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Why Gay-Friendly Places Are More Innovative

Non-discrimination policies appear to increase productivity, especially for firms that rely on human capital.

Employees of Facebook march in the annual NYC Pride parade in New York. (Brendan McDermid/Reuters)

Policy issues related to LGBT inclusiveness remain a hot-button in many parts of the United States. I should know, I’ve felt the heat: My finding that more tolerant and gay-friendly metro areas also have higher rates of innovation and high-tech industry generated a firestorm of criticism, unlike anything I’ve ever experienced.

Adding to this analysis is a detailed new study by the economists Huasheng Gao and Wei Zhang, published in the journal Management Science, which finds that companies in more gay-friendly states are actually significantly more innovative. Specifically, it finds the rate at which companies patent is higher in states with laws that prohibit discrimination based on sexual preference of gender identity.

The study provides a close statistical analysis of the patent rates of companies in states with employment non-discrimination acts, or ENDAs, compared to states that do not have such laws. All in all, it covers nearly 60,000 U.S. public corporations between 1976 and 2008. These firms had an average of $2.5 billion in assets and more than 9,000 employees. It looks at 20 states that had such laws in place, a number which has grown since then.

A map of states that have various ENDAs, according to the ACLU. (Taylor Blake)

A big issue in studies like this revolves around what researchers call “spurious” findings—that is, findings that are caused by something else. For example, many states with ENDAs, such as California and Massachusetts, are also among the most innovative, so maybe companies there are just more innovative per se, and their levels of innovation have little or nothing to do with those states being more gay-friendly.

The study takes great care to rule out factors that might confound the effects of these non-discrimination laws, such as the overall economic performance and talent levels of states, the size of their LGBT populations, and their political orientations. Furthermore, the study looks closely at the effects of laws passed at earlier versus later time periods, and even compares states with ENDAs to neighboring states that do not have them, to make sure it is getting at the precise effect of gay-friendly states on innovation.

The researchers found overwhelming evidence that companies in gay-friendly states generate greater levels of innovation. There are substantial correlations between non-discrimination laws and innovation, measured as the overall numbers of both patents (.64) and patent citations (.86). On average, firms in states with ENDAs had 8 percent more patents and 11 percent more patent citations—an indicator of the impact of those patents.

Firms in more gay-friendly states also have greater numbers of patents per employee (.35) and more citations per employee (.50). This holds up even when you compare those firms with other firms that already have a high concentration of knowledge workers. The effects are larger in states that have more LGBT people, and are more pronounced in companies that depend on high levels of talent and in companies that did not have gay-friendly policies of their own to begin with.

In addition, the study also considers whether gay-friendly policies provide an additional boost to companies’ innovation levels by helping to attract talent into companies. To get at this, the study looks at the effect of ENDAs in shaping the location decisions of inventors, measuring the extent to which gay-friendly states attract inventors from other states without ENDAs.

Here the study finds that ENDAs help firms by attracting more and better talent. Though the pace of this talent circulation is modest, the increase in patents and citations grows substantially over time, showing the compounding effects of attracting more talented workers. Since innovation increasingly comes from groups of researchers, this edge is further bolstered by having more talented employees working together on highly innovative projects.

Ultimately, gay-friendly policies increase business innovation by helping to attract better talent to more open-minded and tolerant states.

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