Does Employee Diversity Lead to Innovation?

Christian R. stergaard, Kari Kristinsson and Bram Timmermans

DRUID/IKE, Department of Business Studies, Aalborg University
Fibigerstraede 4, 9220 Aalborg Oe, Denmark

First draft

Keywords: Diversity, Innovation, Education, Gender, Cultural background

INTRODUCTION
One of the most important challenges and opportunities for firms today is the increasing diversity in

society. The knowledge base becomes more diverse and so does the cultural and ethnic background
among employees. This increasing diversity in the knowledge base increases the need for interaction
and communication within the firms, while increased cultural diversity might lead to conflict. However,
employee diversity might create a broader search space and make the firm more open towards new
ideas and more creative. Ideally, diversity should increase a firms knowledge base and increase the
interaction between different types of competences and knowledge. This creates possibilities for new
combinations of knowledge and innovation.
The relation between a diverse composition of the workforce and the performance of firms was
addressed in Penroses work from 1959 where she states that:It is the heterogeneity of the productive
services available or potentially available from its resources that gives each firm its unique character
An important part of these resources is the firms human capital resources (Penrose, 1959; Barney,
1991). These resources have a cognitive dimension, such as vocational training and experience and a
demographic dimension, such as gender, age and cultural background, which affect the application
and combination of existing knowledge and the communication and interaction between different parts
of the firm.
A growing literature is analysing the relation between diversity among top managers and the
performance of firms. The characteristics of the top managers appear to influence growth, productivity
and revenues (Murray, 1989; Wiersema and Bantel, 1992; Pitcher and Smith, 2001). Others have
1

studied the effect of diverse top management teams on innovation based on indicators such as age or
tenure, with mixed results (Bantel and Jackson, 1989; O'Reilly and Flatt, 1989; Zajac et al., 1991).
However, innovation is an interactive process that often involves communication and interaction
among employees in a firm and draws on their different qualities from all levels of the organization
(Lundvall, 1985; 1992). In addition the composition of the top management team does not necessarily
reflect the composition of the larger pool of human capital in the company (Laursen et al., 2005).
Therefore it is not sufficient to look at the top management team when analysing the effect of
diversity on innovation. The purpose of this paper is to analyse the effect of employee diversity on the
innovative performance of firms, based on the characteristics of all employees in the firm, using
several indicators such as age, education, nationality and gender.
The empirical analysis will be based on two types of datasets: The first is a questionnaire based
innovation survey (DISKO4) collected in 2006 focusing on organizational and technical change in
more than 1700 Danish firms in the period 2003-2005. This database is merged with register data
from the second dataset the Integrated Database for Labour Market Research (IDA) that contains
detailed information on all Danish firms and all individuals on the labour market. Therefore it is
possible to link the diverse composition of firms in terms of gender, age, education, and nationality
with the organisational form, strategy and innovative behaviour of these firms. The analysis shows that
employee diversity has an effect on the innovative performance of firms. We find that employee
diversity with respect to gender, education and nationality has a significant positive effect on firms
likelihood to innovate, while diversity in age has a significant negative effect. We control for factors like
size, industry, competition, organizational change and external cooperation.
The remainder of the paper is structured as follows. Section 2 contains the theoretical discussion on
diversity and innovation. Section 3 describes the questionnaire, data, variables and estimation
technique used in the analysis. Section 4 presents the results of the logistic regressions and Section 5
concludes with a discussion of the results and suggestions for further research.

Diversity and innovation

A growing literature is addressing the relation between diversity and performance. The argument is

that the firms knowledge, in the form of human capital, is very important in explaining its performance
and that this human capital is affected by diversity in the composition of and interaction between
employees (Laursen et al., 2005). Employee diversity is often measured by individuals demographic
attributes that are used as a proxy for different attitudes, knowledge bases and cognitive models. The
individual employees knowledge structures are also affected by group membership, social
interactions, and organisation of the firm (Walsh, 1995).
In their review of 40 years of research on demography and diversity in organisations Williams and
OReilly (1998) finds that diversity has both direct and indirect effects on processes and performance
of groups, however, some results points towards a positive effect of diversity, while others stress the
negative effect of increased diversity, thus diversity has two potential effects. They argue that the

