Workforce Composition and Innovation: How Diversity in Employees’ Ethnic and Educational Backgrounds Facilitates Firm-Level Innovativeness

In this paper, we study how workforce composition is related to a firm’s success in introducing radical innovations. Previous studies have argued that teams composed of individuals with diverse backgrounds are able to perform more information processing and make deeper use of the information, which is important to accomplish complex tasks. We suggest that this argument can be extended to the level of the aggregate workforce of high technology firms. In particular, we argue that ethnic and higher education diversity within the workforce is associated with superior performance in radical innovation. Using a sample of 3,888 Swedish firms, we find that having greater workforce diversity in terms of both ethnic background and educational disciplinary background is positively correlated to the share of a firm’s turnover generated by radical innovation. We also find that having more external collaborations reduces the importance of a workforce with a diverse disciplinary background, while the impact of ethnic diversity is not affected by external collaboration. Our findings hold after using alternative measures of dependent and independent variables, alternative sample sizes, and alternative estimation techniques. These include instrumental variable estimation as well as structural equation modeling for simultaneous estimation of diversity, R&D intensity, and external search.

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