How long does a direct flight from Helsinki to Tokyo take? When Finnair launched its daily flight schedule between the two cities in March 2020, the flight time was about nine and half hours.Footnote 1 But by 2023, flying time was over thirteen hours. The two cities hadn’t drifted apart – certainly not over a few short years. But Finnair could no longer fly the same route. European airlines were banned from Russian airspace after war broke out between Ukraine and Russia, which meant that Finnair had to avoid the time and fuel saving great circle route over northern Russia. This was a big problem for Finnair because their revenues depended on flights to Asia. The company operated flights to twenty-one Asian destinations in 2019 and generated 44 percent of its revenue from those flights. No wonder then that the company’s stock dropped 21 percent following the ban.Footnote 2 But importantly, Chinese carriers were still allowed to fly over Russia and take shorter routes to Europe. So, when Chinese tourists and business travelers returned to popular destinations in Europe, the airlines they chose to fly were determined not just by the comfort of the seats, quality of the meals, and price of the ticket but also the nationality of the airline. European airlines claimed geopolitical factors gave the Chinese an unfair advantage.Footnote 3 Whether unfair or not, Chinese carriers increased the number of flights to Europe within a couple of years while European airlines slashed flights to Asia.Footnote 4
ChatGPT, the AI-powered chatbot developed by OpenAI, was released in late 2022 and drew so much attention from curious users that it crashed several times.Footnote 5 Its popularity shocked even executives at OpenAIFootnote 6 and led to another furious round of contemplation about the future of work. Microsoft’s multiyear, multibillion dollar investment in OpenAI may change the way we interact over the internet, but the transformative impact of large language models will depend on so much more than machine learning algorithms. Where (the markets) it will be available, who (which users) can benefit from it, and how (applications) they use it will be subject to national and international political calculations.
When ChatGPT was released, it was not available in China. However, shares in the Chinese search engine and technology company Baidu soared about 15 percent when it announced the launch of its own AI chatbot “Wenxin Yiyan” (or “Ernie Bot” in English).Footnote 7 But while Baidu’s Ernie drew on decades of data from running China’s biggest search engine, they found themselves in a tough spot when processing those data. They couldn’t easily access the AI chips they needed for data processing. Nvidia, the US company that made the fastest chips, and controlled about 80 percent of the world’s AI chip market,Footnote 8 faced export bans from its home government, preventing Baidu from buying the most advanced models.Footnote 9
Finnair and ChatGPT are two examples, but they are hardly alone. Companies that came of age in the most recent era of globalization have taken for granted greater economic integration – with the associated global supply chains, international trade in goods and services, integrated financial markets, cross-border research and development, and increased foreign direct investment – as well as the institutional foundation that facilitates it. Individuals’ choices related to jobs, careers, and lives have been built on this foundation. But this system is fraying. Shifts in the global balance of power, trade wars, US-China rivalry, the Ukraine war, technology decoupling, rising inflation, volatile politics, and nationalist and protectionist policies are reshaping the rules of the game, increasing uncertainty, and challenging the institutions that support international interactions. This will have profound implications for when, where, and how companies compete, the managerial talent needed to navigate these issues, and the nature of work available to employees in different parts of the world. And while boards and companies are increasingly concerned with geopolitical risks, not enough have the right expertise or confidence to manage the new environment.Footnote 10
Looking Back, and Looking Ahead
In 1989, a then staffer at the US State Department wrote an article titled “The End of History?.” Francis Fukuyama’s essay announced the triumph of liberal democracy. He argued that as history unfolded, it revealed an ideal form of political organization, one that emphasized liberal democratic states linked to market economies. In the years that followed – even as this idea itself was debated widely – the Berlin wall collapsed, and the European Union project moved forward. At the end of the twentieth century, one could have assumed that the world was moving in a progressive, liberal, international direction. And the US, then the undisputed leader with its unparalleled advantages in military, economic, and technological capabilities, became the organizer and manager of the global system. The global system, in turn, was fashioned in its image, emphasizing open markets and free trade, international organizations, cooperative security, democratic solidarity, and liberal values such as political equality, human rights, and freedom of thought and expression.Footnote 11
For companies considering international investments, long-standing challenges were rapidly being addressed. Thomas Friedman wrote in his book The World Is Flat that historical and geographic divisions were increasingly becoming irrelevant. Countries around the world opened their markets to foreign investors providing new opportunities. Liberalization and privatization, the buzzwords of the 1990s, allowed firms to compete in new industries and new geographies. Harmonized global rules on trade and investment allowed firms to access scarce or low-cost resources from other countries. International treaties on property rights protection and dispute resolution allowed firms to deal with foreign markets, customers, suppliers, and governments more confidently.Footnote 12 The result was an unprecedented exploitation of cross-border economic opportunities: Between 1990 and 2016, there was approximately a ten-fold increase in worldwide inflows of foreign direct investment.Footnote 13 Multinational corporations invested in locations that made most economic sense, that is, minimizing costs and maximizing profits.Footnote 14
As companies expanded their geographic reach during the early years of the twenty-first century, aspiring managers flocked to business schools to hone their skills in economics, reading financial statements, analyzing investments, selling to old and new customers, and managing a distributed and diverse workforce. They spent little-to-no time thinking about grand politics and its role in international business. Today, as business students of the 2000s come of age in the corporate and investment worlds, the landscape is vastly different, and unfamiliar. And they are discovering that global politics is fundamentally reshaping the business world. Mark Carney, a former leader of both the Bank of Canada and the Bank of England, noted that the world is at a “moment … where the accepted forces and policies that have been in place virtually all my adult life are changing.”Footnote 15 Even companies that had previously largely been insulated from geopolitics had to figure out how to respond.
