Newswise — Firms require a stable economic and political environment to ensure their confidence in making long-term investment decisions, particularly in foreign countries through foreign direct investment (FDI). When there is a possibility of changes in legislative procedures in the host nation, it becomes challenging for firms to anticipate the consequences of their investment choices. Populist leaders, who assert their representation of the people's will, frequently gain power by pledging to modify existing rules and procedures, thereby creating an atmosphere of greater uncertainty for multinational corporations.
The presence of populist rulers in democratic countries has a significant impact on investment decisions, creating a challenging and uncertain investment climate that makes it difficult for firms and investors to navigate. Consequently, managers are discouraged from making immediate irreversible decisions. In a recent study published in the Global Strategy Journal, researchers delve into this issue to gain a deeper understanding of how the presence of populist leaders influences investment choices in democratic nations.
Margherita Corina, co-author of the study, explains, "We hypothesized that countries with populist leaders in power are less likely to be targeted by firms considering foreign direct investment (FDI) decisions." Corina and her colleague, Alfonso Carballo Perez, who are professors at NEOMA Business School, further postulated that countries with robust country-level institutional frameworks and firms with a greater international presence could potentially mitigate these adverse effects. To examine and validate their hypothesis, the authors analyzed data from U.S. multinationals operating in 37 democratic countries between 1999 and 2020.
The study findings indicated that the presence of populist leaders in government negatively impacts foreign investment by creating heightened uncertainty through the discourses of these populists. Corina expands on this, stating, "Given that foreign investment is typically a long-term commitment and populism poses a significant risk of institutional change, firms become even more cautious in their investment decisions when a populist government assumes power in a country. As a result, managers may choose to delay their actions in order to gather more information before proceeding."
Additionally, the authors of the study discovered that the adverse effects of populism on foreign investment can be mitigated by a robust institutional environment and the level of firm internationalization. Countries with weak institutional frameworks that offer inadequate protection to foreign investment face difficulties in the expansion of multinational companies in the context of populism. This is because the threats posed by populist leaders are perceived as more credible in such environments, leading to increased institutional volatility and uncertainty. In contrast, countries with strong institutional frameworks provide greater stability and safeguards, reducing the negative impact of populism on foreign investment. Similarly, firms with higher levels of internationalization are better equipped to navigate the challenges posed by populism and its potential disruptions.
Moreover, enterprises with elevated degrees of globalization are more adept at maneuvering the obstacles presented by populist rulers. This could be attributed to their familiarity with functioning in overseas markets and their proficiency in adjusting to governmental and financial shifts.
Given the enduring prevalence of populism worldwide, these discoveries hold significant relevance for multinational firm executives who grapple with political unpredictability.
"Considering the irreversible character of investment choices, managers might encounter challenges in formulating investment decisions within nations where populist leaders specifically target multinational corporations. To mitigate potential risks, companies could enhance their resilience by diversifying operations across alternative countries," Carballo elucidates.
To recapitulate, this research provides significant revelations pertaining to the interconnection of populism and global strategies. Additionally, it proposes methodologies for firms to enhance their adaptability within an uncertain investment environment under populist regimes. These approaches encompass leveraging robust institutional frameworks in foreign nations and utilizing insights gained from internationalization to facilitate well-informed decision-making. As the global landscape grows progressively uncertain, future investigations are imperative to enable informed and effective decision-making.
The Global Strategy Journal, published by the Strategic Management Society, is the world’s leading journal for managerially oriented global strategy research.
RSS