difficulties of finding significant positive effects of diversity might stem from differences defining
performance indicators and the lack of separating the creativity (invention) phase from the
implementation (innovation) phase.
Fagerberg (2005)describes the difference between invention and innovation as: Invention is the
first occurrence of an idea for a new product or process, while innovation is the first attempt to carry it
out into practice" (Fagerberg, 2005, p. 4). Thus innovation is visualised as being a two-stage process
with the idea phase being separate from the implementation phase. This distinction has also been
supported by research within cognitive psychology. West (2002)suggests that the innovation process
should be split up into (1) the creative stage and (2) the innovation implementation stage. Therefore
an innovation often depends on groups of individuals in the organisation. Woodman et al. (1993)
defines organisational innovation as the creation of a valuable, useful new product, service, idea,
procedure, or process by individuals working together in a complex social system. It is in the context
of a complex social system in an organisation, where the different types of individual knowledge come
into play to generate new knowledge or ideas. Therefore the composition of individuals within the firm
is an important factor for understanding innovation, since diversity in the composition of a firms
employees contributes to diversity in the knowledge base.
Penrose (1959) describes a firm as a collection of productive resources and it are the services
these resources posses that provide the input for the productive processes of a firm. Subsequently,
employee diversity becomes important for the performance of firms, since heterogeneity of these
productive services provide firms with different characteristics (Penrose, 1959). Barney (1991) made a
distinction between three categories of resources a firm would possess and out of which a unique
character could arise. These three categories are: physical capital resources, human capital resources
and organizational capital resources. However, in the knowledge-based economy a firm relies less on
their tangible and more on their intangible resources (Teece et al., 1997).
Whenever services are the input, it is also the combination of services that influence the
performance of a firm. This combination can also occur within human capital resources where the
services (e.g. knowledge, skills and attitude) contribute to a firms performance. A combination of
services can only occur when services are different from each other. Diversity among services is thus
required for combination to take place. This has already been recognized by previous research on the
effect of diversity on firm performance.
Previous studies have focused on the effect of the top management on firm performance. The
upper-echelon framework analyses factors that affect the executive leaderships strategy formation
and subsequently organisational behaviour and performance. Finkelstein and Hambrick (1990) argues
that functional background and demographic characteristics influence the managers interpretation of
problems and tenure is related to strategic inertia, however, they find that the characteristics of the full
management team has greater predicting power of firm performance than the top person. Murray
(1989) analysed how heterogeneity in the top management team influence firm performance. As
measures of the heterogeneous composition of top management team he looked at difference in age,
tenure, and occupational and educational background based on different educational levels (i.e.

graduates, undergraduates, doctorates) in several disciplines (e.g. liberal arts, engineering, science,
business, law, etc.). Murray found a positive effect of diversity on firm performance. Kildfuff et al.
(2000)analysed the demographic component of top management team diversity by gender, age and
race. They found that these characteristics gave a more accurate reflection of how much the team
differs in attitude, values and norms. Pitcher and Smith (2001) also analysed the effect of top
management team heterogeneity on firm performance. As proxies for heterogeneity they used team
tenure, functional background, industry experience, age and education. Pitcher and Smith found that
heterogeneity was positive for long-term performance, however, it had some limits if the managers
receive orders from the company headquarter.
There have only been a few studies of diversity of top management and innovation performance.
Bantel and Jackson (1989) analysed how the composition of top management teams in the finance
sector affects innovation defined as the number of products, programs and services that firms had
adopted or developed. They analysed diversity by age, tenure, education and functional background
and found a positive relation between educational level, functional background and innovation.
Many studies only look at the diversity in management team. However, innovation is an interactive
process (Lundvall 1985, 1992) and would thus suggest that more employees rather than only the top
management team are involved. Van der Vegt and Janssen (2003)apply a broader perspective and
analyses the effect of task interdependence and heterogeneity in groups on innovative behaviour.
They also argue that innovation is an interactive process, where employees interact in groups and
develop, discuss, modify and realise new ideas, thus diversity in groups should promote innovation
behaviour. However, they find no direct link between group diversity and innovative behaviour when
they controlled for size and organisation of work (flexibility and task non-routineness). Van de Vegt
and Janssen (2003) conclude that diversity in groups is important, but the characteristics of work
organisation are more important. Laursen et al. (2005) takes a broader perspective and analyses the
composition of all the engineers in Danish engineering consulting firms rather than only the top
management team to see how employee diversity affects firm performance. They argue that firm
performance is not only related to levels of human resources, but also to the composition of these
resources. However, too little and too much diversity should have a negative effect, which implies an
inverted curve linear relationship between diversity and performance. They discovered that combining
fundamental different skills leads to a better competitive advantage, besides, they also find some
support of a curve linear relationship between diversity and performance i.e. a low level of diversity
and a high level of diversity is positive.
In their overview of research on the effect of diversity on performance Williams and OReilly (1998)
shows that diversity has an effect on performance, although some have found negative effects and
others a positive effect of diversity. The positive effects relate to openness, creativity, learning,
flexibility, broader search space, better problem solving, increased absorptive capacity1 and new
combinations of knowledge, while the costs of diversity are related to lack of economies of scale in the

(Cohen and Levinthal, 1990)

knowledge production, distrust, conflict, dissatisfaction and increased transaction costs2, since
interaction and communication between two different knowledge bases and groups might be difficult.
Thus, diversity has a positive side and a negative side. However, in their discussion of why they do not
find any negative effects of diversity Bantel and Jackson (1989) argue that: This may be because the
dysfunctional effects of heterogeneity occur only when extremely high levels of diversity exist, and
such extreme diversity is less likely among members of top management teams (Bantel and Jackson,
1989, p 118). Innovation is an interactive process and that diversity among those who interact
promotes the innovation process, since diversity affects the way knowledge is generated and applied
in the innovation process. Thus, employee diversity should generally have a positive effect on
innovation.
Hypothesis 1: Employee diversity has a positive effect on the likelihood that firms innovate
Diversity can be addressed in multiple ways. According to Stirling (2007)diversity consists of
variety, balance and disparity, where variety is the number of groups, balance is the evenness in the
distribution of the groups and disparity is the distance between the groups. Thus, the effect of diversity
depends on the definition of the groups. In addition a company can be diverse in other dimensions
such as diversity in the number and disparity of the services and products the company produces or
diversity in collaboration with external partners and outsourcing of activities.

