GLOBIS graduate Katrina Vinluan shares her insights from a recent GLOBIS seminar on Geopolitical Risk.
“It's harder to be a multinational today. You have to think of how to do business in different ways,” says Alexander Kazan, Managing Director of Eurasia Group, which provides global consultation on regional strategies for executives and Fortune 500 companies doing business in emerging markets.
While many groups are quick to blame Donald Trump's presidency for the recent economic uncertainty, his election is only one of the many geopolitical risks business managers, executives, and global business leaders need to be concerned about.
Trump's Change in Policies: A Form of Geopolitical Risk
A geopolitical risk includes the business risks affected by a country's foreign policy, which influences political, economic, trade, and social policies with other countries. In the case of Trump, his favor for bilateral agreements, pushing for better bargains for the U.S, presents new geopolitical risks for business, upending traditional, long-standing agreements. His vision of “making America great again” has taken the U.S. out of the Trans-Pacific Partnership and perhaps the WTO, shifting its policies inwards. With the United States' influence taking a backseat on the global multilateral agenda, other countries may no longer count on the global public goods often offered by the U.S. to the rest of the world. In the past, America has championed transcontinental roads and globally beneficial infrastructure. It has advocated strategic alliances through NATO (North Atlantic Treaty Organization), the United Nations, and the World Trade Organization. A superpower nation, it has been a security umbrella for other nations, and the U.S. dollar has been an economic reserve even for other economies.
This has led to greater geopolitical risk are all around. Kazan insists “[These] trends are structural.” He opines that what has been happening in the U.S. is almost inevitable, referring to polls citing U.S. fatigue from its war in Afghanistan. Americans are demanding that their leader prioritize domestic issues over those of other countries.
With America's change in policies—and other countries’ changes, as a result—efforts to globalize business become fragmented. A fragmented world leads to greater cost and complexity when to conduct global business transactions, as strategies and approaches must differ in each business territory.
Geopolitical Risks Are Inevitable Anytime, Anywhere
Geopolitical risks are also forthcoming beyond the U.S. In Europe, there was Brexit. In the Middle East, Saudi-Iranian proxy conflicts could also cause changes in economic dealings. Also, the leadership of new Saudi Crown Prince Mohammad bin Salman may lead to less dependence on oil and a stronger push for entrepreneurship, drastically changing the statistics of the country where two-thirds of its population is employed by the state. Meanwhile, North Korea's progress in developing its ICBM (Intercontinental Ballistic Missile) program harkens the call for stronger military deterrence. Brazil has recurring political scandals that have been inhibiting economic reforms; its 2018 elections remain unpredictable. China is creating new institutions supported by efforts to build a global infrastructure network; Southeast Asia is perceived as a top beneficiary. For France, the election of Emmanuel Macron may prompt labor reform, with more hiring and firing flexibility. Macron's leadership may also lead to a new EU fiscal policy and a new Eurozone finance minister. These and more headliners do not only affect a country's political situation, but also how they deal with the rest of the world in terms of economy, trade, policies, security measures, and more.
“Big shifts are happening and people are underestimating them. The old rules don't necessarily apply,” concludes Mr. Kazan. There appears to be a greater need for scenario-planning among companies. In this time of “fragmenting globalization,“ it becomes essential to dig deeper into the nature and role of the state, the role of technology, the changing patterns of communication in every country, and the nature of labor markets.
More than a Pound of Cure
As cliché as it may seem, experts like Kazan appear to communicate the old adage that “an ounce of prevention is worth a pound of cure.”' While risks are inevitable, we can learn from the pioneering example of Shell Oil—scenario-planning is possible and beneficial.
Shell has developed the habit of asking “What if?” in approaching business, and learning how to move from scenario-planning to decision-making. Their scenarios have explored alternative energy resources, sustainable environmental practices, and long-term business opportunities despite the limitations of energy sources.
There are many ways that companies today act or do not act based on apparent geopolitical risks. And while it may take a mindset shift of an entire organization to get everyone into the habit of forward-thinking, as a manager, executive, or global business leader, maybe you could start today by asking, “What if?”
GLOBIS University, in partnership with Eurasia Group, is offering a 2-day Executive Education Course on Strategic Risk Management this October. Faculty includes Eurasia Group President and world-renowned security risk expert Ian Bremmer and Boston Consulting Group Senior Partner and Managing Director Takashi Mitachi. This course was previously offered at New York University (NYU) in 2016 and received high reviews from its participants. Through courses such as Global Perspectives, GLOBIS University seeks to nurture global leaders, and this course, which brings together the expertise of both organizations, is aimed towards business executives in Japan.