1. Introduction
One of the major mechanisms for the diffusion of knowledge is the mobility of people. The geographic mobility of labor relocates human capital and its embodied knowledge and personal experiences (Döring and Schnellenbach, 2006). The importance of this knowledge transfer is increasing. The global economy is creating an unprecedented demand for a diversified and open-minded workforce while highly-skilled workers are seeking opportunities to utilize their human capital abroad and increase their income and experience. For example, an estimated 900,000 highly-skilled professionals entered the US between 1990 and 2000. Moreover, temporary workers account for one-sixth of the total IT workforce in the US (OECD, 2002). Such phenomena increase the rate of circulation of talent over space and across firms, leading to much greater diversity of the workforce than a few decades ago. Large, and often export-oriented, companies are seeking nowadays knowledge workers from all over the world (Saxenian, 2006; Page, 2007). For example, international transferees of multinational firms transmit knowledge in the form of experience and work practices across borders. It is an important question for firms and for governments to ask whether there are productivity-enhancing impacts from growing diversity among employees within firms.
A recent branch of migration literature has been focusing on the association between innovation and the presence of foreign workers. This literature, reviewed in, e.g., Ozgen et al. (2012), has tended to treat immigrants as a rather homogeneous group of employees. Potential skill complementarities and ethnic or cultural backgrounds of employees have often not been explicitly taken into account. Most studies use various firm characteristics as the main determinants of innovation and estimate a so-called knowledge production function (e.g., Audretsch and Feldman, 2004; Cohen and Levinthal, 1990). Such studies have often overlooked the characteristics of individual employees. The latter are clearly needed to assess the impact of employee diversity on the innovativeness of firms. To date – with the exception of Parotta et al. (2011), Lee and Nathan (2010), Simonen and McCann (2008) and Almeida and Kogut (1999) – there has been very little empirical evidence that takes the presence and characteristics of foreign employees into account in identifying the determinants of innovation at the firm level. We therefore focus in this paper on the effects of foreign employees with diverse backgrounds on firm innovation.
We utilize high-quality linked employee-employer data at the firm level, obtained from four different collections provided, in a secure environment and under a confidentiality agreement, by the Central Bureau of Statistics for the Netherlands (hereafter Statistics Netherlands). We combine survey and administrative information that relates to the period 2000-2002. We study by means of the resulting unique micro-dataset of 4582 firms whether the presence and relative numerical importance of migrants among the firms’ employees influences the firm’s self-reported innovativeness. We also test whether cultural diversity among these migrants is more conducive to innovation. Clearly, cultural diversity is a multidimensional concept (Wimmer, 2008), influenced by many factors (e.g. language, ethnicity, religion, identity, etc.). Due to data restrictions, we proxy cultural diversity among employees simply by birthplace but allocate birthplaces to culturally distinct groups. While this approach never fully represents cultural diversity, it has the advantage that birthplace information is objective and time invariant. The benefits for innovation obtained from a culturally diverse workforce are expected to be larger in sectors that employ high-skilled migrants and we account for this by excluding in some regressions sub-sectors that employ predominantly unskilled migrants.
Our study is the first to analyze innovation effects of foreign employees by means of a representative micro dataset at the firm level in the Netherlands. A potentially important issue is that of reverse causality. Foreign workers are not randomly assigned to more or less innovative firms. We address this issue by an instrumental variables (IV) approach that exploits the historical distribution of immigrants and past culinary diversity of the community the firm is located in. We exclude the hospitality sector in IV regressions of innovation because in that sector – in which ethnic restaurants employ migrants of the same or similar cultural background – the instruments would be correlated with the error term of the regression. We find that the instruments are adequate for the other sectors, with the overidentifying restrictions satisfied.
We proceed as follows. The next section briefly reviews a range of channels through which the employment of immigrants can impact on firm innovation. Section 3 then describes the strategy we adopt to identify the net effect of the presence and cultural diversity of immigrant employees on the responses firms give in the Netherlands Community Innovation Survey. The data are outlined and summarized in section 4. Section 5 reports the results of regression modeling and a range of feasible robustness checks, while section 6 sums up.
2. Theoretical linkages between immigration and innovation
An innovation is primarily the introduction of something radically new in the operations of a firm, obtained by means of analytical knowledge. The improvement of an existing product or the modification of an existing process or organizational arrangement can also be viewed as an innovation. Technological advances come from things that people do (Romer, 1990). Many worker characteristics, such as age, education, occupation, cultural background and language may affect knowledge acquisition and worker mobility (Poot, 2008). Current knowledge is the outcome of accumulated efforts. Each inventor begins from where its predecessors left off. The inventor explores the latest generation of products and services, and makes use of market knowledge that embodies a cumulative investment in time to develop products and processes (Grossman and Helpman, 1994). The presence of foreigners with diverse backgrounds in a labor market may serve to enrich this cumulative effort.
There have been many studies that have analyzed the impact of infrastructural and organizational aspects of firms on innovativeness. The importance of ideas rather than physical assets has only recently entered the innovation research agenda (Jones and Romer, 2010). The biggest change in the recent scientific literature is that it is now not the firm but the employees that are seen as a major source of innovation. One key focus of this new approach is the impact of foreign workers on the innovativeness and productivity of host firms and countries. Thus, one branch of this literature analyses the impact of foreign entrepreneurs, students and inventors on innovation (Stuen et al. 2012; Kerr, 2010; Kerr and Lincoln, 2010; Hunt and Gauthier-Loiselle, 2008; Lobo and Strumsky, 2008; Zucker and Darby, 2007; and Faggian and McCann, 2006). Evidence of spillover benefits from skilled foreigners joining an organization applies even to professional sports (see Alvarez et al. 2011). Another branch of this literature discusses the innovative and productive effects of externalities created by clusters of immigrant groups with diverse cultural backgrounds in particular regions (Ozgen et al. 2012; Niebuhr, 2010; Mazzolari and Neumark, 2009; Südekum et al. 2009). A major focus of this type of study is the average effect of immigrant diversity on regional productivity or innovation.
