doi:10.1111/j.1435-5957.2009.00271.

Migration and innovation: Does cultural diversity matter for

regional R&D activity?*
pirs_271

563..586

Annekatrin Niebuhr1
1

IAB Nord, Regional Research Network, Institute for Employment Research, Projensdorfer Strae 82, D-24106
Kiel, Germany (e-mail: annekatrin.niebuhr@iab.de)

Received: 27 April 2009 / Accepted: 20 September 2009

Abstract. Recent theoretical research deals with economic costs and benefits of cultural diversity related to immigration. However, empirical evidence regarding the impact of cultural
diversity on economic performance is still scarce. We analyse the effect of cultural diversity of
the labour force on patent applications for a cross-section of German regions. The results
suggest that differences in knowledge and capabilities of workers from diverse cultural backgrounds enhance performance of regional R&D sectors. As regards innovation, the benefits of
diversity seem to outweigh the costs caused, for example, by communication barriers.
JEL classification: C21, J61, O31
Key words: Cultural diversity, regional innovation, knowledge production function, Germany

1 Introduction
The significance of the immigration of qualified workers will rapidly increase in the ageing
European economies since demographic change will cause a decline of the labour force and a
sharp increase of the average age of workers. Foreign workers are already an important factor
of the German economy. In 2004, almost 7% of all employees in Germany have foreign
nationality. More than 100,000 highly skilled foreigners with a university degree work in
Germany. Zimmermann (2005) notes that, in spite of the rising importance of migration, the
issue is still controversial, and the understanding of the effects of international labour mobility
is rather limited. Research on the economic consequences of migration has mainly focused on
labour market effects and, more precisely, on the question whether immigrants depress wages
and increase unemployment of native workers. Many analyses stress substitution effects among
* I would like to thank Christoph Grenzmann (Stifterverband fr die Deutsche Wissenschaft) for the generous
provision of regional R&D data and Andrea Stckmann for excellent research assistance. Financial support from the
Volkswagen Foundation is gratefully acknowledged as part of the Study Group on Migration and Integration Diversity,
Integration and the Economy. I thank Herbert Brcker, Eckhardt Bode, Stefan Fuchs, Rdiger Wapler and anonymous
referees for helpful comments and suggestions on an earlier version of this paper. The usual disclaimer applies.
2009 the author(s). Journal compilation 2009 RSAI. Published by Blackwell Publishing, 9600 Garsington Road,
Oxford OX4 2DQ, UK and 350 Main Street, Malden MA 02148, USA.
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A. Niebuhr

native and foreign workers. However, taking into account that labour is not homogenous, the
impact of immigration depends on whether migrants are skilled or unskilled and on labour
market conditions in the host country.
The objective of this paper is to provide evidence on the impact of migration on innovation,
a subject that has not received much attention in the migration literature up to now (see Hunt and
Gauthier-Loiselle 2008). This papers analysis differs from many previous studies that focus on
labour market effects of immigration.1 Moreover, there are only a small number of papers that
investigate the significance of labour mobility as regards knowledge spillovers and innovation
(e.g., Almeida and Kogut 1999; Kim and Marchke 2005; Simonen and McCann 2008). The
findings so far suggest that the mobility of R&D staff is associated with the transfer of
knowledge and positively affects patent applications. However, these studies do not consider the
heterogeneity of researchers with respect to their cultural background. This is another aspect that
differentiates this analysis from other studies. We do not restrict heterogeneity of labour to the
level of education only. Due to their different cultural backgrounds, it is likely that migrants and
native workers have fairly diverse abilities and knowledge. Thus, there might be skill complementarities between foreign workers and native in addition to those among workers of different
qualification levels. Presumably foreign and native workers of the same educational level are
imperfectly substitutable groups because of cultural differences. Fujita and Weber (2004) argue
that cultural diversity of the labour force might be of special importance for R&D activity since
the generation of new products and ideas heavily relies on individual talents and skills from
diverse educational and cultural environments.
The possibility that diversity can enhance productivity, innovation, and growth has already
been considered in the economic literature. Diversity might refer to economic diversity, i.e.
heterogeneity of firms and industries, or to the diversity of people. Most studies have concentrated on the impact of economic diversity and the effects of a diverse urban environment rather
than on cultural or ethnic diversity of people.2 According to Jacobs (1969), diversity of geographically proximate industries promotes innovation and growth in cities. Glaeser et al. (1992)
as well as Feldman and Audretsch (1999) provide corresponding empirical evidence for U.S.
cities. Duranton and Puga (2001) and Henderson et al. (1995) investigate the role that a
diversified urban environment plays in fostering innovation and attracting innovative industries.
Romer (1990) highlights the significance of a variety of intermediate inputs for productivity in
his seminal endogenous growth model.
As regards the diversity of people, Keely (2003) argues that interaction between heterogeneous skilled workers gives rise to knowledge spillovers and produces new research ideas. Hunt
and Gauthier-Loiselle (2008) as well as Kerr and Lincoln (2008) investigate the effect of skilled
immigration on innovation for a cross-section of U.S. States. According to the former study,
immigrants patent at much higher rates than natives. This patenting advantage is due to the
above average share of degrees in science and engineering among skilled immigrants. Kerr
and Lincoln (2008) show that invention increases with higher admission levels through the
direct contribution of immigrants to patenting. Empirical evidence provided by Anderson et al.
(2005) suggests that creativity is greater in regions marked by more diverse employment bases.
Finally, Audretsch et al. (2009) consider the impact of cultural diversity of the labour force on
entrepreneurship.
While there is an emerging theoretical literature dealing with the economic effects of
cultural diversity (e.g., Lazear 1999b, 2000; Fujita and Weber 2004), there are surprizingly few
empirical studies within the field of economics. Theoretical models consider different costs and
1
See Longhi et al. (2008) for a meta-analysis of the labour market effects of immigration. Ozgen et al. (2009)
consider the impact of migration on income convergence.
2
See Duranton and Puga (2000) for a survey of literature on diversity in cities and its economic effects.

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565

benefits of diversity and specify various linkages between diversity and economic performance.
However, corresponding empirical work, that can help determine whether positive or negative
effects of cultural diversity prevail, remains scarce. Until now, there has been mainly crosscountry evidence and studies focusing on growth and productivity effects in U.S. regions
(Easterly and Levine 1997; Ottaviano and Peri 2005, 2006). Up to now, evidence on the impact
of skilled immigration on innovation, provided, for example, in Chellaraj et al. (2008), Hunt and
Gauthier-Loiselle (2008), and Kerr and Lincoln (2008) is restricted to the U.S. Most investigations that analyse the relationship between innovation input and output fail to take cultural
diversity into account (e.g., Anselin et al. 1997; Bottazzi and Peri 2003; Bode 2004,). The aim
of this paper is to investigate the impact of cultural diversity on regional innovation in Germany.
Therefore, we extend the knowledge production framework to analyse whether a more diverse
labour force, from a cultural point of view, fosters innovation due to production complementarities, or whether negative effects of diversity, caused, for example, by language barriers,
outweigh the benefits. Due to data restrictions, we define cultural diversity as diversity of
workers nationality rather than ethnicity or cultural background. Regionally differentiated
information on country of origin of inhabitants and employees is not available in German official
statistics.
The rest of the paper is organized as follows. In Section 2, the theoretical framework of the
analysis is outlined. Production complementarities and costs associated with cultural diversity
are discussed. The data set applied in the empirical analysis is described in Section 3. An
important issue of the investigation concerns the measurement of cultural diversity. In Section
4, we introduce the applied diversity indicators and provide some empirical evidence of cultural
diversity in German regions. We employ the knowledge production function approach to
investigate the impact of cultural diversity on regional innovation capacity. The corresponding
regression model and some robustness issues are discussed in Section 5. The regression results
are presented in Section 6. Conclusions follow.

