Racial Diversity Spurs Economic Growth

“It is hardly possible to overrate the value of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. . . . Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress.” John Stuart Mill, 1848

The benefit of social integration, specifically racial, is a contested issue. While potential frictions may arise around cultural and ethnic differences, many believe that the benefits of diversity far outweigh the negatives. As John Stuart Mill so eloquently stated in his quote,  being around people with different beliefs and ideas creates more interesting outcomes.

In a recent study, Sampsa Simila sets out to answer a fundamental, yet complex, question: Does the social structure of a community influence its rate of economic development?

To begin answering this question the authors examine Metropolitan Statsitical Areas (MSA’s) between 1993 to 2002, looking for a proxy to explain economic growth—specifically the allocation of venture capital (VC). They use VC because it is an excellent marker of  social connectedness as venture capitalists rely on social connections to gain access, trust, and assess the credibility of entrepreneurs with no track record.  That is why VC deals usually occur in ones backyard as opposed to across the country.

The other data point needed to answer the question is social relationships along diverse lines.  The authors use “microgeographies”—hyperlocalized data on where people live to assess their opportunities for interaction with people of a different race.  The idea is that if you lived on a block that is made up of people of difference races you have more opportunity to interact with diverse individuals making it more likely that you actually do.  If you live in a segregated community even if you wanted diverse interaction it is unlikely.

So the authors hypothesize that the more integrated a community, the more diverse social connections, the more information and resources will flow, leading to better use of VC funds into a community stimulating innovation and economic growth.

And in fact the as the authors explain, “the more integrated communities benefited more from venture capital, in terms of having higher rates of patenting, entrepreneurship, job creation, and economic growth. Given that a one standard deviation increase in racial integration in a region increased the positive outcomes associated with the supply of venture capital by 30 to 100 percent, these effects appear not just statistically significant but also economically meaningful.”

The authors provide some likely explanations to account for this relationship:

  1. First, more integrated regions may produce more and better ideas in which venture capitalists can invest.
  2. Second, social contentedness could ease the resource mobilization process, allowing entrepreneurs to more readily recruit the people and funding that they need.
  3. Third, higher levels of integration may magnify the spillover effects associated with entrepreneurship.

The study, Community and Capital in Entrepreneurship and Economic Growth,  was co-authored by Olav Sorenson.

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