The Impact of Cultural Diversity on Innovation Performance: Evidence from Construction Industry of Azerbaijan

Institute of Economics of theAzerbaijan National Academy ofSciences,Institute of Economics of theAzerbaijan National Academy ofSciences,Azerbaijan State University ofEconomics,Ibrahim Chechen University,Turkey,IntroductionIn today's world, innovations and successful decision-making in entrepreneurial activities are among the most important components of successful long-term oriented organizational behavior. In addition, innovation is an important driver of long-term national economic growth and an important policy goal (Romer, 1990; Schumpeter, 1962). As the twice Nobel Laureate Linus Pauling stated: "The best way to have a good idea is to have a lot of ideas". According to him, the success of creativity depends a lot on having various ideas. Most of studies on diversity emphasize that different ideas play a significant role in change making and this is the key factor for knowledge accumulation.According to Berliant and Fujita (2012), ideas in general help us to communicate, while exclusive ideas help us bring in originality to collaborative work.Today, when non-rivalrous knowledge (Romer, 1993) is widespread and easy to be accessed as never before, it is a challenging task for firms to transform potentially new knowledge into productivity growth. In order to understand the effect of these pervasive phenomena, we consider only within-firm diversity. We are of the opinion that despite limited information availability, people are still the main factor, which influences how information is circulated, and ideas understood, interpreted and used.There is a number of works on the growing importance of cultural diversity for innovation (e.g. 0stergaard et al., 2011; Ozgen et al., 2011; Pozzoli et al., 2012; Kemeny, 2012; Nathan & Lee, 2012). In our research when we use "culture", we refer to national characteristics and not to corporate culture.The results of our research can be useful for managers in the process of making decisions on the selection and implementation of the strategies related to employees and creating suitable environment for them. Also our findings will help better understand the process of innovation, understand the factors, which can influence innovation activity and help to know how these mechanisms work under conditions of diversity inside a firm.The remainder of this article is structured as follows. Section 1 reviews the existing literature on the components of cultural diversity: racial, gender, foreigners' diversity and its relationship with innovation performance. Section 2 discusses the methodology, as well as the data used to test the hypotheses. Section 3 contains the empirical results, followed by a short summary and conclusions.1. Literature review1.1. Cultural diversity and innovationWe have identified from reviewed literature that there is a range of works, which found the positive and negative impacts of cultural diversity on innovation and firm performance. The overall impact remains an open question, especially regarding to impact on innovativeness of the firm. There are studies which found an inverted U-shape relationship between diversity and economic performance (see e.g. de Graaff and Nijkamp, 2010), meaning that there is an optimal diversity. Can the same effect be true regarding to the relationship between cultural diversity and innovation? Results of a literature review show that, a wide range of models, which used random effects find that there is a significantly positive impact of diversity rather than curvilinear relationship. The effect is even higher when migrants are skilled and when the sector is knowledge-intensive.Blau (1977) had an idea that firms with different levels of cultural diversity in the end have different levels of development and organizational outcomes. There are some views, which argue that low diversity is beneficial for members of groups. …