strategy + business issue 32

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 RISKY BUSINESS

Geopolitics
and the Global
Corporation

content strategy & competition

In an economy filled with
both promise and threat,
business executives must draw
a new map of the world.

by Sven Behrendt and Parag Khanna

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It has become commonplace to argue that the that carry risk far greater than that to which they are
combination of the September 11, 2001, terrorist accustomed. Major conflict scenarios abound in the
attacks in the United States and the conflict in Iraq has great crescent from the Middle East through Central
forced business strategists to make geopolitical uncer- Asia to India and Southeast Asia, which encompasses
tainty a component in corporate decision making. The both the greatest potential for economic development
effect of these crises and associated political decisions on and enormous political uncertainty. Multinational cor-
energy, transportation, tourism, insurance, and other porations (MNCs) are now active in at least 70 countries
sectors demonstrates the massive consequences that rated at “medium” to “extreme” risk, and more than
Photograph by Holly Lindem

wars, wherever and however they may take place, can $150 billion is invested in 50 countries rated “fairly” to
have on business. “very” corrupt in the Transparency International
Though some view the cessation of hostilities in the Corruption Perceptions Index, according to Control
Iraq war and the subsequent fall in oil prices as the end Risks Group, a London-based international business
of a crisis, in reality they constitute a mere pause in the consultancy. Though a sagging global economy in 2001
transformation of the global business environment. The witnessed the first drop in foreign direct investment
maturity of Western markets demands that firms expand (FDI) in more than a decade, FDI in developing coun-
beyond the confines of the developed world into areas tries fell by only 14 percent, versus 59 percent in devel-
 Sven Behrendt Parag Khanna The analysis and recommen-
(sven.behrendt@weforum.org) (pkhanna@brookings.edu) is dations presented herein are
is senior project manager in advisor on global issues to the the authors’ alone and do not
the Global Agenda team at the World Economic Forum and necessarily reflect those of
World Economic Forum. senior research analyst for the their employer organizations.
Forum’s Global Governance
Initiative at the Brookings
Institution.

oped economies, according to the United Nations unpredictable. In this context, geopolitical risk has a
World Investment Report 2002. clear meaning for business: It is the potential for inter-
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In terms of their capacity to actively mitigate this national political conflict to threaten the financial and
risk, corporations are overexposed. From business operational stability of companies around the world. To
schools to boardrooms, the corporate world lacks the develop a framework to mitigate this risk, MNCs must
models and instruments to remain confident in its understand the specific nature of the relationship
understanding of geopolitical trends and political and between corporate globalization and geopolitics, map
social change, and the corresponding risks these carry the “sites of risk” for corporations in their activities, and
for business activity worldwide. Given the difficulty of adopt forecasting tools to enhance their enterprise re-
modeling global market complexity, many chief execu- silience with respect to threats from conflict and terror-
tives will greet calls for a major shift in corporate think- ism. CEO leadership is crucial to advancing this process.
ing with a resigned shrug. But as Jeffrey E. Garten, the
former undersecretary of commerce for international Global Hazards
trade and the current dean of the Yale School of Man- The Cold War’s conclusion was met by a tremendous
agement, argues, “CEOs ought to think more broadly expansion of global business, as corporations found
about what true business leadership means today.… themselves newly able to expand into transition
They ought to realize that they should take more economies and emerging markets. The dogma of the
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responsibility for shaping the environment in which 1990s held that free market enterprise and a liberal eco-
they and everyone else can prosper. They should be cor- nomic agenda would lead to more stable geopolitical
porate chief executives, but also business statesmen.” relations. The decline of interstate warfare during this
Just as economic globalization has forced political period also provided a geopolitical environment that
leaders to adjust to the rigors of a nonstop marketplace, enabled heavy consolidation across industries, resulting
the pace of political events around the world requires in the emergence of massive conglomerates with world-
that corporate executives take the initiative to confront wide reach. The economy was paramount; corporations
the consequences of the links between geopolitics and were almost unconstrained by political and social con-
business performance. Whereas the global surge of siderations.
multinational corporate activity in the 1990s brought Yet business’s greater international presence and
down national borders, the next era of geopolitical increasing geopolitical complexity have also heightened
change will be less certain, which will make deeper business’s exposure to conflict and violence, leaving
strategy + business issue 32

