Geo-Political Stability and Challenges for MNCs

Posted in Finance Articles, Total Reads: 2428 , Published on 09 February 2014
Advertisements

At this moment, if you look around the globe for any part of the world and you will find that part is undergoing some kind of turmoil or a socio-political change. The economies of the nations are becoming more unstable and restless than ever. The U.S., just after avoiding the fiscal cliff, is now contemplating the QE tapering. The European Union’s unity is put to test and questions are being raised on The Euro. Despite China’s impressive economic prowess, it is being subject to more stratification than ever. Indian decision and policy making mechanism has come to a halt. The Arab and North African nations are facing internal disturbances- affecting the oil and energy equilibrium. This uneasiness is not only destabilizing the governments, but is also making the lives of MNC’s and their chief executives’ difficult. Geo-political stability and international relations were never as relevant as they are now.


image:freedigitalphotos.net, Michelle Meiklejohn

There is a strong correlation between the geo-political scenarios with the business the MNCs do.  A stable economy with effective political system will provide a conductive environment for a business to grow. This would be in the form of provision of necessary resources (like electricity, transportation, water etc.) or in giving incentives for growth (like providing export incentives, free trade agreements, credit facilities etc.) The MNCs invest heavily in the country they think they should expand- through FDI, FII and most importantly employment to the citizens of the nation.


According to Control Risks Group, a London-based international business consultancy, around $150 billion has been invested in countries that are marked as “fairly” to “very” corrupt in the Transparency Perception Index. Unstable economies are not helping the cause- their investments are at a high risk. At the same time, unstable economies will interfere with the day to day functioning of the organization and create hurdles in their path. The increasing frustration of the company will eventually result in it pulling out of the nation- a move that has the potential to further destabilize the economy.

The question now arises is that how do MNCs cope up with the changing dynamics of the world. In my opinion there are three choices that they have. The first is to play safe- invest and operate in countries which are insulated from a very high change of risk. Those nations include the likes of developed nations like Germany, Japan and the US. Though returns are proportional to the risk taken, the chief executives of the MNCs must decide which of the developing economies to venture. For a market entry- a proper plan including a contingency plan along with a holistic analysis of the nation is a must. For example- it is easier for a single brand retail manufacturer to establish in India compared to a steel producing company. The second is to collaborate with established players in the economies. Such established companies know the pulse of the economy and have seen through ups & downs.

This is a less risky and less profitable way- but the MNC must be quick enough to grasp any opportunity it sees in establishing in the economy independently. The last option would to take a calculated risk and continue operations or enter the economies where the situation is politically unstable. The MNC must be convinced that the political situation does not have a very high nuisance value and that it has the strength to bear through it. The rewards in such cases are very sweet- as- if the situation normalizes it will be a big breakthrough for the MNC. However it should be ready for the worst to happen.

Unfortunately for the MNCs, none of the modern frameworks, such as PESTEL or Porter’s Diamond, can help them in making an appropriate choice of venturing into or continuing operations in the nations. Hence much will depend on factors external to the MNCs.


When the question of resolving geo-political instability arises, the answers lay both internally and externally. External factors include the arbitration of geo-political organizations such as the ASEAN, CARICOM, and The Arab League etc. But history is testimony to the fact that when the question of resolving crises within the geographical area arises, these organizations become toothless. Intervention of foreign super-powers is also not feasible given their indirect interest in the markets and international pressure. What the organizations can utmost do is identify the problems in the nascent stages and resolve them before they proliferate to other nations. However, once the instability seeps in, it is difficult to deal with. This makes it imperative for the nations to resolve the geo-political instability internally.

There is no panacea which can resolve the problems internally.  We have to look at individual nations from their point of reference and learn the nuances associated with them. For example, in some countries like Italy, Japan, and the United States – politics is the primary driver of economic-policy. At the same time in economies of China, Egypt, Germany, and Greece it is the other way round, with economics becoming a key determinant of political outcomes. In the first set of countries, the political system must be revamped so as to make it stable, sturdy and independent from the ruling political party. In the other set of countries, emphasis on issues which stimulate social well being must also be considered by the political classes along with the economic ones.

2014 does bring in hope. Fresh elections in India have a chance of breaking the policy deadlock. U.S.’s GDP growth has beat the estimates by a huge margin. China is becoming more open to its neighbors than ever, though disputes are still unresolved. Germany looks in control of the Euro Zone and the condition of other developing economic nations is expected to soothe. In conclusion, I would like to say that every problem has a solution. And every solution leads to a new problem. This is a viscous and never ending circle with which both the private and public sector companies must learn to live with. The quicker they learn, the faster they progress.

The article has been authored by Ashutosh Deshpande, IIFT

References


1. Risky Business: Geopolitics and the Global Corporation: Sven Behrendt and Parag Khanna (Strategy Business all 2003 / Issue 32)

2. What Is ASEAN’s Relevance for Geopolitical Stability in Asia-Fenna Egberink, Frans-Paul van der Putten (Journal of Current Southeast Asian Affairs, Vol 29, No 3)

3. The Political Economy of 2013: M. A. El-Erian as published on Project Syndicate

4. A  T Kearney’s Global Business Policy Council Report on Rising Geopolitical Instability

5. The Site:  http://www.doingbusiness.org/


Advertisements


If you are interested in writing articles for us, Submit Here