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Several studies examine the determinants of firm performance in China, but none explores the impact of ethnic diversity on firm performance. This study examines the relationship between ethnic diversity and firm performance in China by drawing on province-level indices of ethnic fractionalization and firm-level indicators of financial performance. We analyse a sample of 1079 Chinese firms in the materials and industrial sectors and find that higher ethnic heterogeneity negatively impacts on firm financial performance in these sectors. This implies that ethnic composition can explain observed divergence in firm performance of Chinese firms and that low-growth firms can gain economic benefits by minimizing ethnic heterogeneity among its workers. [ABSTRACT FROM AUTHOR]