Terrorism and international business

By Michael R. Czinkota, Gary Knight, Gabriele Suder

The airplanes of 9/11 forced countless multinational corporations (MNCs) to update their strategic planning. Our work with executives at more than 150 MNCs shows that 10 years later, companies are still grappling with how best to manage the terrorist threat.

In the two decades before 2001, the rate at which firms launched international ventures was growing rapidly. After 9/11, foreign direct investment fell dramatically as firms withdrew to their home markets. The popularity of international-sounding company and brand

names decreased appreciably as managers now emphasize domestic and local affiliations.

The tendency to reverse course on globalization has been accompanied by declining international education in the United States, as revealed by falling enrollments in foreign language and international business courses. In the past decade, managers shifted much of their focus from proactive exploration of international opportunities to a defensive posture emphasizing threats and vulnerable foreign

operations.

In Europe, the radicalization of individuals and groups, motivated by ideology, religion or economic concerns, threatens local cooperation and social harmony. European business schools have benefited from tighter restrictions on international student enrollments in the U.S., but the focus of teaching has shifted from global to regional trade.

Another outcome of the terrorism threats has been a rise of public-private partnerships, in which governments and firms collaborate to counter them. For example, global police agencies now partner regularly with private firms to combat cyber crime and attacks on critical computer infrastructure.

Governments and activist groups now use social media to organize campaigns fighting against threats ranging from dictators to disease. But nations also have begun to curtail social media when they are contrary to government interests.

The cost of protecting against terrorism is many billions, while terrorist spend millions or less on their actions. There are abundant opportunities for small groups to employ non-weapon technologies, such as aircraft, to cause massive harm.

Though our capacity to protect key facilities has improved over time, the security focus on high-value assets encourages terrorists to redirect their violence at “soft targets” such as transportation systems and business facilities. Greater security at home means attacks will increasingly take aim on firms’ foreign operations.

Companies have placed more emphasis on terrorism risk considerations when choosing how to enter foreign markets. In the last century, foreign direct investment (FDI) was the preferred approach. But terrorism has shifted the balance.

Now many more firms favor entry through exporting, which permits broad and rapid coverage of world markets, reduces dependence on highly visible physical facilities, and offers much flexibility for making rapid adjustments.

In terms of economies of scale and transaction costs, FDI is generally superior, but the risks of exporting are judged to be lower. Markets tend to punish failure more harshly than they reward success, which makes risk-minimizing strategies more effective.

Skillful management of global logistics and supply chains cuts the risk and cost of downtime. Firms seek closer relations with suppliers and clients in order to develop more trust and commitment. Some have increased “on-shoring” by bringing suppliers back into the country when their remoteness constitutes risk.

Terrorism causes an organizational crisis whose ultimate effects may be unknown, and poses a significant threat to the performance of the firm. Corporate preparedness for the unexpected is a vital task. Innovative managers develop back-up resources, and plan for dislocations and sudden shocks with a flexible corporate response.

Terrorism is a public threat, and some managers believe government should bear the cost of protecting against it. Others argue that a public-private partnership is the most effective approach, with firms taking the lead.

There is also the issue whether corporate headquarters or the locally exposed subsidiary should fund prevention and preparation expenditures. Regardless of who pays, everyone can agree on the need to guard against terrorism.

Every world region is vulnerable, and most attacks are directed at businesses and business-related infrastructure. Terrorism requires decision-making and behaviors that support vigilance and development of appropriate strategies. Managers who fail to prepare run the risk of weaker performance or even loss of the firm.

While we can no longer choose the lowest cost option, 10 years after 9/11 companies are more aware, less exposed, and less vulnerable to the risk of terrorism. But in the next 10 years comes the really big task: What can and should we do collectively and individually to reduce the causes of terrorism.

Michael Czinkota teaches international business in Georgetown University’s McDonough School of Business and at the University of Birmingham in the U.K. He is a former deputy assistant secretary in the U.S. Department of Commerce. Prof. Gary Knight works at Florida State University in Tallahassee on international marketing in Japan. Gabriele Suder holds the Jean Monnet chair at SKEMA Business School in France.