The What and Where of Employee Diversity, and Effects on Innovative Performance

Abstract

Firm-level innovativeness fundamentally involves combining knowledge in new ways. Therefore, it is often taken for granted that innovativeness is enhanced by employee diversity. However, empirical results have been mixed. One possible cause may be that studies on diversity have only examined parts of the metaphorical elephant, for example star scientists, top management teams, and individual groups. Furthermore, holistic approaches to examining diversity are required, as different forms of diversity are often related, which can lead to false conclusions. Unsurprisingly, it remains unclear what kind of diversity leads to positive firm- level outcomes, and how diversity should be distributed within the firm. We examine the diversity-innovativeness relationship using fixed effects panel regression on linked employer-employee data combined with data from the Community Innovation Survey. Unlike previous studies, we examine organizational diversity on four different organizational layers simultaneously, which collectively constitute the firm’s workforce. We primarily focus on the two topmost layers (managers and experts) and examine their impacts on firm-level innovative performance. We make three main findings. First, diversity on the management layer has the strongest effects on innovative performance. Second, diversity of past job roles explains innovative performance, but common types of demographic diversity (e.g., education, diversity, nationality, age, industry background) do not. Third, intrapersonal diversity, that is, diversity on the level of person-level job histories, shows the clearest effect. Implications to theory and practice are discussed.