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Journal of Small Business Strategy
2018, Vol. 28, No. 03, 31-47
ISSN: 1081-8510 (Print) 2380-1751 (Online)
©Copyright 2018 Small Business Institute®

w w w. j s b s . o rg

While the positive (and negative) outcomes of racial di-
versity in large organizations are widely known, literature 
on small firms (firms with fewer than 15 employees) is par-
ticularly sparse (Ash, 2007; Headd, 2015; Stoner, Hartman, 
& Arora, 1996).  Important differences between small and 
large organizations (e.g. presence of formal systems, agility, 
business environment, goals, and objectives) make general-
izability of these outcomes unclear.  The “liability of small-
ness” increases the risk of firm failure because small firms 
lack economies of scale and cannot raise as many funds to 
overcome unexpected changes in the market (Headd, 2015; 
Lumpkin, McKelvie, Gras, & Nason, 2010).  In addition, 
firms that are eight years old or younger (new firms) also 
experience the “liability of newness,” which involves the 
risk of firm failure because organizational routines are not 

yet well developed, and customers do not yet know or trust 
the firm, rendering the firm less able to compete (Freeman, 
Carroll, & Hannan, 1983; Lumpkin, et al., 2010; Stinch-
combe, 1965).  We focus on the unique combination of new 
and small firms, and argue that employees of such firms 
may possess stocks of knowledge that if fully leveraged 
early, could enable the firm to develop an inimitable com-
petitive advantage. Because there is not much research on 
the impact of diversity and inclusion in new, small firms, 
we will use evidence from both “new” and “small” firms to 
support our ideas.  

The preponderance of small firms and the changing de-
mographics of the U.S. labor force underscore the impor-
tance of racial diversity in small firms.  Between 1993 and 
2011, small firms were responsible for 67% of net new jobs 
and employed 17 million individuals (Census Bureau 2016; 
Small Business Administration (SBA), 2013).  Eighty six 
percent of the approximately 5.7 million firms in the United 
States employed fewer than 15 employees (Census Bureau, 
2016).  The vast majority of small firms are owned by white 

Introduction

Jennifer M. Sequeira1, Kelly P. Weeks2, Myrtle P. Bell3, SherRhonda R. Gibbs4
1University of Southern Mississippi, USA, jenseqtnt@yahoo.com
2Rhodes College, USA, weeksk@rhodes.edu
3University of Texas at Arlington, USA, mpbell@uta.edu
4University of Southern Mississippi, USA, sherrhonda.gibbs@usm.edu

Making the case for diversity as a strategic business tool in small firm survival and success

Diversity, Race, Small business, Intellectual capital

Although human resource managers have long realized the impact of diversity on organizational outcomes, most of the research to date 
has focused on large organizations. Very little consideration has been given to small firms in the United States with fewer than 15 em-
ployees, which are not required to comply with federal Equal Employment Opportunity legislation.  We propose that by valuing racial 
diversity and creating an inclusive organizational climate from inception, new small firms with growth objectives can increase their 
competitiveness, leading to better performance and long-term survival.  Anchoring our arguments in intellectual capital theory, coupled 
with Cox and Blake’s seminal work on valuing diversity, we provide testable propositions that detail why new small firms should pursue 
and view racial diversity as a strategic business tool, even when they are not legally required to attend to these issues.  We offer practical 
recommendations for small firms seeking to create an affirming climate for racial diversity and strategies that can be used to recruit, 
select, retain, and benefit from a racially diverse workforce.

APA Citation Information:  Sequeira, J. M., Weeks, K. P., Bell, M. P., & Gibbs, S. R. (2018). Making the case for diversity as a strategic 
business tool in small firm survival and success. Journal of Small Business Strategy, 28(3), 31-47.



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J. M. Sequeira, K. P. Weeks, M. P. Bell, S. R. Gibbs Journal of Small Business Strategy / Vol. 28, No. 3 (2018) / 31-47

men, and employees in these firms are largely homogeneous 
in race (Ferguson & Konig, 2018; Holzer, 1998).  It is inter-
esting to note that, while only 7 percent of U.S. small firms 
are owned by African Americans, these firms are also racial-
ly homogenous (Ruef, Aldrich, & Carter, 2003).  By 2020, it 
is estimated that minorities will comprise 40 percent of the 
overall labor force (Toossi, 2012).  Potential problems with 
homogeneous workforces are well documented (see Apfel-
baum, Phillips, & Richeson, 2014), and possible remedies to 
these problems include hiring a racially diverse workforce 
and creating inclusive organizational climates.  There is 
some evidence that performance in small firms with diverse 
workforces is higher than in small firms that are not diverse 
(Hartenian & Gudmundson, 2000).  If small business own-
ers understood the potential implications and benefits of di-
versity in areas of communication, creativity, recruitment, 
persuasion, and turnover (among others), they might be 
able to maximize their organizational success (Ash, 2007).  
In other words, firm survival and success may partly hinge 
upon taking advantage of these demographic changes and 
developing a diverse base of intellectual capital for all small 
businesses.  However, in the United States, these firms are 
not typically subject to Equal Opportunity legislation (i.e., 
Executive Orders on Affirmative Action and Title VII of the 
Civil Rights Act) due to employing fewer than 15 people.  
Such legislation has been shown to stimulate inclusion of 
those who might otherwise be intentionally or unintention-
ally excluded from the workforce (Kalev & Dobbin, 2006).  
Without the impetus of legislative compliance, small firms 
may need other motivations to pursue racial diversity.  

When compared to older small business counterparts, 
new small firms are in a particularly precarious position.  
Fifty percent of new, small firms fail within five years.  
Scholars point to underdeveloped organizational roles and 
routines, and lack of trust relationships and established cus-
tomers as being primary causes of new firm failure (Lump-
kin et al., 2010).  New, small firms are constrained by limit-
ed resources and limited stocks of human and social capital 
(Lumpkin et al., 2010).  New firm founders and policymak-
ers stand to benefit from an exploration of how a racially di-
verse workforce might reduce risk, build community repu-
tation, and increase the social and intellectual capital of new 
firms.  This would provide new firms with a competitive 
advantage, promoting business growth, and survival.  New 
small firms which employ a racially diverse workforce early 
in the firm’s development can enhance the quality of their 
intellectual capital, which potentially enhances firm success 
and long-term survival.  

