Blog

GEOSTRATEGIC RISKS AND THEIR IMPLICATIONS ON CORPORATE STRATEGY

Firms should be working out their strategy in today’s world keeping in mind the geopolitical changes which keeps on affecting the world  economy and social behaviour which  influences the consumption behaviour of the world or a region comprising of group of countries  or a country.  That, therefore, to a great extent affects a firm’s operations within a country or outside as it goes cross border or if their global value chain goes beyond one single country’s border. The management of the firm now need to focus on macro variables around politics, economics, and international relations to define their corporate strategy and do their corporate planning. They cannot stay oblivious to the happenings induced by any bilateral political relationships between countries or multilateral relationships or between communities or any such geo strategic factors that has a potential to affect the equilibrium of a business environment. Intueri, therefore, considers that management consulting to create a business plan or a strategy plan should factor in appropriate hedges or mitigation strategy to combat  the risk or uncertainties induced by such political turbulence and maintain a sustainable growth strategy against all changes. The blog is one in a series that Intueri will keep on publishing on world affairs, country relationships, and more—those  they feel management consultants need to be aware of and to give appropriate consideration while working with clients

Increasing geopolitical fluidity and intensifying strong-state policies increase the risks associated with economic interactions between states. States have always used tools of economic policy and diplomacy to pursue their geopolitical goals. While globalization was ascendant, many believed that economic connectedness—Western companies and consumers benefiting from low-cost manufacturing, which simultaneously pushed forward emerging-economy development—would contribute to a gradual convergence of states’ outlooks and goals, reducing the likelihood of geopolitical tensions. However, confidence in the mutuality of benefits has weakened. This is particularly true among Western countries, where the strongest geo-economic trend of recent years has been the erosion of support for globalization and growing support for protectionist policies. It is notable that two of the states that have traditionally been among the firmest advocates of global economic integration, the United Kingdom and the United States, have seen the most dramatic uncertainties emerge around their trade-related policies.

In today’s increasingly interconnected world, geostrategic risks find themselves at the heart ofshaping corporate decisions. Geostrategic risks can be broadly classified as spanning geopolitical, political, and macroeconomic uncertainties, and these can certainly affect profits for companies. In a May 2016 survey conducted by McKinsey, 84% of executives believed that geopolitical instability will significantly impact global business over the next five years by reducing profitability. Nonetheless, these concerns vary by industry: while financial services reported the highest levels of fears, healthcare and pharma companies voiced the least concerns.

However, despite these growing uncertainties, less than a third of executives believed that their organizations have effectively factored in these risks into their strategies and around 13% have taken concrete actions towards addressing these concerns. These numbers pale in comparison to results regarding cybersecurity and big data; thus, while technology hasmoved to the forefront for companies, geopolitical risks have been largely neglected. A large reason for this is that organizations have not developed effective frameworks for assessing such risks; most steps taken are ad hoc. Furthermore, the majority ofexecutives believe that the methods used are limited in scope (as they remain largely qualitative as opposed to quantitative in nature). From a company’s perspective, it will be increasingly imperative to utilize research to identify global trends, formulate decision-making protocols, and pursue initiatives that avert risk and capitalize on opportunities. As globalization brings the world closer together, organizations need to adapt to a rapidly changing global climate or face the consequences of not responding to current trends.

These geostrategic risks are also relevant to national economies. A Clingendael study from 2015 evaluated the interconnectedness of the Dutch economy and conclusively found that its integration left it particularly vulnerable to shocks from geopolitical developments. The report specifically identified sanctions, national economic policies (such as China’s One Belt, One Road initiative), and political instabilities in East Asia, the Middle East, North Africa, and Eastern Europe as especially pressing for the Dutch. However, the conclusions from this project are applicable to other nations as well. Decision-making processes must incorporate elements of geostrategic analysis in order to be well-informed and comprehensive; while predicting the future may be out of reach, countries can nonetheless (and ought to) identify trends and prepare contingency plans that adequately account for different possibilities. From this perspective, countries are like companies (albeit much larger), in that they both must consider geostrategic risks as increasingly imperative parts of navigating the global economy.

On looking ahead, here are the four biggest developments that could disrupt strategies in the years to come: 

1. The Rise of Nationalist Movements:

As the political scene becomes increasingly jumbled, governments and citizens alike have found it comforting to re-assert the state as a beacon of power and certainty. The resurgence of nationalist movements ranging from Modi’s Hindutva to Trump’s “Make America Great Again” campaign has become a global movement. While the means of re-establishing identity differ from place to place, nonetheless, these movements share an emphasis on establishing group mentalities. However, as a result, non-state actors have suffered as in- and out-groups have been created; prominent examples include the Rohingya in Myanmar. In addition, another concern that arises is the risk of states intervening in the affairs of others in order to advance their agendas or support groups that they believe to be marginalized or mistreated as a result of this consolidation of identity.

