Melting pot or tribe? Country-level ethnic diversity and its effect on subsidiaries

Abstract

The purpose of our study is to explore the effect of country-level ethnic diversity on subsidiary-level ownership strategy and employee productivity. We examine two characteristics of ethnic diversity in society, the level of diversity and degree of inclusion. Using a multi-source and multi-year (2004–2010) sample of 30,007 subsidiaries from 79 home-countries operating in 63 host-countries, we find that high levels of diversity are not a de facto form of country risk as some have argued. Rather, it is the ability of a dominant ethnic group to exclude others from full economic and political participation. As societies become more fragmented, and one or few groups become more dominant and prevents other groups from fully participating in the political process or economic opportunities, this may increase business risk and lower labor productivity. The broader policy implications are that policymakers should have engagement policies toward disfranchised ethnic groups. Policymakers should develop polices aimed at leveraging the benefits of diversity. MNCs have an interest in promoting such policies and fostering greater economic and political inclusion in countries where they operate.