2.1 The role of knowledge and diversity in explaining entrepreneurship dynamics
It is argued that bigger and culturally diverse cities attract individuals with greater human capital and capabilities and this affects regional economic development (Florida
2002; Audretsch et al.
2015a). The argumentation behind this is largely rooted in the
Information, Consumption and
Reinvention approaches to city development (Glaeser et al.
2004).
In particular, the
Information City approach view suggests that cites are places where there are a constant flow and exchange of ideas, so high-growth cities are likely to exhibit higher presence of skilled and highly qualified individuals, facilitating entrepreneurial entry and new venture growth. The ability of cities as agglomerated locations to foster new ideas is one potential reason why they become centres of entrepreneurship (Chinitz
1961; Audretsch and Lehmann
2005). Exchange of ideas both within and across industries in cities may generate horizontal and vertical spillovers and facilitates inter-organizational knowledge transfer of new ideas (Van Wijk et al.
2008), which can further create and sustain businesses. The Jacobian externalities attempt to determine that diversified knowledge and industries are more conducive to knowledge generation and exchange (Beaudry and Schiffauerova
2009).
The
Consumer view of a city advocates for skilled employees with high absorptive capacity are attracted by city cultural amenities which further facilitates knowledge exchange (Glaeser et al.
2001,
2004; Florida
2002). The diversity of people and cultures attracted by cultural amenities may be expected to offer more opportunities for cross-fertilization of ideas within and outside those spaces, contributing to the intensity (and to the novelty) of regional knowledge generation. In empirical analysis, this may be entirely captured by the knowledge-generation measures and absorbed into the existing KSTE framework.
There are several types of important cultural amenities in cities. First, are restaurants, theatres and cinemas which add to lifestyle and life quality. Second, aesthetic and physical settings include architectural and a landscape beauty in a city which attract both high-skilled workers and tourists. More aesthetically attractive places will bring tourism and create spots for meetings and communication, facilitating information and ideas exchange. Third, public services and provision of knowledge, transport links and infrastructure is an important amenity embedded into local context where business operates (Autio et al.
2014; Audretsch et al.
2015b).
Finally, the
Reinvention City view argues that cities adapting to emerging technologies faster will survive (Glaeser
2005). For such cities, a diversity of industries and people is likely to facilitate interactions of people with diverse backgrounds working in different industries or possessing different cultural heritage which makes them more agile to changes. Famous study by Spanjer and van Witteloostuijn (
2017) supports a more complex, non-linear effect of diversity of skills and knowledge on entrepreneurial outcomes, where experience diversity is measured as the number of skills linked to an entrepreneur’s jobs and the number of knowledge fields associated with the entrepreneur’s jobs is associated. Heterogeneous knowledge acquired by entrepreneurs and interactions with people with different job experiences and background may promote unorthodox perception of the new knowledge generated by technological change and increase chances of new market application of knowledge and new business formation in a spirit of KSTE.
Overall, all three views are important in understanding the role that knowledge and various forms of cultural diversity as a source for new business ideas play in new business formation and urban economic development. These three perspectives should be aligned to work as a single mechanism and enable strategic management of the knowledge spillover entrepreneurship. The KSTE argues that the ability of knowledge-intensive environments to foster new ideas can generate entrepreneurial opportunities and their commercialization, leading to ultimate urban success (Audretsch and Lehmann
2005; Audretsch et al.
2006; Agarwal et al.
2010; Acs et al.
2013).
More specifically, entrepreneurial opportunities that emerge from a society’s investment in human capital, research and development (Saxenian
1994) generate new knowledge that further ‘spills over’ to a third party when it flows between economic agents, with a third party not incurring the costs of knowledge production (Audretsch and Feldman
1996). Although this may impose certain appropriability risks (Laursen and Salter
2014), spillover of knowledge is desirable as it reduces the public and private cost of innovation which enables new business as a way to commercialize ideas (Audretsch et al.
2006) and increases return to investment in knowledge.
Agarwal et al. (
2007,
2010) develop a model of ‘creative construction’ which shows how knowledge spillovers combined with an entrepreneurial action enable knowledge appropriation, which leads to the creation of dynamic ventures. Entrepreneurs play the central role as conduits of knowledge spillovers. Therefore, a knowledge-intensive environment, conducive to opportunity discovery, may influence venture creation and positively influence start-ups’ survival and growth.
However, it is not only a knowledge-intensive environment rich in research and development that would serve as a potential source for new ideas and knowledge spillover entrepreneurship. It is also cultural diversity embodied in creative individuals which serves as an important source for entrepreneurial opportunities, driving the entry of new start-ups (Leung et al.
