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Cultural Diversity in Management, Firm Performance, and the Moderating Role of Entrepreneurial Orientation Dimensions

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Cultural Diversity in Management, Firm Performance, and the Moderating Role of Entrepreneurial Orientation Dimensions

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Extending previous theorizing on cultural diversity's organizational effects by integrating value-in-diversity and social identity perspectives with the framework of Blau's (1977) theory of heterogeneity, we hypothesized curvilinear relationships between racial and gender diversity in management and firm performance. We evaluated relationships within the context of firm-level entrepreneurial orientation. Our empirical study indicated complex relationships among study variables. It revealed that innovativeness positively and risk taking negatively moderated nonlinear relationship patterns for both racial and gender heterogeneity. Research and practical implications are discussed.
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CULTURAL DIVERSITY IN MANAGEMENT, FIRM
PERFORMANCE, AND THE MODERATING ROLE OF
ENTREPRENEURIAL ORIENTATION DIMENSIONS
ORLANDO C. RICHARD
University of Texas at Dallas
TIM BARNETT
Mississippi State University
SEAN DWYER
Louisiana Tech University
KEN CHADWICK
Nicholls State University
Extending previous theorizing on cultural diversity’s organizational effects by inte-
grating value-in-diversity and social identity perspectives with the framework of
Blau’s (1977) theory of heterogeneity, we hypothesized curvilinear relationships be-
tween racial and gender diversity in management and firm performance. We evaluated
relationships within the context of firm-level entrepreneurial orientation. Our empir-
ical study indicated complex relationships among study variables. It revealed that
innovativeness positively and risk taking negatively moderated nonlinear relationship
patterns for both racial and gender heterogeneity. Research and practical implications
are discussed.
In the United States, women hold more than 40
percent of the administrative and managerial jobs,
and about 17 percent of “officials and managers”
are racial minorities (Equal Employment Opportu-
nity Commission [EEOC], 2002). Despite these
facts, there has been little research on the perfor-
mance effects of racial and gender heterogeneity in
management groups (Williams & O’Reilly, 1998).
Instead, management-level diversity studies usu-
ally focus on nonvisible types of diversity, such as
the functional background and job tenure of top
managers (Finkelstein & Hambrick, 1996). Cultural
diversity, however, also encompasses differences
in visible characteristics such as race and gender
(Cox, 1994). Several studies of diversity have found
that it has positive effects at the individual and
small-group levels (Cox, Lobel, & McLeod, 1991;
Watson, Kumar, & Michaelson, 1993), but others
have concluded that heterogeneous groups perform
less well than homogeneous groups (Pelled, Eisen-
hardt, & Xin, 1999; Tsui, Egan, & O’Reilly, 1992).
Existing theories do not appear to offer a sufficient
explanation for these inconsistent findings.
We sought to integrate existing theoretical expla-
nations (value-in-diversity, social identity, and
self-categorization theories) within the context of
Blau’s (1977) theory of heterogeneity and suggest
that the relationship between cultural diversity and
performance is more complex than previous mod-
els have suggested. Specifically, we extended our
analysis beyond simple linear relationships and
investigated potential curvilinear and contingency
relationships. We added to the research concerning
cultural diversity among managers by examining
two visible components of diversity—race and gen-
der. Further, instead of analyzing diversity’s effects
at an individual or group level of analysis, we ex-
amined how heterogeneity within management af-
fects firm performance.
THEORETICAL DEVELOPMENT AND
REFINEMENT
Cultural Diversity in Management and Firm
Performance
Cultural diversity has been studied in both labo-
ratory and field settings. In general, lab studies,
grounded in the value-in-diversity perspective,
have indicated that diversity within work groups
increases their effectiveness (Cox et al., 1991;
We would like to thank Associate Editor Marshall
Schminke and three anonymous AMJ reviewers for their
helpful comments.
Academy of Management Journal
2004, Vol. 47, No. 2, 255–266.
255
Watson et al., 1993). In contrast, field studies,
guided by social identity and related self-categori-
zation theories, have suggested that diversity is as-
sociated with negative performance outcomes
(Pelled et al., 1999; Tsui et al., 1992). In this sec-
tion, we integrate predictions from these two per-
spectives to provide a theoretical framework based
on Blau’s (1977) theory of heterogeneity.
Blau (1977) suggested that firms with different
levels of cultural diversity experience dissimilar
dynamics and organizational outcomes. Within
culturally homogeneous groups, members will tend
to communicate with one another more often and
in a greater variety of ways, perhaps because they
share worldviews and a unified culture resulting
from in-group attachments and shared perceptions
(Earley & Mosakowski, 2000). According to social
identity theory, cultural homogeneity in manage-
ment groups may thus increase satisfaction and
cooperation and decrease emotional conflict (Tajfel
& Turner, 1985; Williams & O’Reilly, 1998). Since
homogeneous groups do not have significant cul-
tural barriers to social intercourse, positive social
associations and in-group social contacts are fos-
tered (Blau, 1977). This formulation suggests that
deleterious social identity and self-categorization
processes will not inhibit an organization with a
culturally homogeneous management group.
As cultural diversity increases, however, social
comparison and categorization processes occur,
and in-groups/out-groups and cognitive biases may
emerge, creating barriers to social intercourse
(Blau, 1977; Smith, Smith, Olian, Sims, O’Bannon,
& Scully, 1994; Tsui et al., 1992). Therefore, as
heterogeneity in management groups reaches mod-
erate levels, the psychological processes associated
with social identity theory and self-categorization
processes may be more likely to occur. These pro-
cesses generate individual behaviors such as soli-
darity with others in a race- or gender-based group,
conformity to the norms of one’s group, and dis-
crimination against out-groups (Tajfel & Turner,
1985). To the extent that multiple subcultures exist
in moderately heterogeneous groups, conflict is po-
tentially maximized (Earley & Mosakowski, 2000;
Lau & Murnighan, 1998), and intergroup interac-
tion and communication may be blocked (Alex-
ander, Nuchols, Bloom, & Lee, 1995; Blau, 1977).
For example, Earley and Mosakowski (2000) found
that moderately heterogeneous groups exhibited re-
lationship conflict, communication problems, and
low identification of members with an overall work
group. Within management groups, the difficulties
associated with moderate levels of heterogeneity
may lead to negative performance outcomes for an
organization.