assessments of and adjustments to geopolitical risk MNCs suddenly and nakedly exposed. They have
essential for continuing business success. become larger, more obvious targets for attack, but they
Many political analysts today speak of the also are vulnerable because their strategies were based on
post–September 11 world as highly uncertain and fluid, the assumption of fundamentally stable geopolitical
with systemic “shocks” likely and at the same time relations.
 • Technology advances risk as well as control. The
technologies that facilitate global corporate activity also
enable illicit interactions and the sudden appearance of
threats; greater security measures taken by governments
and corporations can provide “point solutions” to hard-
en systems and structures against specific threats, such as
cyberattacks, but because the platforms and infrastruc-
ture of business and crime overlap, the window remains
open for threats to enter.
In this context, the expression “global player” Geopolitical risk is not limited to globally net-
acquires new meaning: Previously a reference solely to worked industries. On the surface, it may seem that

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an economic actor, the term now describes a company urban terrorism and supply chain disruptions affect
that has, however unwillingly, become a political actor as mostly large MNCs, but rising insurance costs and
well. Today, corporate global players function in the heightened security measures apply to businesses of all
complex nexus of what the innovative German sociolo- sizes, creating even more incentive to understand con-
gist Ulrich Beck has called the risk society. To remain a flicts unfolding around the world. These emerging
global player today, a firm must be able to survive not threats interact with changes in international transport
only economic downturns, but also geopolitical shocks. and trade. Al Qaeda, for example, has been implicated
An understanding of the risk arising from increased in recent attacks on economic targets such as oil tankers.
geopolitical uncertainty begins with a view of globaliza- Global dependence on key transportation systems such
tion as a process that has made risk an endemic reality as jet aircraft, container vessels, and tankers is growing
— that is, no longer simply the result of conflict in one steadily, building up an increasing array of complex,
country or another (though no doubt that remains the economically important, and time-sensitive economic
case in many parts of the world), but something inher- subsystems.
ent in the globalized system itself. As Foreign Policy edi- These subsystems are vulnerable not only to con-
tor Moisés Naím has written, “Thanks to the changes ventional “blowback” — the unintended consequences
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spurred by globalization over the last decade … nation- of foreign policy decisions — but also to new, nontradi-
states have benefited from the information revolution, tional forms of warfare. The U.S. Department of
stronger political and economic linkages, and the shrink- Defense’s 2001 Quadrennial Defense Review Report
ing importance of geographic distance. Unfortunately, claims that new asymmetric threats such as cyberattacks
criminal networks have benefited even more.” are likely to increase. Because the so-called revolution in
Globalization involves risk for several concrete military affairs has widened America’s clear lead in all
reasons: conventional weapons areas, a fact that has deterred
• The definition and quality of governance differ most nation-states from traditional military confronta-
vastly. Governments in the developing world have been tion, the report predicts more attacks that take advan-
slow to adapt to the demands of efficiency required by a tage of the openness of Western societies and economies.
greater business presence; thus, such traditional political Among the most significant risks are those to our capac-
risks as corruption and expropriation still apply. ity to produce, communicate, and use information,
• Nongovernmental actors are empowered. The which is central to national security in multiple ways,
increasing spectrum of political and economic activity from conducting e-government, to waging information
occurring outside government control or oversight warfare, to combating transnational criminal organiza-
means that vulnerabilities have increased throughout the tions. A recent FBI survey showed that nine out of
networks of globalization. 10 business and government agencies had detected
 computer-security breaches within the previous 12 The persistence of such risks should persuade com-
months, with hundreds of millions of dollars in losses. panies that not purchasing terrorism insurance consti-
Corporations therefore can be adversely affected by the tutes a moral hazard. Still, many firms in high-risk envi-
spread of technological know-how. ronments continue to avoid it. Congress has moved to
Furthermore, the impact of just one attack on an adopt a European-style federal terrorism reinsurance
economic target — the September 11, 2001, assault in plan, which covers 90 percent of claims over the first
New York — shows that the financial, transportation, $10 billion.
and tourism sectors, and possibly the telecommunica- However, insurance is not a solution to the existen-
tions sector, are more vulnerable than was previously tial risks posed by this expanded understanding of risk
thought. With the resulting uncertainty continuing to sites. Although reinsurance schemes are a major mecha-
affect the economy, companies are being forced to take nism for mitigating the actual costs of risk, the broader
on additional costs for security. All in all, according to nature of risk requires that companies acquire a better
Fortune magazine, the private sector will spend more sense of the big picture of geopolitical risk in order to
than $150 billion on homeland security–related expens- secure their operations and markets.
es such as insurance, workplace security, logistics, and First and foremost, companies must adopt a more
information technology — approximately four times comprehensive view of the relationships between various
the U.S. federal government’s announced homeland types of risk and the company’s mission, strategy, and
content strategy & competition