2005; Kreiser et al.
2010; Marino et al.
2012; Audretsch and Belitski
2013).
Qian (
2013) following Florida’s (
2002)
The Rise of the Creative Class advocates for cultural diversity as a form of urban amenity and an important factor for attracting skilled labour (Florida
2002; Florida et al.
2008). City tolerance to other cultures contributes to talent attraction from various countries, including the talent settling in a city and a talent which visits a city for business and leisure. More specifically,
Melting Pot Index, measured as the relative percentage of foreign-born people in a region, was sometimes used interchangeably as a proxy for cultural diversity and tolerance in cities (Qian
2013).
Diversity of ideas and backgrounds and ability to exchange them within urban spaces attract high-skilled workers and, most importantly, retain talent (Florida
2002). Cultural diversity is crucial in this context because, in addition to experience diversity advocated by Spanjer and van Witteloostuijn (
2017), tolerance to new ideas is important for new market opportunities. This may include people coming from different countries of birth, religious beliefs, customs and traditions, sexual orientations, and languages. In particular, ethnically diverse cities, featuring diversities in cultures and social norms, will attract people who value diverse experiences (Olfert and Partridge
2011). A familiar feature of this growing diversity is that it is largely urbanized (Nathan
2012). European cities have the highest numbers of migrants and minority groups in the world (Landry and Wood
2008), but also have high mobility and knowledge flow. Cultural diversity becomes part of the mechanism in attracting high human capital. The positive association between cultural diversity and highly skilled labour has been found in a number of studies (Boschma and Fritsch
2009; Sobel et al.
2010). It creates an environment of tolerance to new ideas. Altogether, it contributes to the exchange of new nonconventional ideas, creating new markets with people feeling non-threatened to exchanging and expressing ideas and pushing and pulling them forward in creating so-called ‘culturally diverse areas’ within existing urban spaces.
Cultural diversity also creates an environment conducive to networking and the exchange of ideas (Leyden et al.
2014). For example, residents coming from different backgrounds and cultural experience (Lee
2011), including residents from non-EU countries permanently residing in European cities and tourists visiting cities, all have different perspectives of thinking and ability to see opportunities, which makes designing new products, services and processes, or modifying the existent ones more likely (Kreiser et al.
2010; Qian
2013). To the extent that cultural diversity contributes to the development of the knowledge-intensive context, and with variety of ideas, conducive to opportunity discovery, it is likely for cultural diversity to influence entrepreneurial entry. Knowledge spillover theory of entrepreneurship prospective (KSTE) provides support for the variety of ideas and knowledge to be important source of entrepreneurial opportunities at local and country levels (Audretsch and Lehmann
2005; Audretsch et al.
2006; Rauch et al.
2013; Acs et al.
2013).
Empirical evidence suggests that new business formation and survival in high-tech sectors are systematically greater in regions rich in knowledge (Geroski
1995; Audretsch and Feldman
1996; Audretsch et al.
2006) and in regions where amenities facilitate cultural exchange (Glaeser et al.
2001; Nathan
2012). Audretsch and Dohse (
2007) have also demonstrated that firms which were located in regions with diverse knowledge exhibited higher rates of growth and survival than if the location is in a region with a paucity of knowledge endowment. In addition, entrepreneurs themselves are part of a region’s talent pool and are also attracted to tolerant, diverse environments. Diversity in education, competencies, experiences and skills result in divergence of perceptions and aspirations, as well as the ability to implement ideas independently through employment or entrepreneurship. Localized cultural diversities (Glaeser et al.
2001; Falck et al.
2011; Rauch et al.
2013; Leyden et al.
2014) serve as a strategic tool for market entry and survival. We therefore hypothesise:
H1a: Knowledge-intensive industries and cultural diversity are likely to have positive impact on new business formation.
H1b: Knowledge-intensive industries and cultural diversity are likely to have positive impact on start-up survival rates.
Knowledge intensity embedded in industry and cultural diversity embodied in city communities per se are unlikely to facilitate start-up employment growth. First, prior research discovered that cultural framework indirectly influence growth by shaping the legal framework, traditions, ideas and forms of interaction (Chambers and Hamer
2012; Rauch et al.
2013). Whereas cultural diversity is likely to play an important role in market entry and survival, it is unlikely to change significantly over a short period of time, which limits inflow of new ideas and knowledge and may not be sufficient to generate significant changes in employment growth (Qian and Acs
2013; Audretsch and Belitski
2013).