Although moderate levels of cultural heterogene-
ity may create barriers to effective social inter-
course, high levels of heterogeneity could actually
weaken these barriers (Blau, 1977), since group
members will be more evenly diffused over the
categories of cultural diversity, and in-group/out-
group identities will be reduced (Alexander et al.,
1995). In groups with high levels of cultural heter-
ogeneity, casual social contacts and communica-
tion are more likely to involve members of different
racial/gender groups. Further, the in-group pres-
sures that inhibit social interaction with out-group
members should be weakened (Blau, 1977). In man-
agement groups with high heterogeneity, out-group
discrimination is thus less likely to occur. In fact,
few common bases for subgroup formation and so-
cial identity are likely to exist in management
groups with relatively high levels of diversity (Ear-
ley & Mosakowski, 2000). In addition, we posit that
the processes associated with the value-in-diversity
paradigm are fully realized within highly diverse
management groups, which further enhances per-
formance (Cox et al., 1991; Watson et al., 1993). An
organization with high levels of cultural heteroge-
neity in management may not be inhibited by social
identity processes because organization members
have many out-group contacts and may, instead,
greatly benefit from a diverse pool of resources.
In sum, in keeping with previous research ex-
ploring the nonlinearity of human capital effects
(Hitt, Bierman, Shimizu, & Kochhar, 2001), we ex-
pected cultural heterogeneity in management to
exhibit a U-shaped relationship with firm perfor-
mance.
Hypothesis 1. Cultural diversity in manage-
ment will have a U-shaped curvilinear rela-
tionship to performance.
The Moderating Effects of Entrepreneurial
Orientation Dimensions
Entrepreneurial orientation defined. The diver-
sity of management groups should be studied in light
of relevant contextual factors (Chatman, Polzer, Bar-
sade, & Neale, 1998). Firm strategy (Richard, 2000)
and strategy process variables are particularly rele-
vant to the study of management diversity, since
strategy formulation and implementation involve in-
dividuals at all levels and across all functional areas
of management (Burgelman, 1983).
Entrepreneurial orientation is a firm-level con-
struct (Covin & Slevin, 1991) that is closely linked
to strategic management and the strategic decision
making process (Birkinshaw, 1997; Burgelman,
1983; Kanter, 1982; Lumpkin & Dess, 1996; Naman
256 AprilAcademy of Management Journal
& Slevin, 1993). A firm’s entrepreneurial orienta-
tion is its propensity to act autonomously, inno-
vate, take risks, and act proactively when con-
fronted with market opportunities (Lumpkin &
Dess, 1996). Entrepreneurial orientation should be
distinguished from entrepreneurship, which re-
lates to new business entry and is concerned pri-
marily with questions such as, “What business do
we enter?” and “How do we make the new business
succeed?” Entrepreneurial orientation is a process
construct and concerns the “methods, practices,
and decision-making styles managers use” (Lump-
kin & Dess, 1996: 136). Entrepreneurial orientation
is grounded in the strategic choice perspective and
concerns the “intentions and actions of key players
functioning in a dynamic generative process”
(Lumpkin & Dess, 1996: 136). An entrepreneurial
orientation promotes initiative (Burgelman, 1983)
and what Birkinshaw (1997) called “dispersed” en-
trepreneurship, which is the involvement of multi-
ple management levels in the formulation and
implementation of entrepreneurial strategies. An
entrepreneurial orientation is not created or im-
posed by top management, but reflects the strategic
posture as exhibited by multiple layers of manage-
ment (Stevenson & Jarillo, 1990).
Entrepreneurial orientation is conceptualized as
having anywhere from three to five dimensions,
which may vary independently (Lumpkin & Dess,
1996) and have different moderating effects on the
relationship between management diversity and
performance. An organization could exhibit rela-
tively high levels of one or more dimensions and, at
the same time, relatively low levels of other dimen-
sions (Lyon, Lumpkin, & Dess, 2000). In our re-
search, we focused on the three most commonly
cited entrepreneurial orientation dimensions: inno-
vativeness, risk taking, and proactiveness. We
viewed the dimensions of entrepreneurial orienta-
tion as interacting with cultural diversity to affect
firm performance but saw the moderating effects of
the dimensions as likely to differ.
The moderating effect of innovativeness. Inno-
vativeness reflects the propensity of a firm to ac-
tively support new ideas, novelty, experimenta-
tion, and creative solutions in pursuit of a
competitive advantage (Lumpkin & Dess, 1996).
Conceptually, an innovative strategic posture is
thought to be linked to firm performance because it
increases the chances that a firm will realize first-
mover advantages and capitalize on emerging mar-
ket opportunities (Wiklund, 1999). We believe that
homogeneous management groups will perform
well in firms with innovative orientations. Mem-
bers of homogeneous management groups are likely
to exploit their shared perceptions and high-quality
communication to respond to their organization’s
demand for novelty and creativity. However, the
development of racial and/or gender diversity in
management groups may lead to the formation of
in-groups and out-groups, stronger identification of
members with other members of their own race or
gender than with the management group, and thus
the potential for poor intergroup communication
and increased conflict. In this paper, we argue that
these negative effects should be highest at moderate
levels of heterogeneity (Hypothesis 1) because
categorical groups will be large and concentrated
enough to promote in-group identification and out-
group bias (Blau, 1977; Earley & Mosakowski,
2000). Thus, we would expect the combination of
an innovative strategic posture and relatively mod-
erate levels of cultural diversity to lead to the low-
est levels of firm performance.