2 Theoretical framework
Ottaviano and Peri (2006) argue that skills of foreign workers might complement those of the
native labour force. In their model of multicultural production, different cultural groups provide
different services. Diversity has a positive impact on regional productivity. However, heterogeneity also hampers the exchange between different cultural groups: there are adverse productivity effects because of cultural distance. Other authors also recognize that there is a trade-off
with respect to heterogeneity. Lazear (1999a, 2000) considers the positive productivity effects of
ethnic diversity, but there are costs of diversity arising from barriers to communication caused
by different languages and cultures.3 Thus, according to the literature, there appears to
be an optimal degree of diversity which is influenced by the nature of production. Some of
the literature on this theme also examines the significance of institutions in this context. An
important result of this research is that the implementation of growth enhancing effects of
diversity may require a specific set of rules, or regulatory framework. Ottaviano and Peri (2006)
emphasize the role of a core of shared norms (integration) that might constitute a prerequisite for
realizing the potential benefits of diversity.
There appears to be a link between the costs and benefits of diversity on the one hand and
the concept of ethnic identity described in Constant et al. (2006) on the other hand. According
to the authors, migrants start out from their ethnicity, i.e. permanent characteristics associated
3
Costs of diversity might also be due to an inability to agree on common public goods and public policies. See
Alesina and La Ferrara (2005).

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A. Niebuhr

with the country of origin, and then develop their ethnic identity as they are exposed to the
culture and values of the host country. Ethnic identity is defined as the balance between
commitments with the host country and commitments with the country of origin. Constant et al.
(2006) distinguish four states of ethnic identity: assimilation, integration, marginalization and
separation. Assimilation seems to imply a strong decline of both costs and benefits of cultural
diversity since it is characterized by a strong identification with the host country and conformity
to the corresponding norms and codes. With respect to the economic effects of diversity,
integration might be interpreted as the best state because it involves commitment to the host
society, but also a strong dedication to the culture of origin, thus, still ensuring high benefits but
relatively low costs of diversity. In contrast, in case migrants are primarily identified as marginalized or separated, cultural diversity may mainly entail high costs.
The benefits of diversity might be of particular importance in the R&D sector, whereas in
industries specialized on more standardized forms of production it might be more likely that
costs of a diverse labour force outweigh the positive effects. Alesina and La Ferrara (2005) argue
that cultural diversity may lead to innovation and creativity since it involves variety in abilities
and knowledge. Fujita and Weber (2004) note that knowledge production relies heavily on the
talents and skills of employees coming from a wide range of cultural backgrounds. The nature
of R&D activity calls for interaction between different workers and a pooling of different ideas
and abilities. Berliant and Fujita (2008) also refer to the significance of cultural diversity for
knowledge creation and transfer. The heterogeneity of people is important for the creation of
new ideas.
As outlined by Alesina and La Ferrara (2005), ethnic diversity can affect economic performance in different ways. Diversity might have a direct impact on economic outcomes via
different preferences or by influencing individual strategies. Moreover, diversity might have an
influence on the production process. Our analysis focuses on the latter approach. As in Romer
(1990), we assume that the production of new knowledge in region i requires people engaged in
R&D. Following Ottaviano and Peri (2005), we augment the production function to allow for
effects of cultural diversity of the workforce. R&D staff Lin differs with respect to nationality n.
In order to develop new designs of products Pi, they can make use of the existing technological
knowledge Ai:
N

Pi = [1 ( divi )] Ai1 ( Lin )

(1)

n =1

where t(divi) (0,1) is transaction cost that is an increasing function of cultural diversity. Thus,
only a fraction [1 - t(divi)] of inputs is available for production due to communication barriers
and other differences between cultural groups which hamper interaction among them. The
additively separable function with respect to labour input implies that, given the total number of
researchers, output increases as jobs are distributed across more groups of workers. With a given
number of nationalities N, it is more productive to distribute employees evenly across the N
groups than to concentrate on a single nationality. As regards the qualification level, we assume
labour to be homogeneous. Heterogeneity only refers to the cultural background of the workers.4
Researchers with the same educational attainment but different nationality are not perfect
substitutes for each other. With this functional form, productivity in R&D is higher, the larger
the number of nationalities and the more balanced their supply. The magnitude of the positive
impact of diversity depends on the elasticity of substitution among nationalities s = 1/(1 - a).

4
In the regression analysis, we control for qualification of the workers since we focus on a specific skill level, namely,
highly qualified R&D employees.

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In order to differentiate the impact of a simple increase of R&D staff from the effect of
diversity, we multiply Equation (1) by (Li/Li)a
N

Pi = [1 ( divi )] Ai1 Li ( Lin Li ) = [1 ( divi )] Ai1 Li divi

(2)

n =1

Cultural diversity of R&D workers is given by divi = ( Lin Li ). The diversity index is
n =1

influenced by the number of nationalities that are present in the regional workforce and by the
distribution of R&D employment across nationalities.
The marginal effect of diversity on knowledge output is given by:

Pi

1
= Ai1 Li [1 ( divi )] [1 ( divi )]
divi
divi
divi

(3)

Thus, the size and direction of the diversity effect is influenced by two factors: the elasticity of
substitution between nationalities, i.e. the strength of the complementarity, and the transaction
costs associated with diversity.
With respect to the trade-off associated with cultural diversity, some issues emphasized by
Lazear (2000) are noteworthy. Lazear argues that the gains from diversity should be greatest if
different groups have information sets that are disjoint because then individuals can learn a great
deal from each other. In contrast, if knowledge and capabilities completely overlap, there are no
benefits from diversity. Moreover, the information and knowledge must be relevant for other
groups. With respect to innovation it is most likely that primarily the know-how of high skilled
foreigners is relevant. The educational attainment of workers might also affect the costs of
diversity. Costs that arise due to language barriers might be lower among employees with a
university degree. This is in line with Keely (2003) who argues that interaction cannot take place
if the technology gap between workers is too large. Thus, the skill level of workers probably
influences both the relevance of information and the barriers of information exchange.

3 Data
Point of departure of our empirical analysis is the knowledge production function outlined in
Section 2 that links R&D input to R&D output, namely, new products, processes and ideas.
Thus, we first of all need adequate proxies for regional innovation and R&D input to investigate
the impact of cultural diversity on knowledge production. Regional data on patent applications,
used as a measure for knowledge output,5 and on R&D inputs in Germany are available on the
county level (NUTS 3) and for planning regions (so-called Raumordnungsregionen) which
consist of several NUTS 3 regions linked by intense commuting. We have to restrict the
regression analysis to planning regions due to some data restrictions for NUTS 3 regions.
Overall, our cross section contains 95 regions. Data for these regions is generated by aggregation
of NUTS 3 level information if data is not available for planning regions. Furthermore, the
analysis takes into account the region type. Starting from a classification based on a typology of

5
Bottazzi and Peri (2003) argue that patent applications can be considered as a good approximation of innovation.
For an in-depth discussion of the caveats of applying patents as a measure of innovation see also Griliches (1990).

