How geopolitics affects businesses of every size and what they can do about it

Compliance, Cyberattacks, ESG, Geopolitics, Global Business, Governance, International Trade, Midsize Businesses, Regulatory Risks, Risk Management, Risk Mitigation, Sanctions, Security, Threat Intelligence, Threats, Tobias Jaeger, Vulnerability Management

March 3, 2023
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Geopolitics: The Global Stage

CEOs and company decision-makers are well aware of the various factors that can impact the success and growth of your business. From economic trends to technological advancements, the business landscape constantly evolves, and companies need to adapt and respond to these changes to stay competitive. However, one factor that is often overlooked but can have a significant impact on business operations is geopolitics.

Geopolitics studies how geography, power, culture, and politics intersect in international relations. It encompasses many economic, social, cultural, and environmental factors and profoundly influences the global business landscape. In this article, we will explore the relevance of geopolitics for businesses of all sizes and highlight how it can impact business operations.

Geopolitics and Trade

One of the most significant ways geopolitics can impact businesses is through its influence on trade relationships between countries. Geopolitical tensions, such as trade wars, can disrupt global supply chains, leading to tariffs, trade barriers, and economic sanctions. These can profoundly impact businesses that rely on international trade to source inputs or export their products.

For example, in 2018, the United States imposed tariffs on steel and aluminum imports from several countries, including Canada, Mexico, and the European Union. This move sparked retaliation from these countries, leading to a trade war significantly impacting businesses that relied on these imports. As a result, companies that relied on steel and aluminum imports had to pay higher prices for these inputs, which increased their production costs and reduced their competitiveness.

Moreover, trade tensions can also impact consumer behavior. For example, Chinese consumers boycotted products from several countries, including the United States, in response to the trade war. This led to declining sales for companies that rely on Chinese consumers, such as Apple and Nike.

Geopolitics

The Impact of Sanctions

Recent US sanctions and export restrictions targeting Russia include restrictions on exporting certain products, including software, technology, and oil exploration or production equipment. In addition, these sanctions have implications for US and non-US companies that do business with or in Russia, as they may be prohibited from exporting certain products or face increased scrutiny from US regulators. 

In addition, the US government has increased its enforcement efforts in recent years, and companies that violate the sanctions can face significant penalties, including fines and imprisonment. The most recent development is the introduction of language that covers the 'enablers' of sanctioned individuals and companies.

Stalling Investment

Geopolitics can also impact investment opportunities for businesses. For example, political instability or conflict can discourage investment in a particular country or region, reducing economic growth and investment opportunities. For example, the ongoing conflict in Syria has significantly impacted the country's economy, leading to a decline in investment and economic activity. The decline has, of course, also impacted its neighbors and the wider region.

Similarly, geopolitical tensions can also impact the availability of financing for businesses. For example, economic sanctions can make it difficult for companies to access financing from international banks. Again, this can impact businesses of all sizes, from small startups to large multinational corporations.

Growing and Changing Regulations

Geopolitics can also influence business operations regulations and policies, including environmental regulations, labor laws, and taxation. For example, in response to the growing threat of climate change, many countries are introducing new regulations and policies aimed at reducing greenhouse gas emissions. These regulations can impact businesses that rely on carbon-intensive activities, such as the oil and gas industry.

Likewise, political shifts can also impact labor laws and regulations. For example, changes in government can lead to changes in labor laws, which can impact businesses' labor costs and productivity.

Geopolitics Risk Management

Businesses need to assess and manage risks associated with geopolitical factors such as political instability, terrorism, and cyber threats. These risks can impact businesses of all sizes, from small startups to large multinational corporations.

For example, in 2014, a cyberattack on Sony Pictures Entertainment resulted in the theft of confidential information and the release of sensitive emails. This incident highlighted the growing threat of cyberattacks from state-sponsored groups to enterprising private outfits specialized in encrypting data for ransom. As a result, the need for businesses to protect themselves against such threats has never been higher.

Similarly, businesses need to be aware of the risks associated with political instability and terrorism. In some regions of the world, such as the Middle East and North Africa, political instability and terrorism are significant risks that can impact business operations.

