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Determinants of firm performance: does ethnic diversity matter?

Author

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  • Sefa Awaworyi Churchill

    (RMIT University)

  • Maria Rebecca Valenzuela

    (Monash University)

Abstract

This paper empirically investigates the impact of ethnic diversity on firm performance and applies systematic analysis of the possible channels with which this can happen. Using unit record data on 28,088 publicly listed firms in 62 countries, we first adopt indices of ethnic diversity for countries and then examine its impact on various measures of firm performance. Our empirical analyses show that higher levels of ethnic and linguistic heterogeneity are associated with poorer firm performance. This finding is consistent across various measures of firm performance and is robust to several sensitivity checks. We argue that the observed negative effect of ethnic diversity on firm performance could be explained by various mechanisms of influence including trust, social networks and discrimination. Specifically, trust and social networks enhance firm performance but are lower in ethnically diverse countries. Further, we find that the extent to which discrimination hinders firm performance is higher in more diverse countries.

Suggested Citation

  • Sefa Awaworyi Churchill & Maria Rebecca Valenzuela, 2019. "Determinants of firm performance: does ethnic diversity matter?," Empirical Economics, Springer, vol. 57(6), pages 2079-2105, December.
  • Handle: RePEc:spr:empeco:v:57:y:2019:i:6:d:10.1007_s00181-018-1529-1
    DOI: 10.1007/s00181-018-1529-1
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    More about this item

    Keywords

    Ethnic diversity; Firm performance; Profits;
    All these keywords.

    JEL classification:

    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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