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settlement structure according to the criteria population density and size of the regional centre,
we differentiate between agglomerated, urbanized and rural regions.6
Patent applications, applied as an indicator for innovative output of the region, comprise
patents published by the German and the European patent office that have been assigned to the
innovators region of residence. As Bode (2004) notes, this approach avoids potential mismeasurement due to centralized patenting of multi-site companies. Annual patent data is available
for the period 1995 to 2000.7 Information on R&D input was provided by the German Stifterverband. R&D data include R&D staff as well as R&D expenditure of commercial firms. The
data come from a census and are available for 1995, 1997 and 1999. However, we can only use
data for 1997 and 1999 in our analysis. Data for 1995 is not compatible due to some changes in
the delineation of regions. Thus, the investigation is restricted to a panel data set with only two
observations in the time dimension. Finally, we include several explanatory variables in the
regression model based on employment data provided by the German Federal Employment
Agency for the period 1993 to 2000. The employment statistic covers all employment subject to
social security contributions.8 The information is given on the NUTS 3 level and refers to
workplace location. We use employment data differentiated by nationality, educational level,
branch, occupation, and firm size in order to generate our diversity measure and several control
variables that enter into the regression model.

4 Regional disparities in cultural diversity of the labour force

We apply different methods to quantify cultural diversity in order to check the robustness of
results with respect to a variation in measurement. A first indicator of cultural diversity is rooted
in the literature on growth effects of ethnic fragmentation (e.g., Easterly and Levine 1997). In
these studies, the probability that two randomly drawn individuals belong to two different
groups is frequently used as a measure of fragmentation. The corresponding diversity measure
is calculated as 1 minus the Herfindahl index of concentration across groups:
Ni

2
DIV _ Hit = 1 sint

(4)

n =1

where sint is the share of employees with nationality n among all employees of region i in year
t. Ni is the number of different nationalities actually present in region i. Ottaviano and Peri
(2006) note that this indicator accounts for both richness of the distribution, i.e. number of
nationalities, and a relatively even distribution across nationalities. Thus, according to this
measure, cultural diversity will increase if the number of nationalities rises or if the shares of
different nationalities in employment converge. A disadvantage of this diversity measure is,
however, that the index assigns disproportionately high weights to the largest nationalities. The
result is largely driven by the share of the dominant population group, i.e. the natives. The
Herfindahl measure will therefore be highly correlated with the employment share of Germans
(foreigners, respectively).
An entropy index, such as the Theil index, offers a more adequate way of measuring cultural
diversity than the Herfindahl index. The corresponding diversity measure is defined as follows:
6
Four planning regions had to be merged due to restricted data availability. The classification has been developed by
the Federal Office for Building and Regional Planning. For details see URL: http://www.bbr.bund.de/raumordnung/
europa/download/spesp_indicator_description_may2000.pdf
7
See Greif and Schmiedl (2002) for more detailed information on the patent data base.
8
Hence, civil servants and self-employed are not recorded in the employment statistic.

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569
Ni

DIV _ Tit = sint ln ( sint )

(5)

n =1

The maximum of the Theil index is ln(Ni), indicating that employment is evenly distributed
across the Ni different nationalities in region i, i.e. sint = 1/Ni, "n. If the labour force consists of
just one ethnic group, the index takes the minimum value ln(1) = 0. The marginal contribution
of an additional worker to cultural diversity is ceteris paribus the higher, the smaller the ethnic
group to which she belongs. The Theil index is a measure of cultural diversity that reflects both
the share and the variety of the foreign population in the region under consideration (Audretsch
et al. 2009).
And finally, we apply the so-called Krugman index to measure cultural diversity of
employment:
Ni

DIV _ K it = sint
n =1

1
Ni

(6)

The index is calculated as the sum of absolute differences between the employment shares of
nationalities and a reference that is given by 1/Ni. Thus the reference corresponds with an even
distribution across nationalities. This implies that a value of DIV_Kit = 0.5 indicates that at least
one quarter (0.5 DIV_Kit) of the total workforce has to change nationality for the employment
distribution to correspond exactly to the reference distribution (see Bickenbach and Bode 2008).
So in contrast to the diversity measures introduced above, a low Krugman index points to a
relatively diverse workforce.
Whereas most studies on the effects of cultural diversity are based on population data, we
use employment data instead. The advantage of our measure is a closer connection to the
production process. Moreover, nationality defines cultural identity of employees in the present
analysis. Country of birth is the most widely used indicator in this context. However, information on country of birth is not available in German statistics. Applying nationality to determine
cultural identity has advantages and drawbacks. Referring to nationality implies that naturalized
citizens do not enter into the diversity measure as foreign persons. However, using country of
origin as a definition of the foreign workforce implies that we do not consider people with a
migration background born in Germany, unless we have information on the country of birth of
the parents. Naturalized employees probably tend to be more successful with respect to educational attainment and labour market integration due to the terms of naturalization in Germany
(minimum duration of stay, required language skills). Therefore, our diversity measure might be
imprecise with respect to the highly qualified labour force and affected by a downward bias.
The indicators of cultural diversity in this study are based on regional employment data
differentiated by occupation, educational attainment, and nationality. We can differentiate
between 3 levels of education (no formal vocational qualification, completed apprenticeship,
university degree) and 213 nationalities. We use total employment and R&D employment to
calculate diversity measures. R&D employment is defined on the basis of occupations. We
consider engineers, chemists, physicists, mathematicians, technicians, other specialized technical staff, and natural scientists. Different diversity indices are calculated for total employment
and R&D employees: aggregate measures as well as qualification-specific indices corresponding to the levels of education mentioned above. By considering the cultural diversity of the
labour force at different qualification levels, we can check whether education matters, i.e. taking
into account that it might be cultural diversity of highly qualified workers only that affects the
process of innovation.
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A. Niebuhr
Table 1. Cultural diversity of the labour force (Theil index), 2000
Total employment

R&D employment

All skill groups

High skilled

All skill groups

High skilled

Mean
Standard deviation
Maximum
Minimum

0.35
0.21
0.86
0.03

0.22
0.11
0.47
0.03

0.15
0.10
0.47
0.01

0.18
0.11
0.55
0.00

Agglomerated regions
Urbanized regions
Rural regions

0.57
0.35
0.26

0.33
0.22
0.16

0.28
0.16
0.15

0.31
0.20
0.16

East Germany
West Germany
Germany

0.15
0.54
0.47

0.13
0.34
0.29

0.09
0.26
0.23

0.11
0.30
0.27

The share of foreign employees in Germany amounts to 7.1% in 2000.9 This corresponds
with a value of the overall diversity measure (Theil index) of 0.47. Table 1 shows summary
statistics and results of different diversity measures for regions types. Agglomerated regions
achieve highest levels of cultural diversity, whereas rural areas are marked by a relatively low
diversity of the workforce. Moreover, there are distinct differences between East and West
Germany. In East German regions, cultural diversity is significantly lower than in the western
part of the country. The Herfindahl and the Krugman index show similar spatial patterns. In
particular, the regional distribution of the Herfindahl and the Theil index correspond very
closely. The Krugman index differs somewhat as density at the upper tail of the distribution
tends to be higher than for the other measures. Furthermore, density increases more quickly at
the lower tail of the distribution.
There are also distinct differences between the diversity measures for high skilled, R&D,
and total employment. Cultural diversity is higher among all workers than among high skilled
and R&D employees. This might reflect to some extent a downward bias in measurement of
diversity for high skilled workers mentioned above. Due to the terms of naturalization, such as
skill requirements, one might expect that naturalized workers are on average characterized by a
higher level of educational attainment than foreign employees. This might result in a bias of a
diversity measure that is solely based on foreign workers. But recent empirical evidence
suggests that there are no significant differences in the share of the high skilled among foreigners and the naturalized population in Germany (see Statistisches Bundesamt 2009). Moreover,
the overall number of nationalities is likely to be lower in high skilled and R&D employment
than in the total work force. However, for R&D employment, cultural diversity is higher among
high skilled as compared to total R&D staff.
The most diversified regions are Stuttgart, Munich and Frankfurt, highly agglomerated
regions in the South-West of Germany (see Figure 1). There are no cities from the northern part
of the country among the leading regions. Lowest diversity measures arise in East Germany, the
only exceptions being Berlin and one neighbouring region. On average, East German regions do
poorly as regards diversity of their R&D staff, most notably the rural peripheral areas.
5 Econometric issues
We apply the knowledge production function introduced by Griliches (1979) to investigate the
impact of cultural diversity of R&D employment on innovation. This function is widely used to
9

This refers to the labour force subject to social security contributions only.

