When politics drives entrepreneurial innovation

(Press-News.org) In November 2016, India’s government abruptly invalidated its two highest-value banknotes, wiping out about 86 percent of the nation’s cash supply overnight. Known as the Great Indian Demonetization, the move was intended to curb corruption and encourage the adoption of digital payments.

The sudden shift sparked chaos. Long lines formed outside banks as people scrambled to exchange their money before it became worthless. Small business owners and street vendors, many of whom relied almost entirely on cash, were forced to choose quickly: adopt digital payment technology or risk losing their livelihood.

A new study led by researchers at Washington State University shows that in such moments political identity can matter as much as financial resources in shaping how entrepreneurs respond. Entrepreneurs who supported the ruling party were more likely to adopt quickly, seeing the policy as credible and consistent with their values, according to the study, published in the Journal of Business Venturing Insights.

To understand what influenced the adoption of digital payments, researchers surveyed 294 “necessity entrepreneurs”—small business owners, shopkeepers and street vendors who often operate informally and rely heavily on cash. The face-to-face interviews were conducted in June 2017, about seven months after demonetization.

“Entrepreneurs aligned with the ruling party perceived the policy as credible and consistent with their values, which activated resource deployment toward digital payment adoption,” said Amrita Lahiri, an associate professor of entrepreneurship in WSU’s Carson College of Business and lead author of the study. “By contrast, other entrepreneurs withheld action despite having similar resources when the policy conflicted with their identity.”

Entrepreneurship research has traditionally emphasized resources such as income and education as the biggest drivers of innovation or adoption of new technologies. Lahiri and her co-authors found political identity also played a significant role.

“Our primary finding is that political identification drove early adoption of digital payments,” she said. “This was a brand-new technology in India at the time, and adoption decisions were strongly tied to politics.”

Researchers expected entrepreneurs with more resources to adopt faster. Instead, they often found the opposite. Entrepreneurs with higher incomes who distrusted the ruling party chose not to adopt digital payments, even though they could afford to. Meanwhile, lower-income entrepreneurs sometimes adopted out of necessity.

“Political identification reduces perceived ambiguity of institutional signals and lowers entrepreneurs’ threshold for action,” Lahiri said. “If you are aligned with the ruling party, it’s clearer in your mind what to do. If you are not aligned, you may resist even if it hurts your business.”

The findings suggest that access to resources alone cannot fully explain entrepreneurial behavior in times of crisis. Instead, identity—and particularly political identity—shapes how resources are mobilized.

The study also underscores the challenges of rolling out new technologies or policies in politically polarized contexts. In such environments, entrepreneurs may interpret government initiatives in sharply different ways. Some embrace policy shifts as aligned with their goals, while others view them with skepticism, which inhibits adoption.

Lahiri said policymakers cannot rely only on financial incentives to encourage adoption. Building trust through credible, nonpartisan messengers such as local leaders, peer entrepreneurs and non-governmental organizations may be essential.

“If the government alone says, ‘Do this, it’s good for you,’ people aligned with the ruling party may comply, but others may resist,” she said. “Adoption should feel organic, not top-down.”

By showing how political identity shapes entrepreneurial decisions, the researchers argue that identity should be considered alongside financial and human capital in models of entrepreneurship. While this study focused on India, Lahiri said the findings could apply to other regions with high political polarization, uneven institutional trust or widespread informal entrepreneurship—including parts of the United States.

“Entrepreneurial success is not just about having resources and opportunities to build, grow and thrive in business,” she said. “It’s also about understanding and making sense of the world, and politics and political identity play a strong role in that process.”

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