GPRS: THE NEW NORMAL FOR BUSINESS

As geopolitical risks (GPRs) reshape the corporate landscape, businesses must adapt and innovate to survive in an increasingly uncertain world.

One theme that Synergia Foundation has always persisted upon is that despite the reluctance of the corporate world to keep one eye on the fast-evolving geopolitical global scene, they have and will continue to be surprised. The Ukraine War was a rude shock to many businesses who failed to read the signs and made no provisions to secure their supply chains or customer base.

While it is true that not even the most experienced geopolitical analysts can predict with any degree of accuracy a causative event that flings nations at each other’s throats, nor can they exactly predict the course such conflicts will take place with their likely fallout for global trade.

However, one does not have to be a PhD scholar to understand the basic fact that there is an element called geopolitical risk in business circles that adversely impacts global trade and innovation.

In a rapidly evolving, globally-connected world, it is a fact of life that businesses must consider geopolitical risks as an essential mantra of their business strategy. While small insignificant businesses catering to customers in a small geographical area with basic essentials may escape unscathed from geopolitical disruptions, at least for a small period of time, larger corporations with a global footprint cannot escape the ripple effect of such events. Therefore, businesses must learn to align their corporate strategy with geopolitical risk management by maintaining a close collaboration between businesses, and security think tanks acting as tripwires and the government.

Businesses must learn to align their corporate strategy with geopolitical risk management by maintaining a close collaboration between businesses, and security think tanks acting as tripwires and the government.

Changing Landscape Of Political Risk

Allianz Global Corporate and Speciality, in a survey of 2650 risk management experts from 89 countries, compiled a list of the Biggest Business Risks in 2022. This list had ‘Cyber Risks’ at the top with 44 per cent (offensive cyber is the first tool to be used in any geopolitical confrontation today, so is the shutting down of the internet), followed by ‘Business Interruption’ at a close 42 per cent. This, too, is triggered by conflict, turmoil and collapse of governance. ‘Changes in Legislation and Regulations’ at 19 per cent was listed fifth. As the Russian example showed, whatever assurances may have been given in good times by the host government, these can be revoked at a moment’s notice in times of trouble and political upheavals. Therefore, it can be surmised that Geopolitical Risks (GPR) have elements of all these three in some form or the other and in varying degrees from event to event.

Elisabeth Braw, a columnist at Foreign Policy and a fellow at the American Enterprise Institute, quotes a survey done by WTW and the now-famous Oxford Analytica showing a massive 93 per cent multinationals recording losses due to political instability in 2021. In 2020, these percentages were only 35 per cent.

GPRs have become more prominent due to several factors, including the Russian invasion of Ukraine, tensions between China and the United States, and ongoing conflicts in North Korea and Iran. As a result, companies are now taking wars and conflicts more seriously, recognising the potential impacts on their operations and bottom lines.

The Ukraine war has finally opened the eyes of even the most reluctant non-believer of the linkage between geopolitics and corporate profits. When the Berlin Wall fell and McDonald’s opened its first fast food joint in Moscow in 1990, it heralded a boom for MNCs to flood the hungry Russian market.

As per the Investopedia website, nearly 330 MNCs have closed shop in the Russian Federation, incurring heavy losses since then. As per the Yale Chief Executive Leadership Institute, these included some of the biggest names in the commercial world-Amazon, Apple, Volkswagen, Toyota, Samsung, Alphabet, Mercedes Benz, BP, Royal Dutch Shell and ExxonMobil, to name a few. Amongst Indian companies, TATA was the biggest, which had to exit to continue with its extensive business relations with the West or face crippling sanctions.

A piqued Kremlin passed ordnance through a government commission that permitted nationalisation of the assets of these companies left behind in Russia, thus adding to their losses.

The sharpening rivalry between the U.S. and China is another geopolitical earthquake threatening to pull back all the benefits of globalisation. Meanwhile, businesses operating in China or exporting to the country face the risk of becoming targets if their home governments take actions that displease Beijing. Research has shown that companies largely relying on exports to boost their revenues face the greatest uncertainty and thus will be more risk-averse in times of higher geopolitical risk.