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Fig. 1. Regional disparities in cultural diversity of R&D employment (Theil index), 2000

investigate the effects of R&D inputs on regional levels of innovation (e.g., Acs et al. 1994,
Anselin et al. 1997). Referring to the theoretical outline in Section 2, if (Pi/divi) > 0, diversity
fosters regional innovation because the positive impact associated with the production complementarity outweighs negative effects linked to a labour force marked by more diverse cultural
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A. Niebuhr

backgrounds. In contrast, (Pi/divi) < 0 implies that production complementarities are too weak
to compensate for the negative effects associated with cultural diversity. We check whether
positive or negative effects dominate in the regression analysis.

5.1 Basic specification

The regression analysis is applied to the knowledge production function that links R&D inputs
to innovation output, namely, patent applications. Since the number of patents is affected by the
size of the regional economy, we investigate the relationship between patents and R&D input in
per capita terms. R&D staff and R&D expenditure per inhabitant are used as proxies for R&D
activity. The basic regression model is given by:
K

ln Pit = 0 + 1 ln RDit 1 + 2 ln HCit + 3 ln DIVit + k Ckit + uit

(7)

k =1

where Pit is the number of patents per capita in region i and year t. RDit-1 is R&D personnel or
R&D expenditure per capita in year t-1 and uit is the error term. In order to appropriately model
the relationship between R&D input and output, the input variable enters into the model with a
time lag of one year. Patents as well as R&D input refer to firms only. We assume that knowledge
is embodied in human capital (HCit) and use the share of high skilled employees (university
degree) in total employment as a proxy for the regional knowledge stock. However, human
capital might also foster the innovation process via facilitating knowledge spillovers. Finally, the
inclusion of a human capital variable enables us to check whether diversity among highly
qualified workers just works as an approximation of the human capital endowment of the region.
With respect to the objective of the investigation, the coefficient of interest is a3 that captures the
impact of cultural diversity of R&D workers on patent applications. The diversity index DIVit is
calculated according to Equations (4) to (6), depending on the considered measure. Separate
models are estimated for diversity measures based on total R&D employment and high skilled
R&D employment.10
Furthermore, we expand the original knowledge production function by some control
variables Ckit in order to avoid misspecification due to omitted variables. Controls comprise an
indicator for the sectoral composition of regional economies, more precisely the ratio of
manufacturing to service employment in the region STRUCit. The industry structure is considered because the propensity to patent is higher in manufacturing than in the service sector.
According to Bode (2004), the propensity to patent might also be affected by the size of firms.
In order to capture corresponding effects, two additional variables are considered: the employment shares of small (less than 20 employees) and large (500 or more employees) firms
(SMALLit, LARGEit). As the innovation process in highly agglomerated areas may significantly
differ from the process in rural peripheral regions, we take into account the region type as well
by means of a categorical variable REGTYPEi that differentiates between agglomerated, urbanized and rural (see Appendix for details). Finally, we allow for systematic differences in R&D
activity between East and West Germany (Dummy EAST) that might for example, be due to
disadvantages caused by some kind of heritage of the centrally planned socialist economy still
at work.
10
We also considered local university research as a potential determinant of R&D output and included R&D staff at
universities and polytechnics per inhabitant as an explanatory variable. However, results are rather disappointing since
the coefficient of university research is insignificant in most specifications. The poor performance of university research
might be caused by the fact our data set does not allow to focus on applied research at universities and research institutes.
Corresponding results are available upon request.

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5.2 Robustness checks

To investigate the robustness of our empirical results, a number of additional regression models
are applied. First, we have to consider potential effects of measurement errors and simultaneity.
Due to endogeneity of explanatory variables, the relationship estimated by ordinary least
squares (OLS) cannot be interpreted as causal. The estimated effect of diversity on R&D output
might be biased due to potential endogeneity of cultural diversity. Innovation activity may
influence labour migration and thus, cultural diversity of the labour force since regions characterized by high innovation output, growth, and favourable labour market conditions are preferred
destinations of immigrants. We use diversity measures calculated with low skilled employment
lagged both in space and time (by 5 years) and the latitude of the region centre as instruments
(Zit) for contemporaneous diversity indices. As an alternative instrument, we use the lagged
share of foreigners in low skilled employment. The variables are valid instruments if they are
relevant [corr(Zit,DIVit) 0] and uncorrelated with the errors term [corr(Zit,uit) = 0].11
Lagged cultural diversity in neighbouring regions is supposed to influence current diversity in
the region under consideration due to migration flows. As migration occurs primarily across
shorter distances and is influenced by herd behaviour (see Bauer et al. 2002; Burkert et al. 2008),
cultural diversity in a region is likely to affect future diversity in neighbouring areas. Moreover,
diversity among low skilled workers should reflect the existence of amenities that will also attract
high skilled workers. However, employees without a formal vocational qualification should not
play an important role in innovation. The latitude is used as an approximation of the main
destinations of immigrants in Germany in the 1950s and 1960s that are located in the Southwest
of the country. Relevance of both instruments rests on the idea that migrants limit their destination
choices to places with significant prior immigration from the same origin. The instrument
variables (IV) are highly correlated with the diversity measures and unlikely to be affected by
reverse causation. This applies especially to the latitude variable as a pure geographic variable.
Second, fixed and random effects panel data models are applied so as to control for
unobserved time-invariant effects:
K

ln Pit = 0 + 1 ln RDit 1 + 2 ln HCit + 3 ln DIVit + k Ckit + i + t + it

(8)

k =1

where hi denotes a region-specific effect, controlling for unobserved regional characteristics, lt

captures time effects, and nit is a white noise error term.
Moreover, evidence provided by Bode (2004) and Anselin et al. (1997) suggest that geographically bounded spillovers and spatial dependence are important for regional innovation
activity. Therefore, we check for misspecification due to omitted spatial effects indicated by
spatial autocorrelation in the regression residuals. Depending on the results of corresponding
LM-tests, we might estimate spatial lag models or spatial error models. The spatial lag model is
given by:
R

j =1

k =1

ln Pit = 0 + wij ln Pjt + 1 ln RDit 1 + 2 ln HCit + 3 ln DIVit + k Ckit + uit

(9)

Thus, we extend the non-spatial model by a spatial lag of the dependent variable
R

ij

ln Pjt where wij is an element of the R R spatial weights matrix W. We consider two

j =1

11
More precisely, relevance requires a partial correlation of the instrument with the endogenous regressor, namely,
the coefficient of the instrument variable should be significant in the first stage regression.

