Does Employee Treatment and Workforce Diversity Impact Corporate Innovative Efficiency?

Abstract

Using patents and citations per R&D dollar as measures of innovation efficiency, we find that corporate policies that result in better treatment of employees and a more pro-diversity culture, specifically treatment of women and minorities, enhance future innovative efficiency, even after controlling for endogeneity. Such positive effect is stronger in more innovative firms, more financially constrained firms, more undervalued firms, firms where employees are more valuable, firms in industries with longer employee tenure and firms with stronger governance. Better employee treatment and diversity policies also increase firm value via this positive effect on innovation efficiency. We suggest a channel through which employee treatment may enhance firm value.