Does employee’s diversity help innovation?: Evidence from Canadian firms

Labour is commonly perceived as a uniform input within the literature on knowledge production. Nevertheless, the ethnic diversity of employees can also exert an influence on knowledge generation. Organisational behaviour (OB) theories have identified decision-making and social categorisation as two fundamental processes that can shape the effects of diversity on innovation. Ethnically diverse employees may contribute to innovation through their distinct ideas rooted in their diverse cultural backgrounds. Conversely, they might impede innovation due to potential conflicts in behaviour. In this research, we explore the impact of ethnic diversity among employees on both product and process innovations, using data from the Canadian Workplace and Employee Surveys (WES). Our mixed logit model estimation outcomes substantiate the positive contribution of ethnic diversity on innovation, even after controlling for employee and firm characteristics. These results remain robust when we account for potential endogeneity issues. Furthermore, our findings suggest that ethnically diverse employees are particularly effective in fostering innovation within firms that possess substantial organisational capital and offer comprehensive training programmes. Across various industries, it appears that manufacturing, transportation, and select service sectors have reaped the greatest benefits from ethnic diversity to innovation.