Sample and Data

The quantitative analysis is based on data from the DISKO43 questionnaire survey on

organisations, employees and research and development strategies in Danish firms and the IDA
register database. Innovation is defined as whether the firm has introduced a new product or service
during the period 2003-2005, excluding minor improvements on already existing products and
services. Diversity is analysed at the firm level investigating the composition of the firms employees
based on gender, age, nationality and education. Besides these variables there will be included a
number of control variables that might influence the firms innovation and performance.
The DISKO (Danish Innovation System: Comparative analyses of challenges, strength and
bottlenecks) questionnaires focus on organisational and technical change in Danish firms and give a
comprehensive picture of factors that are often associated with change and innovation. Over time four
DISKO surveys have been conducted: DISKO1 in 1996, DISKO2 in 2001, DISKO3 in 2004, and
DISKO4 in 20064. The DISKO4 survey data was collected by sending a questionnaire to the
management of a stratified sample of Danish firms with more than 20 employees in 2006, with
emphasis on firms that previously participated in DISKO surveys and large firms with more than 100
fulltime employees. The questionnaire refers to the period 2003-2005 and has been sent to 4136
companies, 1775 answers have been received, which gives a response rate of 42.9 percent.

(Williamson, 1987)
The DISKO4 survey on organisations, employees and research and development strategies in Danish firms was conducted by
Statistics Denmark in 2006 on behalf of four research groups (IKE, CARMA, CIP, and CCWS) from Aalborg University.
4
For a more thorough explanation of the DISKO research see http://www.business.aau.dk/ike/data.html
3

To obtain detailed background information on the firms in the DISKO survey it was merged with
data from the IDA dataset (Integrated Database for Labour Market Research). IDA is maintained by
Statistics Denmark and contains extensive information on the characteristics of individuals, e.g. age,
gender, level of education, work experience and nationality. These are linked with establishments and
employers. The dataset is longitudinal and has been updated annually since 1980. The DISKO4
survey referred to 2003-2005, therefore the DISKO4 data was merged with IDA data for November
2002. For weighting our sample we used the total population of firms that were active both in 2002 and
20045. Hotels & Restaurants and Culture & Sports have high values for the weights in the lower size
groups therefore these are omitted in the logistic regression analysis. In addition region dummies are
omitted since the weights for regions where too high. Furthermore, 168 firms with less than 20
employees in 2002 are included in the category 20-29 employees since these firms that have grown in
the period 2002-2006. Table 1 shows the number of firms for each industry and size group in our
sample.

Table 1: The number of firms in the DISKO4 database based on industry and size.
20-49
employees

50-99
employees

100-249
employees

250 or more
employees

Manufacturing

198

196

137

64

Construction

129

53

24

Wholesale & Retail

245

104

40

12

Hotel & Restaurant

14

18

Transport

64

37

25

Finance & Insurance

14

20

19

16

127

54

46

23

11

Business Services

9
Culture and Sports
Source: Based on data from Statistics Denmark

3.1

Measures

The dependent variable that will be used is whether or not the firm has had one or more
innovations. This variable has been extracted from the DISKO4 survey where the respondent was
asked how many innovation the firm has had in the period 2003-2005 excluding minor improvements
on already existing products and services. The possible choices where zero, one and more than one.
The last two answers have been collapsed into one to make a distinction between innovative and noninnovative firms.
The independent variables can be categorised in several groups, such as employee diversity
variables, recruitment variables, collaboration, organisation and strategy variables, and dummies for
industry and size. The employee diversity variables age, education and nationality are based on an
entropy index that measures balance and variation.

The most recent dataset is from 2004 but the DISKO4 could only be compared with IDA data from 2002.

i si (ln si) = s1 (ln s1) + s2 (ln s2)+ si (ln si)

i s i = 1
s = share

The age, education and nationality diversity variables have been categorised in respectively four,
eighteen and six groups. The disparity part of diversity is partly included in the definition of the groups
The age groups are: younger than 25, 25- 40, 41 55, and 56 and older.
Education consists of a wide array of categories. The focus is diversity among employees with a
higher education since earlier DISKO surveys have shown that firms with employees that have a
higher education are more likely to be innovative. The distinction has been made between Bachelor,
Master and Ph.D. degrees in social science, humanistic, food and medicine, engineering, and natural
science. For Bachelor and Masters there is a category added with teachers and army and the last
group is other education.
In the entropy index for nationality the groups are: Danish, Nordic, EU15 and Swiss, other
Europeans, other western countries, and the rest of the world.
For diversity in the gender composition firms are grouped together by the size of the share of the
highest represented gender in the firm. Basically the entropy values for gender shares are grouped to
make the results easier to interpret. The five groups are:

Group 1: 90-100 percent of the same gender

Group 2: 80-90 percent of the same gender

Group 3: 70-80 percent of the same gender

Group 4: 60-70 percent of the same gender

Group 5: 50-60 percent of the same gender

The second set of variables are related to the firms recruitment strategies and thus indirectly
related to diversity. It is recruitment of new employees that determines how diverse the composition of
a firm is. Diversity Policy is the first variable in this group. This variable indicates whether or not the
firm has an active approach in hiring older and/or foreign employees. Whenever it has this strategy it
will receive the value one, otherwise it will receive the value zero. Having such an approach would be
a proxy of an open mentality towards diversity, hiring foreigners would increase diversity in a firm and
hiring older people as well since often the tendency is to prefer young workers above old. The second
recruitment variable is called Internal. This variable indicates if internal processes are important for
recruitment e.g. hiring a person known by an employee. Having such a strategy would be detrimental
for diversity, since people tend to interact with those that are equal to them. Such a recruitment
strategy would lead to a higher likelihood of hiring individuals similar to those that are already present
in the firm and thus decrease diversity in the firm. This effect is termed homophily in the sociology

literature (McPherson et al., 2001). Furthermore is this recruitment also a proxy for the openness of
the company.
The third second group of independent variables deals with collaboration, strategy, organisational
change, and competition, which are taken from the DISKO4 survey. Collaboration is divided in five
categories where each group indicates how many types of collaboration partners the firm has had a
high degree of cooperation with in the period 2003-2005. The types of partners asked for are both
national and international customers and suppliers, universities and other institutes of higher
education and consultancy firms. The categories show if the firm had zero, one, two, three, or four or
more collaboration types during that period. This variable measures the external diversity in the
company.
The strategy variable is based on the question if the firm has had a high priority on product, market,
technology, organisational, or business process development. The variable Divstrat1 adds up these
strategies and will have a value varying between zero and five. Whenever there is a high priority in
product and market development these are collapsed in a market strategy and the other three are
collapsed into a firm/organisation strategy. The Divstrat2 variable is computed by adding these two
together thereby creating a value for Divstrat2 between zero and two.
The independent variable organisational change indicates whether or not the organisation has
implemented a form of organisational change they consider as important. Earlier DISKO studies have
shown that organisational change is important for innovation. The Competition variable is based on in
what degree the firm experienced an increase in competition on the national or the international level.
Possibilities are that: they did not experience an increase, there was a slight increase or there was a
high increase in competition on the international of national level.
The last independent variables are industry and size dummies. The sample has been split up in
eight industries: manufacturing, construction, wholesale and retail, hotel and restaurant, transport,
finance and insurance, business service, and culture and sports. Two industries are not represented in
the final regressions i.e. hotel and restaurants and culture and sports. To correct for the size of the
firm four groups where used: less than 50, between 50 and 100, between 101 and 249, and 250 or
more.

3.2

Descriptive statistics

Table 2 shows distribution of firms that innovated during the period 2003-2005 based on the size of
the firm. The average size of a firm in the sample is 105.26 where the smallest firm has one employee
and the biggest 4041. The table indicate that larger firms have a higher tendency being innovative
compared to smaller firms. The total number of firms that made an innovation in the survey is 910
while 740 that did not innovate.

Table 2: Did the organisation innovate (by size).

0-49
employees

50-99
employees

100-249
employees

413
197
25.03
11.94
55.81
26.62
54.77
41.21
341
281
Yes
20.67
17.03
37.47
30.88
45.23
58.79
754
478
Total
45.7
28.97
Frequency Missing = 79
Source: Based on data from Statistics Denmark
no

250 or more
employees

94
5.7
12.7
32.75
193
11.7
21.21
67.25
287
17.39

Total

36
2.18
4.86
27.48
95
5.76
10.44
72.52
131
7.94

740
44.85

910
55.15

1650
100.00

Table 3 illustrates whether or not the firm has had an innovation by industry. In Manufacturing,
Wholesale & Retail, Finance & Insurance, Business Service, and Culture & Sports there are more
firms that had at least one innovation. The worst performer in this sense is construction where 73.23
percent indicated not to have had an innovation during the period 2003-2005.

Table 3: Did the organisation innovate (by industry).

manufacturing construction wholesale & hotel
& transport
retail
restaurant
220
145
181
13.33
8.79
10.97
29.73
19.59
24.46
38.13
73.23
48.14
357
53
195
yes
21.64
3.21
11.82
39.23
5.82
21.43
61.87
26.77
51.86
198
376
Total 577
34.97
12.00
22.79
Frequency Missing = 79
Source: Based on data from Statistics Denmark
no

21
1.27
2.84
55.26
17
1.03
1.87
44.74
38
2.30

69
4.18
9.32
55.20
56
3.39
6.15
44.80
125
7.58

finance & business

insurance
service
9
0.55
1.22
13.04
60
3.64
6.59
86.96
69
4.18

84
5.09
11.35
35.15
155
9.39
17.03
64.85
239
14.48

culture & total

sports
11
0.67
1.49
39.29
17
1.03
1.87
60.71
28
1.70

740
44.85

910
55.15

1650
100

Table 4 indicates if the firm has incorporated what they consider important organisational change.
Within the sample there are many firms that conducted organisational change (1101 firms). Table 5
illustrates that most firms in the sample experienced an increase in competition (92.2 percent). The
major part of these firms thought that the increase they experienced was heavy.

Table 4: Did the firms conduct organisational change.

Frequency
Percent
628
36.32
no
1101
63.68
yes
Source: Based on data from Statistics Denmark

Cumulative Frequency
628
1729

Cumulative Percent
36.32
100.00

Table 5: Increased competition (national or international).