Proponents of cultural diversity have maintained
that the multiple perspectives and insights a cul-
turally diverse workforce provides can foster a
wide range of creative decision alternatives, effec-
tive decision making, and high-quality decisions
(Cox, 1994, McLeod, Lobel, & Cox, 1996). In terms
of strategy formulation and implementation within
management groups, this value-in-diversity per-
spective suggests that the attributes of a heteroge-
neous management group enhance the develop-
ment of strategic alternatives and promote creative
and effective competitive strategies. As the level of
heterogeneity in a management group reaches rel-
atively high levels, group members become more
evenly diffused over the categories of cultural di-
versity, and in-group/out-group identities are re-
duced by the relatively small sizes of homogeneous
groups (Alexander et al., 1995). Thus, communica-
tion and interaction should increase because group
members have many out-group contacts (Blau,
1977). In firms emphasizing the need for innova-
tiveness, such relatively heterogeneous manage-
ment groups should be able to effectively respond
by taking advantage of diverse backgrounds, per-
ceptions, and worldviews without suffering greatly
from the aforementioned negative social identity
and categorization effects. Thus, we expect the
combination of an innovative strategic posture and
relatively high levels of diversity to have the most
positive impact on firm performance.
Hypothesis 2. The U-shaped relationship be-
tween cultural diversity in management and
performance will be significantly stronger in
firms with innovative orientations.
The moderating effects of risk taking and pro-
activeness. The risk-taking dimension of strategic
posture is a firm’s propensity to take business-
2004 257Richard, Barnett, Dwyer, and Chadwick
related chances with regard to strategic actions in
the face of uncertainty. Proactiveness is its propen-
sity to take the initiative to compete aggressively
with other firms (Covin & Slevin, 1989). A strategic
posture emphasizing risk taking and proactiveness
suggests that a management group will need high
levels of trust and interpersonal communication.
Both the risk-taking and proactiveness dimensions
of entrepreneurial orientation require a firm to
make quick decisions and aggressively compete by
implementing bold and risky strategies in the face
of uncertainty. Timely risks may be a key factor, as
strategic decision speed has been linked to firm
performance (Eisenhardt, 1989).
Members of homogeneous management groups
may have fewer cognitive and interpersonal barri-
ers to overcome in reaching agreement on aggres-
sive and risky strategies (Miller, Burke, & Glick,
1998; Watson et al., 1993). However, homogeneous
groups may lack the diverse cognitive perspectives
needed to recognize strategic opportunities and/or
simultaneously consider alternatives, capacities
that are essential for decision speed (Eisenhardt,
1989; Judge & Miller, 1991). In sum, culturally ho-
mogeneous groups do little for risk-taking and pro-
active orientations. In contrast, we posit, a moder-
ate level of diversity will benefit firms with such
orientations. Research has shown that up to a cer-
tain level, diversity relates to task conflict (Pelled et
al., 1999), which is disagreement among members
about the content of tasks being performed (Jehn,
1995). Such conflict is suitable for firms that thrive
on risk and proactivity. Thus, we predict that a
moderate level of diversity in management is ideal
in a risky or proactive context. Beyond moderate
levels, however, we expect a different effect. Em-
pirical research has suggested that high levels of
diversity reduce agreement-seeking behaviors and
social cohesion in the context of strategic decision
making (Ferrier, 2001). Other studies have indi-
cated that diverse decision-making groups are
slower to reach consensus than homogeneous
groups (Watson et al., 1993). Consequently, deci-
sion-making speed, as well as a firm’s ability to
effect strategic change, are often impeded (Ham-
brick, Cho, & Chen, 1996). These potentially nega-
tive consequences suggest that a highly diverse
management might have difficulty operating suc-
cessfully in a context characterized by an emphasis
on risk taking and proactiveness. Thus, we expect
that risk taking and proactiveness will negatively
moderate the relationship between management
group heterogeneity and firm performance. The
combination of a highly proactive and risk-taking
posture and high levels of diversity is likely to have
the most negative impact on firm performance.
This presentation represents a shift from the earlier
curvilinear predictions, outlined in Hypotheses 1
and 2. The first hypothesis proposes a U-shaped
relationship between diversity in management and
performance, and the second, that the U-shaped
relationship will be stronger for more innovative
firms. However, Hypotheses 3 and 4 differ mark-
edly, suggesting an inverted U-shaped relationship
between cultural diversity in management and per-
formance where a moderate level of diversity is
advantageous for risk-taking and proactive firms.
Hypothesis 3. Firm risk taking will moderate
the curvilinear relationship between cultural
diversity in management and performance in
such a way that low and high, but not moder-
ate, levels of diversity will negatively relate
to performance, resulting in an inverted
U-shaped relationship.
Hypothesis 4. Firm proactiveness will moder-
ate the curvilinear relationship between cul-
tural diversity in management and perfor-
mance in such a way that low and high, but not
moderate, levels of diversity will negatively re-
late to performance, resulting in an inverted
U-shaped relationship.
METHODOLOGY
Sample
Initially, we obtained a stratified random sample
frame consisting of 700 banks with $100 million or
less in total assets, 700 with $100499 million in
assets, and 700 with $500 million or more in assets.
We sent questionnaires to the 2,100 bank presi-
dents, 535 of whom responded. The bank presi-
dents completed items related to their firms’ de-
grees of entrepreneurial orientation and provided
other data not utilized in the present study. Prior to
beginning the current study, we obtained contact
information for the senior human resource execu-
tives of the 535 banks that responded to the first
survey and queried these HR executives regarding
the demographic characteristics of their banks’
management. Data were collected for fiscal year
1998. One hundred fifty-three of the 535 HR exec-
utives provided usable data, resulting in a 29 per-
cent response rate. The average number of employ-
ees in the banks was 154, and the banks had an
average of 7 branches. The average bank age was 77
years.
Measures
Cultural diversity. Using data provided by the
HR executives, we assessed the racial and gender
258 AprilAcademy of Management Journal
heterogeneity of each bank’s management group.
Because multiple layers of management are in-
volved in the strategic process (Birkinshaw, 1997;
Burgelman, 1983), we included senior executives
who set corporate strategy and policies and the
managers who implemented such policies: middle
management, department managers, and salaried
supervisors. To simplify reporting, we provided
each HR executive a blank 1998 EEO-1 Standard
Form 100. The “officials and managers” job cate-
gory was employed to represent the management
group. This job category includes administrative
and managerial personnel who set broad policies,
exercise overall responsibility for the execution of
these policies, and direct individual departments
or special phases of a firm’s operations (EEOC,
2002). The nature of banks requires high interde-
pendence among management groups and mem-
bers particularly within, but also across, branches.
The average management group size was 32.
