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Is Mixing Better than Matching?

Written by Tessa Conroy, SoGES 2013-2014 Sustainability Leadership Fellow, and PhD Candidate in the Department of Economics

Diversity and Performance of U.S. Businesses

Environmental science research stresses the importance of diversity in sustaining a successful ecosystem. Yet, even outside of the natural sciences, the evidence that diversity is good for performance is mounting. Recently, a Harvard economist and his coauthor found that scientific papers written by a more diverse group of authors make greater contributions to science as measured by the quality of the journal and citations.1 Even outside of academia, diversity seems to be good for performance.2 A 2012 study, by the Credit Suisse Research Institute shows that businesses with women on their boards outperformed their peers with all male boards by 26% in share price performance. Similarly, a 2011 study by Catalyst shows that Fortune 500 companies that had a more diverse board of directors, specifically a relatively large share of women members, out-performed their peers by 16% in return on sales.3

It seems that diversity can be good for the environment, good for science, and good for business, but is it good for the economy?

There’s at least some evidence that it is. The basic argument linking diversity to economic performance is focused on how we share knowledge and how we innovate. Knowledge shared between experts from different industries, rather than among experts within the same industry, is more likely to lead to valuable information spillovers that stimulate innovation.4 That is to say that inter-industry knowledge sharing, rather than intra-industry knowledge sharing, is most conducive to new insights and advancing ideas. The classic example uses the brassiere industry, which actually came about not from the lingerie industry, but from dressmakers’ innovations in the garment industry.5 The first major empirical test linking diversity to economic performance found that local industrial diversity leads to higher employment growth in cities.6 There is also evidence that compared to a concentration of specialized activity, bringing together diverse and complementary economic activities better promotes innovation.7

To the extent that the variety in a market and niche of each business in an industry is connected to the culture, expertise, and traditions of the business owner, the U.S. economy may be lacking valuable diversity. It’s striking that female and minority entrepreneurs are severely outnumbered most everywhere in the country. Economically speaking, the low rates of business ownership among women and minorities suggest that the U.S. economy may be underutilizing a valuable resource. Non-traditional entrepreneurs are likely to perceive otherwise unrecognized opportunities and bring unique products and services to market, in addition to generating jobs and income.

Nationally, 51% of businesses are owned exclusively by males, whereas only 29% are women-owned, which is disproportionately low given that men and women comprise nearly equal shares of the labor force.8 The gender disparity in sales is even more dramatic with male-owned businesses earning $7.10 in sales for every $1 earned by female-owned business. Minorities own just 21% of businesses and again there is a dramatic disparity in sales.9  Nonminority-owned businesses earn $9.60 in sales for every $1 earned by minority-owned businesses.10

These numbers demonstrate that women and minorities have only a limited presence in the market. However, national averages don’t capture the important variation across regions within the U.S. The maps show the density of female-owned firms and male-owned firms by county.11 It seems that the success of female entrepreneurs may be linked to specific factors associated with particular locations such as the West Coast and the front range of the Rocky Mountains. Male entrepreneurship too, it seems, is associated with specific factors but not necessarily the same factors as women. Unfortunately, we know fairly little about the gender- and minority-specific drivers of entrepreneurship across the U.S and there is an opportunity for research in this field.

If it is the case that talented women and minorities who are considering entrepreneurship face barriers that discourage them from starting their business, then there may be significant costs to the economy in terms of jobs and income. With a better understanding of why non-traditional entrepreneurs do better in some regions than in others, it may be possible to consider policy alternatives that would minimize barriers to entry or adjust incentives in such a way that would lead to greater rates of entrepreneurship nationally.

A sustainable economy will enable its most talented innovators, and in doing so, facilitate diversity and growth. With better knowledge of the barriers and opportunities for entrepreneurs of all backgrounds, there is greater potential for a new and more diverse class of entrepreneurs in the future. As the class of entrepreneurs evolves, businesses may well also evolve. In addition to new products and services, the practices and operations could also change. New businesses have the advantage of implementing socially responsible and environmentally conscience methods from the beginning. By enhancing environmental awareness and increasing green business practices, there is an opportunity for a generation of businesses that start-up with a focus on sustainability that is good for both business owners and their customers.

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1 Freeman , Richard, and Huang Wei. "Collaborating With People Like Me: Ethnic co-authorship within the US." NBER Working Paper No. 19905. (2014).

2Gender Diversity and Corporate Performance. Rep. Zurich: Credit Suisse Research Institute. (2012).

3The Bottom Line: Corporate Performance and Women's Representation on Boards (2004-2008). Rep. New York: Catalyst. (2011)

4 Jacobs, Jane. The Economy of Cities. New York: Random House, 1969. Print.

5 Glaeser, Edward L. "Growth in Cities." Journal of Political Economy 100.6, Centennial Issue (1992): 1126-152. JSTOR. Web. 12 Apr. 2014.

6 Ibid.

7 Feldman, Maryann P., and David B. Audretch. "Innovation in Cities: Science-based Diversity, Specialization and Localized Competition." European Economic Review 43 (1999): 409-29. Web.

8 Percentages discussed above do not sum to 100% as there are four ownership categories as classified by the 2007 Survey of Business Owners including “Male-owned,” Female-Owned,” “Equally male-/female-owned”, and “Publicly Held.”

9 "USA QuickFacts from the US Census Bureau." USA QuickFacts from the US Census Bureau. Web. 10 Apr. 2014.

10 Nonminority-owned refers to firms where Non-Hispanic Whites own 51 percent or more of the interest or stock of the business. Minority-owned refers to firms where Blacks or African Americans, American Indians and Alaska Natives, Asians, Native Hawaiians and Other Pacific Islanders, and/or Hispanics own 51 percent or more of the interest or stock of the business.

11 The density of male- and female-owned firms is calculated as the ratio of the number of male-owned (female-owned) firms to the male (female) labor force. Estimates of the number of firms come from the 2007 Survey of Business Owners. Labor force estimates come from the 2005-2009 American Community Survey.

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