To proceed, we examine how intellectual capital theory 

informs arguments about why racial diversity is important 
for new small firms.  Then, we incorporate the importance 
of intellectual capital for new small firms into Cox and 
Blake’s (1991) well-known diversity framework, culminat-
ing in testable propositions which consider how inclusive 
organizational climates lay a strong foundation for firm 
competitiveness, performance, and survival.  We conclude 
with recommendations that may be applicable to new small 
firms seeking to diversify their workforce. 

Intellectual Capital 
 

Researchers often use the Resource Based View (RBV) 
theory as a lens through which the resources in a firm can be 
strategically viewed and managed (Richard, 2000; Teece, 
2000; Welsh, Davis, Desplaces, & Falbe, 2011).  Resources 
can be tangible or intangible and include financial, social, 
human, and physical assets, as well as firm capabilities and 
competencies.  The RBV theory assumes that each firm 
within an industry has heterogeneous resources that are not 
easily transferred (or are immobile) from one firm to anoth-
er.  In addition, the theory suggests that the resources a firm 
holds can be strategically used to drive the firm’s direction 
and give it a sustainable competitive advantage, if these re-
sources can be characterized as valuable, rare, difficult to 
imitate, difficult to substitute, and if the firm has established 
procedures and policies to leverage its resources (Barney, 
1991; Wernerfelt, 1984).  

The Knowledge Based View (KBV) of the firm, an 
extension of the RBV, holds that knowledge is one of the 
firm’s most strategically significant resources (Juma & Mc-
Gee, 2006; Spender, 1996; Wiklund & Shepherd, 2003), and 
this resource results when individuals in the firm interact.  
According to Spender (1996, p. 59), the KBV “can yield 
insights beyond the production-function and resource-based 
theories of the firm by creating a new view of the firm as 
a dynamic, evolving, quasi-autonomous system of knowl-
edge production and application.”  Thus, it is the collective 
knowledge that results from employee interaction that be-
comes a leveragable resource.  This resource is referred to 
as intellectual capital (Kong & Thomson, 2009; Youndt & 
Snell, 2004).  

Intellectual capital has been identified as a critical fac-
tor that influences a firm’s ability to create long-term prof-
its, be innovative, and perform well in the knowledge-based 
economy (Hsu & Fang, 2009; Martin-de-Castro, Delga-
do-Verde, López-Sáez, & Navas-López, 2011; Subrama-
niam & Youndt, 2005).  Intellectual capital is multidimen-
sional, with the initial theory comprising three components: 



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J. M. Sequeira, K. P. Weeks, M. P. Bell, S. R. Gibbs Journal of Small Business Strategy / Vol. 28, No. 3 (2018) / 31-47

human, relational, and structural capital (Stewart, 1997).  
Over time, these constructs have evolved and today are 
more commonly labeled human, social, and organizational 
capital (Youndt & Snell, 2004).  Each component of intel-
lectual capital is interrelated and acts synergistically to en-
hance the value of the firm.  

Human capital, the principal component, refers to the 
explicit and tacit knowledge, skills, experiences, attitudes, 
and abilities of the firm’s employees (Mention, 2012; Stew-
art, 1997; Youndt & Snell, 2004).  Human capital is ob-
served by many scholars as an antecedent of innovation, 
enhanced performance, and competitive advantage (Edvins-
son & Malone, 1997; Hayton, 2005).  Organizational capital 
is comprised of firm processes and strategies that support 
employee productivity, such as organizational structure, 
organizational culture, routines, intellectual property, and 
databases (Hsu & Fang, 2009; Youndt & Snell, 2004).  Or-
ganizational capital enables management to disseminate the 
firm’s collective knowledge.  Lastly, social capital refers 
to the knowledge that emanates from the firm’s connec-
tions with internal and external stakeholders and includes 
elements such as customer satisfaction, customer loyalty, 
market share, customer and supplier relationships, corpo-
rate reputation, and image (Hsu & Fang, 2009; Kaplan & 
Norton, 1992; Youndt & Snell, 2004).  Social capital is a 
critical resource for new small firms as their size may limit 
access to a broad social network and the benefits that arise 
from network resources.

New, small firms are susceptible to a variety of in-
ternal and environmental forces such as fragile financial 
structures, dependence on a few customers, and competi-
tion (Pena, 2002).  To counteract the effects of these de-
ficiencies, scholars suggest that small firms leverage their 
intellectual capital to build a sustainable competitive advan-
tage (Kemelgor & Meek, 2008; Scarborough & Cornwall, 
2016).  One way to increase intellectual capital is by diver-
sifying the employee base early in the development of the 
firm, while continuously valuing inclusivity as a key strate-
gic human resource management goal (McMahan, Bell, & 
Virick, 1998).  However, because most employees of new 
small firms are relatively homogenous, the intellectual cap-
ital that would be available to them from a diverse employ-
ee base is not utilized.  In addition, small businesses often 
lack a dedicated human resources manager, and therefore 
these duties may be left to the owner of the firm.  Research 
has shown that integrating a high-performance work system 
into the structure of a small organization while also utilizing 
the intellectual capital of the employees can lead to more 
success (Coder, Peake, & Spiller, 2017).  Thus, despite not 

having formal HR managers, firms can be more competitive 
in both the short and long-term (Hormiga, Batista-Canino, 
& Sánchez-Medina, 2011) if strategies are put in place to 
manage the firm’s intangible assets early, when it is most 
critical to do so (Lichtenstein & Brush, 2001; Messersmith 
& Guthrie, 2010).  To fully realize these benefits, however, 
new small firms must create inclusive organizational cul-
tures, which “demonstrate value for all employees, as hu-
man resource practices are aligned with and supportive of 
diversity” (Scott, Heathcote, & Gruman, 2011, p. 740).