security budget. operations, and develop integrated plans for managing

their exposure to those risks. Booz Allen Hamilton has
A Risk/Response Framework termed the state resulting from such activity enterprise
In light of the systemic nature of risk — along supply resilience, which the consulting firm defines as “the abil-
chains, across geographies, and within transaction net- ity and capacity to withstand systemic discontinuities
works — a new approach for comprehensively under- and adapt to new risk environments.” Though corpora-
standing and addressing risk is needed. Such a frame- tions’ risk environments differ, each company that wants
work must evaluate exposure at seven sites of risk and to achieve enterprise resilience must relate risks to strate-
develop corresponding strategies. These risk sites are: gies by creating frameworks in advance for evaluating
1. Presence in Emerging and Unstable Markets. threats. Each risk requires a corresponding strategy that
These are traditional political risk sites, encompassing plots short- and long-term responses and solutions. This
the threat of war, terrorism, organized crime, and expro- collection of strategies to guard against future unavoid-
priation. able risks is the essence of enterprise resilience.
2. Distribution of Personnel. Corporate expansion But integrating political variables into strategic
and activity in emerging markets requires staff travel and planning is easier said than done; we do not have the
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necessitates having offices in potentially unstable loca- modeling capabilities to predict the cycles of an inter-
tions. dependent economy, much less a global economy over-
3. Headquarters. The physical exposure of the cor- shadowed by geopolitical risk. Nonetheless, risk analysis
porate “brain” is the material risk inherent in centralized can begin with an understanding of systemic dynamics
headquarters. and trends, evaluated at different levels of analysis.
4. Supply Chain and Partnerships. Risk is posed Systemic risks arise from the complexity that
by the potential for breakdown within insecure cross- emerges as technology enables actors across disparate
border operational relationships. geographies to influence one another. Whereas tradi-
5. Market Volatility. Industries and subsectors such tional risk analysis focuses on geography, risk today
as tourism and energy are vulnerable to geopolitical evades geographic constraints. The functional risks asso-
conflicts. ciated with the diffusion of powerful and potentially
6. Capital Hazard. Political shocks can cause the sud- lethal technologies are the origin of many business risks
strategy + business issue 32

den loss of investment flow into an industry. today. Thus, the transnational nature of both business
7. Information Vulnerability. Intellectual capital can and risk means that geopolitical analysis must include
be compromised by risks associated with false informa- local, national, regional, and international dimensions.
tion, miscommunication, poor cybersecurity, and block- Firms have increasingly utilized scenario-planning tech-
age of information flows. niques and services to augment their strategic planning
 Risk analysis instruments supply “early
warnings” about trends and measure a
country’s capacity to withstand political,
economic, security, and social shocks.

