Political Ideology and Firm Location

• In Event: Firms in the Global Economy

Abstract

Why do some U.S. firms locate new plants in predominantly Democratic districts while others display a preference for areas that are Republican? Recent research in finance and management argues that firms possess a political ideology (liberal vs conservative; Democrat vs Republican) based on the political values that dominate among their employees, managers and executives. We build on this work to argue that firms prefer to locate in areas where the prevailing ideological profile closely matches their own. This is because a firm’s ideology shapes many of its practices and policies and, as a result, firms find it easier to attract, integrate, motivate and retain qualified individuals who are politically aligned with the firm. By contrast, attracting and retaining workers as well as motivating them to perform well is more challenging when they may fundamentally disagree with the firm's objectives and practices. Thus, firms prefer ideologically congruent areas because a larger proportion of the labor pool in such areas will share the firm’s ideology. We test our argument using a dataset of over 835,000 new establishment openings of over 36,000 firms from 1990 to 2014. We find strong evidence that firms are more likely to open new establishments in districts that have a similar ideological profile to theirs. This relationship is robust to the inclusion of a battery of controls and fixed effects at the firm, district, industry and state levels, as well as a range of alternative model specifications. Our findings suggest that firms sort geographically upon political dimensions. This has important implications for how local politicians are able to attract new businesses to their region and how political shifts due to demographic changes could potentially affect an area's economic profile.

Authors

• Benjamin Barber, IE Business School

• Daniel J. Blake, IE Business School