In short: not as much as many think
Shortly after Indiana passed a new law restricting abortion, Indianapolis-based pharmaceutical giant Eli Lilly condemned the law and announced that it would seek to expand outside the state.
It’s widely argued that social conservative policy is bad for business. Is that actually true, as the Lilly statement would seem to suggest? At some level, yes. But the impact is less than some claim. Today, social policy is a relatively marginal factor in business location decisions.
In 2002 economist Richard Florida published his book The Rise of the Creative Class that became the most influential book on urban policy of the 21st century to date. He argued that economic success required attracting “creatives,” and he summed up the formula under the heading of three interrelated T’s: technology, talent, and tolerance. Tolerance meant being open to a diversity of people and lifestyles. As he wrote in a follow-up a decade after the book came out, “Our work finds a strong correlation between, one the one hand, places that are welcoming to immigrants, artists, gays, bohemians, and socioeconomic and racial integration, and, on the other, places that experience high-quality economic growth.”
He particularly became known for linking economic success to a high score on the “gay index” created by another researcher. He stressed that nothing about gays per se drove success, but that gays were a proxy for overall tolerance; a city where gays felt welcome was probably one in which other groups felt welcome too.
Florida’s book was probably the single most influential work in convincing state and local leaders of the importance of talent, of human capital, for economic development. It also led many to believe that attracting talent required socially progressive policies.
His model was very powerful and persuasive in that era. This was when big, coastal “superstar” cities like New York and San Francisco were coming into their own after recovering from decades of decline. The dotcom era had just occurred, and high tech had exploded in the Bay Area. There really was wide variation in gay friendliness between cities at that time, which is why gays tended to congregate publicly in only a limited number of cities in America. Many cities in fact did not have many immigrants and not much diversity beyond a longstanding white-black two race mix.
Today, things are different. Most urban areas are very socially progressive, even in red states like Indiana. And their level of diversity has grown. The city of Indianapolis is now only 53% white, for example, and will soon be a majority minority city. Also, we see that the previously high-flying coastal cities and states are struggling with a variety of serious and pervasive governance dysfunctions: rising crime, homelessness, sky high housing prices and an inability to build sufficient new housing, unreliable transit systems, prosecutors who publicly announce they won’t enforce laws, long term school closures, a suffocating woke hegemony, etc. This is sending people and business heading for the exits.
This time, the migration is sometimes going to places with very socially conservative red state governance, including Texas and Florida, which have boomed even as they have passed socially conservative laws. And unlike the traditional middle class Sunbelt draw, this now includes high-end business and the wealthy elite. For example, high finance, a very socially liberal industry, has been migrating to greater Miami. The asset manager BlackRock, one of the major promoters of the progressive Environmental, Social, and Governance (ESG) movement in corporate America, is opening an office in West Palm Beach. Elliott Capital Management, a huge hedge fund run by Paul Singer, one of America’s biggest promoters of LGBT rights, is moving its headquarters to West Palm Beach as well. Many other finance and venture capital companies have been making similar moves. All of this is happening despite prominent socially conservative moves by Florida Governor Ron DeSantis and the state legislature.
Undoubtedly these companies and people remain committed to progressive social causes. But that is only one of many factors that affect business location decisions. Social progressivism has not been the knockout criteria some might have believed it to be. While it would be a mistake to write off big blue coastal cities, which will likely rebound, there’s now a level of comfort by these corporations and people to move to very aggressively red states when other factors favor it.
A look at the Eli Lilly announcement in Indiana shows this more complex business decision landscape. Their announcement was primarily a restatement of what they’ve already been doing for several years now.
Lilly is the largest private sector employer in Indianapolis with over 10,000 jobs: disproportionately high paying ones. The company has long been a pillar of the local business community and very civically engaged. It has been a model corporate citizen for decades and very committed to both the city and state.
However, changes in the drug industry and worker preferences forced Lilly to look elsewhere for high-end research and development talent. It has built up a presence in biotechnology hotbeds like San Diego, New York/New Jersey, and Boston. Earlier this year the company announced a $700 million expansion in Boston, including a new genetics center. At the same time, Lilly has bought out or given early retirement to a number of employees in Indianapolis. The net result of these changes is that Lilly employed fewer people in Indianapolis in 2020 than it did in 2009 during the depths of the Great Recession, according to data from the regional economic development organization.
Lilly did recently announce a multi-billion dollar new investment in Indiana. Notably it was a manufacturing facility and thus lower in the value chain. It is also being sited in the red city of Lebanon on the urban outskirts, not in blue Indianapolis by its headquarters.
None of this is to suggest that Lilly dislikes Indiana or prefers red cities and states for manufacturing. These moves were prompted by business and marketplace imperatives, and were based on a wide range of factors. Lilly’s CEO recently noted the low educational attainment levels in the state of Indiana, for example. The shift to genetics and biotechnology in new drug development and away from traditional discovery techniques disadvantages Indiana because it has limited expertise in these areas. From the standpoint of Lilly, the abortion law was not a positive, but likely not decisive either given their preexisting moves in this direction.
It’s possible that other Indiana companies will make similar announcements. Most likely, these would be companies for which, like Lilly, existing business considerations already augur for looking out of state. It’s also possible that various sporting events could be lost, or conventions relocate to other cities, which would be a painful loss. However, I would expect that businesses will be cautious about painting themselves into a corner on abortion lest a state they can’t afford to walk away from like Texas pass similar legislation.
In short, passing socially conservative legislation can indeed create a real business cost. But that cost is generally not as high as the headlines would suggest. Social policy is but one of many factors that drive overall decisions by individuals and corporations. Perhaps abortion will reset the clock back to the previous era circa 2000, but that’s not yet evident.
Advocates for socially progressive causes often argue for their position on utilitarian grounds. That is, they will say these policies are necessary for economic growth. But while economic development is an important consideration, critical social policy should not be set on the basis of what makes the most money, but what is the right thing to do. I would hope people feel this way regardless of whether they take a conservative or liberal position on these issues.
*Image Credit: Unsplash