A study of 13 nations in Europe, Asia and Latin America finds that the greater the amount of populist rhetoric in a nation, the less likely entrepreneurs are to register their businesses – dodging both taxes and government regulations.

“Populist rhetoric refers to political language that focuses on the ‘will of the people’ and taking action against a ‘corrupt elite,’” says Tim Michaelis, co-author of a paper on the work and an assistant professor of psychology at North Carolina State University. “One effect of this is to reduce trust in institutions and established systems, which increases uncertainty. And previous research suggests entrepreneurs are more likely to pursue informal venture entry in response to institutional uncertainty, meaning they start a new business but don’t register it with the government.

“We wanted to take a broader look at this phenomenon,” says Michaelis. “Do we see a relationship between populist rhetoric and informal venture entry in both high-income economies and low-income or emerging economies? What could that tell us about what drives these decisions? We also wanted to see what role, if any, socio-cultural norms play in such decisions, which led us to look at the phenomenon of cultural tightness.”

Cultural tightness refers to the extent to which a culture punishes behavior that deviates from established social norms. A tight culture has rigid social norms that dictate behavior, whereas the looser a culture is the more permissive it is of a range of behaviors.

“Because cultural tightness is associated with enforcing social norms, higher levels of cultural tightness are associated with following the rules and not deviating from social expectations,” explains Michaelis. “And cultural tightness tends to be resilient – it doesn’t fluctuate that much over time.

“However, we wondered if high levels of cultural tightness might actually amplify distrust of institutions when levels of populist rhetoric are high. If the populist rhetoric is coming from national leaders and seems to be attacking established institutions, does that erode trust in the reliability of the government and the enforcement of rules – making people less likely to register their businesses with that government?”

For the study, the researchers drew on data regarding 10,474 entrepreneurial business ventures from 13 countries that spanned lower-, middle-, and high-income economies. Their dataset included measures of populist rhetoric from the Global Populism Database, data on the business ventures from the World Bank Enterprise Survey, and measures of national-level cultural tightness established in previous research. The data came from three countries in Latin America, eight countries in Europe and Central Asia, and two countries in South and East Asia.

The researchers used a statistical model to determine which variables influenced entrepreneurs’ decisions to pursue informal venture entry, rather than registering their businesses.

“The findings highlighted a clear relationship between populist rhetoric and informal venture entry across all types of economies,” says Michaelis. “For example, populist rhetoric was measured on a scale from 0-2, with higher scores representing stronger populist messages. And an increase of one unit was associated with a 76% increased likelihood in informal venture entry. Here’s a good example from our data set: a one unit increase in populist rhetoric coincided with a change from 5% to 8.6% of new businesses starting unregistered.

“And we found that cultural tightness does serve as an amplifier. For example, high levels of cultural tightness would bring that that 8.6% number up to 11.5% of new businesses being unregistered. When you consider the overall number of businesses being started at a national level, which can be millions of new ventures per year, this is a substantial difference.”

So, what’s driving this shift?

“The data suggests that uncertainty is a key driver here,” says Michaelis. “People who are starting businesses want reliability, and if political rhetoric is rattling their faith in the trustworthiness of the government, or of established institutions like banks, then people appear to be more willing to launch their businesses informally.”

In a follow-on analysis, the researchers also found that political ideology plays a role.

“The effect was greater when the populist rhetoric was politically left-leaning,” says Michaelis. “This may be because left-wing rhetoric is more likely to target elites and institutions, while right-leaning rhetoric is more likely to target racial minorities and immigrants.

“Ultimately, the takeaway from a business owner’s perspective is that entrepreneurs are more likely to make a strategic choice to launch their businesses informally when their political environment is characterized by left-wing populist rhetoric,” says Michaelis. “By not registering their business ventures, they can increase their short-term flexibility. However, it also imposes long-term constraints on their enterprise, since it is more difficult to expand domestically if a business is informal – and it is far more difficult to expand internationally.

“From a government perspective, the takeaway is that populist rhetoric makes it more difficult for the government to collect tax revenue from new businesses,” says Michaelis. “It also means the government is not able to enforce regulations on those informal businesses, covering everything from workplace safety to environmental standards to food-safety requirements.

“The work underscores the complex relationship between political rhetoric, cultural identity and business. It’s an important topic, given that we are seeing increased political polarization, and populist rhetoric, in countries around the world.”

The paper, “Populism, cultural tightness, and informal venture entry,” is published in the Journal of Business Venturing. Corresponding author of the paper is Paul Sanchez-Ruiz of Iowa State University. The paper was co-authored by Jorge Arteaga-Fonseca of Mississippi State University and Christopher Sutter of the University of Cincinnati.