Blau’s (1977) index of heterogeneity was used to
develop measures of racial (white, black, Hispanic,
Asian, and Native American) and gender diversity
in management. This procedure was consistent
with previous measurements of diversity (Ham-
brick et al., 1996; Richard, 2000). Blau’s index (cal-
culated as 1 ⫺⌺P
i
2
,where Pis the proportion of
individuals in a category and iis the number of
categories) could thus theoretically range from 0 to
.80. In our sample, Blau index values for race
ranged from 0 to .61. Although we do not explicitly
categorize index values into “low,” “moderate,”
and “high” heterogeneity here, Blau index values of
.25 or above would reflect relatively high heteroge-
neity for this sample and management groups in
the financial industry. To reduce kurtosis and
skewness, we used the logarithm of the racial di-
versity measure.
For gender heterogeneity, we observed index val-
ues from 0 to .50, reflecting the entire feasible
range. Again, the index values represented a con-
tinuous measure. However, as with racial heteroge-
neity, Blau index values greater than .25 would
reflect relatively high levels of heterogeneity. The
test for normality appeared sufficient for the gender
diversity measure, and thus we did not use any
transformation for this measure. Following the ap-
proach of Alexander and colleagues (1995), we
used the quadratic terms of both racial and gender
heterogeneity to test the curvilinear relationship
between heterogeneity and performance.
Entrepreneurial orientation. To measure di-
mensions of entrepreneurial orientation, we used
Covin and Slevin’s (1989) nine-item entrepreneur-
ial orientation scale, which is intended to assess
three components of firm-level entrepreneurial ori-
entation—innovativeness, risk taking, and proac-
tiveness. Previous studies have reported evidence
of reliability and validity for the entrepreneurial
orientation scale (e.g., Naman & Slevin, 1993).
However, questions remain as to the dimensional-
ity of the measure (Knight, 1997; Lumpkin & Dess,
2001). We factor-analyzed the component items
with data collected from the presidents of the 382
banks that were not included in the sample for this
study, employing a maximum likelihood analysis
with oblique rotation.
In evaluating each item’s factor “loading,” we
applied a relatively stringent rule of thumb, accept-
ing an item only if it had a .40 or greater loading on
a factor that was also at least .20 greater than its
loading on any other factor. We obtained a two-
factor solution. Five items loaded on factor 1. These
items addressed risk propensity, environmental
boldness (that is, competitive aggressiveness), ag-
gressiveness of decision making, competitive pos-
ture, and the degree to which a firm was first to
market with new services, techniques, and/or tech-
nologies. Thus, we interpreted this factor as a risk-
taking factor. Two items loaded on an innovative-
ness factor, as the items concerned the number of
new or changed service and product lines a finan-
cial institution had introduced in the previous five
years. Thus, the factor analysis did not result in a
separate factor for proactiveness. To further inves-
tigate the dimensionality of the entrepreneurial ori-
entation scale, we performed a confirmatory factor
analysis using the 153 respondents to the present
study. The CFA confirmed that the same two-factor
solution fitted the data better (GFI .91) than ei-
ther a one-factor (GFI .80) or a three-factor (GFI
.86) solution. In view of the results of the factor
analyses, we formed risk-taking and innovativeness
measures for respondents to the current study by
summing the items comprising each factor and di-
viding by the number of items. This calculation
resulted in measures with scores ranging from 1 to
7, with higher scores indicating a stronger propen-
sity to engage in firm-level risk-taking or innovative
behaviors. The Cronbach alphas for the risk-taking
and innovativeness scales were .78 and .80, respec-
tively, with all corrected item-correlations exceed-
ing the .40 threshold.
Firm performance. Productivity, an intermedi-
ate output measure, is an important performance
indicator in a bank (Mehra, 1996). Productivity was
calculated as the logarithm of net income per em-
ployee (Richard, 2000) for year-end 1998. Return
on equity (averaged for the years 1997 and 1998 to
account for volatility), our bottom-line measure of
financial performance, is a preferred measure of a
2004 259Richard, Barnett, Dwyer, and Chadwick
bank’s financial performance and overall viability
(Hopkins & Hopkins, 1997).
Control variables. Racial heterogeneity and the
proportion of whites in management are not syn-
onymous. For example, two teams, one with 90
percent whites and 10 percent blacks and the other
with 90 percent Hispanics and 10 percent blacks,
would have the same Blau index score. Although
the nature of our sample (managers in the banking
industry) is such that the majority of the manage-
ment teams were likely to be predominantly white,
including a proportional control variable enabled
us to interpret the results of our heterogeneity vari-
able with more confidence. Therefore, we con-
trolled for the percentage of whites in the manage-
ment groups. We also controlled for the percentage
of men in the management groups. Another control,
firm size, was the logarithm of the total dollar value
of bank assets. We also annualized the percentage
of asset growth experienced by the banks for 1997–
98. Higher percentages reflected a growth strategy,
and negative percentages reflected asset reduction.
RESULTS
Table 1 provides the means, standard deviations,
and correlations for the study variables. Regression
results for the tests of hypotheses are presented in
Table 2.
Hypothesis 1 states that cultural diversity in
management will have a curvilinear relationship
with firm performance in which firms with low and
high levels of heterogeneity will outperform those
with moderate levels of heterogeneity. To test this
hypothesis, we ran two regressions, one with the
control variables, percent white and percent male,
included and one without those controls. Since the
results were not materially different, the regres-
sions reported here are those for the full models
including all control variables. Model 1 in Table 2
reports the results for the control variables along
with race and gender heterogeneity measures. In
model 1, only the squared racial diversity term was
significantly related to either measure of firm per-
formance, as it was positively related to productiv-
ity (
0.60, p.00). Model 2 adds the hypothe-
sized moderators and interaction terms. In this
regression, the significant effect for racial diversity
disappeared. Thus, the results did not support the
presence of a U-shaped relationship between racial
or gender heterogeneity and firm performance
across all the firms in the sample.
