Building resilience following a policy shock: Evidence from India’s demonetization

Abstract

Greater resource endowments are assumed to help the resiliency of businesses involved in a crisis. We challenge this assumption using the context of a unique natural experiment – India’s demonetization policy shock in November 2016, when the Indian Government removed, without any warning, 86% of the country’s currency in circulation, thereby precipitating large-scale disruption amongst small businesses in India. We take a multi-method approach to examine the effects of demonetization on 294 small businesses to show that resource endowments (financial and human capital) do not ensure business resilience. Using motivated cognition as a theoretical lens, we argue and empirically demonstrate that resources facilitate business resilience when the entrepreneur identifies with the political party enacting the policy but do not appear effective in facilitating resilience when the entrepreneur does not identify with the political party enacting the policy. Our study contributes to the literatures on resilience, entrepreneurial cognition and institutions in entrepreneurship.