A new world order taking shape, with economic power distributed between the US and China.Footnote 16 Considering purchasing power parity, China has already surpassed the US as the world’s largest economy. It has become the number one trading partner for most countries and established itself as the most essential link in the world’s critical global supply chains. It is also home to the largest number of the most valuable global companies on Fortune’s Global 500 list for the first time. China has rivaled the US in attracting foreign investment and investing in research and development. On the other hand, the US dollar remains the world’s dominant reserve currency and currency of choice in cross-border transactions, US equity markets remain the world’s largest, and the US retains a significant lead in venture capital investments. The US continues to attract the most talented innovators and entrepreneurs in the world.
As the world becomes multipolar, it is likely to see greater frictions among great powers as traditional values of Western liberal democracy clash with the Chinese ideology. In their work, Jessica Chen Weiss and Jeremy Wallace argue that the major features of the Chinese Communist Party rule include “a prioritization of the state over the individual, rule by law rather than rule of law, and a renewed emphasis on ethnic rather than civil nationalism.”Footnote 17 These features are inherently inconsistent with the tenets of the liberal international order such as individual freedom, rule of law, and free markets. One report argued that Chinese leadership rejects the concepts of independent judiciary and checks and balances as “erroneous Western thoughts.”Footnote 18 It is no surprise that some consider the rise of China to be “a death knell for the liberal international order.”Footnote 19
Geopolitics Is about Economics
A manager may ask herself, should my company expand abroad? Should we sell our products to customers in foreign markets? Should we operate new factories, offices, or subsidiaries in another country? In most cases, these are hard-nosed business decisions. How attractive is the foreign opportunity? What is the net present value of the project? Can the firm manage risks associated with the investment? Is the cost of capital reasonable? What will the opportunity cost be? Does the company have sufficient human capital to manage this? At the end of the day, the company chooses to invest (or not) based on the direct costs and benefits that accrue to it.
But the company’s corporate investment decision may also create indirect costs or benefits to other parties not involved in this transaction; what economists refer to as externalities. In particular, a business decision (invest or not) can have implications for a nation’s security. It is a negative externality if it harms the country’s security but a positive externality if it strengthens it. If what might be a smart business decision for a company is not considered to be so good for the country’s economic and military security, governments will try to incentivize and restrain the actions of private companies in ways that strengthen their geopolitical position.