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574

A. Niebuhr

 in this analysis. A first and frequently applied specifialternative raw adjacency matrices W
cation is a binary spatial weights matrix such that w ij = 1 if the regions i and j share a border and
w ij = 0 otherwise. Second, w ij is set to the inverse of travel time between the capitals of regions
i and j with a cut-off point at 150 km, i.e. w ij = 0 if distance between regions centres exceeds
 spatial weights matrices W are derived by
this cut-off point. From the raw matrices W
normalizing such that j wij = 1, i .
Taking into account the weighted sum of patent applications in neighbouring regions implies
that spatial autocorrelation of the error term is due to omission of some substantive form
of spatial dependence caused by interaction among regions. We assume that there might be
important knowledge spillovers that result in interdependent innovation processes of adjacent
R&D departments leading to spatial dependence in patent applications. Localized knowledge
spillovers are likely to be caused by interregional mobility of R&D workers which in turn is
affected by frictional effects of distance. Moreover, evidence in Scherngell and Barber (2009)
suggests that geographical distance and co-localization of organizations in neighbouring regions
are important determinants of R&D collaborations. Following Bode (2004), we apply the
patents granted to researchers in neighbouring regions as a proxy for the knowledge stock in
adjacent locations.
In contrast, the spatial error model will be the appropriate specification if the misspecification is due to nuisance dependence. Spatial autocorrelation in measurement errors or in variables
that are otherwise not crucial to the model might entail spatial error dependence. The spatial
error model may be expressed as:
K

ln Pit = 0 + 1 ln RDit 1 + 2 ln HCit + 3 ln DIVit + k Ckit + uit

(10)

k =1

with uit = wij u jt + it as the spatial autoregressive error term.

j =1

Finally, we take into account that outlying observations might have a marked effect on the
regression results. To address this issue, we apply quantile regressions as introduced by Koenker
and Basset (1978). The median regression corresponds to the least absolute deviation estimator
and is a robust alternative to OLS. Quantile regressions minimize an objective function which
is a weighted sum of absolute deviations:

min yi xi + (1 ) yi xi

i : yi < xi
i: yi xi

(11)

Here yi is the dependent variable and xi is the vector of explanatory variables which is multiplied
by the coefficient g. The objective function can be interpreted as an asymmetric linear penalty
function of deviations from predicted to actual patents per capita. An important special case is
the median regression (q = 0.5). Since this regression puts less weight on outliers than OLS, it
is a robust alternative.

6 Regression results and discussion

A point of departure of the regression analysis is a basic pooled model that is estimated with
different versions of the pivotal explanatory variable, cultural diversity of R&D employment
based on different diversity indicators. We apply the three measures introduced in Section
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Migration and innovation

575

4 to total R&D employment (DIVit) and high skilled R&D staff (DIVit high). Table 2 shows the
results of the basic regression model. The specifications in columns 1 to 6 only differ with
respect to the diversity measure included. In line with previous evidence on the knowledge
production function, we get a highly significant impact of R&D expenditure on innovation
output.12 A positive effect is also associated with the regions human capital endowment.
However, the coefficient is only marginally significant at the 10% level in the models 2 and 4,
those specifications including diversity among high skilled R&D staff only.
Furthermore, some control variables appear with significant coefficients, indicating that
structural characteristics of the regions matter for innovation activity. The relative size of the
industrial sector is associated with a significant effect on innovation output. According to the
estimates, a specialization of regions on manufacturing as compared to services tends to raise
patents per capita. Furthermore, areas characterized by a relatively large share of small firms on
average seem to perform better than other regions. The negative coefficient of the region type
variable implies that there might be systematic differences between the innovation processes of
metropolitan areas, urbanized and rural regions. More precisely, less densely populated regions,
especially rural areas, tend to be marked ceteris paribus by lower productivity of R&D activity.
This might point to some kind of positive agglomeration effect at work. However, the region
type variable is marginally significant in some specifications only. Moreover, the significant
coefficient of the dummy variable suggests that there are still systematic differences in R&D
activity between East and West Germany. Even after controlling for R&D input and other factors
that influence regional patent applications East German regions achieve a lower R&D output per
capita than locations in the western part of the country.
Finally, turning to the most important variable, the results point to an innovation-enhancing
effect of cultural diversity of the workforce. The coefficient of cultural diversity is positive and
highly significant, irrespective of applied diversity measure. Only in model 6, is diversity not
significant at the 5% level. Thus, the impact of diversity is rather robust with respect to a
variation of measurement. Differences in size of the coefficients, that show up especially for the
Krugman index on the one hand and the Theil and Herfindahl measures on the other hand, can
be traced back to different definitions of the indices. Further, the impact of diversity among
highly educated R&D employees is smaller than the effect that is detected for total R&D staff.
Thus, the regression results indicate that cultural diversity is a factor which positively influences
the process of knowledge creation. The qualification level of labour might not matter in this
context because the educational attainment of R&D workers and their communication skills
tend to be on average relatively high.
However, as indicated by the tests for spatial autocorrelation (Morans I, Lagrange multiplier
error and Lagrange multiplier lag tests), regional R&D activity is marked by some spatial
interaction not captured by the regression model so far. The differences between the test
statistics suggest that problems are caused by omission of some kind of substantive form of
spatial dependence that might rest upon knowledge spillovers between neighbouring regions.13
In order to check whether the identified impact of cultural diversity is affected by the omission
of spatial dependence, we include a spatial lag of patent applications per capita in some
specifications. Moreover, the results of the Hausmann-Wu test for endogeneity of the diversity
measures point to a potential problem that might adversely affect the estimates. However, for
diversity of total R&D employment the test is only significant at the 5% level. Nevertheless, we
apply instrument variable (IV) regression in order to check the robustness of results with respect
to potential endogeneity of our diversity variables.
12

Substituting R&D expenditure per capita by R&D personnel per capita does not significantly change the results.
Higher significance of LM lag tests indicates that the spatial lag model is the appropriate specification. The
corresponding decision rule is proposed by Anselin and Florax (1995).
13

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Papers in Regional Science, Volume 89 Number 3 August 2010.

0.87
190
6.27*
1.59
0.61
0.05
4.86*
4.30*

Adj. R2
Observations
Wu-Hausman F-Test
Morans I
LM error
Robust LM error
LM lag
Robust LM lag
0.87
189
7.95**
2.05*
1.45
0.01
6.72**
5.28*

0.19** (3.18)
0.71** (9.06)
0.80** (2.80)
0.09 (0.66)
-0.07 (1.61)
-0.47** (3.21)

2.66** (2.81)
0.36** (7.93)
0.31 (1.92)

(2)

0.87
190
6.69*
1.73
0.80
0.02
5.21*
4.43*

0.69** (8.66)
0.80** (2.90)
0.13 (1.00)
-0.07 (1.62)
-0.41* (2.51)

2.83** (2.93)
0.36** (7.73)
0.26 (1.61)
0.19** (2.93)

(3)

(4)

0.87
189
7.78**
2.08*
1.50
0.01
6.57**
5.08*

0.16** (3.06)
0.72** (9.08)
0.79** (2.76)
0.09 (0.68)
-0.08 (1.79)
-0.48** (3.35)

2.85** (2.98)
0.36** (7.91)
0.32 (1.96)

Herfindahl Index

ln(patents per capita)

(5)

0.87
190
4.99*
2.04*
1.35
0.00
6.02*
4.67*

0.68** (8.42)
0.89** (3.04)
0.16 (1.22)
-0.09* (2.10)
-0.51** (3.05)

(6)

0.87
190
5.76*
2.18*
1.70
0.00
8.15**
6.45*

4.84 (1.54)
0.69** (8.57)
0.91** (3.00)
0.15 (1.14)
-0.10* (2.20)
-0.61** (4.06)

5.36* (2.48)
0.39** (8.45)
0.25 (1.47)

Krugman Index

8.08** (2.79)
0.38** (8.28)
0.17 (0.91)
9.22* (2.13)

Notes: t-statistics in parentheses are based upon Huber-White standard errors. ** significant at the 0.01 level, * significant at the 0.05 level.
All models include time fixed effects. Test on spatial autocorrelation were conducted with different weight matrices in order to check robustness.
The results presented in the table are based on a weights matrix using inverse distance with a cut-off point of 150 km.