Hypotheses 2 and 3 were assessed simulta-
neously in model 2. Because our factor analysis of
the entrepreneurial orientation scale did not yield a
factor analogous to proactiveness, we were unable
to test Hypothesis 4. Our test of Hypothesis 2 ex-
amined the positive moderating effect of innova-
tiveness on the diversity-performance relationship,
while the Hypothesis 3 test evaluated the negative
moderating effect of risk taking. For racial hetero-
geneity in management, innovativeness signifi-
cantly and positively moderated the relationship
with firm performance as measured by productivity
(
2.08, p.02) and return on equity (
2.02,
p.03). For gender heterogeneity in management,
innovativeness positively, although marginally,
moderated the relationship with productivity (
2.07, p.10), but not return on equity (
0.66,
p.26). In general, these results provided moder-
ate support for Hypothesis 2.
Risk taking was found to have a marginally sig-
nificant and negative moderating effect on the re-
lationship between racial heterogeneity in manage-
TABLE 1
Descriptive Statistics and Correlations
a
Variable Mean s.d. n1 2 3 4 5 6 789
1. Size 11.70 1.26 155
2. Growth strategy 0.22 0.41 155 .24**
3. Percent white in management 0.94 0.16 153 .06 .01
4. Percent men in management 0.54 0.21 153 .25** .03 .12
5. Racial diversity in management 0.05 0.10 150 .29** .05 .43** .17*
6. Gender diversity in management 0.41 0.15 150 .35** .06 .05 .49** .06
7. Innovativeness 4.45 1.27 154 .29* .04 .06 .15 .12 .12
8. Risk taking 3.64 0.99 155 .20** .13 .04 .13 .05 .01 .45**
9. Productivity 3.23 0.64 153 .29** .14 .24** .03 .03 .12 .02 .03
10. Return on equity 13.00 6.32 152 .31** .04 .04 .09 .06 .09 .18* .06 .58**
a
Size was the logarithm of total bank assets averaged for 1997 and 1998. Growth strategy was the percent annual change in total assets
between year-end 1996 and year-end 1998. For risk taking and innovativeness, scores ranged from 1.00 to 7.00. Productivity was the log
of net income per employee for year-end 1998. Return on equity was the percent return averaged for years 1997 and 1998.
*p.05
** p.01
260 AprilAcademy of Management Journal
TABLE 2
Results of Regression Analysis
a
Variable
Hypothesis
Tested
Productivity, Model 1 ROE, Model 1 Productivity, Model 2 ROE, Model 2 Productivity, Model 3 ROE, Model 3
b
b
b
b
b
b
Control
Intercept 0.21 (0.64) 9.89(6.63) 1.38 (0.98) 17.54* (10.54) 0.49 (2.73) 4.27 (21.84)
Size 0.17*** (0.05) 0.33*** 1.97*** (0.49) 0.40*** 0.17*** (0.05) 0.33*** 1.91*** (0.53) 0.38*** 0.28*** (0.10) 0.52*** 1.52* (0.79) 0.40*
Growth strategy 0.11 (0.12) 0.07 0.64 (1.25) 0.04 0.18(0.12) 0.120.21 (1.29) 0.01 0.38 (0.29) 0.19 0.94 (2.33) 0.07
Percent whites in management 0.98* (0.42) 0.22* 1.14 (4.37) 0.03 1.09* (0.43) 0.24* 1.79 (4.62) 0.04 2.41 (2.02) 0.45 12.02 (16.14) 0.33
Percent men in management 0.11 (0.27) 0.04 0.84 (2.77) 0.03 0.16 (0.28) 0.05 0.90 (3.00) 0.03
Racial diversity in management 3.87** (1.42) 0.57** 12.33 (15.02) 0.18 4.43 (5.95) 0.66 57.84 (63.69) 0.85 19.76 (17.38) 3.24 108.16 (138.0) 2.60
Gender diversity in management 0.76 (1.44) 0.18 11.96 (14.73) 0.28 8.75 (6.88) 2.05 34.90 (73.95) 0.82 1.78(1.06) 0.292.37 (2.31) 0.59
Racial diversity in management
squared
1 11.71** (4.02) 0.60** 26.05 (41.92) 0.13 8.65 (15.13) 0.44 116.0 (161.0) 0.60 36.92 (32.01) 2.80 222.24 (255.0) 2.48
Gender diversity in management
squared
11.07 (2.76) 0.13 28.26 (28.58) 0.35 13.57 (13.71) 1.67 95.82 (148.0) 1.19
Entrepreneurial orientation
Innovativeness 0.21(0.14) 0.420.25 (1.53) 0.05 0.28 (0.29) 0.48 2.37 (2.31) 0.59
Risk taking 0.05 (0.21) 0.08 1.92 (2.24) 0.29 0.05 (0.37) 0.08 1.01 (2.96) 0.22
Interactions
Innovativeness racial diversity 3.50** (1.40) 2.50** 33.02* (15.03) 2.33* 4.94(3.09) 4.0341.03(24.75) 4.88
Innovativeness gender diversity 0.87 (1.25) 1.16 5.84 (13.47) 0.78
Risk taking racial diversity 2.48(1.61) 1.3921.03 (16.52) 1.19 1.30 (3.78) 0.86 24.49 (30.23) 2.37
Risk taking gender diversity 4.01* (2.05) 4.38* 21.52 (21.83) 2.37
Innovativeness racial diversity
squared
2 9.22* (4.49) 2.08* 89.45* (48.02) 2.02* 9.94(7.06) 3.2896.30* (56.41) 4.65*
Innovativeness gender diversity
squared
2 3.04(2.36) 2.0716.61 (25.28) 1.13
Risk taking racial diversity
squared
36.17 (4.95) 1.13 70.17(52.97) 1.283.97 (8.03) 1.07 70.35 (64.01) 2.77
Risk taking gender diversity
squared
38.44** (3.94) 4.70** 57.71(42.44) 3.25
R2/Adjusted R2.19/.14 .13/.08 .30/.20 .19/.08 .49/.30 .32/.06
Model total 145 144 145 144 45 44
F3.98*** 2.46* 2.97*** 1.75* 2.60* 1.23
a
Standard errors are in parentheses. Model 3 uses a reduced sample.
p.10
*p.05
** p.01
*** p.001
ment and performance for return on equity (
1.28, p.09), but not productivity (
⫽⫺1.13,
p.11). Stronger results emerged for gender het-
erogeneity, with significant findings for productiv-
ity (
⫽⫺4.70, p.02) and marginally significant
findings for return on equity (
⫽⫺3.25, p.09).
