Cultural Diversification through Employment of Foreign Workers: Benefiting firms and cities

LIU Yang
Fellow, RIETI

The well-known benefits of employing foreign workers include securing labor force and improving international competitiveness. However, it cannot be ignored that the contribution to cultural diversity, i.e., diversification of ways of thinking, knowledge, and ideas, also plays an important role in society. In many countries, cultural diversity has contributed to improving corporate performance and regional development. Avoiding cultural diversity could lead to the loss of competitiveness (Bassett-Jones, 2005). In order to maintain competitiveness in the future, Japanese companies should actively embrace cultural diversification.

Effects of cultural diversification caused by foreign workers

Amidst intense market competition, it has become necessary to read complex market conditions and initiate innovation with fresh ideas. To realize this, multicultural teams have an overwhelming advantage over monocultural teams consisting of people who grew up in similar environments along with similar levels of education.

According to Lee (2015), cultural diversity resulting from migrant workers provides two types of economic effects. First, at the firm level, it improves the workforce's ability to identify market conditions and find solutions from broader perspectives, thereby encouraging corporate innovation with fresh and diverse ideas. Second, at the city level, the presence of cultural diversity in local economies promotes innovation across the city, boosts productivity, and even contributes to the employment and wage level of local residents.

Firm effect

The firm effect includes broadening of workers' perspectives, which allows them to read market conditions accurately, seize opportunities, and improve problem-solving skills. A variety of diverse cultures brought by immigrant workers can help create new ideas. In situations of firm innovation or new product development, they can introduce ideas from elsewhere to be adapted and used in new forms. (Lee (2015)).

This effect has been proven in many countries through research based on quantitative analysis. For example, using a dataset of Ireland, McGuirk (2012) confirmed that cultural diversity among workers contribute to innovation at the firm level. In a research study based on a dataset of Denmark, Parrotta, Pozzoli, and Pytlikova (2014) showed that multi-ethnic cultural diversity has a positive impact on firms in terms of the number of patent applications. Furthermore, using a dataset of 7,600 companies based in London, Nathan, Max and Neil Lee (2013) found that a culturally diverse management team is capable of developing more product innovations than a monocultural management team. A similar effect has been observed at small and medium-sized companies as well. In a research study using a dataset of UK small-and medium-sized enterprises, Lee (2015) found that firms with a greater share of immigrant owners or partners are more likely to introduce new products and processes. Furthermore, empirical research by Hornung (2014) confirmed that immigrants have a sustained and long-term effect on manufacturing companies' productivity.

City effect

Cultural diversification brought on by foreign workers also has a city level effect in terms of promoting local innovation and boosting community-wide productivity. For example, using datasets of 20 European countries, Bosetti, Cattaneo, and Verdolini (2012) found that employing high-skilled immigrant workers brings greater diversity in the skilled professions, leading to a greater number of patent applications and higher level of scientific research in the community. A German study by Suedekum, Wolf, and Blien (2014) found that diversification attributable to migrant workers increases local productivity, generating a positive impact on natives' wages and employment.

Matters to be noted surrounding cultural diversification

The following matters should be taken into account with regard to the effect of cultural diversification through migrant employment. First, what is important is not the mere ratio of migrant workers in the workforce, but the cultural diversity that comes about as a result of hiring foreign workers. Studies mentioned thus far do not indicate that foreign workers are better managers or with higher productivity than locals. They emphasized the effect of cultural diversity, brought about as a result of cooperation between native and migrant workers.

In addition, the benefit of cultural diversity must be weighed against the difficulty of cross-cultural communication and potential lack of mutual understanding. Overcoming these issues requires advanced management capability and skills (Bassett-Jones, 2005).

Current situation in Japan

In order to enjoy the benefit of cultural diversity in a mostly monoethnic country like Japan, there is no option other than embracing migrant workers. Japan may be able to employ women and seniors to combat labor shortages, and encourage globalization of Japanese workers to reinforce international competitiveness. However, employing foreign workers is the only way of attaining the benefits of cultural diversity.

Japan's foreign workers' ratio among those with a university degree or above is lower than that of other industrialized nations. According to the Organisation for Economic Co-operation and Development (OECD)'s statistics, Japan ranked the second lowest (2006 data). Foreign workers working at Japanese companies are usually made to adopt the approach of accepting and following Japanese mentality and customs. They are rarely able to apply their unique perspectives that lead to cultural diversity.

As Bassett-Jones (2005) stated, the choice is between accepting workplace communication risk to obtain cultural diversity, and accepting the risk of losing competitiveness to avoid cultural diversity. Many countries around the world opted for the former through management efforts. However, the current situation in Japan seems to be that many companies are going for the latter. This has a lot to do with Japanese preference to maintaining the status quo. When corporate executives and general workers are evaluated, the focus seems to be more on whether they have caused any problems with the existing protocols rather than on whether they have made contributions with innovative ideas. This causes many workers to steer clear of new approaches, which could put them in hot water. They do not take the stance of trying out a new approach and finding a solution if it leads to a problem. Sacrificing competitiveness this way might provide stability but may leave them exposed to future crisis.

Many governments have adopted various policies to secure overseas human resources. Since 2012, the Japanese government has promoted policies for accepting highly skilled foreign workers under the concept of "bringing innovation to Japanese industries and encouraging friendly competition with Japanese workers to further develop a specialized and skilled labor market." In recent years, Japan has seen an increase in the number of international students, who are viewed as employees with better in-house communication compared to those who have never studied in Japan. Companies willing to utilize them to actively seek cultural diversification are likely to be better positioned in future competition.

The work upon which this column is based was supported by JSPS KAKENHI Grant Number JP 16K17144

December 15, 2016
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December 27, 2016