Abstract
While researchers have examined how ethnic diversity affects regional organizational performance, little research has been done to examine how ethnic diversity affects the creation of firm establishments for different sized firms. By generating additional market segments, in addition to fostering supply-side effects, we propose that a region’s ethnic diversity fosters an environment that is conducive to the growth of small firm establishments but not medium- or large-sized establishments. Using county-level data on US firm establishments and ethnic diversity, we find that a one standard deviation increase in ethnic diversity is associated with a 6 to 8% increase in the number of small firm establishments and a 26–28% decrease in the number of large-sized firm establishments.
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Notes
Our study, business venturing is defined as the number of establishments at the regional level. We use panel data with county and year fixed effects to examine the relationship between ethnic diversity and the number of establishments at the regional level while examining the number of establishments for different firm sizes.
All of this is not to say that it is impossible for large corporations to serve local markets. For example, McDonald’s is known to serve beer in South Korea and many European countries and offer teriyaki burgers and wasabi in several Asian countries and many other different products around the world (TMD 2013, 2015; NBC 2016a).
The U.S. Census provides the county business patterns (CBP) database at https://www.census.gov/programs-surveys/cbp.html
It is important to clarify that we are not examining new firms only in the data. Within any given region, new firms enter and compete with the existing firms (incumbents). We are measuring the overall effect on business activity for a given county and given year.
Note that 1 − λ is identical to the commonly used measure of fractionalization. For example, Alesina et al. (2003) provide the following formula: FRACTj = \( 1-\sum \limits_{i=1}^n{S}_{ij}^2 \), where Sij is the share of group i (i = 1…N) in country j.
The US County database is no longer maintained by the U.S. Census Bureau, but the U.S. Census maintains links to its source files.
These two effects are found by multiplying the semi-elasticity from the regression by each measure’s standard deviation. For Shannon, this is found by multiplying the semi-elasticity (i.e., a 188.4% increase in the number of establishments in model 3) by the standard deviation (0.05). For Simpson, this is found by multiplying the semi-elasticity (i.e., a 163.6% increase in the number of establishments in model 6) by the standard deviation (0.03).
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Boudreaux, C.J. Ethnic diversity and small business venturing. Small Bus Econ 54, 25–41 (2020). https://doi.org/10.1007/s11187-018-0087-4
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DOI: https://doi.org/10.1007/s11187-018-0087-4