2. Superpower Rivalries:

As state-centered politics move to the forefront,previous norms of diplomacy and mutual respect have eroded. The United Nations has found it increasingly difficult to manage relations; thus, nations feel emboldened to transgress previously established rules without fear of reprehension. Especially given the growth of cyberspace as a new sphere of communication and power projection, there are more opportunities for dysregulation. The China-U.S. and Russia-U.S. rivalries have gained prominence as of late, and aggressive pushes for territorial domination have become increasingly common (such as China’s One Belt, One Road movement). In addition, nations like India and Japan have forged strategic partnerships to bolster economic and political agendas. Thus, superpower rivalries have become a reality, and these relationships must be closely monitored in the years to come.

3. Smaller States Gaining Importance:

These rivalries between major powers have in turn generated instabilities that impact smaller states, which also factor into geostrategic risks. Typically, smaller states have turned to the precedent set by rule-based order; however, as previous alliances become more tenuous, they now risk falling under the hegemony of more established powers. Thus, these states now face a difficult decision: to behave like the small states they are “supposed” toproject their own autonomy in the face of adversity. In addition, smaller states oftentimes face the consequences of regional conflicts in neighboring countries. For example, it is estimated that Jordan’s population grew about 25% from 2011 to 2015 due to fleeing from Syrian refugees.

However, smaller states are not just subject to the conditions imposed upon them by larger states. They also occupy influential positions. For example, instability in Libya has spread to neighboring countries in the form of refugees and weapon transactions.

4. The Sphere of Politics and Economics seem to be Merging:

Finally, the geopolitical climate has also shaped the nature of economic interaction, and this in of itself is a source of risk. Economic policy has consistently remained a tool for states to pursue their agendas. However, the means of accomplishing these goals differ for each country. For example, the United States under Trump has looked to protectionism, while China through its previously described One Belt, One Road program has sought to deepen its ties with neighbors. This Chinese push for infrastructure, some critics argue, will exacerbate regional tensions by increasing domestic reliance on a foreign source and perpetuating indebtedness. Furthermore, the spheres of politics and economics are not separate, and it remains highly plausible that domestic tensions could ultimately influence economic policy. In addition, countries ultimately are self-interested actors, and this can lead to conflicts of interest.

Impacts on Global Economy

US-China Rivalry

Growing trade tensions are feared to have a drag effect on other global economies. The US-China rivalry is particularly pressing for 2019. Economists fear that US tariffs on over $250 billion USD of various Chinese goods could damage other industries, because of the global nature of their supply chains. In addition, they will suppress investment amid trade uncertainty. Asides from these economic concerns, US-China relations have also grown tenser on the political front, with the United States expressing support for Taiwan, as well as condemning China’s record over cybersecurity and human rights (such as with the suppression of the Uighurs). In addition, the US hopes to limit Chinese access to dual-use technologies, such as artificial intelligence and high-performance chips, by encouraging countries such as Japan and South Korea to reduce ties with large Chinese tech companies like Huawei. The advent of 5G technologies, where data can be transmitted as much as twenty times faster than in the current 4G system), has also created a new battleground for the United States and China.

Syrian Civil War

In addition, the conflict in Syria has had and will continue to have significant geostrategic implications for the foreseeable future. Turkey, Russia, Iran, the US, and Israel all have significant stakes in the civil war. Russia has firmly backed the regime of Bashar al Assad as a means of extending its influence in the Middle East; however, the Kremlin seeks to avoid direct conflict with Turkey, the US, and Israel. On the other hand, Iran has been more vocal of its support for the President, and will use the Syrian conflict to bolster Hezbollah, its ally in Lebanon, as well as counteract Israel.

On the other hand, while the US and Turkey are both NATO members, they have differing agendas to pursue. The United States is looking to close out its fight against the Islamic State and more broadly, limit Iranian influence in the region (however, this has sparked tensions with Russia). Meanwhile, Turkey will continue to discourage Kurdish action in Syria. Ankara views the Kurdish People’s Protection Units (YPG) as a terrorist organization, while Washington has relied on the YPG for anti-ISIS backing and leverage against Iran. Overall, the situation in Syria is complex, and the messy linkages between various parties could lead to conflict escalating in 2019.

