Populism spawns political uncertainty that influences corporate decision-making. Two NEOMA researchers, Alfonso Carballo Perez and Margherita Corina, have found that the impact of populism on foreign direct investment varies depending on the strength of the populist country’s institutions and the internationalisation of the companies themselves.

From Venezuela to Hungary via “new Turkey”, the entire world is witnessing a powerful upsurge in populism in democratic countries. Populist rulers, styling themselves as champions of the will of the people, typically espouse an anti-globalisation and anti-elite rhetoric aimed at manipulating public opinion. They habitually attempt to disrupt the political and economic institutions in their country that guarantee the security of foreign investment. The presence of a powerful populist leader fuels enormous political uncertainty that affects the decision-making of economic stakeholders from other nations based in their country.

The two NEOMA economists looked at how populism affects multinational investment and what levers might shape corporate strategy in these unsettled political contexts.

Investment uncertainty

Foreign direct investment is one of the driving forces behind economic globalisation. It encourages the flow of capital, technology and skills between countries. Manufacturers turn to investment, for example, to access new markets, uncover cheaper labour or build more efficient supply chains. These companies are then in a position not just to establish new subsidiaries, but also to merge with local firms.

When a populist ruler takes over as head of a nation, however, it often generates a complicated, unstable and unpredictable business environment, leading to a shift in the rules of the game set by earlier governments. This political uncertainty makes it difficult for companies to predict such actions or collect key information about the legislative process. The NEOMA researchers point out that investment by foreign companies can drop by over 10% following the election of a populist government. Foreign companies prefer to bide their time and see how a situation is going to develop rather than run the risk of taking irreversible action. But are they totally powerless?

Negative effects mitigated by institutions and companies

The NEOMA researchers analysed the investment data from a sample group of US multinationals in 37 democratic countries between 1999 and 2020. They noted that the impact of populism on foreign direct investment is moderated by the presence of national institutions. A strong country-level institutional framework can mitigate the negative effect of populist governments on business investment decisions by 23.2%. These predetermined rules serve as a buffer against the pressures exerted by populist rulers. Nevertheless, in the opposite instance, when the framework provides weak protection for foreign investment, the negative effects of populism on societies remain the same.

The study demonstrates that corporations with high levels of internationalisation are better equipped to tackle the challenges posed by populist heads of state. In fact, the researchers note that raising the level of internationalisation can attenuate the negative effect of populist governments on investment decisions by 7.8%. Why? Because these companies have a formidable advantage resulting from their overseas operations: they know how to navigate a wide variety of markets and specific local characteristics. This makes them more resilient and means they can bend more easily to political and economic developments. While populist rulers may take aim at multinational corporations as agents of globalisation, firms can absorb risk more effectively by diversifying their economic investments in other countries.

Exploring the role of populist influence

The NEOMA scientists emphasise the importance of further research into how multinationals can proactively address the pressure exerted by populist governments. In particular, companies can embrace non-market strategic responses or leverage their ability to influence institutional change through corporate lobbying. Furthermore, the study’s outcomes focused solely on democratic countries, thereby excluding a major player in the global economy: China, a populist – but non-democratic – nation. The country would make a particularly interesting case study: it was ranked the world’s second largest recipient of foreign direct investment in 2021 behind the US.

Find out more

Carballo Perez, A., and Corina, M. (2023). Foreign direct investment in the context of rising populism: The role of institutions and firm-level internationalisation. Global Strategy Journal, 1–32. https://doi.org/10.1002/gsj.1488