Geopolitical propositions for multinational firms: 5-point agenda
By Faisal Ahmed and Lawrence Habahbeh
Faisal Ahmed
Lawrence Habahbeh
Geopolitics continues to influence the strategic intent of multinational enterprises (MNEs), but these firms either remain oblivious or fail to take timely cognizance. Even if they do, they tend to assess the commercial impact of an event without deciphering pertinent geopolitical risks. From Ukraine to now Taiwan, and from the China-U.S. trade war to the pandemic-induced volatility in the world order, “geopolitics” did receive larger attention in industry discourse, but with dismal pragmatic contemplation.
In fact, geopolitical risks are systemic in nature and are capable of amplifying even the usual threats that an MNE potentially faces. MNEs can, and indeed must, focus on some key propositions that can enhance their preparedness to evaluate geopolitical risks and their spillover effects. Here we make five such propositions.
First, great power rivalries can intermittently disrupt a firm's strategy. This is a crucial wake-up call for the MNEs, most of whom are also lead firms managing global value chains in vulnerable economies too. The compound risk of rising geopolitical rivalries as a result of the weakening of the international security apparatus has deepened mistrust among the global powers, including the U.S., China and Russia.
Such risks are a threat multiplier and put stress on the critical resources underpinning sovereignty, national security and non-traditional security measures, e.g., energy or food security. The recent developments in the Indo-Pacific, including the formation of the U.S.-backed Indo-Pacific Economic Framework (IPEF) as supposedly positioned against China's Belt and Road Initiative (BRI), or a strong push for Quad 2.0, represent such geopolitical rivalries.
Of course, they have their own connotations, but the participating countries in the IPEF will have to face the consequences owing to the lack of a concrete roadmap for infrastructural financing. They can not only be disruptive to MNEs but can cause serious economic injury to small and medium-sized enterprises (SMEs) as well.
Second, geopolitical risk amplifies risks in alternative assets markets. Alternative assets are non-traditional assets and include private equity, venture capital, hedge funds, natural resources, real estate, etc. Such assets are different from the traditional ones, such as stocks, bonds, etc. and require a longer investment period. They are, therefore, largely illiquid and are also less regulated. Since the alternative assets markets have a longer time frame, they gradually become vulnerable to external geopolitical shocks.
For instance, the real estate market in Ukraine has nosedived, and the housing market in other Eastern European countries that have hosted Ukrainian refugees may also bear a grim outlook. In the case of hedge funds too, both Russia and Europe witnessed a sharp decline when the war started. Russia has also defaulted on external sovereign bonds for the first time since the Bolshevik Revolution.
Third, geopolitical maneuvering threatens energy security and influences the cost of doing business. Prior to the war in Ukraine, Europe's dependence on Russian energy was significant. In response to Russia's war in Ukraine, Europe sought to reduce its dependence on Russian hydrocarbon imports. As the European Union depends on LNG imports from the U.S., the U.S.' ability to supply more gas to replace Russian piped gas is constrained in the short to medium term. LNG terminals and the associated infrastructure on both sides of the Atlantic are already operating, but limited.
Now, European firms are turning toward floating storage regasification units as a means to increase imports quickly. Also, as per a report by S&P Global Platts Analytics, Russia will remain a dominant natural gas supplier to Europe until 2040. Europe is a major recipient of contracted Russian pipeline exports, and any move by the EU to breach natural gas import contracts with Russian firms could trigger an escalation. The Nord Stream 2 project between Russia and Germany is halted now.
Fourth, regional or domestic geopolitical challenges can cause social unrest, thus disrupting consumer demand. This unrest can happen amid increasing debt and declining purchasing power. Sri Lanka is an example. Macroeconomic mismanagement along with geopolitical factors, e.g., prolonged ethnic conflicts, have led the country into an unmanageable crisis. Also, the amplification of existing inflationary pressures as a result of the Ukraine war has led to global shortages of fertilizers, soaring prices of oil and natural gas and shortages of global grain supply, thus increasing the risk of social instability.
Fifth, technological disruptions will shape the new geopolitics. Technology is going to shape the development of an ecosystem based on artificial intelligence (AI) MNEs, which need to move up the technological value chains and enhance preparedness to cope with geopolitical challenges. For instance, there has been much discourse around the geopolitical maneuvering emanating from China's 5G, i.e., the fifth generation of mobile networks.
The West has largely criticized China's technological advances with allegations of data privacy, etc., but the fact remains that China is a world leader in AI. MNEs and SMEs alike need to revisit their business models to align with the evolving technological paradigms and how they shape the geopolitics of tomorrow.
It is therefore imperative that managerial decision-making factors in the suggested geopolitical propositions to develop suitable business models. This applies to both the lead firms, i.e., MNEs, as well as the SMEs.
Faisal Ahmed, a geopolitical expert, is a professor of international business at the non-profit institution, the FORE School of Management, New Delhi, India. Lawrence Habahbeh, a strategic and enterprise risk specialist, is a member of the risk management board of the Institute of Actuaries, London, the U.K.