Work Package 2

WP2 will primarily focus on the firm-level to investigate the mechanisms exclusionary populists use to erode the private-public divide between the political and the economic domains, looking at the ‘economics of threat’ as a complement to the NORFACE Governance theme of the ‘politics of threat.’ We seek to answer the following research question:

What strategies do exclusionary populist parties use to erode the boundaries between the public- and the private domains once they have acquired power?

The political economy of democratic backsliding and of the emerging “authoritarian capitalism” (Sallai & Scheiring, 2020; Bohle et al., 2022) have seen little scholarly attention so far (see however Bank, 2017). The proposed project seeks to understand the economic consequences of backlash/backsliding by investigating their relationship with the national business systems that prevail in different regions of the EU.

We also investigate how firms react to populism. We draw on the corporate political activity (CPA) and on the non-market strategy literatures to explore how firms cope with volatile economic environments (Mellahi et al., 2016; Oh and Oetzel, 2017) and how they protect themselves against populist policies that may undermine their business objectives. We thereby also address the following research question:

What strategies do societal actors in the economic and media spheres use to deal with (the perspective of) exclusionary populists in power?

Differences across sectors that are exposed to or protected from arbitrary state intervention are particularly important. We then attempt to link these trends to firm-level coping strategies.

WP2 will use the data collected and processed for WP1 to more specifically study the political economy of countries that have experienced backlash and backsliding. Data about income distribution, inequality, wage levels etc. will be used to analyse the evolution of the situation in the sample countries over time. We will also collect macro-economic indicators on FDI investment performance in order to assess the overall impact of illiberalism on these economies.

Beyond investigating patterns of institutional change, this WP will also seek to provide an understanding of the mechanisms at work in individual countries. We will carry out in-depth case studies to understand the ways in which companies adapt to increasing uncertainty. This builds on previous studies on firm coping strategies in autocratic environments (Sallai & Schnyder,  2019 a, b) and extends the findings to more country and industry cases. In particular, we will raise the question of differences in how domestic and foreign owned firms react to the changing rules of the political order.

Generally, we are interested in how the relationship between the state and business has evolved since the beginning of backsliding. We attempt to further our understanding of how foreign subsidiaries and domestic firms from different sectors develop strategies to cope with increased intervention of the state through nationalisations (and in some cases subsequent privatisations), the increasing level of corporate appropriations, such as “forced buy-outs”  (Sallai & Schnyder,  2019 a, b; Szanyi, 2016; Bałtowski & Kozarzewski, 2016), and targeted state actions in specific sectors. We aim to explore which strategies are successful in maintaining firm performance within this context.

One key puzzle of populism in East Central Europe is the decline of the self-limiting state (Sallai & Schnyder,  2019 a) and the impact of populist regimes on property rights, which seems at odds with a growth model that was based for decades on the inflow of foreign direct investment (FDI) (Noelke and Vliegenthart, 2009, Bohle and Greskovits, 2012, 138-181). When populists came to power in Hungary and Poland and to a lesser extend the Czech Republic and Slovakia (Henley, 2018), many expected that due to the increasing political rhetoric against foreign FDI, investment – at least from Western liberal democracies – will turn away and growth will slow down. The rise of populism in Hungary and Poland was accompanied not only by anti-multinational rhetoric, but also drastic policy changes – such as nationalisations or the introduction of punitive special taxes on selected FDI dominated sectors – against foreign-owned companies (Sass and Kalotay, 2012: 1). Yet, despite the populist, anti-foreign political slogans, and the turn away from FDI in some selected sectors, both governments have consistently supported inwards investment in export-oriented industries, such as car manufacturing, electronics production, and shared service centres (Sass, 2017; Jirasavetakul & Rahman, 2018).

Although Western European business associations have raised their voice against populism at the EU-level and also in some European capitals (Kinderman, 2019), Western European manufacturing industry continues to use the region as a cheap ‘production site’ (Benner, 2018) with new plants announced regularly (Strzelecki, 2019). Hence, while some companies that found themselves targeted by the populist regimes feel threatened (Sallai & Schnyder  2019 a), others - who are granted privileges - are responding positively to the growing economies and expand (Vegh, 2018).

However, when investing in countries with populists in power, managers may face unexpected dilemmas, not only due to the institutional constraints in the host country environment, but also because the institutional context and business environment differs greatly from their home countries, which might create tensions within the MNE (between the headquarter and the subsidiary). This may create competitive disadvantages compared to domestic firms (Sallai, 2016; Sallai & Schnyder,  2019 b).

We aim to investigate the internal and external complexities that MNEs and domestic firms face when operating in populist countries and address three key sub-questions that allow us to contribute to answering the overarching RQs mentioned above:

 1.   Why do MNEs condemn populism in Western European countries and at EU-level, but continue to increase their investments in populist and even authoritarian countries?

2.   What kind of ethical and business dilemmas do managers face when operating in populist countries?

3.   How do firms manage the internal and external institutional pressures that stem from operating in countries where populists are in power?

 Given the novelty of this research into the political economy of populism in Eastern and Western Europe, in WP2 we will rely on primary data collection through interview-based field research to complement existing data. The WP will adopt a comparative country case study approach based on interviews with top-level managers of companies, and leaders of business associations, based in six countries (Austria, Germany, Hungary, Poland, and Slovenia; 20 interviews in each country, a total of 120 interviews altogether). By investigating large multinational and domestic firms in five EU countries we will explore the impact of populism at the EU level.