Frequency
Percent
133
7.8
no increase
447
26.22
slightly increase
1125
65.98
heavy increase
Frequency Missing = 24
Source: Based on data from Statistics Denmark

Cumulative Frequency
133
580
1705

Cumulative Percent
7.8
34.02
100.00

For the external diversity based on collaboration the number of types of collaboration partners has
been measured by adding up national suppliers, national customers, international suppliers,
international customers, university and other institutes of higher education, and consultancies. Table 6
shows how many firms have had how many different types of collaboration partners.

Table 6: Number of high degree collaboration partners.

Frequency
Percent
403
23.31
0
301
17.41
1
531
30.71
2
301
17.41
3
193
11.16
4 or more
Source: Based on data from Statistics Denmark

Cumulative Frequency
403
704
1235
1536
1729

Cumulative Percent
23.31
40.72
71.43
88.84
100.00

The strategies a firm executed are illustrated in Table 7 and Table 8. Table 7 shows the number of
high priority development strategies without indicating which strategies are included. The spread
between the numbers of strategies is fairly equal as the percentages indicate.

Table 7: Number of high priority development strategies (divstrat1).

Frequency

Percent

208
12.03
0
228
13.19
1
372
21.52
2
344
19.90
3
294
17.00
4
283
16.37
5
Source: Based on data from Statistics Denmark

Cumulative Frequency

Cumulative Percent

208
436
808
1152
1446
1729

12.03
25.22
46.73
66.63
83.63
100.00

Table 8 shows how many firms have a market and/or organisation strategy. Most of the firms have
at least one of the two.

10

Table 8: Does the firm have a market and or firm/organisation strategy (divstrat2).

No
yes one of them
Both

Frequency

Percent

Cumulative Frequency

Cumulative Percent

490
665
574

28.34
38.46
33.20

490
1155
1729

28.34
66.80
100.00

Source: Based on data from Statistics Denmark

Table 9 shows descriptive statistics of the diversity measures. The average of gender group is
slightly above 3, that is, the average distribution of gender is in the 70-80 percent group. For the age
entropy value, the average value is high compared to the potential maximum value. This illustrates
that there is a rather equal distribution of age groups within Danish firms. This is not the case for
nationality since there is, obviously, a high representation of one nationality present (the Danes). The
maximum entropy value also indicates that in this sample the maximum, which is an equal share of all
nationality groups, is not reached. Theoretically the maximum value would have been 1.7918.
Education also has a relative low average entropy value and just as in nationality the maximum is not
present in the sample. Theoretical, the maximum value is 2.8904. The skewness in the distribution of
education might be explained by the fact that the categories are only based on higher educated
persons. In addition there are many categories thus having an equal share of all levels in all
disciplines is almost impossible to achieve. Table 10 provides additional information on the distribution
of the gender groups. There is a rather equal distribution of these gender groups in sample of Danish
firms.

Table 9: Descriptive statistics for the diversity measures.

Observations
Mean
Gender groups
1729
3.01215
Age Entropy
1729
1.08942
Nationality Entropy
1729
0.12671
Education Entropy
1729
0.45358
Source: Based on data from Statistics Denmark

Std Dev
1.46027
0.18303
0.16917
0.43243

Minimum
1
0
0
0

Maximum
5
1.38629
1.20054
2.16912

Table 10: Distribution of gender groups in Danish firms.

Frequencies
375
Gender group 1
334
Gender group 2
288
Gender group 3
359
Gender group 4
373
Gender group 5
Source: Based on data Statistics Denmark

Percent
21.69
19.32
16.66
20.76
21.57

Cumulative Frequency
375
709
997
1356
1729

Cumulative Percent
21.69
41.01
57.66
78.43
100.00

Table 11 shows the number of firms with a diversity policy i.e. whether the firm has an active
approach for hiring older and/or foreigners. Almost one out of five firms have such an approach. Table
12 illustrates the number of firms that make use of internal processes or recruiting new personal 27
percent of the firms indicate that they have such an approach.

11

Table 11: Number of firms with an active approach on hiring older and/or foreigners.
Frequencies

Percent

1411
81.61
No
318
18.39
At least one
Source: Based on data from Statistics Denmark

Cumulative Frequency

Cumulative Percent

1411
1729

81.61
100.00

Table 12: Internal processes for recruiting new personnel.

Frequencies
Percent
no
1258
72.76
yes
471
27.24
Source: Based on data from Statistics Denmark

Cumulative Frequency
1258
1729

Cumulative Percent
72.76
100.00

Table 13 presents a correlation matrix of the independent variables.

12

Table 13: Correlation matrix of the independent variables.

