How Industry Diversity Shapes Funding Decisions

Based on research by Haiyang Li (Rice Business) and Jade Yu-Chieh Lo (Drexel)

Key takeaways:

• Functional diversity on innovative projects has a more complex effect than once thought.
• Diversity, in this context, refers to differences in the primary function or specialization of participating firms that are collaborating on projects.
• Technical reviewers react neutrally to industry diversity. Business reviewers react to it less well.

When fund reviewers consider an innovative proposal, the mix of collaborators can shape how that proposal is received. But whether diversity helps or hurts depends on who is doing the evaluating.

Haiyang Li of Rice Business and Jade Yu-Chieh Lo of Drexel University examined this question using data from collaborative projects funded by the Advanced Technology Program at the U.S. National Institute of Standards and Technology. To qualify for funding, projects had to be both innovative and collaborative, with clear potential for broad economic impact.

Each proposal went through two distinct reviews: business reviewers — consultants with backgrounds in venture capital, business development and economics — who assessed market potential; and technical reviewers — drawn from NIST, federal labs and the scientific community — who evaluated technological feasibility and innovation.

Prior research has explored how diversity among collaborators affects project performance. Li and Lo instead asked how diversity shapes how projects are judged.

How do different reviewers respond to participant diversity?

The researchers analyzed 138 collaborative projects across 29 technology categories funded between 1993 and 2001. For each project, they measured:

• Participant diversity: differences in firms’ primary industry classifications.
• Novelty: whether the project represented a new R&D direction for participating firms.
• Category clarity: how clearly defined or “fuzzy” the project’s technology category was.

They then compared ratings from business and technical reviewers.

What they found is that the two groups responded differently to participant diversity.

Technical reviewers reacted neutrally. From an R&D perspective, cross-disciplinary collaboration can signal creativity and intellectual cross-fertilization. Diversity did not significantly affect their evaluations.

Business reviewers, however, were less receptive. Projects spanning multiple industries can appear harder to position in a market, more costly to coordinate or less focused strategically. On average, diverse collaborations received lower ratings from business evaluators.

When does functional diversity help — and when does it hurt?

That negative effect, however, was not uniform.

When diverse teams proposed highly novel projects, the penalty disappeared. Strong novelty mitigated business reviewers’ concerns. Category clarity also mattered. If a project fit within a clearly identifiable technology category, diversity was no longer viewed negatively — and in some cases was viewed slightly positively. By contrast, when projects fell into ambiguous or “fuzzy” categories, diversity amplified skepticism.

The findings suggest that diversity in collaborative innovation has a more complex influence than previously assumed. It does not simply affect how teams function internally. It also shapes how outsiders interpret a proposal’s coherence and market promise.

For innovators, the implications are practical. Diverse teams may generate valuable ideas, but they must also present those ideas in ways that signal clarity and commercial direction. For researchers, the study opens a broader question: how do different evaluative lenses shape which innovations move forward — and which stall at the funding stage?

Li and Lo (2018). “In the Eyes of the Beholder: The Effect of Participant Diversity on Perceived Merits of Collaborative Innovations.” Research Policy.