The Foundation for a Diverse Workforce: An Inclusive 
Organizational Climate

Racial diversity alone does not create the environment 
for organizational productivity (Gonzalez & DeNisi, 2009); 
nor do diversity programs alone create such an environment 
(Herdman & McMillan-Capehart, 2010; Scott et al., 2011).  
Diversity can be a “double-edged sword” if it is not accom-
panied by a climate that values diversity (Cox & Blake, 
1991; Roh & Kim, 2016), giving rise to more negative out-
comes, such as interpersonal discrimination and conflict, 
less coordination among work groups (Boehm, Dwertmann, 
Kunze, Michaelis, Parks, & McDonald, 2014; Milliken & 
Martins, 1996; Pelled, Eisenhardt, & Xin, 1999), lower 
employee satisfaction, more employee turnover (Green-
haus, Parasuraman, & Wormley, 1990; Scott et al., 2011), 
and lower performance (Joshi & Roh, 2009).  Proper care 
must be taken in organizations that have specific diversity 
initiatives designed to improve inclusivity, as the way they 
promote these initiatives can determine their effects (Kid-
der, Lankau, Chrobot-Mason, Mollica, & Friedman, 2004).  

Consequently, researchers have called for more research 
on the performance results of companies with HR policies 
that are inclusive, fair, and diverse at all levels (e.g., Joshi 
& Roh, 2009; Kulik, 2014).  Factors leading to more inclu-
sive climates for diversity include perceptions of justice in 
human resources policies (Buttner, Lowe, & Billings-Har-
ris, 2012; Mor Barak, Cherin, & Berkman, 1998), voice and 
participation in decisions (Bell, Özbilgin, Beauregard, & 
Surgevil, 2011; Chrobot-Mason, 2003), social integration 
of minorities and women at work (McKay, et al., 2007), and 
equal access to opportunities (Chrobot-Mason & Aramov-
ich, 2013), among others.  A positive diversity climate has 
been linked to lower interpersonal discrimination among 
employees, which leads to better workgroup performance 
(Boehm, et al., 2014).  A positive diversity climate has also 
been linked to higher psychological empowerment, higher 
“identity freedom”, a climate for innovation, and higher or-



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ganizational identification (Chrobot-Mason & Aramovich, 
2013).  This suggests that a positive diversity climate will 
increase organizational outcomes for all employees, not just 
minorities.

We are not aware of research on diversity climate which 
specifically examines new small firms, however, Boehm et 
al. (2014) found that smaller work groups tend to have less 
discrimination, presumably because work group members 
get to know each other on a more personal level, learning 
shared deep values (Daft, 2016).  Although Boehm et al. 
(2014) were examining small groups within a larger orga-
nizational context, these ideas could be applied to small 
businesses as well.  Because small businesses have fewer 
employees, these individuals will likely know each other 
on a more personal level and be able to communicate more 
effectively.  Therefore, small businesses may have an easi-
er time integrating diversity-related values than their larger 
counterparts.  In addition, Richard, Roh, and Pieper (2013) 
argued that “smaller firms are more flexible and experi-
ence less inertia, leading to more effective implementation 
of DEM (diversity and equity management) practices as 
well as greater ability to adapt and change the demographic 
composition of management” (p. 234).  New small busi-
ness owners have a unique opportunity to be proactive and 
positive in their diversity approach, creating a diverse and 
inclusive climate (Shore et al., 2009) at inception and main-
taining it, rather than implementing diversity haphazardly 
as the firm grows.

Proposition 1.  New, small firms with inclusive organi-
zational climates from inception will experience positive 
organizational outcomes, such as higher levels of job 
satisfaction and commitment, and lower turnover rates as 
they grow.  

Valuing Diversity in New Small Businesses

Many corporate leaders agree that there is value in 
having a diverse workforce and investing in initiatives to 
achieve that outcome, given the potential benefits of doing 
so and the costs of not doing so (Chavez & Weisinger, 2008; 
Roh & Kim, 2016).  However, many of these organizations 
are large and have the financial resources to invest in di-
versity initiatives that fit their organizational cultures.  It 
is important to examine the differences in large and small 
firms to determine how and if small firms will also benefit 
from incorporating diversity initiatives into their company 
culture from the outset.  We propose that the diversity fo-
cus will give the new small firms an advantage in a variety 

of competitive areas.  Specifically, Cox and Blake’s (1991) 
seminal work proposed that six key dimensions of business 
performance, namely (1) costs, (2) acquisition of human re-
sources, (3) marketing, (4) creativity, (5) problem-solving, 
and (6) system/organizational flexibility can be positively 
influenced by the management of cultural diversity.  These 
ideas are particularly relevant to the dynamic and compet-
itive environment in which new small firms operate.  Be-
cause small firms are typically focused on the objectives 
and vision cast by the owner, and because the policies and 
relationships are more informal than in larger companies 
(Jennings & Beaver, 1997), small firms may be able to capi-
talize on the intellectual capital they receive from beginning 
with a diverse workforce and focus on an inclusive culture.  
The intellectual capital accumulated by new firms with ra-
cially diverse employees could be viewed as a unique bun-
dle of resources (Barney, 1991; Wernerfelt, 1984) that can 
help the firm reduce costs, solve problems effectively and 
efficiently, attract employees, develop new products, ser-
vices, and marketing ideas, and build external relationships 
that may help a new, small firm survive and thrive.  Accord-
ingly, these resources may be rare, valuable, and inimitable 
with cultural experiences that enrich new small firms.  In 
the following sections, we consider how Cox and Blake’s 
(1991) key dimensions for managing diversity to obtain a 
competitive advantage apply to new small firms that are 
committed to cultivating a climate that supports and em-
braces racial diversity. 

Diverse workforce knowledge and its influence on 
organizational and cognitive flexibility.  Most research 
to date has examined the strategic choices of firms from 
the perspective of large organizations.  Large firms can use 
their various sources of capital (financial, organizational, 
physical, and social) to create a competitive advantage in 
the marketplace (Barney, 1991).  Less is known about the 
strategies utilized by smaller firms, but one thing is clear: 
new, small firms do not have access to the same resources, 
and must focus on some resources more than others (Coder 
et al., 2017).  We argue that properly utilizing their human 
resources will help increase their chances of survival and 
success.  Whereas large firms face challenges because of 
rigid structures and bureaucratic procedures, small firms 
may be able to access external social networks and utilize 
internal knowledge of employees with more efficiency 
because of their flexibility (Lumpkin et al., 2010).  Small 
organizations also have flatter hierarchies and easier com-
munication (Wilkinson, Dundon, & Gugulis, 2007), result-
ing in less formal procedures, which could lead to more 



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innovative ideas (Peetz, Muurlink, Townsend, Wilkinson, 
& Brabant, 2017).  The more diverse their employee base, 
the more likely they will have knowledge to draw from and 
multiple external networks to tap into, which could translate 
into more organizational flexibility overall.

