When, in late March, North Carolina governor Pat McCrory signed the controversial HB2 bill (known also as 'the bathroom bill') banning individuals from using public bathrooms that do not correspond with their biological sex and preventing cities and counties from passing rules preventing discrimination against lesbian, gay, bisexual and transgender (LGBT) people, he met with an immediate backlash.

It was not just from civil rights activists and artists such as Bruce Springsteen, Demi Lovato and Pearl Jam, who cancelled their North Carolina concerts. American Airlines and Bank of America issued statements asking the state to repeal the law, while PayPal cancelled its plans to open a new global operations centre in Charlotte.

John Sternlicht, a member of the LGBT community and an economic developer who lived in North Carolina for more than 20 years, was stunned to learn about the state’s new laws. “The people of North Carolina know better than this, and so should the governor of the state that approved the bill,” he says, adding that the bill will have a profound impact on the state’s business climate. “There are disasters like hurricanes that you cannot do anything about, and there are self-inflicted ones like this one. How can you pass a law like this and expect that there to be no economic backlash?”

Indeed, the situation in North Carolina mirrors that of Indiana in March 2015, when governor Mike Pence signed the Religious Freedom Restoration Act (RFRA), seen as giving businesses the right to discriminate against the LGBT community on religious grounds. According to Visit Indy, the tourism promotion agency for Indianapolis, the state’s capital and largest city, Indiana has lost at least $60m in revenue since the RFRA was passed. Among the big corporations that condemned Mr Pence’s decision to sign the RFRA were American Airlines and Apple, while local businesses website Angie’s List halted a $40m expansion of its Indianapolis office.

When it matters

Discriminatory laws, whether connected with sexual orientation, religion or race, prompt a range of emotional reactions from members of the public and business. But do such laws really have a lasting impact on economies and their investment attractiveness? After all, $60m is unlikely to make a dent in state finances, given that in 2016 Indianapolis alone had a budget of $1.1bn. And PayPal, although prompt to react in the case of the HB2 bill, does business in countries such as Uganda, Yemen and Ethiopia, all of which severely penalise members of the LGBT community.

In his book The Flight of the Creative Class, economic theorist Richard Florida stated that openness to people regardless of sexual orientation, race or nationality brings talent to certain locations, which in turn drives innovation and hence economic progress. “Being innovative means being able to challenge and change the way we look at things and operate, and that can be done by confronting our interactions with people different than us,” says Rafal Dudkowski, managing partner at Iknow, a management and technology consultancy. He adds that this is why tolerance is one of the three pillars of the University of Toronto’s Global Creativity Index, an annual ranking of economic growth and prosperity.

But innovation and talent, though important components of economic development and investment decisions, are not the only drivers. According to Niclas Berggren, associate professor of economics at the Stockholm-based Research Institute of Industrial Economics, while it is clear that tolerance is related to economic outcomes, its overall impact on the economy is harder to discern.

In an article co-written with Mikael Elinder from Uppsala University and published in academic journal Public Choice in 2010, Mr Berggren revealed his findings that tolerance towards people of a different race tends to be positively related to economic growth, but tolerance towards gay people seems to show the opposite.

“The positive effect of tolerance towards people of a different race is not difficult to understand: by employing the most productive people irrespective of background, the economy benefits,” says Mr Berggren. “Meanwhile the negative effect of tolerance towards gay people may result from gay-averse, productive people being deterred from going to a certain country. Other explanations are also possible: that tolerance towards gays is part of a ‘post-modern’ cultural change that also involves a less materialistic and work-oriented view of life, which can result in relatively lower growth.”

Tradition and shifts

Most indices measuring the relationship between tolerance and prosperity put locations that are liberal and open to diversity on top. Most, but not all, as Mr Berggren points out that a state such as Utah, not famous for its liberal outlook, is faring well economically.

“For tech and creative sectors, tolerance is important and is a prerequisite for attracting top talent, but you have a whole range of more traditional sectors in which this might not be the case,” says Angelos Angelou, founder of Angelou Economics, an Austin-based economic consultancy. A state such as Utah is a case in point: according to the fDi Markets database, it has been predominantly attracting BPO and agricultural investments.

However, while Utah seems to be opening up to diversity (after seven years of back and forth between state lawmakers, LGBT groups and the Church of Jesus Christ of Latter-day Saints, the state passed the LGBT Rights Bill in March 2015), North Carolina is sending the opposite message, and it is one that might scare investors.

“That certain places are more open than others is nothing new,” says Mr Sternlicht. “But going out of your way to pass discriminatory laws is a whole different thing. It promotes xenophobia, not something that investors, especially foreign ones, seek.”

For his part, Mr Sternlicht published an op-ed in North Carolina newspaper the Fayetteville Observer, damning Mr McCrory’s decision regarding the HB2 bill. Mr Sternlicht, who now works as executive director of the Economic Development Association of Skagit County in the state of Washington, also took the opportunity to appeal to North Carolina businesses considering expansion or relocation. “It was a tongue-in-cheek article, but in all honesty, if North Carolina wants to discriminate against certain groups, there are a number of locations, including mine, that will welcome those groups with open arms.”