Thus, the results provided moderate support for
Hypothesis 3 as well.
Because of the relatively low level of racial
heterogeneity in the majority of the management
groups in our sample, our data related to this
variable were skewed (more values were close to
0, representing homogeneity, than to .80, repre-
senting heterogeneity). Violation of normality as-
sumptions impedes the interpretation of results,
so we duplicated the racial diversity analysis in a
sample subset that was normally distributed,
with racial heterogeneity ranging from low to
high. The results were similar to those for the full
sample of firms. Subset results in Table 2 (model
3) indicated general support for Hypothesis 2,
which further increases our confidence in the
full-sample findings.
For clarity, we developed graphs of some of the
above moderating effects, which are shown in Fig-
ures 1–2. Because of the generally consistent re-
sults across both race and gender and the more
powerful statistical results related to race when
innovativeness was a moderator, in Figure 1 we
illustrate the joint effect of racial heterogeneity and
innovativeness on the productivity performance
measure. We divided the data set into high-innova-
tion companies (scoring one standard deviation
above the mean) and low-innovation companies
(scoring one standard deviation below the mean).
As Figure 1 demonstrates, the relationship of racial
diversity in management with productivity varies
in form according to a firm’s level of innovative-
ness. The high-innovativeness curve has a negative
slope as racial diversity in a firm’s management
team moves from homogeneity through moderate
heterogeneity. However, in the high-innovative-
ness firms, there is a dramatic positive slope once
racial heterogeneity exceeds about .25 on the Blau
index.
Although only marginal support was found for
the impact of risk taking on the relationship be-
tween racial diversity and performance, the find-
ings are more robust for gender diversity. There-
fore, in Figure 2, we graphed the gender results
along the productivity measure at both high and
low levels of risk taking (one standard deviation
above and below the mean). The curvilinear rela-
tionship between gender heterogeneity and firm
performance varied according to our predictions. In
high-risk-taking firms, there was a definite inverted
U-shaped relationship between gender diversity
and performance, as firms with homogeneous man-
agement groups and very heterogeneous manage-
ment groups performed less well than firms with
moderately heterogeneous management groups. As
a whole, the results supported our contention that
risk taking would emerge as a negative moderator
of the diversity-performance relationship. Our re-
sults revealed the complexity of the relationships
but were generally supportive of the moderating
hypotheses.
FIGURE 1
Interaction Effects of Racial Diversity in Management and Innovativeness
262 AprilAcademy of Management Journal
DISCUSSION
Overview
We hope that this study will represent both a
departure and a fresh beginning in the study of the
diversity-performance relationship, particularly
among managers. We believe our study makes three
noteworthy contributions. One contribution of our
study is its attempt to offer a “third-way” theoreti-
cal perspective on the diversity-performance relation-
ship, as we depart from both the “diversity equals
better performance” and “diversity equals poorer per-
formance” arguments that have dominated the litera-
ture. Our theoretical framework, grounded in Blau’s
(1977) theory of heterogeneity and incorporating no-
tions from the value-in-diversity, social identity, and
social categorization literatures, suggests that cultural
diversity and performance may not have a simple,
linear relationship. One virtue of this new approach
to studying the relationship is its potential for recon-
ciling conflicting previous empirical findings.
Previous research into management group diver-
sity has focused largely on (1) nonvisible aspects of
diversity, such as functional background and (2)
top management teams. A second contribution of
our study is thus the extension of this area of re-
search into visible attributes of cultural diversity—
race and gender—at several levels of management.
This extension is particularly appropriate in that
our focus on firm performance and the moderating
effect of entrepreneurial orientation acknowledges
the role of multiple layers of management in strat-
egy formulation, implementation, and entrepre-
neurial behaviors. Finally, until recently, research
has not addressed contextual factors that may mod-
erate the relationship between diversity and per-
formance. A final contribution of our study is its
analysis of the potential moderating effects of
entrepreneurial orientation.
Although our empirical results did not fully sup-
port the hypothesized curvilinear relationship be-
tween cultural diversity in management and firm
performance, we did observe such effects in spe-
cific strategic contexts. More specifically, in firms
with highly innovative strategic postures, both low
and high management group heterogeneity were
associated with higher productivity than was mod-
erate heterogeneity. This effect was strongest for
racial diversity. This finding has potentially impor-
tant implications. The results suggest, as we ex-
pected, that the relationship between cultural di-
versity and performance is more complex than that
captured by either rubric (“greater diversity equals
better/poorer performance”). In short, the finding
on diversity suggests that although neither the val-
ue-in-diversity perspective nor social identity the-
ory is necessarily incorrect, their ability to explain
the diversity-performance relationship might de-
pend upon the overall level of diversity within the
management group under consideration and the
context within which the group is operating.
In firms characterized by high levels of risk tak-
ing, we observed an inverted U-shaped relationship
between management group heterogeneity and pro-
ductivity, with moderately heterogeneous manage-
ment groups exhibiting better performance than
other management groups. This effect was strongest
FIGURE 2
Interaction Effects of Gender Diversity in Management and Risk Taking
2004 263Richard, Barnett, Dwyer, and Chadwick
for gender heterogeneity. Thus, the results suggest
that totally homogeneous groups may not thrive in
an environment requiring decision speed and ag-
gressive competitive behavior. As management
group diversity approaches a moderate level, how-
ever, its positive effects may yield performance ad-
vantages in a high-risk strategic context. Notwith-
standing, as diversity exceeds moderate levels and
continues to increase, cognitive biasing and com-
munication problems may increase, which leads to
reduced cooperation and increased conflict. These
results are consistent with previous research indi-
cating that high diversity reduces agreement seek-
ing, social cohesion, and decision speed (Ferrier,
2001), phenomena that may impede a firm’s ability
to respond in a context that demands aggressive-
ness (Hambrick et al., 1996).
