The chaos marking the start of Donald Trump’s second term is a stark reminder of how the ascent of a populist leader destabilises a country’s political and economic landscape. Should companies scale back their investments in the US? How should they assess their risk level? Three researchers – including NEOMA’s Margherita Corina and Alfonso Carballo –examined the investment patterns of 36,000 companies across 42 countries between 2005 and 2021.

In the wake of the 2008 financial crisis and the global surge in populism, numerous researchers have investigated the political aspects of this phenomenon: the polarisation of public debate between the “people” and the “elite”, the abrupt enactment of large-scale reforms, the challenges to institutions, and unpredictable – often erratic – decision-making.

When populism takes hold, investment drops

And yet, these changes also profoundly disrupt the economic and corporate framework since they trigger a sharp escalation in uncertainty. There is a significant impact on investments in particular: it is difficult to bet on a future that is clouded in uncertainty.

It is this link between populism and investment strategies that three researchers explored, including NEOMA’s Margherita Corina and Alfonso Carballo. Their study drew on an analysis of the investment choices made by 36,000 companies from 42 countries between 2005 and 2021.

Three key findings emerge from the research. First, when populism takes hold, investment drops. Secondly, in countries where the political institutions ensure that checks and balances are relatively robust, this downturn is less severe. Lastly, the longer a populist leader remains in place, the less effective these institutions are at halting the downward trend in investment.

This study will offer valuable guidance to firms that are currently rethinking their strategic approach in the context of the rise in populism. Investment decisions are no longer based purely on economic criteria (the level of risk, interest rates, anticipated profitability, etc.): the presence of checks and balances is now a crucial consideration.

Elections: the merits of proportional voting systems

The authors focused on three types of checks and balances. The first, and most crucial factor in their opinion, is a country’s electoral system: if it operates on majority voting, a populist party’s victory in the polls could grant it full authority over decision-making mechanisms. Fearing major disruptions, businesses revise their investments downwards.

Under proportional representation, on the other hand, the executive emerges from a coalition-led government. Policies have to be agreed on by several parties, requiring the populist wing to soften its stance. By its very design, the proportional system limits the scope of future changes… which in turn encourages investment.

Judicial independence: reassuring – but open to attack

Another form of oversight mechanism, an independent judiciary, does not have the same level of influence. It’s true that the existence of an independent high court provides a solid guarantee, as does the freedom granted to judges to deliver rulings without the fear of reprisals. And companies can look forward to a relatively stable set of rules governing the economy.

However, businesses are aware that populist governments aren’t afraid to contest this state of affairs. In Poland in 2015, the PiS party drastically curtailed the powers of the constitutional court, the highest in the land. In Mexico in 2024, the Morena party revised the constitution, granting voters the right to appoint supreme court judges.

Is the executive obliged to answer for its actions?

The authors show that the level of corporate investment is linked to the transparency of a ruling party and its accountability for the consequences of its actions. Can the party in power be dismissed, brought to justice, sanctioned or compelled to justify its actions? Is there a free press? Is the right to demonstrate recognised? Are periodic elections guaranteed?

Nonetheless, the executive’s obligation to answer for its actions carries less weight in influencing corporate decision-making. It serves as a type of counterbalance that is poorly suited to standing up to a populist leader intent on radical change.

Populist leaders target checks and balances

The authors note that the system of checks and balances gradually loses its capacity to alleviate business concerns about investing. Why? Because a good number of populist leaders disrupt the institutions and rules of the democratic framework, which they see as obstacles to their reformist ambitions – Poland and Mexico being two good examples of this.

These institutions are exposed to persistent pressure, which they manage to withstand or eventually succumb to. Moreover, these manoeuvres by those in power are not acted out in broad daylight: they are covert, underground and downplayed. This scenario creates even more uncertainty and less transparency for businesses, as the specifics of the impending changes remain ambiguous.

Populism hits investment hard over an extended period

Accordingly, we can see the longer a populist leader remains in place, the less effective these institutions are at halting the downward trend in investment.

The authors further observe that would be interesting to explore in greater depth in the future if populist executives inflict different damage, whether they identify with the left or right. Are companies more wary of populist leaders who have no clear political orientation and who are more unpredictable? Or is the traditional left-right debate a thing of the past? Has it been replaced by the divide between nationalist conservatives and “global citizens” with progressive social positions?

Find out more

Margherita Corina, Christopher Hartwell and Alfonso Carballo, Holding back the damage: strong political Institutions and the effect of populism on business Investment, Journal of International Business Studies, February 2025. DOI:10.1057/s41267-024-00769-5