Income Inequality and Multinational Enterprise Expansion Strategy

In this paper, we examine the extent to which host country income inequality influences multinational enterprises’ (MNEs) expansion strategy for foreign production investment. Applying a transaction cost framework, we predict that income inequality generally attracts foreign production investment, as MNEs prefer countries where they can achieve their strategic objectives while incurring lower levels of transaction costs arising from interactions with various market and non-market actors. We also hypothesize that the positive effect of income inequality on location attractiveness will diminish at higher levels of inequality, when the attraction effect is increasingly offset by additional monitoring, bargaining and security costs owing to the more fractious nature of high inequality societies. Finally, we argue that the effect of income inequality on location choice is contingent on investment motives: the positive effect is stronger for efficiency-seeking investment but weaker for market-seeking and compet...