In addition to organizational flexibility, cognitive flex-
ibility has been associated with the “ability to excel in per-
forming ambiguous tasks” and divergent thinking (Cox & 
Blake, 1991, p. 51) which can be used as tools to help the 
organization look at problems differently thereby creating 
new solutions to those problems.  More diversity in the 
workforce could lead to more cognitive flexibility with a 
variety of perspectives interacting and creating firm bene-
fits.  Of course, this flexibility will likely only be recognized 
if the climate for diversity is strong and translates into an 
organization where individual ideas are heard and incorpo-
rated.  As the new small firm encourages and manages the 
various perspectives emerging from its diverse workforce, 
it will likely become even more flexible (Gardenswartz & 
Rowe, 1998).  In addition, as the new firm learns and makes 
use of information gathered through its diverse employee 
base, it can modify existing practices and processes to ef-
ficiently and effectively target offerings to specific market 
segments (Madhavaram & Hunt, 2008).  This increased 
ability to respond to changing environments may increase 
the new small firm’s chances of survival in an increasingly 
competitive marketplace.  

Proposition 2.  Early racial diversification of a small firm, 
combined with a climate that values diversity, will lead to 
more organizational and cognitive flexibility. 

Diverse workforce knowledge and its influence on 
human resource acquisition.  In comparison to larger 
firms, new small firms are often at a disadvantage when 
recruiting and hiring employees since they tend to have 
limited human resource personnel, smaller recruiting bud-
gets, lower salaries and benefits, and liabilities of newness 
and smallness (Cardon &  Stevens, 2004; Patel & Cardon, 
2010).  Sixty percent of small firm owners and managers 
view finding skilled workers as their greatest challenge 
(Howart, 2013).  The National Federation of Independent 
Businesses found that “locating qualified employees” was 
the third biggest concern for U.S. small businesses, and it 
was also the concern that has increased the most over the 
last five years, right after “finding and keeping skilled em-
ployees” (Wade, 2016).  Small firm owners are often not 
trained in executing human resource practices, and as a re-
sult, their firms may lack formal human resource policies 

or programs (Kotey & Slade, 2005; Patel & Cardon, 2010).  
These business owners are also time constrained (Klaas, 
McClendon, & Gainey, 2000) which could result in hiring 
the first applicant deemed eligible.  

Small firms, particularly very small ones, rely primarily 
on inexpensive and convenient sources, such as direct ap-
plicants and employee referrals for recruitment of new em-
ployees (Deshpande & Golhar, 1994; Hornsby & Kuratko, 
1990).  Employee referrals tend to lead to racial homogene-
ity or replication of the current workforce, since friends and 
family who would be referred tend to be demographically 
similar (Mouw, 2002; Pager & Shepherd, 2008).  With a 
diverse workforce, the firm has access to relational capi-
tal usually unavailable to small firm owners (Nahapiet & 
Ghoshal, 1998; Robinson, 2006), which can improve ac-
cess to potential employees (Fernandez, Castilla, & Moore, 
2000; Liao & Welsch, 2005).  In addition, there is evidence 
that high quality applicants are looking for job character-
istics that small businesses may be able to provide, such 
as challenge and variety in the job, autonomy at work, and 
the presence of friendly, supportive coworkers (Froelich, 
2005).  Therefore, there is hope that if small firms focus on 
diversity early in their formation, they may reap a competi-
tive advantage in recruitment and selection of high quality, 
diverse employees.

Proposition 3.  Early racial diversification of the small firm, 
combined with a climate that values diversity, will position 
the new firm to effectively recruit and hire more diverse em-
ployees in the future as the firm grows.

Diverse workforce and reduced costs.   In addition 
to difficulties with recruitment, new small firms have many 
disadvantages when it comes to controlling costs.  Because 
most new small firms are generally not well funded, the 
cost disadvantages can be enormous, and likely lead to the 
higher failure rate of new small firms (Audretsch, 1991).  
Typical strategic foci of large firms (diversifying products, 
increasing economies of scale, differentiating through brand 
image) are more difficult with the limited resources of small 
firms.  In addition, some sought-after applicants value good 
pension and health insurance benefits (Froelich, 2005) and 
because small firms often cannot afford the same type of 
benefits or salary as larger firms, they may lose key em-
ployees.

Small firms may lack the ability to accumulate rare and 
valuable resources in the form of finances, but they may be 
able to utilize their flexible structures and social networks 
to cultivate human resources even more than larger firms 



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(Lumpkin, et al., 2010).  In other words, utilizing the in-
tellectual capital of a diverse workforce may be a method 
for new small businesses to reduce operations and trans-
action costs and compete with larger firms.  However, this 
asset must be proactively developed and managed.  Costs 
associated with not valuing and properly managing racial 
diversity may include lower levels of job satisfaction, in-
creased turnover, and absenteeism among minority employ-
ees (Chrobot-Mason & Aramovich, 2013; Downes, Hem-
masi, & Eshghi, 2014; Greenhaus et al., 1990).  The more 
intellectual capital an employee brings to the firm, the more 
costly it is to lose that person (Kemelgor & Meek, 2008).  
In addition, as an organization’s diversity level increases, 
white employees are more likely to turnover than minorities 
(Tsui, Egan, & O’Reilly, 1992) and the costs of rehiring and 
training new employees is high.     

 However, Chrobot-Mason and Aramovich (2013) 
showed that white men resist diversity initiatives less when 
the organization focuses on diversity for competitive advan-
tage as opposed to when the diversity initiatives are framed 
as critical to adhere to affirmative action laws (Kidder et al., 
2004).  Therefore, it is important to ensure that all workers 
are valued (Scott et al., 2011), and diversity is approached 
in a positive, beneficial manner.  Even when minority em-
ployees perceive discrimination, their intentions to quit are 
reduced and commitment is enhanced if the organization 
sincerely supports diversity (Triana, García, & Colella, 
2010).  The majority of the research on reducing turnover 
for diverse firms is focused on large corporations, and very 
little has been done on the reduction of turnover costs in 
small businesses.  Regardless, this seems to be an area 
where the costs are borne for both small and large firms, and 
all firms are searching for ways to keep valuable employ-
ees.  Using their flexibility and ability to adapt quickly, new 
small firms should begin with a climate that values racial 
diversity and a commitment to building a diverse employee 
base, so that as they grow they reap savings resulting from 
increased employee satisfaction, lower turnover, and great-
er productivity.  

