Cultural diversity and plant-level productivity

• Cultural diversity positively affects total factor productivity at the plant level.
• Diversity is measured at the establishment and the aggregate local level.
• We distinguish size and fractionalization of the group of foreigners.
• Group size does not matter, fractionalization into different nationalities does.
• Aggregate level is at least as important as micro level impacts of diversity.

Using comprehensive data for German establishments, we estimate plant-level production functions to analyze if “cultural diversity” affects total factor productivity. We distinguish diversity in the establishment's workforce (the micro level) and in the aggregate labor force of the region where the plant is located (the macro level). We find that a larger share of foreign workers — either in the establishment or in the region — does not affect productivity. However, there are spillovers associated with the degree of fractionalization of the group of foreigners into different nationalities. Regional diversity is at least as important for productivity as micro-level diversity.