By Nathaniel Lupton, Guoliang Frank Jiang, Luis Escobar, & Alfredo Jiménez

Does income inequality impact business decisions? Since the Occupy Movement, which began in New York in 2011 (Shrivastava & Ivanova, 2015), and the subsequent publishing of French economist Thomas Picketty’s (Piketty, 2014) Capital in the Twenty-First Century, rising disparity in incomes has been a constant topic of concern, calling both capitalism and globalization into question. Aside from public discontent and the rise of populism, income inequality has been linked to degradation of health, education, civic cooperation, and economic growth itself (Alesina & Perotti, 1996). This trend has not only been common among developed economies, such as the U.S. and many of those constituting the E.U., but also in emerging economies like China, Russia, and Brazil. Nevertheless, governments have responded to income inequality with rhetoric, and newly designed instruments of fiscal redistribution (Abbott, 2012). Despite these efforts, inequality in the distribution of wealth, often divided along gender, ethnic, and racial lines, is expected only to increase in the face of the seemingly never-ending set of crises that has plagued 2020 (Stiglitz, 2020). As jobs are increasingly lost through automation and a shift towards working from home reshapes the geography of economic activity, now is a critical time in which to employ creative and concerted efforts to balance economic activity and growth. Failure to do so will not only be bad for a vast number of workers, but for economic resilience and business survival as well (Amis, Munir, & Mair, 2017).

Following the emergence of the simple but powerful idea that businesses are the key generators of income, and thus are at least indirectly implicated in rising inequality (H. Bapuji, Husted, Lu, & Mir, 2018; Marens, 2018) we sought, in our article “National Income Inequality and International Business Expansion”, to understand how income inequality could impact one of the most important decisions that a multinational business could make: where to locate their production operations. If different levels of inequality are conducive to different business activities, then reducing inequality would require a fundamental shift among policy makers on how such a socio-economic goal attracts foreign investment.

What we found was that multinational businesses exhibit a preference to locate their production in countries that have a moderate level of income inequality, as opposed to countries that have either very high or very low levels of income inequality. We reasoned that, at the lowest levels of income inequality, businesses are faced with high costs of compliance with labor regulations, ranging from centralized collective bargaining arrangements to minimum wages and improved working conditions (Ahlquist, 2017; Western & Rosenfeld, 2011). On the other hand, extreme inequality is the cause and consequence of a dysfunctional society, where civic engagement is likely to be less frequent, but more violent, and economic growth significantly curtailed (Khan, Munir, & Willmott, 2007; Uslaner, 2008). The result, to paraphrase the what’s good for business is good for society axiom, is that what is bad for society (very high inequality) is also bad for business investments, but so too is what is good for society (very low inequality).

Our findings lead us to conclude that an extreme focus on reducing income inequality by national policy makers can deter foreign investment. Since foreign investment is often an important contributor to job creation and overall economic growth, businesses must be included in the decision-making process when dealing with economic inequality. However, dealing with economic inequality will likely require a shift away from policy focusing on forms of business organizations whose value-maximizing incentives may be misaligned with efforts to reduce inequality under some circumstances. Thus, as with other major global problems, income inequality can only be dealt with through a coordinated set of efforts between government, civil society, and business. In particular, the United Nations Sustainable Development Goal 10, which is to reduce income inequality within and among countries by 2030, specifically calls for an increase in foreign investment to the least developed countries, including landlocked developing countries, African countries, and small island developing countries (Carpentier, Kozul-Wright, & Passos, 2015). Does income inequality limit or increase business investment from abroad? We find that a moderate, but not extreme level of inequality attracts foreign investment, which is perhaps one avenue by which multinational organizations impact inequality around the world (Hari Bapuji, Ertug, & Shaw, 2020; Doh, 2019).

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journals.sagepub.com/doi/abs/10.1177/0007650318816493

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