Proposition 4.  Early racial diversification of a small firm’s 
workforce combined with a climate that values racial di-
versity will lead to lower costs and more savings for the 
organization.  

Diverse workforce knowledge and its influence on 
creativity, innovation, and problem-solving.  Clearly, an 
organization’s ability to innovate is related to its access to 

resources.  For a new small firm, those resources tend to be 
the knowledge that the firm’s employees and owners have 
and share.  This knowledge may come from previous expe-
riences and it may be developed through employee training 
and a culture that values learning (MacDonald, Assimako-
poulos, & Anderson, 2007).  For small firms (especially in 
family-owned firms, but also in other small firms) employ-
ee commitment has been shown to be related to firm inno-
vativeness, indicating that employees are willing to build 
knowledge and take risks to benefit the firm (Ahluwalia, 
Mahto, & Walsh, 2017).  

Many new small firms are known for their innovative 
products and ideas, which likely launched them into the 
market; whereas older and larger firms face problems of rig-
id structures and loyalty to the status quo.  Small firms face 
a precarious balancing act between being creative and in-
novative and fitting in with industry norms in order to gain 
legitimacy (Lumpkin et al., 2010).  In addition, larger firms 
have the resources available to invest in innovative ideas, 
and smaller and younger firms often do not.  With respect to 
the employee relations literature, a similar balancing act has 
been found.  New small firms have less rigid structures to 
deal with and therefore can try new and innovative employ-
ment practices, including the way their policies and proce-
dures are formatted, the way their physical space is utilized, 
and the way employees and employers interact (Peetz et al., 
2017).  However, research shows that these new small firms 
seem to quickly adapt to similar employee relations tech-
niques as the older firms (Peetz et al., 2017).  One reason 
for this is that new small firms are likely too busy focusing 
on everyday issues of survival that they neglect to devel-
op the intellectual capital of their workforce.  In fact, one 
study showed that a high performing work system, which 
includes focused human resources practices, combined with 
an emphasis on developing the intellectual capital of the 
workforce, can produce an increase in sales growth, profit 
growth, and perceived success in small businesses (Coder et 
al., 2017).  We posit that one way to increase the intellectual 
capital and subsequently the innovativeness of a small busi-
ness is through employee racial diversity.

Employee diversity is an important antecedent to 
knowledge creation due to the firm’s access to knowledge 
resources (Lauring & Selmer, 2013) through the various 
forms of intellectual capital.  Human capital is the facet of 
intellectual capital which focuses on the specific knowl-
edge, skills, and abilities that individual employees bring 
to the workforce, and social capital focuses on the relation-
ships and interactions between employees in the organi-
zation (Youndt & Snell, 2004).  The facets of intellectual 



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capital interact with each other to impact the innovativeness 
of the firm (Coder et al., 2017).  A diverse workforce likely 
increases human and social capital for a firm through the 
effect of diverse perspectives on creativity and innovation.  
For example, minority opposition stimulates consideration 
of issues from multiple perspectives, leading to improved 
performance and decision-making (Moscovici, 1985).  Cre-
ativity and innovation are interrelated, as innovation stems 
from creativity (Glover, Boocock, Champion, & Daniels, 
2016).  Specifically, creativity is the generation of novel 
and useful ideas while innovation is the implementation 
of these ideas into new products/processes (Sarooghi, Li-
baers, & Burkemper, 2015).  Innovation is highly correlated 
with intellectual capital (Ngah & Ibrahim, 2009) and the 
innovative capacity of a firm and the innovation process 
(opportunity recognition and exploitation) are positively 
influenced by knowledge-based resources (Rigby & Zook, 
2002).  Small firms’ innovative capacity can be negatively 
impacted if they are unable to access important resources 
from the external environment (Glover et al., 2016).  

Just as creativity and innovation are related, prob-
lem-solving has been shown to precede innovation (Glover 
et al., 2016).  Although not all diversity research has shown 
a positive relationship between diversity and problem-solv-
ing (e.g., Bowers, Pharmer, & Salas, 2000), a study by 
Chatman, Polzer, Barsade, and Neal (1998) concluded that 
an inclusive culture strengthens the relationship between di-
versity and work processes, supporting the notion that orga-
nizational culture, an aspect of structural or organizational 
capital, is a moderator in the relationship between diversity 
and work outcomes.  A long-term perspective may also be 
important.  Watson, Kumar, and Michaelsen (1993) found 
that in the early stages of group development, ethnically 
homogeneous groups interacted and performed more ef-
fectively than heterogeneous groups.  Over time, however, 
heterogeneous groups outperformed homogeneous groups 
resulting in more effective problem-solving and idea gener-
ation.  In a similar study, McLeod, Lobel, and Cox (1996) 
discovered that ethnically heterogeneous groups outper-
formed homogeneous groups on a brainstorming task.  The 
ideas produced by diverse groups were of higher quality 
and more effective and feasible than those of homogeneous 
groups.  Diverse groups engage in more divergent think-
ing and resist pressure for conformity (Cummings, 2004).  
Although many of the studies described above used stu-
dent samples, they are still useful in making the case that 
diversity is related to higher performance.  These findings 
imply that organizations of all sizes would benefit from di-
verse perspectives when embarking upon idea generation 

and problem-solving activities.  The importance of diversity 
in perspectives has been accepted in the research focusing 
on large organizations (e.g., Chrobot-Mason & Aramovich, 
2013), and we posit that small firms would also see bene-
fits from utilizing a diverse workforce within a culture that 
values diversity.

Proposition 5.   Early racial diversification of a small busi-
ness combined with a climate that values diversity will lead 
to more creative ideas, more innovative products and ser-
vices, and enhanced problem-solving.