Limitations and Conclusion
Although our results suggest that the relationship
between management group diversity and firm per-
formance is nonlinear, at least in some strategic
contexts, conclusions drawn from our results must
be tempered by the fact that, in regard to racial
heterogeneity, our management groups were not,
on the average, highly diverse. A stronger test of the
hypothesized curvilinear relationships calls for a
setting of work groups in which the full theoretical
range of racial heterogeneity (0 to .80) can be as-
sessed. At the management level, however, maxi-
mum theoretical racial diversity is rare in U.S.
firms. Among Fortune’s 50 Best Companies for Mi-
norities for 1998 were two banks, Washington Mu-
tual, rated 27th, and the Bank of America, rated
41st. The first of these had 28.6 percent racial mi-
norities in management, and the second, 23.5 per-
cent. Given Bank of America’s percentage of white
managers (76.5%), the maximum attainable Blau
index for this bank would be approximately .40.
There were banks in our sample with more diver-
sity than the Bank of America, but it would be
highly unlikely to find a sample of banks in which
the racial heterogeneity index values ranged all the
way to .80. Thus, laboratory studies with assigned
work groups might be utilized to test the full range
of racial heterogeneity in groups, allowing re-
searchers to see whether the positive performance
shift continues throughout the theoretical range of
heterogeneity. Given that more variation existed in
the gender measure and that the statistical patterns
converge with the race measure, we believe that in
at least some strategic contexts (firms with highly
innovative strategic postures), increasing levels of
heterogeneity will continue to affect performance
positively up to maximum levels of heterogeneity.
Confirmation of our theoretical proposition awaits.
We should point out additional limitations in-
herent in our study. We were unable to provide a
test of our hypothesis related to proactiveness, as
factor analysis of the entrepreneurial orientation
scale yielded only two interpretable factors. The
dimensionality of the entrepreneurial orientation
scale may need to be further explored. Research
should continue to explore situations in which the
dimensions converge and diverge.
Of course, our study only examined the linkage
between the level of diversity and two measures of
firm performance and did not directly address the
relationship between the level of diversity and the
process variables (communication, conflict, social
contacts, and so forth) identified above. Our theo-
retical suppositions should be tested in future
cross-sectional and longitudinal research that looks
at the relationship of cultural diversity in manage-
ment with these and other process variables.
Given our use of a single industry, caution
should be used in generalizing beyond the financial
sector. We call for diversity research in other in-
dustries and in other nations. Our sample consisted
of U.S. banks, although many other countries have
diverse managements in terms of both race and
gender and could thereby provide viable samples to
explore. Just as inviting is the exploration of other
diversity dimensions related to globalization (for
instance, ethnicity, geographic background).
In conclusion, our findings indicate that manage-
ment-level heterogeneity can be a critical asset in
certain strategic contexts but that the diversity-
performance relationship is complex. In addition to
the strategic posture of entrepreneurial orientation
that we found to moderate the relationship, other
contextual variables require attention. Future re-
search that takes into account the complexity of the
diversity-performance relationship and its poten-
tial moderators should move scholars closer to a
general theory of cultural diversity in the firm.
For a final thought, we note that results of this
research have managerial implications. The find-
ings begin to answer a practical question: What is
the financial impact of breaking the “glass ceiling”?
Our results show that within certain settings, cul-
tural diversity in management groups can be ex-
ploited to gain a competitive edge. Given the irre-
versible trend towards more racial and gender
diversity in organizations, it behooves managers to
develop organizational capabilities that maximize
the benefits of diverse human capital and ulti-
mately strive for a “sustainable diversity ad-
vantage.”
264 AprilAcademy of Management Journal
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Orlando C. Richard is an assistant professor of human
resource management and organizational behavior and
Ph.D. program coordinator at the University of Texas at
Dallas. He completed postdoctoral research at the Sloan
School of Management after earning his Ph.D. in business
administration from the University of Kentucky. His re-
search focuses on organizational demography, organiza-
tional justice, and mentoring relationships.
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ate professor of management at Mississippi State Univer-
sity, where he received his D.B.A. His research interests
include ethical decision making in organizations, the
impact of religious faith on workplace behavior, and
social identity and social exchange processes in organi-
zations.
Sean Dwyer (Ph.D., University of Alabama) is an associ-
ate professor of marketing at the College of Administra-
tion and Business, Louisiana Tech University. His areas
of research interest include sales force management, in-
ternational marketing, cross-cultural/global selling, and
cultural diversity.
Ken Chadwick is an assistant professor in the Manage-
ment and Marketing Department at Nicholls State Uni-
versity. He received his D.B.A. from Louisiana Tech Uni-
versity. His research interests include the performance of
entrepreneurially oriented firms, diversity, and small
business management.
266 AprilAcademy of Management Journal
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Composition of modern workforce has been changing on account of newer developments and emerging trends in the global economy that transformed and reshaped the relationship between employee and employer. The article aims to study the association among workforce diversity and intention to quit with mediating effect of workplace inclusion. The attempt is made to identify the variance in perception among employees’ towards the workforce diversity with respect to their gender, age, and experience in the present institution. Data collection was made during March 2019 to September 2019 from 347 employees working in higher education institutions (HEIs) in the eastern part of Uttar Pradesh, India. Hierarchical multiple regression was administered to examine the relationship between the dependent, independent, and mediating variables. ANOVA and Z-test are used to examine the difference in perception of various dimensions of diversity. Data analysis reveals partial mediation effect of workplace inclusion on the association among workforce diversity and intention to quit. The practical implication of the present research work emphasizes the reorientation of management practices to nurture employee inclusion in the HEI through active support system that embraces the engrossment of top management in the all-inclusive process. The present study examined the cause and effect relationship of workplace diversity on intention to quit where workplace inclusion is used as mediating variable. The empirical evidence of the study reveals that employees’ perception towards their institution highly impact their intention to stay. Thus, the study recommends the HEIs to develop such human resource practices that enhance the contribution to every employee irrespective of their diverse characteristics.
