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Ethnic diversity and firm performance: Evidence from China’s materials and industrial sectors

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Abstract

Several studies examine the determinants of firm performance in China, but none explores the impact of ethnic diversity on firm performance. This study examines the relationship between ethnic diversity and firm performance in China by drawing on province-level indices of ethnic fractionalization and firm-level indicators of financial performance. We analyse a sample of 1079 Chinese firms in the materials and industrial sectors and find that higher ethnic heterogeneity negatively impacts on firm financial performance in these sectors. This implies that ethnic composition can explain observed divergence in firm performance of Chinese firms and that low-growth firms can gain economic benefits by minimizing ethnic heterogeneity among its workers.

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Notes

  1. World Bank, June 2015,

  2. We present detailed discussions on this in Sect. 5

  3. For detailed reviews of the existing literature on the determinants of firm performance, see studies and reviews such as Lenz (1981) and Miller and Cardinal (1994).

  4. See also, e.g., Chappell (1980), Hansen and Wernerfelt (1989), Kotha and Nair (1995), Lenz (1981), Spanos et al. (2004).

  5. Compustat data for Chinese firms is retrieved from University of Pennsylvania’s Wharton Research Data Services (https://wrds-web.wharton.upenn.edu/wrds/), while NBS data can be retrieved from http://www.stats.gov.cn/english/statisticaldata/AnnualData/

  6. For further details on index construction process, see Alesina and Zhuravskaya (2011)

  7. We calculate return on assets as the ratio of net turnover to total assets.

  8. We also use primary school enrolment to examine robustness, but the emerging conclusions on the effects of ethnic diversity remain the same.

  9. Using a similar cross-sectional framework, Easterly and Levine (1997) and Alesina et al. (2003) use the technique of seemingly unrelated regressions to examine the effect of ethnic fractionalization on economic development.

  10. For brevity we only report coefficients for the effect of ethnic fractionalization on financial performance measures. Full results with all coefficients are available on request from the authors. We also report results for the full sample only.

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Authors and Affiliations

  1. Department of Economics, Monash University, Melbourne, VIC 3800, Australia

    Sefa Awaworyi Churchill & Maria Rebecca Valenzuela

  2. Kwame Nkrumah University of Science and Technology, Kumasi, Ghana

    Wisdom Sablah

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  1. Sefa Awaworyi Churchill
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  2. Maria Rebecca Valenzuela
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  3. Wisdom Sablah
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Correspondence to Sefa Awaworyi Churchill.

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Table 7 List of provinces
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Awaworyi Churchill, S., Valenzuela, M.R. & Sablah, W. Ethnic diversity and firm performance: Evidence from China’s materials and industrial sectors. Empir Econ 53, 1711–1731 (2017). https://doi.org/10.1007/s00181-016-1174-5

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