0.69** (8.69)
0.80** (2.95)
0.13 (1.05)
-0.06 (1.34)
-0.35* (2.07)

2.69** (2.83)
0.35** (7.66)
0.25 (1.50)
0.24** (3.40)

(1)

Theil Index

Constant
ln(RDit-1)
ln(HCit)
ln(DIVit)
ln(DIVit) high
ln(STRUCit)
ln(SMALLit)
ln(LARGEit)
REGTYPEi
Dummy EAST

Dependent variable

Table 2. Regression results for alternative diversity measures (Pooled OLS)

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Migration and innovation

577
Table 3. IV regression (2SLS)

Dependent variable

Constant
ln(RDit-1)
ln(HCit)
ln(DIV_Tit)
ln(DIV_Tit) high
ln(STRUCit)
ln(SMALLit)
ln(LARGEit)
REGTYPEi
Dummy EAST
Hansen J statistica
Shea Partial R2
F-Test of excluded instruments

ln(patents per capita)

(1)

(2)

(3)

(4)

3.11** (3.00)
0.28** (4.74)
0.12 (0.63)
0.63** (3.37)

3.25** (2.87)
0.25** (3.83)
0.25 (1.22)

3.11** (3.01)
0.28** (4.70)
0.12 (0.62)
0.63** (3.35)

3.26** (2.86)
0.25** (3.75)
0.25 (1.20)

0.69** (8.02)
0.51* (2.35)
0.07 (0.55)
0.001 (0.02)
0.24 (0.73)

0.71** (3.27)
0.77** (7.50)
0.30 (1.13)
-0.14 (0.97)
-0.002 (0.02)
0.28 (0.76)

0.69** (7.99)
0.50* (2.30)
0.06 (0.53)
0.002 (0.04)
0.25 (0.75)

0.72** (3.31)
0.78** (7.44)
0.29 (1.05)
-0.14 (1.00)
0.001 (0.01)
0.30 (0.82)

1.12 (0.2893)
0.20
21.71**

0.46 (0.4983)
0.11
10.62**

0.17 (0.6813)
0.20
22.63**

0.15 (0.7017)
0.10
10.46**

Notes: t-statistics in parentheses are based upon Huber-White standard errors.

** significant at the 0.01 level, * significant at the 0.05 level. All models include time fixed effects.
Latitude of region centre, diversity measures (Krugman index) lagged in space and time are used as instruments in
models 1 and 2. Latitude and the lagged share of low skilled foreigners in total employment are applied as instruments
in the models 3 and 4.
a
p-value in parentheses.

The results of the IV regressions indicate that endogeneity of cultural diversity is unlikely to
be a major problem (see Table 3). The diversity measures are instrumented by diversity measures calculated with low skilled employment lagged both in space and time, lagged shares of
foreigners in low skilled employment, and the latitude of the region. In the following, we focus
on results for Theil diversity measures only. The impact of cultural diversity on innovation
output is even reinforced in the IV regressions. All IV estimates are positive, significant, and
larger than their OLS counterparts. This is surprising since simultaneity should result in upward
biased OLS estimates of the impact of cultural diversity. This suggests that the simultaneity bias
in the OLS estimates is relatively small. The gap between OLS and IV estimates might reflect
a downward bias in the OLS estimates caused by measurement errors. This may indicate that
measurement errors bias towards zero is more important than the upward bias due to the
endogenous location choice of immigrants. Hunt and Gauthier-Loiselle (2008) provide similar
evidence for US States. Another explanation is that there is heterogeneity in the impact of
diversity on innovation output, and that the IV estimates tend to recover effects for a subset of
regions with relatively strong impact of diversity on patent intensity.14
The quality of the IV results critically hinges on the quality of the instruments, i.e. whether
they are relevant and exogenous. We apply the test of overidentifying restrictions to check
instrument exogeneity. The results of the Hansen J-statistic suggest that we can not reject the
hypothesis that the instruments are exogenous. The F-statistics of excluded instruments as well
as Sheas Partial R2 indicate that the partial correlation between the instruments and the
endogenous explanatory variables is sufficient to ensure unbiased estimates and relatively small
standard errors.15
14

See Card (2001) for a corresponding reasoning with respect to returns to schooling.
The F-statistic refers to the test of the hypothesis that the coefficients of the instruments equal zero in the first stage
of 2SLS. Staiger and Stock (1997) propose a F-statistic of at least 10. A statistic less than 10 indicates that the instrument
variables are weak, in which case the 2SLS estimator is biased and inference is unreliable.
15

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578

A. Niebuhr

Before turning to the significance of spatial interaction, we check whether unobserved

region-specific effects are important and adversely affect the estimates of the pooled model. In
Table 4 the results of the random and fixed effects models as well as the between estimator are
summarized. The results of the random effects models (columns 1 and 2) are very similar to the
estimates of the OLS regression of the pooled data. The coefficient of R&D expenditure slightly
declines but is still highly significant. The impact of cultural diversity turns out to be very stable
as well. The effect of diversity of total R&D employment is even reinforced. However, the
findings change dramatically in the fixed effects models (columns 3 and 4). The coefficients of
the diversity measures are insignificant, although still of the same sign at least for total R&D
employment.16 In contrast, applying an alternative specification with fixed effects on the NUTS
1 level, namely for those German Lnder that consist of several planning regions, does not
significantly change the results with respect to cultural diversity. This additional robustness
check is conducted for the specification including the Theil index. The coefficients of the
diversity measures slightly decline from 0.24 to 0.21 for ln(DIV_Tit) and from 0.19 to 0.16 for
ln(DIV_Tit) high. Furthermore, the effect of cultural diversity is still significant at the 5% level
in both specifications.
The problem of the fixed effects model might be linked to the quality of the data on R&D
input, survey data that may be affected by measurement errors. Johnston and DiNardo (1997)
note that estimates may be biased towards zero due to mismeasurement of explanatory variables.
The attenuation bias can be aggravated by fixed effects estimation, in particular if the explanatory variables are highly correlated across time, as is frequently the case when the time period
between the two cross sections is small (see also Griliches and Hausman 1986). With respect to
the data set used in the regression analysis, this applies to R&D expenditure per capita as well
as to the diversity indices. Although there is a considerable variation across regions, there is
much less variation in time.17 This is confirmed by the results of the between estimator (columns
5 and 6) which only uses variation between cross sectional units by applying OLS to the
time-averaged Equation (7). The random effects estimators is the weighted average of the fixed
effects and the between estimator. Differences between random effects and between estimator
results are, however, fairly small. Because of the completely implausible implications and the
outlined methodological problems of the fixed effects specification, we rely on the random
effects model that confirms the OLS and IV results.
We also check whether spatial interaction affects the estimates by applying spatial regression
models. The results in Table 5 suggest that there are significant spillover effects among neighbouring regions. The coefficient of the spatially lagged dependent variable is significantly
different from zero in almost all models, the only exceptions being the two stage least square
(2SLS) estimates in column 6. Thus, the neighbourhood of innovative regions promotes regional
R&D activity. This confirms the evidence on localized knowledge spillovers provided in
Bottazzi and Peri (2003) and Bode (2004). The result is robust with respect to a variation of the
spatial weights matrix (binary contiguity, inverse distance). However, the inclusion of spatially
lagged patents per capita does not seriously affect the coefficient of cultural diversity. The main
differences regarding the impact of diversity emerge between the maximum likelihood (ML)
estimates and the 2SLS results. The size of the coefficient increases once we instrument cultural
diversity in the 2SLS regressions. This is in line with IV results summarized in Table 3.
Altogether, the basic findings regarding the impact of cultural diversity on innovation are not
changed in the spatial lag models.
16
This is also in line with evidence surveyed in Griliches (1990). Several studies indicate that patents are more
correlated with R&D expenditure within the cross section than in the time series dimension.
17
Corresponding findings on the within and between dispersion of the variables are summarised in Table A3 in the
Appendix.