Diverse workforce knowledge and its influence on 
marketing.  While new small firms may not be able to 
achieve low cost strategic goals as easily as larger firms, 
they may instead be able to compete using a differentiation 
strategy (Lumpkin et al., 2010).  Small firms often lack the 
legitimacy that larger organizations build over time, which 
can inhibit the brand image that customers may rely on.  
In addition, small firms may not be able to be the first to 
market with as many new products as large organizations.  
However, Lumpkin et al. (2010) point out that small firms 
can compete through the quality and convenience of their 
products.  

Additionally, because small firms tend to be closer in 
proximity to their customers, they often build personal re-
lationships with these customers that help them gain useful 
knowledge about the customers’ unique needs and how to 
meet these needs (Haksever, 1996), and this may help them 
develop quality products that are exactly what customers 
are looking for (Dewan, Jing, & Seidmann, 2003).  This 
close proximity will also likely lead to a faster exchange 
of knowledge between customers and the firm (Wong & 
Aspinwall, 2004).  Proximity could also help a new small 
firm compete by differentiating themselves on convenience, 
which is a key driver of the strategy of differentiation (Mill-
er, 1988).    

However, because small firms also tend to have fewer 
and more homogenous employees, their external networks 
to valuable customers may be limited.  Consequently, a firm 
with a pool of racially diverse employees can have a clear 
strategic advantage in reaching out to customers.  By us-
ing the knowledge stocks of workers from racially diverse 
backgrounds, a new small firm can specifically tailor its 
product offerings and better serve a variety of markets with-
in a certain vicinity, and thus leverage its relational capital 
and its convenience for these customers.   

As the demographic makeup of the workforce changes, 
so does the marketplace.  Projections indicate that minorities 



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will play an increasingly significant role in the U.S. econo-
my in terms of purchasing power, and minority customers 
may prefer to patronize or support organizations that have 
a racially diverse workforce who understand their needs, 
culture, language, and preferences (Altinay, Saunders, & 
Wang, 2014).  Prospective clients may also question an or-
ganization’s diversity record before they are willing to be-
gin a business relationship (Gardenswartz & Rowe, 1998).  
In fact, McKay, Avery, Liao, and Morris (2011) found that 
having a climate that values diversity is directly related to 
customer satisfaction a year later.  Although these findings 
were in large organizations, we expect the finding will be 
similar in small firms. 

Additionally, compared with large organizations, new 
small firms may have fewer resources allocated to market-
ing, so their need to maximize return on investment and 
leverage relational capital is greater.  Were small firms able 
to capitalize on the advantages associated with racially di-
versity among employees, they could obtain a greater return 
on investment of marketing funds.  Positive reputations and 
image are strategic assets (Fombrun & Shanley, 1990) and 
subcomponents of relational capital.  

A reputation as an employer of racially diverse workers, 
and provider of convenient, relevant products and services 
may enable the new small firm to gain loyal customers who 
intentionally choose to do business with the firm.  This will 
contribute to a positive community image with customers 
and other stakeholders.  Overall, the literature points to ra-
cial diversity as being a critical knowledge resource which 
may serve as informal advertising, leading to increased vis-
ibility and reduced marketing costs.  

Proposition 6.  Early racial diversification of a small busi-
ness combined with a climate that values diversity will in-
crease the marketing capabilities of the new firm.

Since competitive advantages in small firms often re-
volve around human assets (Simpson, Tuck, & Bellamy, 
2004), and the firm’s intellectual capital, it is important for 
new small firms to recognize the benefits that can come 
from a diverse workforce.  Cumulatively, we proposed that 
new small firms that hire racially diverse workforces, value 
racial diversity, and implement inclusive organizational en-
vironments may enhance their intellectual capital, leading 
to better performance (for example, reduced costs, more 
creative ideas, greater profit, organizational flexibility, etc.) 
and higher survival rates.  Small firms that do not hire ra-
cially diverse workforces, value diversity, or implement in-
clusive environments could risk the long-term sustainability 

of their firms.  Consequently, it stands to reason that work-
force diversity, particularly with respect to race, should be 
viewed by new small firms as a strategic human resource 
management tool which is critical for long-term business 
survival and better performance.

Implications for Practice and Research

We have proposed that when new small firm owners 
recognize the importance of racial diversity and a climate 
that values racial diversity, this will allow their firms to be 
more responsive and adaptive to customer needs, develop 
innovative products, and build a sustainable competitive 
advantage.  The intellectual capital gained from new and 
diverse employees can be shared with all organization-
al members so that the organization learns collectively as 
individuals are socially, contextually, and relationally em-
bedded with each other and with the firm (Granovetter, 
1992; Nahapiet & Ghoshal, 1998).  New small firms, often 
overlooked in diversity and human resources scholarship, 
may benefit from and be well-equipped to manage and val-
ue the contributions of a racially diverse workforce due to 
the firm’s size and flexibility.  The large numbers of small 
firms, the millions of people employed by them, and the 
increasing diversity of the U.S. population make these ideas 
particularly important.  

As shown in Table 1, we provide several recommenda-
tions to help new small firms create an affirming climate for 
diversity.  We have chosen recommendations that even the 
smallest (and youngest) firms can begin to adopt.  After ex-
amining their current (and projected) talent and knowledge 
resources, existing and potential customer base, and desired 
knowledge/skills, small firm owners should create a diver-
sity plan that is tied to key performance indicators.  Small 
firm owners can begin to make diversity a priority by writ-
ing diversity-related values into their mission statements, 
communicating the importance of racial diversity for their 
competitive advantage, and framing their values in such a 
way that all employees feel included and have mutual re-
spect for fellow employees (Kidder et al., 2004).  

