How Companies Can Navigate Today’s Geopolitical Risks

The rules of international business are changing. To navigate this new paradigm, companies need to understand four important trends: 1) Interdependence between countries has grown and has created new risks, 2) geopolitical competition between the West and China is growing, 3) this geopolitical competition is playing out in advanced technologies, such as AI and semiconductors, and 4) the private sector can’t escape this tension. To reduce risk, companies must 1) develop their geopolitical skills, 2) ask the right queries, and (3) accept that politics will always be there. 4) Take into consideration reputational risk holistically.

Semiconductors form the basis of every modern economy. They’re used in everything from home appliances to automobiles to weapon systems. However, it became difficult to get them during the Covid-19 epidemic. Due to the concentration of semiconductor chip production in Taiwan and South Korea and disruptions to global supply chains, U.S. businesses faced long waits for chips. Gina Raimondo, Commerce secretary, made this announcement last summer. Warned that an inability to access Taiwan’s semiconductors would lead the U.S. to a “deep and immediate recession.” In other words, dependency on foreign production is a national security risk for the United States.

This vulnerability is an example of what we call “the” New national security economy. This paradigm is defined in four ways: 1) deep connectivity within and among societies, which has led to benefits like globalization, while also introducing risks associated with interdependence. 2) geopolitical competition (West and China), in which 3) the main arena is advanced technologies such as AI, semiconductors. 4) The private industry is a primary player in this fight. This dynamic is intensifying in many areas, including semiconductors.

To navigate this new world, Leaders need to review their operating assumptions. Many CEOs were born during the era of globalization, when trade and free markets were considered net goods. However, the landscape has changed. Many of the key issues that businesses and leaders are grappling with — supply chain obstacles, trade policies, and the competition for access to technology and markets — are often considered individually, but they’re increasingly driven by the new national security economy. It is crucial to understand this paradigm in order to navigate it.

This lens should be used by businesses to decide on who will sit on their boards, how plans are reviewed, how they balance politics with national interest, and what they do about risk.

The New National Security Economy: Holistic Risk

Business leadership and decision making are affected by the impact of connectivity, geopolitical rivalry, technological innovation and the changing role played by the private sector. It’s not hard to see how each affects hiring practices, intellectual property protections, location strategies for production facilities, or efforts to secure supply chains. However, their interactions, their intensity, and the consequences have created a new paradigm.

Companies must now look at risks differently as a result. Organizations approach risk function-by-function. A financial institution might have teams that monitor credit risk and legal risk, market risks, operational risk, regulatory risk, and market risk. This approach is fraught with problems. This is evident in the 2008 Global Financial Crisis, which demonstrated the dangers of siloed risk management.

Organizations should look at how these four factors work together to be more effective in assessing risk in the new paradigm. They must understand how geopolitics affects business, and be able to link the dots between it and traditional business risks. Today, politics in any form, domestic or international, has a significant impact on all types of business risks.

Consider two examples:

Let’s first look at how the U.S.-China tension is causing problems for Apple. Apple is a global success story because it has concentrated manufacturing in China, which has lower labor costs and has access to its growing market. Apple currently produces some 90% of its devices China. But, relations between China and America have been strained. It was worseIntervention by both governments This success could be threatened. For instance, recently, the Biden administration Restricted sale of semiconductor technology China, and put Chinese memory chip company is subject to Chinese restrictions Apple was reportedly looking at using products from these companies in certain iPhones.

Apple now has to deal with more uncertainty and complications due to the four factors in the national security economy. The connected nature of the world created an opportunity, but also risk for Apple’s business. As U.S. anxieties around China’s advanced manufacturing capabilities — which can be used in weapons systems and supercomputing — have grown, the U.S. government has tried to limit Chinese companies’ access to these technologies. This is causing geopolitical conflict in the private sector.

It is also instructive to learn from the Russian invasion of Ukraine in early 2014. When asked to respond to Russia’s 2014 annexation of Crimea, Christophe de Margerie, the former CEO of French energy conglomerate Total (now TotalEnergies) , “We are involved in business; we are not involved in politics.” Yet as the business response to Russia’s 2022 invasion of the Ukraine As demonstrated by the fact that politics and business are deeply intertwined, stakeholder demands, looming sanction and consumer pressure amplified over social media made it possible for companies to quickly respond to these situations. While business leaders and board directors told us they supported curtailing operations or withdrawing from the Russian market, they also acknowledged that the choice would be more challenging if the offending nation was a market that was significant to their firm’s bottom line.

Recent history has shown that Western companies have had the luxury of treating geopolitics as secondary concerns. This has been less true of companies in non-Western markets, where key players often serve a national purpose — either because a firm is state-owned or due to industrial policies and state investment. Many countries have recently introduced national AI development strategies, and the influence sovereign wealth funds It has grown. The potential consequences of leadership in these fields has forced a new attitude and approach onto governments that were once much more laissez faire and obliges Western companies to take more stock of how geopolitical currents are shaping — and heightening — their risk. They can do this by using the four elements of the national security economic.

Navigating the New Paradigm

Although each market and industry is unique, there are steps firms can take in order to navigate the new paradigm.

Add expertise.

Companies must not only develop geopolitical knowledge internally but also look for board members who can help them interpret and navigate how geopolitics intersects to business. From Companies should look for individuals with the potential to improve their expertise, whether they are looking to recruit new board members or continue to train existing executives. While many executive education programs are focused on traditional business disciplines and few address the intersection of geopolitics and business, there are many that focus on geopolitics. Business leaders who have studied engineering or business will likely struggle to understand this concept. Companies should look for board members and hires with more inter-disciplinary backgrounds that provide meaningful exposure to both geopolitics and business acumen. Another benefit is that recruiters can consider candidates from other schools or programs, which may increase the company’s potential candidates.

Ask the right questions.

A national security economy lens should be applied to most plans that an organization makes — from the viability of a potential overseas investment to screening and diligence of entities in a company’s supply chain. When viewed through our lens, many seemingly routine things may be dangerous or risky. This is as simple as asking when considering a decision: “What are the geopolitical implications of the choice we are making?” Asking a question like this alone allows people to consider possible events that are low probability but high impact and plan contingencies accordingly.

Accept that politics cannot be avoided.

Many companies, particularly in the West have tried historically to separate politics and business. This false dichotomy is no longer true in many situations, particularly in international contexts. In many cases, companies are political actors. They need to know what defines their national identity and the identities of those they interact with. One example is that a Chinese company may enter into a deal in order to acquire new technology. While its Western counterpart might be just trying to make money, it could be the latter. These assumptions are different than what many Western market participants are used too. They require Western companies to change their assumptions.

You must consider reputational risks holistically.

The new national security economy gives rise to other forms of enhanced reputational risk that can impact a business — be it Nokia selling technology to Russia, pressure on companies to pull out of Russia, Chinese consumers that shun Western companies that criticize China, and so on. In our model, this risk is magnified and companies must be more sensitive to the potential impact of reputational risks. This requires the ability connect seemingly unrelated events by giving meaning to them. These events could have a substantial, compound business impact.

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The new national security economy is shaping the global business landscape. China’s rise and the competition for advanced technologies have made business leaders and other leaders reluctant geopolitical actors. This is the new business norm, and it’s vital to instill this reality because the stakes are very high for leaders and companies as well as for nation-states.

This article is drawn from the authors’ forthcoming book, The New National Security Economy: A perilous moment.