Second, technological knowledge is important in recognising entrepreneurial opportunities and sustaining competitive advantage (Siegel and Renko
2012; Qian and Acs
2013), however, its effect on job creation can be ambiguous. Investment in new technology may increase the individual demand for labour, if the technical elasticity of substitution is less than one, otherwise introduction of new technology may lead to job destruction.
Digitalization in knowledge-intensive sectors may limit the use of human resources with businesses finding themselves in the need to leverage the traditional business models in particular through applying different type of resources and technology (LEAD
2014; Li et al.
2016). The opportunity offered by emerging technologies could be critical to growth but may have negative implications for employment. ICT enables businesses to reduce the number of intermediaries, search, maintenance, transaction and labour costs, along with the benefits of network externalization (Martin and Wright
2005).
In knowledge-based industries such as education, ICT, creative sectors and finance, ICT-led platforms and digital capabilities are in place to facilitate recognition, transformation and exploitation of new technologies (Teece et al.
1997; Robertson and Swan
2003; LEAD
2014) where we expect high start-up and survival rates, although lower labour-intensity, hence lower employment growth rates. Respectively, we hypothesise:
H1c Knowledge intensity is likely to have an adverse effect on high-employment-growth entrepreneurship, whereas city cultural diversity is unlikely to render any impact on high-employment growth entrepreneurship.
2.2 The interplay between cultural diversity and knowledge intensity
Diversity in cities that people bring with them triggers complementarities in knowledge and skills for firms and leads to more business opportunities which allow to explore entrepreneurial opportunities for start-ups and to further sustain their market positions. Experimental studies highlighted that diversity of economic agents accelerates the knowledge creation but these dynamics appear particularly important in knowledge-intensive rather than labour-intensive industries (Fujita and Weber
2003; Kenney et al.
2013) where creativity, science and technology play an important role. Gambardella and Giarratana (
2010) in their well-cited study highlighted an important consequence of the process of ‘creative construction’: localized knowledge and skills increase the productivity of skilled employees and knowledge-intensive firms disproportionately more compared to less-skilled employees and labour-intensive firms. Gambardella and Giarratana (
2010) discuss the implications of skilled and unskilled labour for regional level dynamics when knowledge spillovers are localized. The process of ‘creative construction’ is rooted into new knowledge which can be generated and disseminated via different conduits, including knowledge embedded in industries and cultural diversity embodied into city communities. It is further facilitated by the exchange and cross-fertilization of knowledge and skills, experiences, leading to the discovery and creation of new market opportunities, start-ups and allowing for knowledge accumulation to enable new venture survival and growth.
We contend that cultural diversity is an integral structural attribute of any community and is powerful to create boundary conditions and change entrepreneurial outcomes through knowledge spillovers of entrepreneurship (Kreiser et al.
2010; Rauch et al.
2013; Dheer
2017) with the effect being particularly strong in knowledge-intensive contexts (Florida et al.
2008; Audretsch et al.
2006,
2010; Delmar et al.
2011; Qian and Acs
2013). Ahlstrom and Bruton (
2002) studied high-technology entrepreneurial firms in China, demonstrating how cultural differences led managers to employ tactics and knowledge different from the Western companies to leverage the contextual differences to develop competitive advantage and survive.
Drawing on these insights, we argue that the relationship between cultural diversity and various entrepreneurial outcomes is not only direct but also indirect. The rationale is that cultural diversity acts as both a direct and indirect mechanism to help entrepreneurs identify new opportunities and assemble the resources they need to exploit an opportunity in the market place. Heterogeneity of knowledge and cultural diversity leads to heterogeneous entrepreneurial outcomes. Cultural diversity affects community’s ability to value, assimilate, and apply new knowledge including both market and technological knowledge (Qian and Acs
2013), and it is not only extremely relevant to entrepreneurial entry but also start-up survival and early stage high-growth (Tidd and Bessant
2014).
Diversity in cultural experiences and skills makes economic agents value ideas differently and hence recognise different opportunities to start a new business (Geroski
1995; Agarwal et al.
2007; Autio et al.
2014). The greater cultural diversity of a city, the more unique an evaluation of any new knowledge within a given sector and city will be, and the higher the likelihood of creating multi-product markets and extending product life-cycles to sustain firm survival rates and ensure their ultimate growth will be.
Therefore, we hypothesise that cultural diversity will moderate the knowledge spillover of entrepreneurship and act as a conduit of opportunity recognition and market creation mechanism.
H2a: Cultural diversity positively moderates net entry in knowledge-intensive industries.
H2b: Cultural diversity positively moderates survival in knowledge-intensive industries.
H2c: Cultural diversity positively moderates high growth-employment entrepreneurship in knowledge-intensive industries.