Small firms’ size and flexibility can easily lead to in-
creased employee voice and participation in decision mak-
ing, which has been shown to increase the feelings of being 
accepted and valued in an organization (Bell et al., 2011; 
Chrobot-Mason, 2003).  New small firm owners should 
make sure that human resource policies are fair, objective, 
and formalized to the greatest extent possible given the re-
sources available.  This may be a long-term process, but it 
should start early with clear job descriptions and require-



39

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ments for jobs in advertisements, objective selection mea-
sures and performance appraisals, as well as fair compen-
sation for employees with the same experience, irrespective 
of race.  Fair HR policies should include ongoing education 
and training for all employees as money and time become 
available.  Once a plan for creating an affirming climate for 
diversity is developed and worked into key areas of the firm, 
small business owners should consider ways to assess and 
evaluate diversity initiatives.  While this measurement pro-
cess is likely the most expensive part of a comprehensive 
diversity initiative, keeping tabs on the success of objective 
human resource policies, and perceptions of fairness, and 

inclusive climates can be invaluable for firms.  Such initia-
tives allow firms to determine how to continuously prop-
agate inclusive climates which will utilize the intellectual 
capital of employees and become a sustainable competitive 
advantage.  

By starting with a commitment to racial diversity, 
strong recruitment, and objective selection processes, new 
small firms can make significant progress toward ensuring a 
racially diverse workforce.  McMahan et al. (1998, p. 201) 
proposed that a “deeply embedded strategy of workforce 
diversity would require the interplay of all HR functions 
(for example, recruitment and selection, performance eval-

Table 1
Recommendations for developing an inclusive diversity climate in small businesses

Climate Strategy Details of Strategy Source
Develop Commitment to Diversity Owners, managers, and employees 

need to gain an awareness of and value 
diversity at all levels.

(Avery & McKay, 2006; Herdman & 
McMillan-Capehart, 2010)

Develop Diversity Strategy Tie the diversity plan to the mission 
statement and values, as well as key 
business results, such as firm perfor-
mance.

(Jayne & Dipboye, 2004; Konrad, 
Yang, & Maurer, 2016)

Transparent Communication and 
Framing

Communicate reasons for diversity 
initiatives as creating a competitive 
advantage rather than to fulfill affirma-
tive action laws.

(Kidder et al., 2004; Scott et al., 2011)

Allow Employee Voice and Participa-
tion

Allow employees to participate in 
decision making and voice dissatisfac-
tion, especially as it relates to culture 
and climate.

(Bell et al., 2011; Chrobot-Mason, 
2003)

Ensure Human Resource Policies are 
Fair and Objective 

Make sure that selection practices, 
performance appraisals, promotion 
practices and compensation are fair, 
objective and as formalized as possi-
ble, given scarce resources.

(Knouse, 2009; Mor Barak et al., 
1998; Roh & Kim, 2016)

Ongoing Diversity Training (long-term 
plan)

Create an ongoing diversity education 
and training program for firm owners, 
and then for all employees, as the firm 
grows.

(Roberson, Kulik, &Tan, 2013; Shen, 
Chanda, Netto, & Monga, 2009)

Assessment and Evaluation (long-term 
plan)

Develop a plan to assess Human Re-
source policies and climate for diversi-
ty.  Regularly evaluate the effectiveness 
of all diversity initiatives, making 
changes as needed.

(Jayne & Dipoye, 2004; Konrad et al., 
2016)



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J. M. Sequeira, K. P. Weeks, M. P. Bell, S. R. Gibbs Journal of Small Business Strategy / Vol. 28, No. 3 (2018) / 31-47

uation, compensation and benefits) and would interact with 
other organizational functions (that is, marketing and cus-
tomer support) to create inimitability”.  High performing 
work systems such as these may be longer-term goals for 
small firms, but research shows that they can be successful 
(Coder et al., 2017).

Table 2 provides recommendations that help new small 
firms recruit and select a diverse workforce as these are 
two of the more critical areas where new business owners 
encounter challenges (Cardon & Stevens, 2004; Froelich, 
2005) and are critical areas for racial diversity and inclu-
sion.  Given that smaller businesses tend to use word-of-
mouth recruiting and employee referrals, the profile of 
workers that currently exists in the firm is maintained since 
individuals tend to associate with similar others, as men-

tioned earlier.  Thus, we encourage new small firms to in-
corporate non-traditional ways of recruiting racially diverse 
workers.  College/community college campuses with ra-
cially diverse student bodies, community and ethnic news-
papers, and professional associations are just a few of the 
options that may provide inexpensive leads for recruitment 
of employees from racially diverse backgrounds.  To attract 
a more racially diverse pool of applicants, firms should 
consider adding pictures of racially diverse employees on 
the firm’s website, in employment advertising materials 
(McKay & Avery, 2005), and a diversity statement on all 
job advertisements.  Minorities are attracted to firms that 
use such recruitment practices (Goldberg & Allen, 2008).  
However, if there is not an affirming climate for racial di-
versity, these recruitment techniques can backfire, creating 

Table 2
Recommendations for recruitment and selection of diverse employees to small firms

Recruitment  Strategy Description of Strategy Source
Recruit from a Variety of Sources Recruit from colleges with diverse 

student bodies, advertise in minority 
newspapers or journals, and profes-
sional associations, etc.

(Newman & Lyon, 2009; Roach, 
2006)

Recruit from a Diverse Applicant Pool Start by recruiting racially diverse 
employees, but also consider a vari-
ety of ages, workers with disabilities, 
LGBTQ workers, etc.

(Ebrahimi, Saives, & Holford, 2008; 
Meyers & Degges-White, 2007)

Develop Job Advertisements that At-
tract Diverse Applicants

Diverse demographics of actors in 
pictures or on website; use a specific 
statement about how the firm values 
diversity in recruitment materials, but 
only if accompanied by an affirming 
diversity climate (as outlined in Table 
1)

(Avery, Hernandez, & Hebl, 2004; 
Goldberg & Allen, 2008; Knouse, 
2009; Lambert, 2015; Perkins, Thom-
as, & Taylor, 2000)

Use Objective and Fair Hiring Tech-
niques

Use semi-structured interviews with 
job-related questions (rather than 
unstructured interviews), and objective 
rating scales.  Use the same questions 
for all applicants.

(Huffcutt & Roth, 1998; McCarthy, 
Van Iddekinge, & Campion, 2010; 
McDaniel, Whetzel, Schmidt, & 
Maurer, 1994)

Regularly Assess Recruitment and 
Selection Techniques (long-term plan)

Use yield analyses, quality scores and 
HR data to track how well recruitment 
sources yield high quality, diverse 
applicants who are hired and re-
tained; track effectiveness of selection 
measures to make sure that selected 
employees perform well.

