How does cultural diversity impact entrepreneurship? Evidence from dialect diversity in China

Although cultural diversity plays a significant role in economic development, no study has focused on entrepreneurship. This study aims to investigate the impact of cultural diversity on entrepreneurship, employing dialect diversity as a proxy. Based on data of 293 prefectural cities in China from 2001 to 2019, our results indicate that dialect diversity negatively impacts entrepreneurship. This conclusion remains valid after addressing endogeneity and undergoing multiple robustness checks. Communication barriers and resource reallocation are important mechanisms, whereas social trust is comparatively weak. Heterogeneous analysis suggests that improvements of legal environment can mitigate the negative impact of dialect diversity. However, this moderating effect cannot be found in the increase of financial development level. Moreover, start-up decisions are negatively affected more significantly for firms operating in the tertiary and secondary industries, foreign- and private-owned. Our research highlights the important role of informal institutions in economic growth and provides insights into cultivating entrepreneurship.