Posted by Dr Max Nathan, SERC, LSE and NIESR
Like many Western countries, the UK has become substantially more ethnically and culturally diverse. The 2011 Census
makes this crystal clear. Since 2001, the foreign-born population in
England and Wales has jumped from 4.6 to 7.5m. At the same time, the
‘white British’ ethnic group shrank from 87.5-80% of the population.
What are the economic impacts of these deep demographic shifts, and what do they mean for cities?
Certainly, population change has been most striking in urban areas:
notably, London is now a ‘majority minority’ city for the first time in
Urban factors may also affect how ‘diversity effects’ play out at
firm level. Although the public debate is still focused on migrants,
jobs and public services, a number of academic researchers
are turning their attention to the wider impacts of immigration,
minority communities and population diversity. Globally, there are now
studies exploring effects on firms’ productivity, innovation, entrepreneurship, or trade patterns; and channels that may influence house prices, or the mix of local goods and services.
There’s been little parallel UK research to date – but in a new SERC Discussion Paper (supported by LLAKES)
I explore the links between the composition of 6,000 English firms’
‘top teams’ and company performance. Unusually, my data allows me to
look at both ethnicity and gender mix.
What might we expect to see? Owners, partners and directors set firms
strategic direction. So the make-up of a ‘top team’ might generate
production externalities through diversity (a wider range of ideas/
experiences, helping problem solving) and/or ‘sameness’ (via specialist
knowledge or better access to international markets). These channels may
be balanced by internal downsides (lower trust) and external barriers
(discrimination), so that overall effects on business performance are
Big cities might then amplify or dampen these channels. Agglomeration
economies might help productivity, and firms may benefit from large,
cosmopolitan customer markets. Alternatively, firms in cities might face
more competition, or minority-headed businesses might face
My results suggest a non-linear link between top team diversity and
business performance, which is net positive for process innovation and
net negative for turnover. Further tests on diverse and
minority/female-headed firms find positive links for diverse top teams,
negative for minority and female-only top teams.
Looking at the influence of urban areas, I find some evidence of
complex amplifying and dampening effects. In London, for example,
diverse firms are less likely to engage in process innovation; but
overall, firms in bigger cities are more likely to.
My data make it hard to identify causal effects, so I interpret these
results as pure correlations. The implication is that while diversity
has internal and external benefits, penalties from being ‘too diverse’
probably result from external constraints. In turn, that suggests
policymakers need to encourage corporate diversity, while taking
discrimination more seriously.
In a companion paper on London firms,
Neil Lee and I found strong links between firm-level diversity and
innovation. This paper suggests diversity-innovation links for firms
outside the capital too. Core city leaders should pay attention.
This post was originally published on the Squareglasses blog.