(Carlson, Connerley, & Mecham, 
2002; Konrad et al., 2016)



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feelings of dissatisfaction, disappointment, and intentions 
to quit (Chrobot-Mason, 2003; McKay & Avery, 2005).  In 
contrast, combined with supportive climates, these sugges-
tions often cost little and are creative ways to attract more 
qualified employees who would be assets to the firm.   

Along with effectively recruiting a racially diverse ap-
plicant pool, new small firm owners should ensure that cur-
rent selection techniques are as objective and bias-free as 
possible.  Since interviews are the most common technique 
used to hire employees, it is important to focus on reducing 
the likelihood of a similar-to-me bias and making the inter-
views more predictive of future performance.  Interviewers 
should use structured interviews, asking job-related and sit-
uational questions (McDaniel et al., 1994), which can elim-
inate racial similarity bias (McCarthy et al., 2010), along 
with increasing the likelihood of finding the most qualified 
applicants for job vacancies.  Choosing the most qualified 
person is particularly important to small firms who have 
few employees and are less able to afford hiring mistakes.

 
Academic Implications and Future Research Ideas

Practitioners and researchers alike need a deeper un-
derstanding of how intellectual capital functions to increase 
small firms’ performance.  Prior studies have demonstrated 
the value of intellectual capital for large firms, but examin-
ing new small firms will add significantly to our knowledge 
in this area.  As we have noted throughout, there are import-
ant differences between large corporations and new small 
firms.  New, small firms often experience a lack of legitima-
cy in the community, a lack of resources for marketing, re-
cruiting, or high-level human resource policies, and a focus 
on survival that can engulf other strategies.  While some of 
the theories and findings on larger corporations may help 
inspire new small firms to plan for the future, more research 
is needed to determine what would actually be beneficial 
and predict a competitive advantage for the firms as soon as 
possible.  Therefore, we next outline a plan for a research 
program to address the significant gaps in the literature to 
date.

There has been a call for more mixed methods designs 
when studying psychological issues in business (e.g., Eid 
& Diener, 2006).  Combining qualitative and quantita-
tive methodologies would be a good way to gain both the 
depth of the personal experiences and stories of individual 
business owners with the generalizability of quantitative 
methods (Johnson & Onwuegbuzie, 2004).  For example, 
qualitative interviews with small firm owners about their 
strategies for diversity and inclusion would likely reveal 

specific struggles with survival as a focus to the detriment 
of employee inclusivity.  New small business owners could 
explain their struggles, while also sharing practical ideas 
that have worked for them.  It would be interesting to com-
pare the experiences of new small firms that have a homog-
enous workforce and want to diversify with those that do 
not believe diversifying in the early stages would be help-
ful.  In addition, a comparison between homogenous and 
heterogeneous small firms could also highlight the particu-
lar strengths and struggles of each.   

It may be beneficial not only to compare the diversi-
ty (in terms of numbers of employees from different racial 
groups) of new small firms, but to also compare the levels 
of inclusive climate indicators, objective HR policies for 
recruitment and selection, and ongoing training and assess-
ment techniques across a variety of new small firms.  Re-
searchers could use the in-depth knowledge gained from the 
qualitative interviews to develop quantitative studies that 
would reach a wider participant pool, and therefore be more 
generalizable.  For example, a survey might include ques-
tions about how well the owner feels that he/she communi-
cates diversity initiatives to employees, specific struggles 
that might be affecting the company’s ability to be more 
inclusive, and the extent to which they are able to incorpo-
rate objective human resource policies into their daily exis-
tence.  In addition, questions could revolve around recruit-
ment and selection policies that we have suggested in Table 
2.  Finally, questions related to the utilization of intellectual 
capital would help determine how much employees’ knowl-
edge and networks are used to increase innovation within 
the company as well as reach new customers outside the 
firm.  Based on our comprehensive arguments, we believe 
that new small businesses that attempt to be more inclu-
sive will show better firm performance rates over time than 
those that are not.   

Another fruitful stream would be to compare the own-
ers’ desire for inclusivity with their employees’ perception 
of the positives and negatives of such a strategy.  Clearly 
having buy-in about the importance of the inclusivity strate-
gy is important for a small business.  Owners may see back-
lash from employees if the strategies are not communicated 
clearly and connected to the firm’s mission and values.  

Many of the ideas above could benefit from longitudinal 
studies.  For example, tracking firms that begin with a ra-
cially diverse workforce and an inclusive diversity climate 
and comparing them to firms that did not have a diversity 
plan from the outset would be interesting.  We believe that 
the racially diverse new firm will reap performance benefits 
earlier and stronger than firms that try to implement racial 



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diversity plans later in their development, or firms that do 
not implement diversity plans at all.  

Conclusion

Given the scant scholarly literature on diversity in small 
firms, we encourage researchers to empirically examine the 
relationship between new small firms’ racial diversity, in-
tellectual capital and performance.  The current arguments 
contribute to the literature about the benefits of a racially 
diverse workforce that is managed within an inclusive cli-
mate for diversity, and set the stage for future researchers to 
fill the gap in the literature between the ways that large and 
small firms must approach diversity and inclusion efforts.  
First, we brought to light the importance of studying diver-
sity in new small firms using findings from extensive diver-
sity research on large organizations.  Second, we proposed 
that, if properly combined with a climate that values racial 
diversity, small firms can benefit as much as, if not more 
than, large organizations by employing a racially diverse 
workforce.  A racially diverse workforce will lead to more 
intellectual capital and knowledge resources, which helps 
new small firms develop innovative ideas, solve complex 
problems, and recruit and retain more qualified employees 
as the firm grows.  New small firms’ focus on racial diver-
sity as an asset will increase the likelihood of attracting a 
diverse customer base.  Being equipped with these advan-
tages should help new small firms survive in an increasingly 
competitive marketplace.  Finally, founders of new small 
companies often have growth as a goal, therefore it is im-
portant that they begin to incorporate a strong foundation 
and system for managing racially diverse human resources 
at the inception of the business, since increased diversity of 
their workforce may enhance the company’s ability to grow 
and thrive (Cox & Blake, 1991).  Future researchers should 
build on these arguments with mixed methods studies de-
signed to bring depth and generalizability to the argument 
that new, small firms should develop a diversity and inclu-
sion strategy from the outset.

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