Regional cultural inclusiveness and firm performance in China

The study examines how informal institutions—specifically regional cultural inclusiveness—affect firm performance in China. Cultural inclusiveness is defined as the degree to which individuals from diverse backgrounds are accepted and respected within a community. Grounded in institutional economics, the authors argue that local culture shapes internal firm operations and governance, with particularly strong effects where formal legal frameworks are weaker. The research questions are whether regional cultural inclusiveness enhances firm performance and through what mechanisms. Competing arguments are noted: inclusiveness can broaden perspectives, improve adaptability, and support collaboration, potentially improving performance; however, greater diversity may also increase coordination costs and reduce team efficiency if not managed well. The paper sets out to empirically test the net effect and investigates mechanisms related to financing constraints and talent structure. The authors hypothesize: (1) cultural inclusiveness improves firm performance; (2) inclusiveness alleviates financing constraints, thereby improving performance; (3) inclusiveness enhances talent attraction and employee structure, thereby improving performance.

The literature on firm performance has emphasized formal institutions (policy uncertainty, legal environment, IP protection, subsidies) and firm characteristics (ownership structure, executive traits, social ties). Organizational culture has also been linked to performance through norms and adaptability. Yet, the role of external informal institutions—regional culture—remains underexplored. The theoretical analysis justifies using food culture as a proxy for cultural inclusiveness via fractal theory: subsystems reflect properties of the whole, and food culture—shaped by geography, social interaction, and identity—exhibits self-similarity with broader culture. Prior work quantifies inclusiveness using deviations in regional food tastes and shares of non-local cuisines. The authors argue that cultural inclusiveness can: (a) build corporate reputation and expand customer bases; (b) foster collaboration and investment opportunities; (c) enhance financing access and reduce discrimination; and (d) attract high-quality, diverse talent that supports innovation. This yields three assumptions: A1, inclusiveness enhances performance; A2, it alleviates financing constraints; A3, it improves employee structure/talent, thereby enhancing performance.

Data: The sample comprises Chinese A-share listed firms from 2010–2019, excluding ST, PT, financial, and real estate firms. Corporate and governance data come from CSMAR; regional indices are from the National Bureau of Statistics. To mitigate effects from the global financial crisis and COVID-19, the main sample ends in 2019; robustness extends to 2005–2022. Continuous variables are winsorized at 1%. Final main sample: 12,466 firm-year observations covering 2,354 firms.

Measures: Dependent variable is firm performance, proxied primarily by ROE, with robustness using ROA and Tobin’s Q. Cultural inclusiveness (Inclu) follows Sun et al. (2023a,b), constructed from provincial-level food taste data (deviation from local cuisine). An alternative inclusiveness proxy (Inclu_alter) is the provincial share of non-local cuisines. Controls span firm-level (size, leverage, BM, SOE), governance (largest shareholder stake, board size, independent director ratio, executive pay, CEO-chair duality), and regional development (per capita GDP, GDP growth, population growth, per capita consumption). Fixed effects include industry and year; standard errors are double-clustered at firm and year.

Baseline model: ROE_{i,p,t} = α + β Inclu_p,t + γ Controls_{i,t−1} + FE_year + FE_industry + ε.

Endogeneity: Uses regional topographical changes (TGC; relief degree of land surface) as an instrumental variable for inclusiveness via 2SLS. First stage: Inclu_p,t = α + δ TGC_p + θ Controls_{i,t−1} + FE + u. Second stage replaces Inclu with its fitted value.

Robustness: (i) Expanded time sample to 2005–2022; (ii) Alternative inclusiveness proxy using number of regional art-performance groups (Art_group); (iii) Alternative performance measures (ROA, Q).

Mechanism tests (2SLS mediation per Griffin et al., 2021):

• Financial constraints (FC): Constructed via a logistic model using size, leverage, dividends, MB, net operating working capital, EBIT; FC ranges 0–1 with higher values indicating tighter constraints. Stage 1: FC on inclusiveness; Stage 2: ROE on predicted FC (FC_fit).
• Employee structure: Mediator is the increment/proportion of employees with bachelor’s degree or above (Bachelor). Stage 1: Bachelor on inclusiveness; Stage 2: ROE on predicted Bachelor (Bachelor_fit).

Heterogeneity: Interacts inclusiveness with CSR dummy (above-median Hexun CSR score) and with RD dummy (above-median R&D investment) to test whether effects are stronger for high-CSR and high-R&D firms.