Brexit

In a situation like Brexit where firms were facing challenging social-political situations in their home markets, adopting corporate strategy to extreme political uncertainty first requires evaluation of the nature and the scope of uncertainty.When firms perceive a limited level of uncertainty, or uncertainty around economic conditions, they can adopt a hedging strategy. The portfolio of activities will be rebalanced toward those that can survive the political turmoil – whether those are productive activities or transversal functions of a multinational firm, such as human resources or internal control. The firm can reduce the cost of those functions and put up with a drop-in sale. For example, in response to Brexit, Sony decided to maintain a strong presence in the UK but moved its EU headquarters to the neighboring Netherlands.

If business continuity is at risk in fast-growing markets, firms have to consider a shifting strategy: quickly moving a significant part of their activities abroad, starting with those functions that can be shifted at minimal costs. This strategy also implies a reallocation of resources to more secure and stable markets.

Paradoxically, the businesses that will survive and ultimately stand out are those that create certainty for themselves, forging a path depending on how the situation unfolds. In the case of Brexit, a no-deal scenario will almost surely threaten business continuity, and we could expect numerous firms to engage in salvaging or shifting strategies.

Global Outlook

According to the IMF’s Davos report released in January 2019, global growth is predicted to slow for 2018-2019 fiscal year from 3.8% to 3.5%.

This trend can be attributed to various factors.

  • For example, due to rising interest rates, a stronger USD, and greater volatility in financial markets, additional pressure has been placed on emerging-market countries and has contributed to capital outflows. These rising interest rates have stung emerging-market organizations that borrowed from the United States during the financial crisis of 2007-2009 at low rates and led to refinancing of previous debts. These complications have only been furthered due to a stronger USD.
  • In the United States, real GDP growth for the year 2019 has been predicted to drop to 2.5% as a result of its trade war with China, geopolitical tension, and rising oil prices. Similarly, growth predictions for the EU have fallen to 1.9% in 2019 from 2.9% in 2018, mainly due to Britain’s difficulties with Brexit as well as a slowing Italian economy. In China, growth predictions have fallen from 6.8% in 2018 to 6.2% in 2019. (forecasted Chinese growth is at its lowest in 30 years). However, due to rising oil prices, economic activity in the Middle East is expected to rise slightly to 2% from 1.8%. Nonetheless, because of regional conflicts as well as the volatility of the oil market, investors are cautious about their optimism.
  • Key sources of risk to the global outlook are the outcome of trade negotiations and the direction financial conditions will take in months ahead. If countries resolve their differences without raising distortive trade barriers further and market sentiment recovers, then improved confidence and easier financial conditions could reinforce each other to lift growth above the baseline forecast. However, the balance of risks remains skewed to the downside.
  • With momentum past its peak, risks to global growth skewed to the downside, and policy space limited in many countries, multilateral and domestic policies urgently need to focus on preventing additional deceleration and strengthening resilience. A shared priority is to raise medium-term growth prospects while enhancing economic inclusion.
  • In other parts of the world, plans to extend and deepen networks of economic corridors are spurring huge investments in infrastructure. By far the most ambitious is China’s Belt and Road Initiative (BRI): launched in 2013, it spans more than 60 countries and involves investment plans totalling a reported US$900 billion. However, there are numerous other such corridors, most of which connect Asia and Europe. They include the China Pakistan Economic Corridor (CPEC); the Bangladesh-China-India-Myanmar Economic Corridor (BCIM-EC); the International North-South Transport Corridor (INSTC), which links India, Iran and Russia; and the Asia-Africa Growth Corridor (AAGC), a joint initiative by India and Japan.

Proponents of these infrastructure plans argue that they will foster peaceful relations by creating new links and patterns of cooperation. However, the ambitiousness of some of these plans has raised concerns that they might exacerbate rather than prevent tension. The geostrategic interdependence they create—both through the physical presence of assets and people on the ground and through patterns of increased indebtedness, which is a potential source of vulnerability for lower-income countries in particular—are more durable and difficult to unwind than mere trade agreements. This raises questions about potential implications if relationships between corridor partners were to sour in the future. 

The geostrategic climate of the modern world has become increasingly difficult to navigate through. However, it is imperative that companies and countries alike factor in modern trends into their decision-making processes. Politics, economics, and society are all intimately intertwined, and these connections will only further manifest themselves in unexpected ways in the years to come.

Leave a Reply

Your email address will not be published. Required fields are marked *

RECENT POSTS:

Posted on : 4 December, 2019

Inclusive Growth in India

Absolute poverty has fallen substantially over the last couple of years, with most of this decline c