March 29, 2011

Running for the Pro-Business Border

How can corporations play neighboring states’ regulations off each other to identify the best environment for doing business?


Recently, citizens in Wisconsin packed the state capital in Madison to oppose legislation that limits collective bargaining for the state’s public sector workers. Elsewhere, amid union demonstrations, the Ohio Senate passed similar legislation limiting bargaining rights for teachers, firefighters, and police officers. These events have highlighted the sophisticated dance that occurs among workers, corporations, and governments to influence the regulations that govern the economy.

Meanwhile, the private sector is also wrangling over labor laws and industry regulations. Twenty-two of 50 US states have variations of right-to-work (RTW) laws, which prohibit unions from compelling workers to join or otherwise support them (by, for example, requiring payment of dues). “RTW policies signal a pro-business environment that certain kinds of businesses, particularly in labor-intensive fields like manufacturing, are attracted to,” says Professor Paul Ingram. Some research even suggests that states with RTW laws experience faster job growth and lower levels of poverty.

While research is inconclusive on the effects of RTW regulations, and experts disagree, the increasing importance of the interplay between business and public policy is not debatable, particularly when it comes to questions of regulatory policy.

One barometer is protests, because they often signal a state’s relative strength or weakness when it comes to regulatory policy and enforcement. In so signaling, protests also have some influence over businesses’ decisions about where to locate. Some of Ingram’s earlier research explored this phenomenon by focusing on retail giant Walmart. The company’s store proposals are protested often, and protestors frequently prevail — but not always to the end protesters may want.

“Walmart uses proposals for stores to investigate where there will be sympathetic communities,” Ingram says. “Rather than a firm intention to open a store, a proposal is a kind of market research that helps estimate regulatory costs that in turn inform decisions about where they ultimately locate stores.”

But gauging protests is not the sole method that firms have at their disposal for assessing how friendly a regulatory environment they will face at any given location. Existing regulations affect business location decisions, too. To learn how, Ingram, along with Hayagreeva Rao of Stanford and Lori Qingyuan Yue of the University of Southern California, took another look at how Walmart decides where to locate stores. From 1998 through 2005, Walmart proposed 102 store openings within 25 miles of borders between RTW and non-RTW states. The researchers followed each proposal from its initial announcement through the final outcome, that is, whether stores ultimately opened.

The researchers found that Walmart was more likely to propose new stores in RTW states near the borders of non-RTW, and to open those stores even in the face of protests, compared to the borders of neighboring non-RTW states. “That’s interesting because Walmart is not unionized,” Ingram notes. “So it’s not that RTW laws would directly affect Walmart’s work force. We take this as an indication that these are states with more business-friendly policies, and Walmart prefers to do business in them.”

In short, the results provide evidence of how firms engage in regulatory arbitrage: Walmart can pick and choose locations with relative ease in part because its stores can draw customers from about 50 miles away. Since the retailer can reach the same customer from any one of a number of potential locations, if it does not find a favorable policy and cultural context in one place it may siphon retail customers from that place by locating nearby in a more business-friendly climate.

In an increasingly interconnected world, Ingram says, it is easier than ever for corporations to engage in regulatory arbitrage. If regulatory policies do not suit the interests of businesses, companies will locate their operations in pro-business states, simultaneously putting pressure on other areas to adopt more pro-business policies. And its practice is not exclusive to retail stores or limited to the United States: some financial services firms have relocated to other countries with less stringent financial regulations while still servicing US customers, and countries such as Ireland have attracted companies formerly based in the United States because of favorable taxation systems. As long as companies can freely choose where they do business, they hold significant sway over the public policies that govern them — both where they’re located and in neighboring jurisdictions. The same is also true for some individuals, who may move to states and countries with more tax and other regulatory structures that they prefer.

“States and countries have to consider this competition when making laws. Neither employees nor companies are hostage to a location — or its regulations — anymore,” Ingram says. “But that doesn’t necessarily mean businesses must cut ties with customers in the jurisdictions they choose not to locate in.”

Paul Ingram is the Kravis Professor of Business in the Management Division and a senior scholar at the Jerome A. Chazen Institute for International Business at Columbia Business School.

Read the Research

Paul Ingram, Lori Qingyuan Yue, Hayagreeva Rao

"Trouble in Store: Probes, Protests and Store Openings by Wal-Mart: 1998-2007"

View abstract/citation  Download PDF  

Hayagreeva Rao, Lori Qingyuan Yue, Paul Ingram

"Laws of Attraction: Regulatory Arbitrage in the Face of Activism in Right-to-Work States"

View abstract/citation  Download PDF  

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