1

10

1 Size
0.234

***

2 Organisational
Change
3 Competition

0.124

*** 0.115

***

4 Gender Group

0.199

*** 0.178

*** 0.072

5 Age Entropy

0.045

-0.078 *** -0.017

***
-0.135 ***

6 Nation Entropy 0.209

*** 0.084

*** 0.014

0.154

*** -0.064 ***

7 Education
Entropy
8 Divstrat 1

0.311

*** 0.193

*** 0.067

*** 0.285

*** -0.238 *** 0.118

***

0.117

*** 0.138

*** 0.183

*** 0.091

*** 0.011

0.067

*** 0.094

***

9 Divstrat 2

0.197

*** 0.222

*** 0.112

*** 0.171

*** -0.091 *** 0.071

*** 0.105

*** 0.166

***

10 Diversity Policy 0.128

*** 0.061

**

0.007

0.035

-0.026

*** 0.071

*** 0.063

*** 0.115

***

0.049

**

0.032

-0.031

-0.069 *** 0.026

0.081

*** 0.067

*** 0.048

11 Internal

-0.010

0.112

-0.019

**

*** Significant at the 1% level. ** Significant at the 5% level. *Significant at the 10% level.

13

Results
The effect of employee diversity on innovation are analysed in four different logistic regression

models. For each model different variables are added to see how they affect the likelihood for having
an innovation in the firm. Model 1 is the most basic model on which the other models will be build on.
Each model will be discussed separately including the effects the variables have on innovation. Table
14 shows the results.
Model 1. This model analyses the likelihood that a firm has innovated based on the diversity
measures for education, age, nationality and gender and organisational change and there will be
controlled for the industry and the size of the firm. The likelihood ratio for the model is highly
significant.
The entropy value for education has a significant (P< 0.001) and positive effect (0.5111) on the
firms likelihood of having an innovation. This means that a higher degree of diversity in education
leads to a higher likelihood of having an innovation6.
Diversity in Age has a significant (P<0.001) negative effect (-1.157) on the likelihood that a firm has
made an innovation. So, having more age groups within a firm and thus a diversified composition of
the workforce based on age is negative for innovation.
Nationality has, just like education, a significant (P<0.001) positive effect (0.2674) on innovation
performance. Thus, having more nationalities present in the company increases the likelihood of
having an innovation. The share of Danes is very high and a balanced composition of foreigners is
highly exceptional and the higher entropy value is in most cases due to having a small share of
foreigners in the firm.
The diversity in gender consists of five groups. Gender group 1, 90-100 percent of the same
gender, is the benchmark. Gender group 2 has a significant (P < 0.001) negative effect (-0.188) on
innovation. However, the odds ratio shows that gender group 2 odds of having an innovation is 20.3
percent higher compared to that benchmark gender group 1. Thus a more equal distributed gender
composition increased the odds of having an innovation. Gender group 3 shows a positive sign
(0.0381) and the odds ratio is higher than in gender group 2. However, the effect is not significantly
different from the benchmark group. Gender group 4 has a positive effect (0.1613) which is also
significant (P<0.001) and an odds ratio of 1.707 meaning that the odds of having an innovation in this
group is 70.7 percent higher compared to the benchmark group. The last group is the one where a
firm has 50-60 percent of the same gender in a firm. In this case there is again a positive (0.3619)
significant (P<0.001) effect on having an innovation with 108.6 percent higher odds of having an
innovation compared to firms with 90-100 percent of the same gender. The more equal the distribution
of gender is in firm the higher the likelihood is of having an innovation.

Table 14 also shows an odds ratio on 1.667. The interpretation of odds ratio of a continuous variable would say that the odds
of having an innovation would increase by 66.7 percent when the value of the independent variable increases by one. However,
this entropy value cannot be compared to a normal straightforward continuous variable such as income or age. Thus
interpreting the odds ratio for the entropy is difficult and in most cases does not make sense. In addition increasing the balance
or adding/removing a new group can cause the increase in entropy.

14

Organisational change has a positive (0.4797) and significant effect on the likelihood of innovation.
The odds ratio measure shows 160.1 percent higher odds of innovating whenever the firm has
implemented organisational change compared to firms that have not implemented organisational
change. The industry effect is in all cases significant. Many of the industries have a negative
coefficient since manufacturing is the benchmark and it is an innovative industry compared to the
others. The only industry that has higher odds of innovating is business services. The benchmark for
the firm size variable is firms with less than 50 employees. The other firms are not significantly
different regarding having an innovation. Firm size 3, 101-250 employees, is significantly positive. The
effect is, however, weak (P<0.1).
Model 2. In this model variables that indicate if the firm has experienced an increase in competition
during the period 2003-2005 are added. Both a slight and a heavy increase have a significant and
positive effect on innovation. A slight increase has a stronger effect and a slightly higher odds ratio
than a heavy increase in competition. The coefficients for the diversity measures are relatively stable;
the biggest change in the coefficient is in the nationality entropy. Organisational change is still an
important factor that explains innovation in firms and in the other control variable there is hardly any
change visible.
Model 3. The collaboration and strategy variables are added to the regression in this model. The
benchmark for collaboration is not having a high degree of cooperation with a partner during the
period 2003-2005. However, having a high degree of cooperation with one partner does not have a
significant effect on the whether the firm has an innovation compared to not having a collaboration
partner. These effects will only become visible from having two types of collaboration partners.
Although the effect is significant and negative (-0.12) the odds ratio reveals that a firm with two
different types of collaboration partners has 26.5 percent higher odds of having an innovation than a
firm that has not collaborated. Having had one extra type of collaboration partner, three, has a
significant positive effect (0.2706) on having an innovation. The odds ratio of having an innovation in
this group compared to the benchmark is 1.87 (87 percent higher odds). Having four or more types of
collaboration partners has also a significant positive (0.2075) effect. Also the odds ratio is positive
(75.5 percent higher odds of having an innovation), however the odds ratio is lower than in the case a
firm has three different types of collaboration partners.
The other variable that has been added to the model is the strategy variables Divstrat1 that
indicates how many strategies (product, market, technology, organisational, and/or business process
development strategy) the firm has implemented. While Divstrat2 shows how many strategy groups
the firm has (market and/or firm and organisation strategy). Divstrat1 does not have any significant
effect. Divstrat2, however, has a strong positive effect (0.6507). The odds ratio show that the
likelihood of having an innovation increases by a factor 3.67 whenever a firm has at least one of the
strategies compared to a firm that has no strategy.
Adding these variables has hardly any impact on the effect and significance of the other variables
compared to Model 1 and Model 2. However, the odds ratio measures for the gender group decreases
compared to the previous models. The higher odds of having an innovation in gender group 2

