New Study Adds to Evidence that Diversity Furthers Entrepreneurship and Innovation

This blog has long advocated the financial and macroeconomic benefits of cultural and cognitive diversity. The basic premise is that differing perspectives results in knowledge elaboration for firms and when properly embraced through appropriate policies and best practices these diverse perspectives can drive innovation. This approach to diversity defines these differing perspectives very broadly–whether arising from gender, race, or even profession–and thereby demands inclusion for all even (in an underrepresented institutional context) white males. As I wrote in 2000, in Diversity and the Boardroom: “properly managed diversity can bring merit in a facially neutral manner.” Or as a recent post on Forbes.com concludes: “diversity management in America’s corporations can no longer be viewed as an expense, but rather as a strategic investment in the future.” Strong empirical evidence supports the case for diversity. “Whether talking about creativity, innovation, or productivity, research in Western Europe and the US regularly finds support for a ‘diversity dividend.’”

Yet another recent study demonstrates the power of cultural diversity. Specifically, a new working paper shows:

the impact of cultural diversity on the entrepreneurial performance of UK regions. We focus on two largely overlooked factors, the measurement of diversity, and the skills composition of diverse populations. First, more than demonstrating the importance of cultural diversity for entrepreneurship, we show that the type of cultural diversity measured is a decisive factor. Second, the skill composition of diverse populations is also key. Diversity amongst the ranks of the highly skilled exerts the strongest impact upon start-up intensities. The empirical investigation employs spatial regression techniques and carriers out several robustness checks, including instrumental variables specifications, to corroborate our findings.

In other words diversity drives innovation and entrepreneurial activity, particularly when cultural diversity is measured by highly skilled recent immigrants. This idea is hardly new. Nevertheless, this study reaches a very refined conclusion that even within the findings linking diversity to entrepreneurial outcomes, it is the influence of recent immigrants with skills that exerts the strongest influence on new business formation. The policy prescription is very clear: we should immediately open the borders of our nation widely to skilled immigrants. Unfortunately, Congress is sentencing our nation to a second rate economy by keeping the level of skilled immigration to the US too low. “While the United States allows unrestricted flows of capital into the country, known as foreign direct investment, Congress has limited the flow of modern-day capital — skilled engineers and tech workers — by capping H-1B visas at a level that American technology companies know is far too low.” Currently there are bills pending in Congress that take steps in the right direction. I advocate even more aggressive steps, such as open immigration for all persons with a college degree.

The US is suffering from a dangerous decline in business start-ups. For the first time in history the number of businesses closing in America exceeds the number of start-ups. This is unacceptable for a nation that has traditionally led the world in innovation and entrepreneurial activity.

In fact, according to the OECD, the US lags almost the entire developed world in employer enterprise birth rates, as shown on the chart above. We must do more to foster entrepreneurship in the US and opening the borders for entrepreneurs and highly skilled worker is one sensible way to achieve this. Those in favor of free market capitalism must also favor the elimination of barriers on the free movement of human resources–especially skilled workers.