Policy for Investment

Perceptions surrounding rising income inequality are garnering substantial media attention and creating their fair share of populist angst. While income inequality and its opposition are far from new, the increasing pace of economic globalization and technological change are often seen as primary drivers of the widening income gap in developed countries. Multinational enterprises, through their offshoring and outsourcing, are often seen as central to rising inequality, yet to date strong empirical evidence explaining their preferences towards this important social characteristic is lacking. Where and how multinationals choose to invest is seen as a function of the economic benefits they anticipate, with less attention to preferences towards other societal characteristics.

Dr. Nathaniel Lupton, assistant professor of International Management, investigates what either attracts or deters investment from multinational enterprises. It’s a nuanced line of investigation – one that can determine the long-term economic viability of nations everywhere, not to mention the social climate of the people who call those places home.

Dr. Nathan Lupton looks into what attracts multinational corporations – and what doesn’t.

“Multinational enterprises are basically looking for the best place to get a desired economic result, but literature on the subject hasn’t yet shown a clear relationship between societal characteristics and business success,” says Lupton. “Certainly there is a link somewhere, because social conditions impact economic growth, but it’s a complex relationship and we are still working out the details."

Lupton and his colleagues have thus set about trying to discover the relationship between foreign investment and inequality.

“We looked at the worldwide overseas production investments of Japanese multinational companies from 1986 to 2012, and found that income inequality is an attractor of investment, although the effect is diminishing and depends on whether the investment is looking for larger markets, achieving cost reductions or product development,” says Lupton.

He describes it this way: At the very low end of inequality (otherwise described as a political environment of egalitarianism) corporate flexibility is greatly reduced. Also, multinational companies are increasingly using market-oriented, pay-for-performance type compensation schemes which higher income inequality societies more readily embrace. Hence, if degree of inequality is the only difference between two potential investment locations, the company is likely to opt for higher inequality. However, high inequality has also been tied to a host of negative outcomes for countries, which together tend to reduce social and hence political stability.

“What we’d expect is that attractiveness for investment would increase as social restrictions ease off, but that’s not exactly the whole story,” says Lupton. “In places with the highest degrees of inequality – those are areas where it’s not necessarily easy to do business either. Multinationals can be lightning rods for discontent, which is reflected in a diminishing relationship between inequality and the investment attractiveness of a country.”

Lupton's research sheds light on motivations from a multinational perspective, and offers a multifaceted view on how inequality affects internationalization in general.

“When caught between increasing foreign investment, labor concerns and political climate, policy makers have to ask themselves - how do we balance these interests and ensure the long term viability of our economy in the face of globalization? This line of research gives the government some understanding of how multinationals view inequality – whether they find it attractive or not. Governments don’t necessarily respond to everything multinationals want, but obviously it is important to be as informed as possible about their positions.”

Lupton earned his PhD in international business and strategy from the Ivey School of Business, Western University. He holds Bachelor of Commerce and MBA degrees from Carleton University. His research focuses on innovation and the socioeconomic outcomes of international business, with a particular focus on economies undergoing liberalization. He has conducted research in Canada, United States, Mexico, China, India and the Czech Republic.