Thesis
AN INVESTIGATION INTO THE RELATIONSHIP BETWEEN DIVERSITY, INCLUSION AND PERFORMANCE AN EMPIRICAL STUDY IN A CORPORATE SOUTH AFRICAN ORGANISATION A combination of quantitative and qualitative methodologies was used to answer the following three questions: 1) What is the effect of demographic variables on diversity and inclusion? 2) Is there a relationship between diversity, inclusion and performance in corporate workplaces? 3) What are the components that drive diversity and inclusion in a corporate workplace in South Africa? The research was conducted in a division of a multinational corporation in South Africa. The quantitative analysis was run using the InclusionIndex™ survey to get a measurement of diversity and inclusion in the organisation. The qualitative methodology included semi-structured interviews and focus groups. Questions one and two were tested empirically using a combination of analysis of variance and structured equation modelling. Question three was answered using the consolidated findings of the quantitative and qualitative components of the InclusionIndex™ survey, the semi-structured interviews, focus groups, and insights from related literature. The research found that diversity and inclusion need to be driven at organisational, interpersonal and individual levels to achieve the benefits of a diverse and inclusive workforce. Components that are critical in order for the strategy to be successful at an organisation level are: ‘senior management’, ‘organisational belonging’, ‘dialogue’, ‘recruitment’, ‘promotion, progression and development’, and the ‘organisation climate’ created through HR processes and policies. At an interpersonal level, they are: ‘acceptance and respect’, ‘immediate manager engaging employees with dignity’, ‘trust and recognition’, ‘engagement in terms of empowered decision-making and access to information’, and finally, the ‘employee’s engagement with the company’s vision and values’. The individual component involves an individual’s ‘personality’, ‘locus of control’, ‘confidence’, ‘power’ and ‘self-esteem’. The structured equation models suggested that perception of diversity and inclusion is affected by an individual’s race, position in the company, the location the individual is based at, and department the individual works in at a confidence level of 95%. Analysis showed that while age and tenure did not produce statistically significant findings on the structured equation model (SEM), these groups showed a stronger relationship with inclusion than gender, sexual orientation, disability, and religion; which showed a non-significant relationship with inclusion when considering all the variables simultaneously. Further, individual performance was seen to be affected by individual perception of inclusion at a confidence level of 95%.
Article
In this study, we integrate insights from the literature on top management team (TMT) composition, gender diversity, and cumulative innovation, and examine how TMT gender diversity (or women in TMTs) impacts firm innovation. We analyze a panel of U.S. firms over the period 2005–2019, exploiting U.S. state-level variation in support policies protecting the rights of female workers. We find that greater TMT gender diversity increases the number of innovations but decreases their impact. Furthermore, greater TMT gender diversity narrows the breadth of search (search becomes more local). We illuminate the multifaceted innovation outcomes of gender-diverse TMTs and highlight the risk-reducing effects of female TMT members in innovation contexts. Our study provides opportune innovation insights that are much needed in the current era, with the increasing presence of female executives in TMTs.
Article
This study is an attempt to elucidate the effects of workforce racial diversity on organizational performance by incorporating an important organization-level moderating condition—an organization’s use of human resource management (HRM) practices. Specifically, this study examines how options- and project-based HRM have influence on the racial diversity–performance relationship. Using the longitudinal data sets of 192 U.S. law firms spanning multiple years (2001–2008), we examined the interactive effects of workforce racial diversity and a set of HRM practices (use of nonstandard employees, lateral hiring, pay dispersion, and training/communication) on organizational performance (profitability). Our findings revealed that while an organization’s reliance on nonstandard employment, lateral hiring, and large pay dispersion has significant negative influence on the racial diversity–performance relationship, training/communication has no clear moderating impact. In sum, the results indicated that when organizations adopt more project-based HRM practices (high levels of nonstandard employment, lateral hiring, and pay dispersion) rather than options-based ones, the effect of workforce racial diversity is likely to become negative on organizations’ bottom-line performance.
Article
The interaction processes of culturally homogeneous and culturally diverse groups were studied for 17 weeks. Initially, homogeneous groups scored higher on both process and performance effectiveness. Over time, both homogeneous and heterogeneous groups showed improvement on process and performance, and between-group differences converged. By week 17, there were no differences in process or overall performance, but the heterogeneous groups scored higher on two task performance measures. Implications for management and future research are given.
Article
The primary purpose of this article is to clarify the nature of the entrepreneurial orientation (EO) construct and to propose a contingency framework for investigating the relationship between EO and firm performance. We first explore and refine the dimensions of EO and discuss the usefulness of viewing a firm's EO as a multidimensional construct. Then, drawing on examples from the EO-related contingencies literature, we suggest alternative models (moderating effects, mediating effects, independent effects, interaction effects) for testing the EO-performance relationship.
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This paper examines corporate entrepreneurship in multinational corporations through a detailed study of initiatives taken by foreign subsidiaries. We develop a theoretical model in which two levels of organizational context (corporate and subsidiary) promote or suppress subsidiary initiative, and initiative in turn has a feedback effect on both subsidiary and corporate context. Using a multi-method study (229 questionnaire returns plus 5 in-depth case studies), the key findings are as follows: Subsidiary initiative is promoted by a high level of distinctive subsidiary capabilities, and is suppressed by a high level of decision centralization, a low level of subsidiary credibility, and a low level of corporate-subsidiary communication. Over time, we find evidence that subsidiary initiative leads to an enhancement of credibility (vis-à-vis the head office), head office openness, corporate-subsidiary communication, and distinctive capabilities.
Article
This paper advances the study of organizational demography and turnover by testing propositions derived from Blau's theory of heterogeneity and social structure. In a sample of 398 U.S. community hospitals, voluntary nursing turnover was examined in relation to three demographic dimensions-educational preparation, tenure and employment status-among nurse staff. The form of relationships between turnover and heterogeneity was specified to test whether heterogeneity affects turnover in a linear fashion or, alternatively, in an inverted U-shaped pattern. Our results suggest that effects of heterogeneity on turnover differ by dimension and that such effects can obtain independently of other dimensions. Further, interactions between demographic dimensions show that demographic dimensions also interact with each other to affect nursing turnover. Our findings partially support Blau's conceptualization of heterogeneity in social structure and highlight the importance of multiform heterogeneity in the study of organizational demography and group interaction outcomes.
Article
By defining strategy as a sequence of competitive actions carried out over time, I develop and test a dynamic process model of competitive interaction among firms. Results based on a sample of thousands of competitive actions carried out by rivals competing in 16 different industries over a seven-year period suggest that characteristics of firms' sequences of competitive actions account for differences in their relative performance. The findings also suggest that a firm's sequence of competitive actions is influenced by top management team heterogeneity, past performance, slack, and three important industry characteristics.