in order to develop — in advance — responses to unpre- Intelligence Council’s Global Trends 2015 report, a
dictable events and circumstances. But geopolitical risk multiyear research effort that involved considerable con-

content strategy & competition

calls for a modified scenario process. Typically, scenarios sultation with the private sector and academic commu-
are devised, probabilities assessed, and strategies devel- nity. Though such activity requires overcoming certain
oped for the most likely outcome. In an era of high Freedom of Information Act restrictions, the post–
uncertainty, scenario planning must be capabilities- September 11 climate makes collaboration more feasible
based, which means that firms must be prepared for all than it was before.
possible outcomes and ensure that flexible strategies can Operationally, political stability at the regional,
be implemented across the spectrum of risks and futures. national, and local levels contributes decisively to invest-
ment decisions. Risk analysis of specific country stabili-
Public–Private Partnerships ty has improved considerably over the years, though it
Scenario planning and forecasting are essential not only can never be considered an exact science; no one truly
to predict and confront risks, but also to collect data and knows what the outcome of a China–Taiwan conflict
knowledge on geopolitical trends. Both within and would be, for example, nor are flare-ups between India
across industries, corporations have a shared interest in and Pakistan predictable. However, there are examples
understanding these trends to ensure a stable market of risk analysis instruments that supply “early warnings”
environment. Corporations generally lack their own about critical trends and provide a way to measure a
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intelligence-gathering mechanisms — costly private serv- country’s capacity to withstand political, economic,
ices are available that cover the spectrum from risk assess- security, and social shocks. The Lehman Brothers
ment to site surveillance — so the private sector should Eurasia Group Stability Index (LEGSI), for example,
engage with governments in partnerships to improve analyzes social and economic data from more than 20
their collective capacity to track and evaluate threats. countries. Eurasia Group’s founder and president, Ian
Cooperation with government agencies provides Bremmer, points out that some of LEGSI’s “political
both long-term understanding and short-term analysis. findings can be counterintuitive to market analysis, in
This collaboration is also called for in the National that they are forward-looking indicators of social trends
Strategy for Homeland Security, which recommends the and industries.” (LEGSI analysis picked up on Latin
development of protection plans for 14 “critical infra- America’s social ills before the markets did.)
structure sectors.” Lead agencies within the government Risk assessment and resilience planning must
have been assigned to work with the private sector to become a CEO-led priority. Most companies have now
devise collective risk-mitigation strategies. come to terms with the pace at which the business envi-
Separate industries can also work together under ronment changes, but it remains quite another task to
government auspices to build long-term risk perspec- understand these transformations and integrate them
tives, through scenario planning and wargaming. This into more flexible corporate strategies and operations.
was done during the development of the U.S. National The inspiration for thorough consideration of such
 Knowledge of risk scenarios must be
rapidly diffused through management via
tailored “political risk templates.”

underlying issues will have to come from corporate lead- networks, power facilities, telecommunications and data
ership: CEOs must demonstrate commitment in order networks, health-care infrastructure, pharmaceutical
content strategy & competition

for their firms to grasp the geopolitical “big picture.” In supply, and most of the security services upon which
an era of endemic globalization risks, strategic guidance critical U.S. infrastructures depend. Furthermore, cor-
is necessary to separate “red herring” risks from those porate innovations in software, security, and biotechnol-
that can indeed have an impact on firm strategy. CEOs ogy will be essential to win the international campaign
must avoid conflating scenarios of such low probability against terrorism.
that they require only contingency plans to stay in the But, in many ways, the recognition that the prevail-
market (e.g., technical malfunctions) with those that ing market-driven paradigm must factor into geopoliti-
require strategic rethinking, such as market failures and cal uncertainty also requires that business take on an
political shocks. If scenarios and the risk horizons con- entirely new understanding of its purpose in a global
tained within them are properly understood, there can society.
be upsides to not reducing exposure. More proactive than response strategies to physical
CEOs, however, cannot develop an overview of the threats — and more fundamental than regulation, codes
entire world of risk and its rapidly changing dynamics of conduct, and corporate citizenship — is the idea that
by themselves. Though CEOs must be trained to differ- business is a political and social actor with responsibili-
entiate between first- and second-order risks, they must ties beyond wealth creation. The market itself is an
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engage senior managers in teams to examine the func- authority in global governance. Indeed, the private sec-
tional sites of risk and devise mitigation strategies to be tor already embodies the “institutional authority” of the
incorporated into operations. Knowledge of risk scenar- standard-setting power of the market, which has consid-
ios must be rapidly diffused through management via erable impact on political decision making. This in turn
tailored “political risk templates” that bring together rel- means that corporate activity affects both shareholders
evant principals for risk-factor analysis in specific risk and stakeholders, particularly in such policy areas as
areas. Particularly in light of the geographically diffuse labor, environment, and intellectual property rights in
nature of political risks today, such a strategy will also the developing world. Thus, the role of the multi-
empower managers around the world to develop crisis national in self-regulation and standard setting signifies
leadership skills, which are essential in the event of com- the entrance of the private sector into the broader nor-
munications disruptions within a firm. mative debates of the era.
This is no longer a radical view. Business leaders
strategy + business issue 32

