Corporate Investment in the Context of Rising Populism: Domestic Firms, MNEs and Emerging Markets

Abstract

This paper analyzes the impact of growing populism on national and multinational investments. Combining insights from international business and political science, various hypotheses are developed about how a populist government and firm’s geographic scope shapes corporate investment decisions. By testing these hypotheses on a global dataset of firms from 1994 to 2020, we show that firms in populist countries reduce investment more than those in non-populist countries. However, our findings highlight that the type of populism matters, as left-wing populism amplifies this negative effect on investment compared to right-wing populism. Furthermore, the effect of populism on business investment is exacerbated in emerging markets compared to developed economies. Finally, the investment activity of multinationals is less sensitive to the presence of populism in their own country than domestic firm´s investment. However, multinationals withdraw their investments when a populist government arrives in the host country. This paper, in addition to considering institutional frameworks in the study of political uncertainty and firm's investments, also recognizes the ability of actors to exacerbate uncertainty by generating institutional volatility. Overall, our results provide new evidence in the literature on the influence of populism on corporate investment activities.