Researchers at N.C. State say in a new study that embracing diversity drives more innovation at companies.

“To be clear, we found that there is a causative link – it’s not just a correlation,” says Dr. Richard Warr, co-author of the study. “And the finding extends across a broad range of industry sectors.”

The study “Do Pro-Diversity Policies Improve Corporate Innovation?” concludes that “corporate policies that promote more pro-diversity cultures, specifically treatment of women and minorities, enhance future innovative efficiency,” an abstract says.

“This positive effect is stronger during economic downturns, and in firms that are more innovative, value intangibles and human capital more highly, have greater growth options, have higher cash flow, and have stronger governance. Pro-diversity policies also increase firm value via this stimulating effect on innovative efficiency. Our results suggest a channel through which workforce diversity may enhance firm value.”

Warr is the head  of the Department of Business Management in NC State’s Poole College of Management where he focuses on information transmission in markets, equity valuation, and other financial information. He says data from diversity policy information at the 3,000 largest publicly traded firms, shows a more diverse employee base leads to:

  • Product innovations
  • Patents created
  • Patent citations
  • Development of new technology

“The take-home message here is that a business which relies on innovation will benefit significantly from supporting diversity within its organization,” Warr explains. “It’s really that simple.”

Richard Warr

The conclusions are based on a review of the diversity information as well as data from the U.S. patent office and new product announcements made between 2001 and 2014.

“We wanted to know whether companies with policies encouraging the promotion and retention of a diverse workforce – in terms of gender, race and sexual orientation – also perform better at developing innovative products and services,” Warr says. “The short answer is that they do.

The study found that “a company that checks all of the diversity boxes would see about two new additional product announcements over 10 years,” Warr explains. “Given that most firms produce an average of two new product announcement per year, that’s significant.”

However, diversity doesn’t mean instant innovation, he notes.

“[The data shows] that improving diversity policies won’t lead to overnight improvements in innovation. It may take time to reap the benefits.”

The paper, “Do Pro-Diversity Policies Improve Corporate Innovation?” was published in the journal Financial Management. The paper was co-authored by Roger Mayer of NC State and Jing Zhao of Portland State University.

 

Study abstract

“Do Pro-Diversity Policies Improve Corporate Innovation?”

Authors: Roger C. Mayer and Richard S. Warr, North Carolina State University; Jing Zhao, Portland State University

Published: Dec. 18, 2017, Financial Management

Abstract: Using new product announcements, patents, and patent citations as measures of corporate innovation, we find that corporate policies that promote more pro-diversity cultures, specifically treatment of women and minorities, enhance future innovative efficiency. This positive effect is stronger during economic downturns, and in firms that are more innovative, value intangibles and human capital more highly, have greater growth options, have higher cash flow, and have stronger governance. Pro-diversity policies also increase firm value via this stimulating effect on innovative efficiency. Our results suggest a channel through which workforce diversity may enhance firm value.