Chapter 10: Geopolitical Risk and Crisis Management in International Business

“Geopolitics is the study of the effects of geography (human and physical) on international politics and international relations.”

– Saul B. Cohen, Geographer

In today’s rapidly evolving global economy, businesses must constantly navigate a maze of geopolitical risks – political instability, conflicts, wars, and economic sanctions -that threaten to disrupt their operations, impact their financial performance, and affect their market access. Geopolitical risk is an unavoidable factor in international business, and businesses must be prepared to identify, assess, and mitigate the effects of such risks. This chapter delves into the nature of geopolitical risks, their impact on global businesses, and the strategies that companies can adopt to manage crises effectively in an increasingly unpredictable world.

The Nature of Geopolitical Risk in International Business

Geopolitical risk refers to the potential for political events to disrupt business activities and affect global markets. These risks can arise from changes in government, civil unrest, military conflicts, economic sanctions, or the breakdown of international treaties. For businesses operating on a global scale, geopolitical risk is a constant concern, as it can affect everything from supply chain operations to financial markets.

One of the defining features of geopolitical risk is its unpredictability. Unlike operational or financial risks, which can often be anticipated through market analysis and forecasting, geopolitical risks are influenced by factors such as the domestic politics of a country, international relations, and even natural disasters. For example, Brexit, the U.S.-China trade war, and the Russia-Ukraine conflict have all created significant uncertainty for businesses that rely on stable, predictable political and economic environments.

Moreover, the rise of populism and nationalism in many countries has led to protectionist policies and trade barriers, further complicating the international business landscape. The growing trend of economic nationalism, where countries prioritise domestic industries and limit foreign involvement, has led to an increasing number of countries imposing tariffs, restrictions on foreign investment, and regulations that disproportionately affect multinational corporations.

The Impact of Geopolitical Risks on Global Business

Geopolitical risks can have wide-ranging consequences for businesses, affecting everything from supply chains to stock prices. The impact of these risks varies depending on the nature of the crisis and the level of exposure a business has to affected regions.

One of the most immediate effects of geopolitical risk is the disruption of supply chains. Conflicts, trade wars, and sanctions can prevent the flow of goods and services across borders, leading to delays, shortages, and increased costs. For example, the trade war between the U.S. and China resulted in tariffs being imposed on hundreds of billions of dollars’ worth of goods, which affected the cost structures of multinational companies reliant on Chinese manufacturing. Companies such as Apple and Nike, which source a significant portion of their production from China, were forced to reevaluate their supply chain strategies and seek alternative manufacturing locations in Vietnam, India, and other regions.

Similarly, the Russia-Ukraine conflict disrupted supply chains in Eastern Europe and beyond. Key industries, such as energy and agriculture, were severely impacted as a result of the conflict. Russia’s role as one of the world’s largest exporters of natural gas and oil meant that the conflict caused energy price volatility in Europe and global energy shortages, affecting businesses worldwide. Companies that were dependent on Russian energy supplies were forced to look for alternative sources of energy or increase costs to manage the disruption.

Another major impact of geopolitical risks is on financial markets. Political instability, such as a coup or civil unrest, can lead to a loss of investor confidence and volatility in stock prices. For instance, the Brexit vote in 2016 created significant uncertainty in financial markets, with the value of the British pound falling to its lowest level in decades. Businesses that had significant exposure to the British market or relied on cross-border trade with the European Union experienced financial losses and strategic challenges.

Geopolitical risks can also affect a company’s reputation and brand image. For instance, Nike faced public backlash when it continued to produce goods in China during the U.S.-China trade war despite the negative sentiments against Chinese practices. Similarly, Shell and other oil companies have been criticised for their operations in countries with poor human rights records, such as Nigeria and Russia, and for failing to adapt to environmental and political concerns in these regions.

Crisis Management: Identifying and Assessing Geopolitical Risks

Effective crisis management begins with identifying and assessing geopolitical risks before they escalate into full-blown crises. Businesses must develop a comprehensive risk management strategy that includes ongoing monitoring of political, economic, and social factors in the regions where they operate.