• Descriptive: Mean inclusiveness index (Inclu) is 0.683 (sd 0.324), showing sizable regional variation; 75th percentile (0.930) is 125.73% higher than the 25th (0.412). ROE mean is 6.818% (sd 8.689). Sample: 12,466 observations.
• Baseline regressions (Table 3): Cultural inclusiveness positively correlates with firm performance. Reported coefficients for Inclu include 0.015 (t=6.125), 0.008 (t=3.352), and 0.025 (t=6.916) across specifications with varying controls. Using the alternative inclusiveness proxy (Inclu_alter), coefficients remain positive and significant (e.g., 0.014, t≈3.4; 0.025, t=5.613). Results hold with firm, governance, and regional controls, industry and year FE, and double-clustered SEs.
• Endogeneity (IV, Table 4): First stage shows TGC strongly negatively related to inclusiveness (e.g., −0.123, t=−47.367; −0.116, t=−44.188). Second stage: fitted inclusiveness significantly increases ROE (Inclu_fit ≈ 2.726, t=3.182; Inclu_alter_fit ≈ 2.908, t=3.182), supporting a causal effect.
• Robustness:
  • Expanded period 2005–2022 (Table 5): Inclusiveness remains positively associated with ROE.
  • Alternative inclusiveness proxy (Art_group) and alternative performance measures (Table 6): Art_group positively relates to ROE (1.333, t=6.959). Inclusiveness also positively relates to ROA and Tobin’s Q (e.g., 0.012, t=6.710 for ROA; 0.102, t=6.710 for Q).
• Mechanisms:
  • Financial constraints (Table 7): Inclusiveness reduces FC (e.g., Inclu → FC: −0.012, t=−2.307; using Inclu_alter also significant). Higher FC_fit is associated with lower ROE (large positive coefficient sign convention indicates worse constraints reduce performance), indicating alleviating FC improves performance.
  • Employee structure (Table 8): Inclusiveness increases the share/increment of bachelor-or-above employees (e.g., 0.010, t=2.354; 0.012, t=2.777). Bachelor_fit positively affects ROE (0.462, t=2.078; alternative specification 0.276, positive but weaker), indicating improved employee composition enhances performance.
• Heterogeneity (Table 9): Effects are stronger for high-CSR firms (interaction Inclu_CSR ≈ 7.727, t=38.509; with Inclu_alter_CSR ≈ 7.545, t=42.078) and for high-R&D firms (Inclu_RD ≈ 2.060, t=7.792; Inclu_alter_RD ≈ 1.950, t=7.944). Overall, cultural inclusiveness has a more pronounced impact where CSR engagement and R&D intensity are higher.

Findings corroborate institutional economics perspectives that local cultural norms meaningfully shape corporate outcomes. Cultural inclusiveness enhances ROE, ROA, and market valuation, and mechanisms operate through reduced financing frictions and improved talent structure. The results position cultural inclusiveness as a strategic regional asset: it can expand financing channels, lower financing costs, and strengthen firms’ human capital, thereby boosting competitiveness and sustainability. The study extends prior work linking inclusiveness to CSR and TFP by offering causal evidence (via IV) on performance and by identifying financial and HR channels. Policy- and management-wise, promoting inclusive climates can reinforce firms’ social license, stakeholder relationships, and innovation capacity, especially for CSR-active and R&D-intensive firms.

The paper demonstrates that regional cultural inclusiveness significantly and causally improves firm performance among Chinese A-share listed firms. The effect persists across model specifications, alternative measures of inclusiveness and performance, expanded time windows, and instrumental variable estimation using regional topographical changes. Mechanism analyses indicate that inclusiveness alleviates financing constraints and enhances employee educational composition, both of which contribute to higher performance. The positive effects are stronger for firms with higher CSR performance and greater R&D investment. The study highlights the practical importance of cultivating inclusive cultural environments to support corporate sustainability and provides empirical support for the role of informal institutions within institutional economics.

Key limitations include the provincial-level construction of the cultural inclusiveness index, which may mask within-province heterogeneity. Finer geographic granularity (e.g., municipal-level measures) could yield richer insights. Future research should also explore interactions between cultural inclusiveness and other institutional factors, and detail its effects on business management practices, innovation processes, and sustainability outcomes.