Ethnic Diversity and Corporate Interstate Investments

Ying Mao | Zheng Wang | Hong Zou

Jul 8, 2025

Key Takeaways

Research Question: Do U.S. firms prefer ethnically diverse locations when making interstate investment decisions?
Data & Method: The authors use greenfield investment data (2011–2021) and estimate firm–project–county location choice models with OLS and shift-share IV. Ethnic diversity is measured using a Herfindahl-based index across four Census categories.
Findings:
- Firms are more likely to invest in ethnically diverse counties.
- The effect is stronger for innovation-focused, service-oriented, or diversity-capable firms.
- These investments receive more attention in conference calls and are followed by increased patent applications, higher sales growth, more favorable media coverage, and improved operating performance.
Implications: Ethnic diversity enhances a region’s attractiveness for corporate expansion, especially among firms seeking innovation and inclusion—highlighting its strategic value in location decisions.

Source: Ying Mao, Zheng Wang, and Hong Zou. (2025). Ethnic Diversity and Corporate Interstate Investments, Journal of Financial and Quantitative Analysis. Forthcoming.

Background and Research Question

When US firms expand across states, where they choose to locate new investments significantly impacts their success. Prior research has highlighted the quality of the local workforce as an important factor in firms’ location choice, among a variety of other local neoclassical and formal institutional factors. This study explores a less examined dimension: How does ethnic diversity in local labor markets influence the probability of being chosen by firms for interstate investment?

Ethnic diversity offers both direct and indirect advantages. Directly, a diverse workforce can enhance problem-solving and productivity. Indirectly, companies can benefit from reputational gains associated with inclusivity. However, diversity may also introduce various costs, such as communication barriers and discrimination among people with different ethnic backgrounds, which could reduce a firm’s preference for investing in high-ethnic-diversity locations. This study provides large-scale evidence on the role of ethnic diversity in firms’ choices of interstate investment locations.

Data and Methodology

Using a novel dataset from fDi Markets of greenfield investments, the authors develop a location-choice model at the firm-project-county level to investigate the effect of local ethnic diversity on firms’ location choices for interstate investments. Local ethnic diversity is measured as 1 minus the Herfindahl index calculated across four racial and ethnic groups: Hispanic, non-Hispanic black, non-Hispanic white, and Asian.

To control for the effect of regional-level characteristics and take account into the possibility that firms may have a wide range of candidate locations, we construct three alternative county pools for each interstate investment: all non-chosen counties in the same state as the chosen county, 19 counties geographically closest to the chosen county, and all counties that ever received interstate investments in the past three years.

Findings

The analyses reveal a positive and statistically significant relationship between a county’s ethnic diversity and its likelihood of being selected for interstate investment. Based on a shift-share-based instrument variable analysis, a one-standard-deviation increase in the diversity index raises the likelihood of a county being selected for interstate investment by approximately 20%, indicating firms perceive substantial economic benefits in diverse locations.

Cross-sectional analyses show the preference for diversity is particularly pronounced among innovation-active firms and projects establishing service-oriented operations. This finding aligns with the view that a diverse workforce is expected to enhance problem-solving, innovation, and customer service. Additionally, firms with better workforce diversity ratings, headquartered in high-diversity or Democratic-leaning counties, or led by pro-Democratic CEOs, exhibit stronger preferences for diverse locations, suggesting inclusive cultures are better equipped to manage diverse workforces.

The study also examines the economic consequences of investing in high-diversity areas. Firms that choose such locations for their interstate investments experience positive market reactions, increased patent applications, higher sales growth, more favorable media coverage, and improved operating performance, compared with firms investing in other locations. Interstate investment in high-diversity areas is also more likely to be mentioned in firms’ conference calls.

Implications

This study contributes to the ongoing debate in the literature examining the economic effects of ethnic diversity. By demonstrating firms prefer ethnically diverse locations when making interstate investment and thereby achieve performance gains, it underscores the strategic value of diversity in corporate expansion decisions.

The findings are also relevant to the current debate on DEI in the US. Amid the current political climate, many large corporations have scaled back their support for DEI initiatives. However, many other CEOs and boards remain committed to their DEI efforts, emphasizing the benefits of workplace diversity in fostering a variety of perspectives and innovative solutions, and in improving overall performance. This sentiment was echoed by CEOs of Nasdaq, Pinterest, Cisco, and others during the 2025 World Economic Forum annual meeting in Davos. The findings in this study support their stance, showing access to a diverse workforce serves as the underlying mechanism of driving firms to choose high-diversity locations for their interstate investments.

For policymakers and business leaders, the results underscore the economic value of diversity. Regions with ethnically diverse labor markets may attract more corporate investment, whereas firms that embrace inclusivity stand to gain a competitive edge in innovation and growth.