Though some view the cessation of hostilities in the Iraq war and the subsequent fall in oil prices as the end of a crisis, in reality they constitute a mere pause in the transformation of the global business environment. The maturity of Western markets demands that firms expand beyond the confines of the developed world into areas that carry risk far greater than that to which they are accustomed. Major conflict scenarios abound in the great crescent from the Middle East through Central Asia to India and Southeast Asia, which encompasses both the greatest potential for economic development and enormous political uncertainty. Multinational corporations (MNCs) are now active in at least 70 countries rated at “medium” to “extreme” risk, and more than $150 billion is invested in 50 countries rated “fairly” to “very” corrupt in the Transparency International Corruption Perceptions Index, according to Control Risks Group, a London-based international business consultancy. Though a sagging global economy in 2001 witnessed the first drop in foreign direct investment (FDI) in more than a decade, FDI in developing countries fell by only 14 percent, versus 59 percent in developed economies, according to the United Nations World Investment Report 2002.
In terms of their capacity to actively mitigate this risk, corporations are overexposed. From business schools to boardrooms, the corporate world lacks the models and instruments to remain confident in its understanding of geopolitical trends and political and social change, and the corresponding risks these carry for business activity worldwide. Given the difficulty of modeling global market complexity, many chief executives will greet calls for a major shift in corporate thinking with a resigned shrug. But as Jeffrey E. Garten, the former undersecretary of commerce for international trade and the current dean of the Yale School of Management, argues, “CEOs ought to think more broadly about what true business leadership means today.… They ought to realize that they should take more responsibility for shaping the environment in which they and everyone else can prosper. They should be corporate chief executives, but also business statesmen.”
Just as economic globalization has forced political leaders to adjust to the rigors of a nonstop marketplace, the pace of political events around the world requires that corporate executives take the initiative to confront the consequences of the links between geopolitics and business performance. Whereas the global surge of multinational corporate activity in the 1990s brought down national borders, the next era of geopolitical change will be less certain, which will make deeper assessments of and adjustments to geopolitical risk essential for continuing business success.
Many political analysts today speak of the post–September 11 world as highly uncertain and fluid, with systemic “shocks” likely and at the same time unpredictable. In this context, geopolitical risk has a clear meaning for business: It is the potential for international political conflict to threaten the financial and operational stability of companies around the world. To develop a framework to mitigate this risk, MNCs must understand the specific nature of the relationship between corporate globalization and geopolitics, map the “sites of risk” for corporations in their activities, and adopt forecasting tools to enhance their enterprise resilience with respect to threats from conflict and terrorism. CEO leadership is crucial to advancing this process.