The unlikely encounter: Is ethnic diversity in start-ups associated with innovation?

Several studies have sought evidence as to whether ethnically diverse teams promote a diversity in knowledge and perspectives which is beneficial for innovation. In multicultural societies, however, there are multiple opportunities for exchange between people from different ethnic backgrounds, and the extent to which such encounters actually imply cognitive diversity seems debatable. We propose to regard as diverse those combinations of ethnic backgrounds that are relatively unlikely to occur under a hypothesis of random allocation to firms, based on the distribution of nationalities at NUTS3 level. We label this measure ``unusualness'' and apply it to the study of innovation in newly founded firms in Germany. Our results reveal that unusualness has a robust positive association with the probability of a start-up introducing an innovation within the first two years of business, while diversity as measured by a standard Blau index is insignificant. The results are robust to a large set of robustness checks. We interpret these results as an indication that not all combinations of national origins matter for innovation, but only those that are associated with differences in cognitive approaches and knowledge.