Regional cultural inclusiveness and firm performance in China

The study investigates the influence of regional cultural inclusiveness, a non-formal institution, on firm performance, particularly within the context of China's developing economy where informal institutions play a significant role. Existing research often focuses on formal institutions and internal firm characteristics, overlooking the impact of external cultural environments. Cultural inclusiveness, defined as the acceptance and respect for individuals from diverse backgrounds, is hypothesized to have a dual effect. On one hand, it can improve firm performance by enhancing competitiveness and adaptability through diverse perspectives and approaches to decision-making. On the other hand, challenges in communication and potential conflicts arising from cultural differences could negatively impact performance. The research aims to empirically examine this complex relationship using data from Chinese A-share listed firms, employing econometric techniques to analyze the correlation and address potential endogeneity issues through instrumental variable regression using regional topographical changes. The study further explores mediating mechanisms (financial constraints and employee structure) and moderating factors (CSR performance and R&D investment) to provide a comprehensive understanding of the relationship.

The literature review examines existing research on firm performance antecedents, focusing on formal institutions (policy uncertainty, legal environment, government subsidies), firm-level characteristics (ownership structure, executive characteristics), and internal organizational culture. While prior research highlights the influence of formal institutions and internal firm factors on performance, there's a gap in understanding the role of external informal institutions like regional culture. This study bridges this gap by focusing on the impact of regional cultural inclusiveness, a concept explored by Sun et al. (2023a, 2023b) through the lens of food culture as a proxy variable based on fractal theory. This theory posits that food culture, as a subsystem of culture, reflects similar characteristics to the overall cultural system, providing a method for measuring cultural inclusiveness.

The study employs a quantitative approach using data from CSMAR (corporate and governance data) and the National Bureau of Statistics (regional development indices) for Chinese A-share listed firms from 2010 to 2019 (excluding financial, real estate, and ST/PT firms). The dependent variable is firm performance, measured primarily by ROE, with robustness checks using ROA and Tobin's Q. The independent variable is cultural inclusiveness, measured using the index developed by Sun et al. (2023a, 2023b) based on food culture diversity. An alternative measure, the proportion of non-local cuisines, is also used for robustness checks. Control variables include firm-level (size, leverage, book-to-market ratio, SOE status), corporate governance (largest shareholder shareholding ratio, board size, independent directors ratio, executive compensation, CEO/Chairman duality), and regional-level factors (GDP per capita, GDP growth, population growth, per capita consumption). To address endogeneity, a two-stage least squares (2SLS) instrumental variable regression is employed using regional topographical changes (TGC) as an instrument for cultural inclusiveness, following the method proposed by Lei et al. (2022) and Sun et al. (2023a, 2023b). Mechanism analysis uses 2SLS to examine the mediating roles of financial constraints (FC, based on Fee et al., 2009; Hadlock and Pierce, 2010) and employee structure (proportion of employees with bachelor's degrees or higher). Heterogeneity analysis investigates the interaction between cultural inclusiveness and CSR performance (using a dummy variable based on CSR data from Hexun.com) and R&D investment (using a dummy variable based on R&D investment). Robustness checks include extending the sample period and using alternative measures of cultural inclusiveness (number of regional art-performance groups).

The baseline regression shows a significant positive correlation between cultural inclusiveness and firm performance (ROE). This relationship holds even after controlling for firm-level, corporate governance, and regional factors, and when using alternative measures of inclusiveness. The 2SLS instrumental variable regression, using regional topographical changes as an instrument, confirms a causal relationship between cultural inclusiveness and enhanced firm performance. Mechanism analysis reveals that cultural inclusiveness improves performance by significantly reducing financial constraints and improving employee structure (increasing the proportion of employees with bachelor's degrees or higher). Heterogeneity analysis demonstrates that the positive impact of cultural inclusiveness is more significant for firms with higher CSR performance and greater R&D investment. Robustness checks, expanding the time frame and using alternative proxies for cultural inclusiveness, consistently support the primary findings.

The findings support the hypothesis that regional cultural inclusiveness positively impacts firm performance in China. The study extends existing research by demonstrating the mediating roles of financial constraints and employee structure in this relationship. The results highlight the importance of considering informal institutions when analyzing firm performance, especially in developing economies. The stronger effect observed in firms with higher CSR and R&D suggests that cultural inclusiveness fosters a favorable environment for sustainable and innovative business practices. The use of instrumental variable regression effectively addresses concerns about endogeneity, enhancing the causal interpretation of the results. These findings offer valuable insights for policymakers and businesses regarding the strategic importance of promoting cultural inclusiveness.

This study provides strong evidence for the positive impact of regional cultural inclusiveness on firm performance in China, particularly for firms prioritizing CSR and R&D. The findings highlight the mediating roles of financial constraints and employee structure and emphasize the significance of considering informal institutions in economic analysis. Future research could explore the impact of cultural inclusiveness at a more granular geographic level, investigate its interaction with other institutional factors, and delve deeper into the specific mechanisms affecting various aspects of business operations, innovation, and sustainability.

The study's main limitation lies in the use of provincial-level data for the cultural inclusiveness index, which might mask variations within provinces. Future research should consider more granular data to capture regional differences more precisely. Additionally, the study focuses primarily on Chinese A-share listed firms, limiting the generalizability of the findings to other types of firms or different national contexts. Further research could also explore other potential mediating and moderating factors beyond those examined in this study.