15

compared to gender group 1 decreases from 21.7 percent in model 2 to 3.7 percent. For gender group
4 this decrease is from just over 70 percent to 54.4 percent and in the case of gender group 5 the
decrease is from 114.3 percent to 87 percent. The assumption that a more equal distribution of gender
leads to having a higher likelihood to innovate is still valid although the effect is decreasing by adding
the strategy and collaboration variables.
Model 4. In this last model the two recruitment variables (diversity policy and recruitment) are
added. Diversity policy is an indicator for whether or not the firm has an active policy in hiring older
people and/or foreigners. The effect of such a policy on having an innovation is positive (0.26) and
significant. The odds ratio also indicates that a firm that has such a policy has 68.2 percent higher
odds of having an innovation compared to a firm that does not have such a policy. The other
recruitment variable Internal shows that recruiting based on internal recommendation seems to have a
significant negative effect (-0.0778) on having an innovation. Having such an approach to recruitment
compared to not having it will result in 14.4 percent lower odds of having an innovation. Employee
diversity in age still has a significant negative effect on the likelihood of innovation, while diversity in
education, nationality and gender groups 4 and 5 remain significant and positive.

16

Table 14: Regression results of the effect of employee diversity on innovation.

Model 1
Variable
Intercept
Education entropy
Age entropy
Nationality entropy
Gender
group5
group4
group3
group2
Collaboration partners
4+ types
3 types
2 types
1 type
Divstrat2
Divstrat1
Diversity Policy
Internal
Organisational change
Heavy Competition
Slight Competition
Industry
Finance & Insurance
Business Service
Transport
Wholesale & Retail
Construction
Size 250 or more
Size 100-249
Size 50-99
Observations

Model 2
Standard
error

Coefficient
1.2451
0.5111
-1.1568
0.2674

Odds
Ratio

Model 3
Standard
error

Coefficient

Odds
Ratio

Model 4
Standard
error

Coefficient

Odds
Ratio

Standard
error

Coefficient

Odds
Ratio

***
***
***
***

0.1647
0.0673
0.1329
0.1444

1.667
0.314
1.307

1.724
0.5104
-1.1799
0.3225

***
***
***
***

0.1678
0.0674
0.1337
0.1451

1.666
0.307
1.381

1.0654
0.4756
-1.0115
0.3475

***
***
***
**

0.1738
0.0699
0.1376
0.1489

1.609
0.364
1.415

1.2692
0.4715
-1.0917
0.2538

***
***
***
***

0.1767
0.0706
0.1385
0.1501

1.602
0.336
1.289

0.3619 ***
0.1613 ***
0.0381
-0.1881 ***

0.0481
0.0468
0.049
0.045

2.086
1.707
1.509
1.203

0.3814 ***
0.153 ***
0.0306
-0.1842 ***

0.0483
0.0469
0.0491
0.0452

2.143
1.705
1.509
1.217

0.3459 ***
0.1545 ***
0.023
-0.2436 ***

0.0499
0.0486
0.0509
0.465

1.87
1.544
1.354
1.037

0.3528 ***
0.1269 ***
0.0292
-0.2199 ***

0.0501
0.0489
0.0511
0.0467

1.9
1.516
1.375
1.071

0.2075
0.2706
-0.12
-0.0030
0.6507
-0.0005

0.664
0.0516
0.0409
0.0509
0.036
0.032

1.755
1.87
1.265
1.422
3.673
1.915

0.0667
0.0521
0.0411
0.051
0.0363
0.0322
0.0336
0.0269
0.0249
0.0392
0.0431

1.717
1.918
1.269
1.428
3.568
1.909
1.682
0.856
2.138
1.207
1.375

0.071
0.1642
0.0815
0.555
0.764
0.104
0.0708
0.057

0.654
2.673
0.629
0.647
0.414
1.007
1.225
1.259

0.4797 ***

0.237

2.61

0.4662 ***
0.1141 ***
0.1185 ***

-0.2532 ***
0.0685
0.646
-0.2631 ***
1.1647 ***
0.1625
2.669
1.1558 ***
-0.2019 ***
0.0783
0.68
-0.2071 **
-0.1266 **
0.534
0.734
-0.1435 ***
-0.7661 ***
0.735
0.387
-0.7338 ***
0.0912
0.995
1.425
0.0845
0.1251 *
0.689
1.474
0.127 *
0.0464
0.0548
1.362
0.0459
1584
1578
*** Significant at the 1% level. ** Significant at the 5% level. *Significant at the 10% level.

