Indore (Madhya Pradesh): Trade openness and workforce diversity are key drivers of innovation in developing countries, according to a study by Indian Institute of Management Indore. The study by Prof Prakriti Soral from IIM Indore, in collaboration with her co-authors, finds that open trade policies foster innovation by attracting skilled workers, venture capital and promoting collaboration. This, in turn, helps businesses -- particularly startups -- build diverse and productive workforces. The study emphasises that protectionist policies, which limit the movement of capital and labour, hinder innovation and workforce diversity.
This study delves into how trade openness influences workforce diversity in knowledge-based economies, highlighting the significant role of innovation ecosystems. As protectionism rises, there’s concern over its long-term global impact, especially on trade balances, innovation, and labour dynamics. Traditional literature mostly focuses on the macroeconomic or broader effects of trade policies, leaving the micro-level implications, particularly workforce diversity, underexplored.
To study workforce diversity, the researchers used secondary data from the Global Competitiveness Report (GCR) 2019 of the World Economic Forum (WEF) along with respondent questions from selected countries. The GCR report offers a comprehensive database of countries and their competitiveness scores. The report outlines 12 pillars for measuring a country's competitiveness and includes 132 countries. One of the dependent variables was workforce diversity.
Respondents were asked, “How diverse is the workforce in your country regarding ethnicity, religion, sexual orientation, and gender?” Then, to identify the impact of trade openness on diversity, trade openness variable data was assessed from the WEF database to understand its effect on diversity.
“The study emphasises that open trade policies foster innovation by attracting skilled workers and venture capital, which in turn promotes a diverse workforce. Trade openness enhances labour mobility and creates a fertile ground for knowledge sharing. This mobility, combined with investments from venture capitalists and increased collaboration, enables companies to build a diverse workforce by attracting individuals from various backgrounds. This shift helps create environments where ideas, talents and skills from different countries converge, boosting innovation and overall productivity,” Soral said.
The study emphasises how such open trade practices encourage innovation, which is essential for economic development, particularly in developing countries. Not innovating in today's competitive market can eliminate companies from the race. Ninety per cent of Indian startups fail within their first five years due to a lack of innovation. Startups require a skilled workforce, funding, and formal mentoring. Venture capitalists provide resources, offering both funds and guidance to help enter the market with large organizations.
The study found that trade openness improves venture capital availability, which is positive for young companies. Policymakers should keep trade barriers low to attract foreign venture capitalists for young innovative companies. Further, the past decade has seen major social and political changes that pressured companies to embrace diversity and inclusion. Diverse top management teams are important for ensuring equal participation of minority groups in the workforce. The research indicates that national-level policies like trade openness can indirectly enhance diversity within organisations.
“A diverse workforce enhances the company's reputation and helps tailor products and services to meet various customer needs. Policymakers should ensure that business ecosystems promote innovative solutions and foreign collaborations in a liberalised market. Organisations will welcome people from diverse backgrounds and boost their workforce participation,” Soral said. The study concludes protectionist trade policies are rising in the world market. “However, governments can promote workforce diversity and a knowledge-based economy by avoiding these restrictive measures,” it suggests. The study informs policy makers about the benefits of trade openness for workforce diversity, innovation, and a knowledge-based economy.
