Abstract
In the economic development literature, cultural diversity (for example, ethnolinguistic fractionalization) has been shown to have a negative impact on economic outcomes in many underdeveloped countries. We hypothesize that the impact of diversity on economic performance depends on the quality of a country's institutions. Under bad institutions diversity leads to conflict and expropriation, while under good institutions diversity leads to economic progress. A culturally diverse society or interaction among different cultures encourages exchange of, and competition between ideas and different world views. Under good institutions, this amalgamation of ideas and views leads to greater entrepreneurial initiatives. We show that higher levels of cultural diversity increase the rate of entrepreneurship in the presence of good institutions using evidence from the USA.
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Notes
For evidence that the relative levels of productive and unproductive entrepreneurship across states are influenced by state-level variations in economic institutions see Sobel (2008).
According to Lerner (2002) and Kortum and Lerner (1998), venture capitalists not only supply funds for business investments but also provide the entrepreneurs with the necessary expertise which is required to innovate and sell their products and ideas in the market. Thus, venture capitalists fulfill the functions of both a capitalist and an entrepreneur.
This single measure incorporates data on venture capital investments per capita, patents per capita, the growth rate of self-employment activity, the establishment birth rate (all new firms), and the large-establishment birth rate (new firms with 500 or more employees). Thus, it is probably more heavily weighted toward larger-scale establishment birth than our other variables.
The three main components based on which the index is created are size of government, takings and discriminatory taxation, and labor market freedom.
There is a potential problem of endogeneity in our specification. It is possible that areas with higher rates of entrepreneurial activities attract more immigrants. To address this we checked the benchmark results of Tables 1 and 3 with the cultural diversity measure calculated from the 1990 census. The results remain robust and comparable.
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Appendix 1: List of Variables and Sources
Appendix 1: List of Variables and Sources
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Sobel, R.S., Dutta, N. & Roy, S. Does cultural diversity increase the rate of entrepreneurship?. Rev Austrian Econ 23, 269–286 (2010). https://doi.org/10.1007/s11138-010-0112-6
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DOI: https://doi.org/10.1007/s11138-010-0112-6