The first step in risk management is identifying potential threats. This involves continuously scanning the geopolitical landscape for indicators of instability. For example, businesses must pay attention to issues such as rising nationalism, civil unrest, changes in government, or significant diplomatic tensions between countries. Global risk consultancy firms like Control Risks and Eurasia Group offer valuable insights into emerging geopolitical risks and provide businesses with the tools they need to assess potential threats to their operations.

Once potential risks are identified, companies need to assess the impact of these risks on their business operations. This includes analysing how disruptions might affect supply chains, investments, operations, and customer demand. Scenario planning is a key tool for assessing the potential consequences of various geopolitical events. For instance, businesses can model how a trade war, military conflict, or sanctions might affect their operations and identify the best course of action.

Strategies for Mitigating Geopolitical Risks

Once risks are identified and assessed, companies must develop effective strategies to mitigate their exposure. One of the most important strategies is geographic diversification. By spreading operations, investments, and supply chains across multiple regions, businesses can reduce the risk of being heavily affected by geopolitical events in any single country. For example, many U.S. manufacturers that relied on Chinese production have begun to move their manufacturing facilities to other countries like Vietnam, India, or Mexico, to reduce exposure to potential trade disruptions.

Building resilient supply chains is another key strategy. By incorporating multiple suppliers, alternative transportation routes, and contingency plans, businesses can better withstand disruptions caused by geopolitical instability. The ability to quickly pivot and find alternative sources of supply is critical in ensuring the continuity of operations. Global logistics companies such as DHL and UPS have developed sophisticated strategies to manage geopolitical risks in their supply chains by diversifying shipping routes and partnering with local logistics providers in different regions.

Another important strategy is engagement with governments and multilateral institutions. By maintaining open channels of communication with governments, international organisations, and regulatory bodies, businesses can better anticipate regulatory changes, policy shifts, and geopolitical risks. For example, Nestlé has worked closely with governments and regulatory bodies to stay ahead of changes in food safety laws, labour standards, and environmental regulations in the countries where it operates.

Finally, businesses must develop a crisis communication plan to manage the impact of geopolitical risks on their reputation. When a crisis occurs, companies must act quickly to communicate with stakeholders, including employees, customers, investors, and the media. The response should be clear, transparent, and demonstrate a commitment to managing the situation responsibly. For instance, during the COVID-19 pandemic, many companies, including airline sand automakers, had to implement rapid communication strategies to keep customers informed about service disruptions and health and safety measures.

Geopolitical risks are an inherent part of doing business in the global marketplace. While these risks cannot be completely eliminated, businesses can manage them through careful planning, diversification, and the development of resilient strategies. The ability to identify, assess, and respond to geopolitical risks is critical for companies looking to maintain their competitive edge and protect their operations in an unpredictable world. By embracing proactive risk management strategies and maintaining open communication with stakeholders, businesses can not only survive geopolitical crises but emerge stronger and more adaptable in the face of future challenges.

In this video, host, Bryan Strawser tackled on the issues of organisational resilience in the face of increasing geopolitical risks. He explores the vital role of boards of directors in guiding businesses through these challenges, addressing myths about board indifference, the importance of cybersecurity expertise, managing global conflicts and supply chain disruptions, and implementing practical resilience strategies.

“Navigating the New Normal: Geopolitical Risk and Board Imperatives” by Brgyhtpath LLC in YouTube is licensed under CC.

References:

• Bremmer, I. (2019). Us vs. Them: The Failure of Globalism. Portfolio.
• Cohen, S. B. (2003). Geopolitics: The Geography of International Relations. Rowman & Littlefield.
• Alexander, D. (2015). Principles of Emergency Management. CRC Press.
• Economist Intelligence Unit. (2019). “Geopolitical Risks and Their Impact on Business.” EIU Report.
• Ghemawat, P. (2017). World 3.0: Global Prosperity and How to Achieve It. Harvard Business Review Press.