Opportunities in new Markets

Understanding geopolitical trends and developments is becoming increasingly crucial for businesses as they seek to expand their operations and take advantage of new market opportunities. While China has long been the focus of many companies looking to expand into emerging markets, several other regions are also experiencing significant growth and development. For instance, several countries in Southeast Asia, such as Vietnam, Indonesia, and the Philippines, have been enjoying rapid economic growth and relative political stability in recent time, making them attractive investment destinations for businesses. By analyzing geopolitical trends and developments, companies can identify emerging markets and regions, and position themselves for growth and success in these areas.

To take advantage of these new market opportunities, businesses must prepare to invest significantly in local infrastructure, develop partnerships with local businesses, and conduct thorough market research. By investing in local infrastructure, companies can help to improve the region's transport, communication, and energy systems, which can facilitate their operations and help to stimulate further economic growth. 

Additionally, by developing partnerships with local businesses, companies can gain valuable insights into the local market, and better understand the needs and preferences of their target customers. Finally, conducting market research is also crucial, as it enables companies to better understand the local competitive landscape, identify potential barriers to entry, and develop effective marketing strategies tailored to the local market.

Geopolitics

So what can businesses do to mitigate these geopolitical risks actively?

Geopolitics plays a significant role in shaping the global business landscape and can profoundly impact businesses of all sizes. Therefore, as CEOs and company decision-makers, it is essential to stay informed about geopolitical trends and developments and to assess the risks and opportunities associated with these factors.

Businesses must take steps to mitigate the risks associated with geopolitical factors, such as political instability, terrorism, and cyber threats. This can include investing in cybersecurity measures, diversifying supply chains, and seeking out new market opportunities.

At the same time, businesses also need to be aware of the opportunities that arise from geopolitical developments. By identifying emerging markets and regions, companies can position themselves for growth and success in a rapidly changing global business landscape.

Understanding the relevance of geopolitics for businesses is essential for companies of all sizes. By staying informed about geopolitical trends and developments, businesses can mitigate risks and identify new opportunities, positioning themselves for long-term growth and success in an increasingly complex and interconnected world.

Businesses can follow and implement the advice outlined in this article by taking the following steps:

  1. Stay informed: Businesses must stay informed about geopolitical trends and developments that may impact their operations, including reading news articles, following social media accounts of experts in the field, and attending conferences and events focused on geopolitical issues.
  2. Conduct risk assessments: Businesses must conduct risk assessments to identify the risks associated with geopolitical factors, such as political instability, terrorism, and cyber threats, including assessing the potential impact of these risks on business operations and developing strategies to mitigate these risks.
  3. Diversify supply chains: Businesses can reduce the risks associated with geopolitical factors by diversifying their supply chains, including sourcing inputs from multiple countries or regions rather than relying on a single source.
  4. Invest in cybersecurity: As cyber threats continue to grow, businesses must invest in cybersecurity measures to protect against cyberattacks, incudling implementing firewalls, antivirus software, and data encryption tools, among other measures.
  5. Seek out new market opportunities: By staying informed about geopolitical developments, businesses can identify new market opportunities in emerging markets or regions, including conducting market research, developing partnerships with local businesses, and investing in local infrastructure.
  6. Develop contingency plans: Businesses need to develop contingency plans to address the potential impact of geopolitical risks on their operations, including developing emergency response plans, establishing communication protocols, and identifying alternative sources of inputs or financing.
  7. Implementing compliance programs: Businesses should implement compliance programs to ensure that they comply with the sanctions and export restrictions, including implementing policies and procedures to monitor transactions, conducting due diligence on customers and suppliers, and training employees on the requirements of the sanctions.
  8. Monitoring transactions: Businesses should monitor their transactions for potential violations of sanctions and export restrictions, including conducting regular audits of transactions and reviewing customer and supplier lists for potential red flags.

By following these steps, businesses can position themselves to better understand and navigate the complex and rapidly changing global business landscape. Moreover, by proactively addressing the risks and opportunities associated with geopolitical factors, businesses can increase their resilience and improve their chances for long-term growth and success.

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