The Responsible Company from Microsoft’s Bill Gates to Anglo American’s Sir
Becoming more resilient in the face of globalization’s Mark Moody-Stuart have espoused variations on the
pressures is not only important for business: It is vital for theme of corporate responsibility as both a moral good
the national security of the U.S. and its allies. Private- and a performance mechanism. The increasingly pre-
sector organizations operate America’s transportation sumed private-sector responsibility for the stewardship
of global public goods lays the foundation for the new tional lending and aid (from emergency humanitarian
“market ethics.” Though such ethics reflect a growing assistance toward development assistance).

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progressive spirit among global leaders, double standards Thus an important component of geopolitical risk
and confused responsibility remain salient features of assessment should be an evaluation of the corporate role
this ethical tug-of-war between public and private itself in either increasing or mitigating risks. Does cor-
spheres. Business has clearly responded by extending its porate activity promote or hinder illicit trade in weapons
political management apparatus to negotiate minimal and natural resources, does it enable or curb corruption
responsibility for public goods management, and at the and graft, does it perpetuate illegitimate regimes or fos-
same time has enhanced social adaptive capabilities ter good governance? And even in the absence of direct
through, for example, corporate citizenship programs political involvement, can business serve as a voice to
and improved values communication. But such prac- encourage government engagement in conflict preven-
tices will remain ad hoc until a deeper consensus tion and resolution, or contribute resources toward
emerges over a social contract on the sustainable man- efforts to rebuild shattered postconflict societies to get
agement of the global marketplace. them functioning, consuming, and trading again? In the
As Brian Jenkins of the Rand Corporation has age of systemic risk, corporations are part of both the
observed, “We have spent decades pulling down borders problem and the solution. +
to economic integration, facilitating the seamless trans- Reprint No. 03308
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fer of goods across national borders — now the guards
and gates are going back up.” The strategic change nec-
essary for business is therefore upstream, not to be Resources
confused with corporate citizenship policies to make a
Randy Starr, Jim Newfrock, and Michael Delurey, “Enterprise Resilience:
positive impact on local conditions abroad. Before com- Managing Risk in the Networked Economy,” s+b, Spring 2003;
panies can consider responsible local engagement in www.strategy-business.com/press/article/?art=30100980&pg=0
overseas operations, they must understand the risks they Moisés Naím, “The Five Wars of Globalization,” Foreign Policy,
face in those markets. Corporate citizenship itself will January/February 2003
expand only when MNCs make longer-term commit- David Rothkopf, “Business Versus Terror,” Foreign Policy, May/June 2002
ments to developing-country markets. Jeffrey E. Garten, The Mind of the CEO (Perseus Books/Basic Books,
Nonetheless, it is self-evident that business is a 2001)
major beneficiary of peace, the most basic public good. Global Trends 2015: www.cia.gov/cia/reports/globaltrends2015/index.html
Better investment opportunities, reduced operational National Strategy for Homeland Security:
costs, and expanded markets constitute the virtuous cir- www.whitehouse.gov/homeland/book
cle that results from the consequences of peace: realloca- 2001 Quadrennial Defense Review Report: www.cdi.org/issues/qdr/
tion of nation-state expenditure (from military toward Lehman Brothers Eurasia Group Stability Index: www.legsi.com
social/public goods) and the transformation of interna-