is a company with an autonomous production and decision features, while
there is a strong outward orientation (Documentatierapport CIS, 2002)

Innovation: A firm is an innovator if during the reporting period it has strongly
improved a current product (process) and/or produced a new product
(process). If the firm has cancelled an innovation it is also an innovating firm.



the NEWNESS leads to radical, major and dramatic change
+
improvement of existing products/services/processes
In our study:
 Foreigner is a person who was NOT born in the Netherlands.
10
Descriptives
Firms


40 % of the firms innovated
Firms are active in multiple innovation types

The change of innovativeness in 2000-2006 (Random or structural?)





0=0; 1266
1=1; 751
1=0; 365
0=1; 419
Employees


On average 18 foreign empl per firm // 10 unique birthplaces // 11% of firm
employment is foreigners



65% of foreigners are between 25-45 years old
22% of foreigners are high-skilled
About 30% of foreigners are from the European continent
The Context of the Study Period in the NL

Migrant employment
Firm size Distribution
Firm size by Foreigners
Location of Firms

Top five NUTS 3 regions
with respect to number of
firms (34% of all firms)
1.
2.
3.
4.
5.
Groot-Amsterdam
Groot-Rijnmond
Utrecht
Twente
Zuidoost-Noord-Brabant
Results I
ln(Firm size)
Lack of personnel
Lack of financial resources
Openness to change
Firms per jobs (Nuts 3 level)
Firms per km2
Intensity of co-location (by birthplace)*
innovative
0.708***
0.048
0.087***
0.017
0.035**
0.014
1.23***
0.118
-0.231
2.6
-0.001
0.001
-
lnunique
-
Diversity index (excl.natives)
-
Sh of foreigners
-
Sh of high skilled frg
-
Sh of frg aged 25-45
-
Constant
Sector FE
Time FE
N
LR
-3.38***
0.458
Yes
Yes
5586
-2950
innovative
0.595***
0.054
0.088***
0.017
0.034**
0.014
1.21***
0.117
0.202
2.6
-0.001
0.001
0.526**
0.201
-0.647
0.394
0.421**
0.181
0.382**
0.142
-3.30***
0.461
Yes
Yes
5586
-2937
innovative
0.568***
0.072
0.088***
0.017
0.034**
0.014
1.21***
0.117
0.174
2.6
-0.001
0.001
-0.001**
0.001
0.228**
0.105
0.167
0.234
-0.936*
0.485
0.389**
0.181
0.311**
0.144
-3.36***
0.476
Yes
Yes
5586
-2927
product
0.545***
0.087
0.092***
0.016
0.023*
0.014
1.37***
0.124
-2.24
3.04
-0.001
0.001
-0.002**
-0.001
0.100
0.125
0.610**
0.277
-1.28**
0.655
0.652**
0.207
0.263
0.17
-3.91***
0.56
Yes
Yes
5587
-2582
process
0.413***
0.069
0.046***
0.012
0.003
0.011
1.13***
0.103
2.63
2.41
-0.001
0.001
-0.001**
0.001
0.248**
0.100
0.082
0.229
-0.523
0.461
-0.031
0.181
0.059
0.143
-3.83***
0.449
Yes
Yes
5588
-2669
Results II – Market Orientation matters!
International International International
0.986
-1.96
3.19
3.29
2.67
3.12
2.45
-.003**
-0.001
-0.001
-0.001
-0.001
0.001
.001
0.001
0.001
0.001
0.001
-0.005**
-0.007***
-0.001
-0.001**
-0.002**
-0.001**
0.002
.002
0.002
0.001
0.001
0.001
0.409**
0.256
0.399**
0.221**
0.087
0.256**
0.173
0.201
0.155
0.107
0.129
0.102
-0.185
0.359
-0.255
0.178
0.609**
0.007
0.364
0.408
0.326
0.241
0.285
0.235
-0.837
0.299
-0.773
-0.929*
-0.523
-0.542
0.836
0.982
0.740
0.506
0.609
0.476
0.301
0.786**
-0.018
0.450**
0.615**
-0.016
0.258
0.290
0.237
0.188
0.216
0.187
0.299
-0.072
0.098
0.269*
0.213
0.038
0.211
0.244
0.196
0.149
0.175
0.146
-3.03***
-4.23***
-3.55***
-3.56***
-4.08***
-3.95***
0.728
0.864
0.629
0.503
0.59
0.469
Sector FE
Yes
Yes
Yes
Yes
Yes
Yes
Time FE
Yes
Yes
Yes
Yes
Yes
Yes
N
2864
2864
2864
5350
5350
5350
LR
-1503
-1487
-1578
-2785
-2472
-2548
Intensity of co-location (by birthplace)*
lnunique
Diversity index (excl.natives)
Sh of foreigners
Sh of high skilled frg
Sh of frg aged 25-45
Constant
process innovative
2.37
-0.027
5.43*
3.81
4.40
-0.002
Domestic
process
Firms per km2
product
Domestic
product
Firms per jobs (Nuts 3 level)
innovative
Domestic
Results III- Sectors matters!:
Chemicals; Metals;
Machinery and Equipment
Firms per jobs (Nuts 3 level)
Firms per km2
Intensity of co-location (by birthplace)*
lnunique
Diversity index (excl.natives)
Sh of foreigners
Sh of high skilled frg
Sh of frg aged 25-45
Constant
Time FE
N
LR
9.57
9.00
0.001
0.004
-0.002
0.003
-0.318
0.504
-0.460
0.879
8.6**
3.39
2.19**
0.719
1.61**
0.531
-3.52**
1.45
Yes
650
-354
Tentative Conclusions





Different types of innovations have different requirements
Results are consistent with general theories about
innovation (role of firm size, operational constraints, etc.)
It is not about “quantity” of immigration but about
composition and quality of the labour force
Skills absolutely matter
Main driver of innovations appears to within the firms,
not spillovers from just the presence of migrants in the
regions
Thank you
 [email protected]
 [email protected]
[email protected]



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