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0.35
0.88
0.87
190

R2 within
R2 between
R2 overall
Observations
0.29
0.88
0.86
189

0.15* (2.04)
0.87** (7.50)
0.40 (1.58)
0.07 (0.55)
-0.08 (1.38)
-0.62** (3.33)

3.90** (3.20)
0.24** (3.94)
0.50* (2.30)

(2)

0.53
0.45
0.45
190

1.09 (1.69)
0.08 (1.34)
0.78* (2.06)

6.34* (2.37)
-0.21 (1.87)
-0.52 (0.70)
0.20 (1.16)

(3)

-0.07
0.93
0.13
0.64
(0.58)
(1.48)
(1.91)
(1.89)

5.96* (2.32)
-0.22 (1.87)
-0.36 (0.53)

(4)

0.51
0.21
0.22
189

Fixed effects

ln(patents per capita)

2.73 (1.84)
0.39** (6.05)
0.23 (0.97)
0.21* (2.05)

(5)

0.00
0.90
0.87
190

(6)

0.39
0.90
0.63
189

0.17 (1.86)
0.67** (5.70)
1.07* (2.52)
0.16 (0.92)
-0.07 (1.18)
-0.45* (2.26)

1.97 (1.29)
0.39** (6.19)
0.26 (1.11)

Between regression

0.66** (5.64)
1.06* (2.51)
0.18 (1.09)
-0.06 (1.04)
-0.38 (1.68)

Notes: t-statistics in parentheses are based upon Huber-White standard errors. ** significant at the 0.01 level, * significant at the 0.05 level.
All models include time fixed effects.

0.85** (7.42)
0.35 (1.42)
0.11 (0.84)
-0.05 (0.88)
-0.34 (1.74)

4.02** (3.34)
0.22** (3.56)
0.40 (1.84)
0.30** (3.55)

(1)

Random effects

Constant
ln(RDit-1)
ln(HCit)
ln(DIV_Tit)
ln(DIV_Tit) high
ln(STRUCit)
ln(SMALLit)
ln(LARGEit)
REGTYPEi
Dummy EAST

Dependent
variable

Table 4. Panel models

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0.54** (5.99)
0.55* (2.15)
0.06 (0.52)
-0.07 (1.61)
-0.35* (2.05)
0.15** (2.81)

1.41 (1.39)
0.35** (7.96)
0.16 (1.01)
0.21** (2.94)

(1)
1.31 (1.30)
0.36** (8.39)
0.21 (1.33)

(2)

0.17** (3.07)
0.55** (6.13)
0.53* (2.02)
0.02 (0.18)
-0.08 (1.84)
-0.43** (2.99)
0.16** (2.96)

ML (binary)

0.49** (5.01)
0.51* (2.16)
0.03 (0.26)
-0.08* (1.98)
-0.43** (2.67)
0.20** (3.07)

1.14 (1.13)
0.35** (8.02)
0.17 (1.11)
0.19** (2.56)

(3)

(4)

0.15** (2.68)
0.50** (5.11)
0.50* (2.05)
-0.01 (0.04)
-0.09* (2.19)
-0.51** (3.76)
0.21** (3.18)

1.06 (1.06)
0.36** (8.46)
0.21 (1.41)

ML (inverse distance)

ln(patents per capita)

0.33
0.11
31.8**
8.3**
3.73*

32.6**
14.7**
1.85

0.65** (3.29)
0.72** (7.12)
0.52 (1.66)
-0.11 (0.71)
0.02 (0.28)
0.24 (0.74)
0.35 (1.36)

3.23** (3.13)
0.26** (4.42)
0.29 (1.53)

(6)

0.35
0.20

0.61** (7.33)
0.81** (2.67)
0.12 (0.99)
0.02 (0.38)
0.16 (0.51)
0.47* (2.02)

2.89** (3.15)
0.30** (6.01)
0.15 (0.85)
0.51** (2.93)

(5)

2SLS (inverse distance)

Notes: t-statistics in parentheses are based upon Huber-White standard errors; ** significant at the 0.01 level, * significant at the 0.05 level. All models include time fixed effects. Latitude
of region centre, diversity measures (Krugman index) lagged in space and time are used as instruments for diversity measures in the models 5 and 6. Patent applications lagged in space
and time is used as an instrument for the spatial lag of the endogenous variable.
The results presented in the table are based on a binary weights matrix and a matrix using inverse distance with a cut-off point of 150 km.

Shea Partial R2
W_ln(Pit)
ln(DIV_Tit)
F-Test of excluded instruments
W_ln(Pit)
ln(DIV_Tit)
Wu-Hausman F-Test

Constant
ln(RDit-1)
ln(HCit)
ln(DIV_Tit)
ln(DIV_Tit) high
ln(STRUCit)
ln(SMALLit)
ln(LARGEit)
REGTYPEi
Dummy EAST
W_ln(Pit) (r)

Dependent variable

Table 5. Spatial lag models

580
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581
Table 6. Quantile regression

Dependent variable

Constant
ln(RDit-1)
ln(HCit)
ln(DIV_Tit)
ln(DIV_Tit) high
ln(STRUCit)
ln(SMALLit)
ln(LARGEit)
REGTYPEi
Dummy EAST
W_ln(Pit) (r)

ln(patents per capita)

(1)

(2)

(3)

(4)

2.55* (2.10)
0.34** (6.60)
0.26 (1.12)
0.24 (1.92)

2.32 (1.67)
0.35** (5.49)
0.29 (1.30)

2.61* (2.05)
0.34** (6.28)
0.22 (0.99)
0.28* (2.47)

2.12 (1.74)
0.36** (6.50)
0.36 (1.74)

0.64** (5.58)
0.63* (2.08)
0.05 (0.31)
-0.10 (1.41)
-0.47 (1.46)

0.20* (2.24)
0.65** (6.05)
0.54 (1.27)
-0.002 (0.01)
-0.10 (1.36)
-0.52* (2.29)

0.60** (5.39)
0.82 (1.91)
0.10 (0.55)
-0.08 (1.05)
-0.32 (1.16)
0.32 (1.71)

0.13 (1.42)
0.57** (5.22)
0.69* (2.32)
0.01 (0.08)
-0.07 (0.79)
-0.64** (2.86)
0.39 (1.94)

Notes: t-statistics in parentheses are based upon bootstrap standard errors with 100 replications.
** significant at the 0.01 level, * significant at the 0.05 level.
All models include time fixed effects.

