Is inequality good for business (investment)?

What is it about?

Multinational companies generally prefer to locate their manufacturing operations in countries with moderately higher levels if income inequality. The reason, we argue, is that higher inequality makes it more cost efficient for the firm to set wage and working conditions, as well as giving them relatively higher bargaining power over the interests of other stakeholders like government and non-governmental organizations. However, very high levels of inequality, which typically have a detrimental effect on social cohesion, tend to repel foreign investment. The findings of this study are based on twenty-seven years of multinational investment data.

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Why is it important?

Growing inequality is increasingly cited as a driver of political and social unrest, contributing to the rise of populism, in turn driving protectionist ideology. Governments are under increasing pressure to restore a more balanced distribution of the proceeds of economic activity, but may risk economic isolation as a result. At the same time, rapidly rising income inequality threatens to deter future foreign investment in a nation. Foreign multinationals can choose from among several locations to invest, and income inequality influences these decisions.

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