0.0238
0.37
0.0412

2.541
1.414
1.421

0.0686
0.1626
0.0784
0.0536
0.738
0.0995
0.0689
0.0548

0.638
2.636
0.678
0.719
0.398
1.408
1.469
1.354

***
***
***
***

0.3799 ***
0.00557
0.1362 ***
-0.1928
1.1428
-0.2493
-0.2268
-0.6537
-0.056
0.0987
0.1031
1578

***
***
***
***
***

0.0248
0.039
0.0428

2.138
1.1559
1.32

0.0704
0.1637
0.0811
0.0551
0.0758
0.1031
0.0706
0.0567

0.689
2.619
0.651
0.666
0.434
1.094
1.277
1.283

0.1831
0.294
-0.1189
-0.00097
0.6325
0.00701
0.26
-0.0778
0.3799
0.0192
0.1497
-0.2205
1.1867
-0.2595
-0.2314
-0.6786
-0.103
0.0927
0.1204
1578

***
***
***
***
***
***
***
***
***
***
***
***
***

**

17

Effects of employee diversity on innovation

The results of the logistic regressions show an effect of employee diversity on the likelihood that

firms innovate. A high entropy value in education has a positive effect on the likelihood of having an
innovation. There are two types of dynamics that influence this likelihood. Different education types, or
a more balance in the education types a firm possesses would increase the likelihood of having an
innovation. There is a bias in the education diversity measure, since it measures diversity within the
highly educated group, meaning the employees with a bachelor degree or higher. All employees with a
degree below bachelor are put in a single category. As a result a higher entropy value can be
explained by having a larger share of employees with a higher education and multiple types of higher
educated people. Having a higher educated employee alone would be positive for innovation
performance, having more different types would increase the likelihood.
The diversity in age within a firm has a negative effect on the likelihood of having an innovation.
Meaning that having only one age group would have a higher effect. As in the case of education this
value does not determine if there is a certain age group that is better or worse to have. However, the
distribution of all age groups is rather equally spread in the firms and the average entropy value is
subsequently rather high. Before using this categorisation of age groups we tried some other
groupings of ages and average age, but this did not change the result, which means that the measure
is rather robust.
Nationality, just like education, appears to have a positive effect on the likelihood of having an
innovation. For a firm it therefore seems to be positive to have more nationalities present in order to
increase the likelihood of having an innovation compared to firms that only have Danes working for
them. Obviously, there is a high share of Danes among the employees and it is hard to reach a
balance between nationalities. Thus the entropy value for nationality is on average very low.
Diversity within gender is defined that the more balance there is between men and woman in the
firm the more diversity there is. The odds of having an innovation increases when more balance is
created 7.1 percent in gender group 2 (80-90 percent of one gender) and 90 percent in gender group
5 (50-60 percent of one gender) compared to gender group 1 (90-100 percent of one gender). Thus it
shows that being more diverse in the composition of gender increases the likelihood of having an
innovation compared to firms with a 90-100 percent gender composition. What also needs to be noted
in the case of diversity in gender is that a high shift in the percentage leads to a high increase in the
odds of having an innovation.
The diversity policy variable would indicate that a firm that has an active approach of wanting to
create diversity within the firm. Actively working on hiring foreigners and/ or older people can be used
as a proxy for a firm with an open culture towards diversity. Having such a policy shows a positive
effect on the likelihood of having an innovation, the odds of having an innovation are 68.2 percent
higher compared to not having it. Putting much emphasis on internal processes for recruitment shows
a negative effect on the likelihood of having an innovation. The reason why this is included in the
diversity measures is that people interact with people that are a lot like themselves. So, whenever an

18

employee recommends a person there is a larger chance that you hire individuals that are similar to
the ones that are already present, thus lowering the diversity in the firm.

Conclusion
Previous studies have focused on the effect of diversity of top management teams on firm

performance. However, the diversity in the composition of these teams might be a poor proxy for the
effect of employee diversity on innovation, since the innovation process involves interaction between
several employees at various levels in the firm. Therefore it is necessary to look at the broader
composition of skills and knowledge in the company. The purpose of this paper is to analyse the effect
of employee diversity on the innovative performance of firms.
Employee diversity in terms of gender, age, education and nationality has an effect on the likelihood
that firms innovate with controls for other factors such as size, industry, external cooperation,
organisational change and competition. Firms with more balanced gender composition are more likely
to innovate compared to firms with high concentration in one gender, likewise are firms with diversity
in nationalities more likely to be innovative. Firms with a higher share of employees with a higher
education and diversity in the types of educations have a higher likelihood of innovating. However,
diversity in age composition appears to be negative, although most firms have employees in all age
groups.
Employee diversity has definitely an effect on innovation, and in most cases this effect is also
positive. However, although innovation and diversity is an interesting field one should not forget that
innovation is only consequential. Eventually this innovation should lead to better performance of firms
in for example profit, turnover, growth, survival etc. Therefore it would be interesting to put diversity
along these performance measures. Before making any strong policy recommendations with regards
to diversity and innovation we would like to stress to make a more thorough analysis. The analysis is a
cross section analysis based on all industries in Denmark, but a longitudinal analysis on the industry
level e.g. a distinction between knowledge intensive and less knowledge intensive industries would
provide a stronger analysis, since the eventual reason to look at diversity is to see what the effect of a
diversified knowledge pool is on the performance of a firm.

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