Furthermore, we investigate whether outlying observations affect the estimates by applying

quantile regressions. Table 6 shows results for the basic specification and spatial lag models. The
coefficients of the median regression are rather similar to the previous estimates for the corresponding diversity measures in Tables 2 and 5, indicating that the effect of cultural diversity is
not subject to serious bias caused by outliers. Significance levels of the coefficients decline, but
the impact of cultural diversity of total R&D employment is still significant at the 10% and 5%
level (columns 1 and 3). However, as regards diversity among high skilled R&D staff, we detect
an important impact in the non-spatial model only.
Finally, we turn to the size of the effect of cultural diversity focusing on the evidence for total
R&D employment since these results seem to be more robust than those for high skilled R&D
workers. Total R&D employment in Germany amounted to roughly 1,971,000 employees in the
year 2000. The share of foreign workers in R&D employment is 2.9% (58,000 foreign employees) and corresponds to a Theil index of 0.23. If the number of foreign R&D workers grows by
100%, and the increase of all nationalities is proportional to their size, the Theil index will rise
to 0.41. Applying the lowest coefficient estimates (ML spatial lag model: 0.19), this change in
cultural diversity of R&D employment will cause an increase of patents per capita by almost
12%. In contrast, the IV estimate of the spatial lag model (0.51) gives rise to an increase of
patents per capita by 34% (direct effect).18 Thus, there is a significant impact of diversity on
innovation. However, one has to keep in mind that these effects result from a doubling of foreign
R&D staff and rest on strong assumptions regarding the distribution of these workers across
nationalities. Moreover, compared with evidence provided in Hunt and Gauthier-Loiselle
(2008), at least the effect associated with the ML estimate seems to be rather small. According
to their results, a one percentage point increase in the skilled immigrant share is associated with
an increase of the mean patents per capita by 17% in the U.S. However, their analysis does not
refer to the impact of cultural diversity on innovation. The beneficial effects of immigration rests
upon the above average contribution of college graduate immigrants to patenting that is caused
by the relatively large share of foreign born graduates with science and engineering education.
Our diversity measures are based on employment shares of more than 200 nationalities.
Depending on the size of the group, immigration of specific nationalities might result in quite
18
We do not discuss the indirect and induced effects that are due to spillover effects among neighbouring regions in
the spatial lag model.

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A. Niebuhr

different changes of diversity. The marginal contribution of an additional individual to cultural

diversity is the higher, the smaller the ethnic group to which that individual belongs. Thus, the
same overall increase of foreign R&D workers will involve a stronger increase of diversity if
small nationalities realize disproportionately high growth. Therefore, the same growth of foreign
workers might give rise to different effects on innovation because the impact of immigration on
cultural diversity might vary.

7 Conclusions
We have analysed the impact of cultural diversity of R&D employment on innovation for a cross
section of German regions. In principle, the effect of diversity on innovation might be positive
or negative since there is likely a trade-off between productivity effects and transaction costs
associated with diversity. The regression results indicate that cultural diversity might indeed
matter for innovation activity. The evidence points to differences in knowledge and capabilities
of workers from diverse cultural backgrounds that may enhance performance of regional R&D
sectors. The positive impact of diversity on innovation seems to outweigh negative effects. IV
estimates suggest that we may interpret this correlation as a causal effect from diversity to
innovation. This corresponds with evidence on the economic effects of cultural diversity provided by Ottaviano and Peri (2005, 2006) for the U.S. The findings are also in line with studies
that emphasize the importance of labour mobility for knowledge transfer and innovation (e.g.,
Almeida and Kogut 1999; Simonen and McCann 2008). Moreover, our results indicate that the
benefits of diversity are not confined to R&D employees with a university degree. However, this
is a plausible result as the educational attainment of R&D workers and their communication
skills might on average be relatively high. Thus, we cannot generalize our findings since only
cultural diversity among skilled R&D staff is considered, and the educational attainment of
workers is likely to matter for the economic effects of cultural diversity.
Theoretical literature on economic effects of cultural diversity stresses the significance of
institutions in this context. The implementation of growth-enhancing effects of diversity may
require a specific set of rules, or regulatory framework. Significant benefits of diversity among
skilled workers and the fact that our focus is on employed migrants suggest that institutions and
regulatory framework concerned with education and labour-market integration of immigrants
play a particular role in realizing the economic benefits. Moreover, our findings have implications for immigration policy that needs to be more in favour of high skilled foreigners if they
foster innovation and growth. Growing international competition for high skilled labour has
already led some governments to revise their immigration policies (Bauer and Kunze 2004).
European countries, especially, developed new arrangements directed towards highly qualified
migrants in order to catch up with countries that offer more favourable conditions for high
skilled immigrants. However, despite recent changes, labour migration regulation is still rather
restrictive in Germany, even for highly educated foreign nationals.

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Appendix: data
R&D data from Stifterverband fr die Deutsche Wissenschaft.
R&D personnel (full-time equivalents) and R&D expenditure (1,000 euros) 1997, 1999.
Patent data from Patentatlas Deutschland edition 2002.
Patent applications 19952000.
Employment data from the German Federal Employment Agency.
Employment by nationality, qualification level and occupation 1993, 1995, 1998, 2000.
Region type classification from the German Federal Office for Building and Regional Planning.
Conditional on population density and the size of regional centres three groups of regions are
distinguished: agglomerated (1), urbanized (2) and rural regions (3).
Distance and travel time.
Interregional travel time bases on estimates for NUTS 3 regions. Travel time for planning
regions was generated by calculating weighted averages of NUTS 3 data.
Data is available for NUTS 3 regions or planning regions. In the analysis, the functionally
defined planning regions are applied. Information for planning regions is generated by aggregation of NUTS 3 level data in case data is only available for NUTS 3 regions. Planning regions
are defined on the basis of NUTS 3 regions, i.e. they consist of several NUTS 3 regions that are
linked by intense commuting.

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585
Table A1. Summary statistics

Patents per 100,000 inhabitants

R&D expenditure per 100,000 inhabitants
R&D staff per 100,000 inhabitants
Employment share of high skilled employees (university degree)
Diversity measures
Theil index
Total R&D employment
High skilled R&D employment
Herfindahl index
Total R&D employment
High skilled R&D employment
Krugman index
Total R&D employment
High skilled R&D employment
Ratio of manufacturing to service employment
Employment share of small firms (<20 employees)
Employment share of large firms (>500 employees)

Mean

Standard
deviation

Minimum

Maximum

40.7
27,608
273
0.07

27.8
35,683
300
0.03

4.1
476
8.5
0.03

140.2
184,344
1,669
0.15

0.16
0.18

0.10
0.11

0.004
0.009

0.47
0.55

0.04
0.05

0.03
0.03

0.001
0.002

0.14
0.16

1.95
1.94
0.48
0.30
0.18

0.02
0.03
0.23
0.04
0.07

1.88
1.85
0.13
0.11
0.06

1.99
1.99
1.19
0.43
0.35

Table A2. Between and within dispersion of variables

Standard deviation

ln(Pit)
ln(RDit-1)
ln(HCit)
ln(DIV_Tit)
ln(DIV_Tit) high
ln(DIV_Hit)
ln(DIV_Hit) high
ln(DIV_Kit)
ln(DIV_Kit) high
ln(STRUCit)
ln(SMALLit)
ln(LARGEit)

Overall

Between

Within

0.97
1.15
0.37
0.84
0.85
0.93
0.91
0.012
0.014
0.51
0.16
0.41

0.96
1.15
0.36
0.84
0.87
0.93
0.92
0.012
0.014
0.51
0.15
0.41

0.15
0.14
0.04
0.09
0.12
0.10
0.12
0.001
0.002
0.04
0.04
0.04

Papers in Regional Science, Volume 89 Number 3 August 2010.

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