In a March 2022 article published in Harvard Business Review, titled “When Geopolitical Risk Rises, Innovation Stalls’, researcher statistically analysed linkages between geopolitical threats and events and innovation. All business titans owe their leadership position to their innovative prowess. The day they stop innovating, they die- look what happened to Nokia, Blackberry, Kodak etc. The researchers concluded that rising geopolitical risk substantially stifles technological innovation among U.S. companies.

The researchers found that as GPR rises, R&D is steered towards rapidly evolving technologies (breakthrough rather than incremental) to make quick profits and reduce their exposure. In other words, companies become more risk-averse and less likely to invest in R&D involving longer-term, multidisciplinary and highly impactful innovation.

Navigating Gprs

As geopolitical risk becomes a core concern for businesses, they must adapt their strategies and risk management approaches. This involves investing more time and resources in understanding and monitoring political developments in the countries where they operate. They will also need to assess their supply chains, seek alternative suppliers, and diversify their operations to minimise the impact of geopolitical shocks.

In addition, companies should be prepared to navigate complex regulatory environments and adapt to shifting political landscapes. This requires greater engagement with governments and other stakeholders to better understand different countries’ political dynamics and regulatory requirements. Furthermore, businesses should prioritise developing robust crisis-management plans and protocols to respond effectively to geopolitical crises and disruptions.

The experiences of these companies underscore the need for businesses to be prepared for the potential impacts of geopolitical risks on their operations. In response to the challenges posed by Russia and China, companies should closely monitor political developments in these countries, assess the vulnerabilities of their supply chains, and consider diversifying their operations to reduce their exposure to such risks.

The MNCs are finally waking up to the Geopolitical Risks (GPR) by covering their exposure. Oxford Analytica’s 2023 Political Risk Survey states that in 2022, 68 per cent of companies with exposure overseas went for political risk insurance to cover them against wars, civil wars, coups and government expropriations etc. In 2019, this figure was only 25 per cent.

The Role of Governments and International Cooperation

The increasing relevance of geopolitical risk to businesses is a wake-up call for executives and policymakers. It highlights the interconnectedness of global supply chains and the importance of international cooperation in maintaining a stable and predictable business environment. As geopolitical tensions continue to rise, companies and governments will have to work together to mitigate these risks’ impact and promote a more resilient global economy.

Governments can play a crucial role in helping businesses manage geopolitical risks by providing clear and consistent policy frameworks, sharing relevant information and intelligence, and supporting businesses in navigating regulatory complexities. At the same time, businesses should actively engage with governments and participate in policy discussions to contribute their expertise and perspectives on addressing GPRs.

Moreover, international cooperation among governments is essential in addressing the root causes of geopolitical risks and promoting global stability. By working together to resolve conflicts, address economic imbalances, and promote sustainable development, governments can create a more conducive environment for businesses to thrive.

Furthermore, businesses should proactively engage with governments and other stakeholders to better understand these countries’ political dynamics and advocate for policies that support a stable and predictable business environment. By doing so, companies can better position themselves to navigate the complexities of these high-risk markets and minimise the potential impacts on their bottom lines.

The Path Forward

The new reality of geopolitical risk for businesses requires a fundamental shift in how companies approach strategy, risk management, and engagement with governments. The following are some essential mantras: -

-Businesses must acknowledge that geopolitical risks are now an integral part of the global business environment and must be addressed as a core concern in corporate strategy and risk management.

-Companies should dedicate time and resources to monitoring and analysing political developments in the countries where they operate, enabling them to make informed decisions about their operations and investments. Think Tanks and Academic Institutions can help them on this account by acting as their tripwires and consultants.

-To minimise the impact of geopolitical shocks, businesses should consider diversifying their operations and supply chains, seeking alternative suppliers, and expanding into new markets.

-Active engagement with governments and other stakeholders is essential for businesses to better understand the political dynamics and regulatory requirements in different countries and influence policies supporting a stable business environment.

-Companies should prioritise the development of comprehensive crisis-management plans and protocols to ensure they can respond effectively to geopolitical crises and disruptions.

Businesses must come to terms with the new normal of geopolitical risk in the global business environment. Adapting to this reality will require a significant shift in corporate strategy and risk management and closer collaboration between businesses and governments. Although the challenges presented by geopolitical risks are daunting, companies that successfully navigate these complexities will be better positioned to thrive in an increasingly uncertain world. By taking proactive steps to understand, manage, and mitigate geopolitical risks, businesses can continue to grow and prosper despite the ever-changing global landscape.