The Dynamics of Economic Performance and Organizational Diversity. An Empirical Study in Zwolle, the Netherlands, 1850-1914

Cities differ dramatically with respect to the extent in which their economic and other activities are diversified. Some cities are specialized, while other cities harbour a myriad of organizations, performing a huge variety of activities. An unanswered question is: Where does such organizational diversity within city communities originate from, and what are its consequences for economic performance and growth? We argue that the extent of organizational diversity goes hand in hand with the fractionalization of the city’s resource environment. Specifically, the more heterogeneous the pool of city inhabitants on salient characteristics such as age, gender and religious background, the more organizational diversity can be expected. This is because human population heterogeneity implies variety and preferences of needs, which spurs entrepreneurship and ultimately sustains organizational diversity. Furthermore, we claim that organizational diversity is beneficial for economic performance and growth, but only up to a certain maximum after which diversity might undermine performance. Cities with an optimal organizational composition have a level of organizational diversity that is high enough to shield it from external exogenous shocks, but not too high to prevent them from reaping externalities resulting from the performance of related activities. In other words, we suggest that cities have to balance technical efficiency and long-run adaptive capacity. In this paper, the above theory will be tested for the city of Zwolle in the Netherlands in the period 1850-1914.