WASHINGTON, DC, June 8, 2011 — A new study in the June issue of the American Sociological Review found evidence of how businesses engage in regulatory arbitrage and make decisions about where to open stores based on states' regulatory policies. The study explored various states' right-to-work (RTW) laws and Walmart store openings from 1998 through 2005. It discovered that Walmart was more likely to propose new stores in RTW states near the borders of non-RTW states, and to open those stores even in the face of protests, than the company was to do so on the borders in neighboring non-RTW states.
RTW laws prohibit unions and employers from entering agreements that make union membership a condition of employment. Twenty-two of 50 US states have variations of right-to-work laws. Under regulatory arbitrage, if regulatory polices do not suit business firms' interests, they will locate their operations in pro-business states, creating an incentive for other states to become pro-business.
In their study, Paul Ingram, Kravis Professor of Business, Management and senior scholar at the Jerome A. Chazen Institute for International Business at Columbia Business School; Hayagreeva Rao, Atholl McBean Professor of Organizational Behavior and Human Resources, Stanford Graduate School of Business; and Qingyuan (Lori) Yue, Assistant Professor of Management and Organization, USC Marshall School of Business, aimed to explore whether RTW policies can signal a pro-business environment for certain kinds of businesses, such as labor-intensive ones. In this case, 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 to gauge which stores eventually opened. The company's store proposals are protested often. Interestingly, the researchers found that Walmart was more likely to propose new stores in RTW states near the borders of non-RTW states, and to open them even if they were protested, compared to the borders in neighboring non-RTW states.
"This is interesting because Walmart is not unionized," noted Professor Paul Ingram of Columbia Business School. "We take this as an indication that RTW states are perceived to have more business-friendly policies, and Walmart prefers to do business in these states."
The results provide evidence of how firms engage in regulatory arbitrage. Walmart often opens stores in states friendlier to business because its stores can draw customers from about 50 miles away. The study has important implications for policymakers, as states and countries have to consider competition from nearby territories when drafting laws. "Neither employees nor companies are hostage to a location—or its regulations—anymore," Ingram said.