A growing literature examines how ethnic diversity influences economic outcomes in cities and inside firms. However, firm–city interactions remain more or less unexplored. A recent paper published by City REDI’s Max Nathan provides new insights into the links between ethnic diversity and firm performance within different urban environments.
The paper – published in Environment and Planning A and available open access here – looks at the links between ethnic diversity in firms’ top teams (owners, partners and directors) and the performance of those firms (specifically, how much revenue they make). It also looks at how those linkages vary across different types of firms, and how different types of urban environment may help or may not.
For a more detailed account, here’s the abstract:
A growing literature examines how ethnic diversity influences economic outcomes in cities and inside firms. However, firm–city interactions remain more or less unexplored. Ethnic diversity may help firm performance by introducing a wider range of ideas, improving scrutiny or improving international market access. Urban locations may amplify in-firm processes via agglomeration economies, externalities from urban demography or both. These firm–city effects may be more beneficial for knowledge-intensive firms, and for young firms with a greater dependence on their environment. However, firm–city interactions could be negative for cost and competition-sensitive younger firms, or for firms operating in poorer, segregated urban markets. I deploy English cross-sectional data to explore these issues within firms’ ‘top teams’, using latent class analysis to tackle firm-level heterogeneity. I find positive diversity–performance links for larger, knowledge-intensive firms, and positive firm–city interactions both for larger, knowledge-intensive firms in London and for younger, smaller firms in second-tier metros.
I find positive diversity-links – but only for certain kinds of companies. The strongest links are for a group of large, knowledge-intensive businesses who comprise about 16% of my sample. The role of cities is also complex. For this first group, being in London amplifies the diversity ‘effects’.
But for a second, smaller group of younger companies, diversity channels seem to be swamped by London’s higher costs and greater competition. These firms perform better when in smaller, cheaper cities like Manchester or Birmingham. In turn, that suggests policies to promote ethnic diversity in firms need to be quite carefully tailored to industry and local conditions.