Take the case of the semiconductor chips. China was a huge and lucrative market for US chip exports. American companies supplied chips that were crucial for smartphones, laptops, coffee makers, cars, and a range of other products that Chinese firms produced for domestic and export markets. Nvidia, an American technology company, for instance, generated about $400 million in quarterly revenue in 2022 by selling its most advanced chips to China.Footnote 20 Beyond rewarding shareholders, the additional revenue was invested in research and development, which resulted in this company (and the US semiconductor industry more broadly) retaining a competitive edge in the global industry – a positive externality for the US. At the same time, the US government was concerned that if advanced chips were available in China, it could give the country’s military, intelligence, and security services an edge – a negative externality. To counter this, the US adopted sweeping restrictions on the sale of advanced computing and semiconductor technology that was essential to China’s military and economic ambitions.Footnote 21 Discussing the US approach, the Deputy Secretary of Commerce explicitly noted that the government’s focus was “in key areas … where private industry, on its own, had not factored in our national and economic security interests.”Footnote 22 On the other hand, while many Chinese firms benefited economically from accessing American technology, the Chinese government worried about foreign control of important industries. What would happen to Chinese firms, military, and industry if the US could turn on and off the supply of crucial semiconductor chips whenever it chose to? In a bid to become self-sufficient and spur domestic development, China gave local chip firms US$1.75 billion in subsidies in 2022.Footnote 23
As this example shows, economic statecraft is a key element of geopolitics. Governments directly control and influence the actions of private enterprises with an explicit purpose of weakening opponents and strengthening their geopolitical positions. Although it is most evident in the case of the US and China, the two great powers of today, other countries also leverage their economic sectors to position themselves favorably in a global system in flux. Countries that control critical networks in the global supply chain actively exploit them for geopolitical advantage.Footnote 24 French President, Emmanuel Macron, announced a €30 billion investment plan in 2021 to pour public money into nuclear power, electric cars, agriculture, space, biotechnology, and other sectors to make the country less reliant on foreign imports and reclaim its independence.Footnote 25 Others altered their domestic markets to signal belonging to a geopolitical camp or intensify preexisting interstate relations. For example, in the face of active US pressure, Italy announced its intention to exit the China backed Belt and Road Initiative by the end of 2023.Footnote 26 The Dutch government similarly faced pressure from the United States to restrict the sale of cutting-edge lithography systems developed by the Dutch company ASML to China. While sale to Chinese customers may be economically profitable to the company, Dutch politicians also worried that the technology could promote Chinese “self-sufficiency in its military-technical development” and that Dutch ASML tools would go into “high-value weapons systems and weapons of mass destruction.”Footnote 27
Geopolitical Risk Depends on Corporate Nationality
Geopolitical risk is the threat, realization, and escalation of adverse events associated with interstate tensions.Footnote 28 It is the likelihood that when states prioritize national security and work to minimize the negative externalities of foreign investment, companies’ ability to leverage their assets toward economic rents will be challenged. This can occur through actions by the company’s own government, for instance, when a country limits a company’s foreign sales through export bans of a product or technology. It can also occur through the actions of a foreign government. For example, a company is not allowed to acquire a foreign competitor because the other country’s government prevents the transaction.
As discussed in recent work with my collaborators, underlying geopolitical risk is the idea that when a foreign firm – especially from an adversarial nation – operates in a country, it creates vulnerabilities in the nation’s security.Footnote 29 There are at least three potential reasons for this concern. First, the foreign firm’s commercial operations generate important revenues that can be converted to security advantages for its home country. For instance, by selling products to a rising middle class in Asia, Western multinational firms can repatriate profits to their home countries. Repatriated resources could then be used to create jobs at home, acquire companies domestically, build plants locally, and strengthen the economy in their home country rather than the country where profits were generated. Second, when a foreign firm plays an important role in the local economy, domestic industry could falter as local governments have limited means to encourage foreign firms to act in the “national interest.” There are plenty of examples where domestic control of a company was deemed important by the local government. It was for this reason that the United States blocked the attempted acquisition of the American company Fairchild Semiconductor Corporation by Japan’s Fujitsu Ltd in 1987. Similarly, the acquisition of US energy firm Unocal by the Chinese company COONC was blocked in 2005. The operation of US ports by the UAE-owned Dubai Ports World was also sidelined in 2006. The third reason is that the prevalence of foreign firms in a country can generate political leverage for the foreign government. Foreign firms can potentially act on behalf of their governments to collect information and/or spread propaganda in the country. Researchers in one study found that when people across nineteen countries in six continents were exposed to a representative set of Chinese messages, their perception that the Chinese Communist Party delivers growth, stability, and competent leadership increased.Footnote 30 It also moved the average respondent from slightly preferring the American model to slightly preferring the Chinese model.
While these concerns exist with regard to all foreign firms, they are especially heightened when the foreign firm in question is from an adversarial rather than a friendly country. This is because security externalities are more likely to be exploited by rivals than friends. That is, rival countries have greater incentives to leverage “their country” multinational corporations to gain a political advantage. The distinction between foreign friends and rivals is seen in many domains. Across the world, trade occurs more intensively between geopolitical allies than rivals.Footnote 31 Countries prefer to engage with “like-minded” partners in international organizations.Footnote 32 American politicians were worried about the Japanese acquiring a flagship US semiconductor company because they could “end up with no US semiconductor industry,” and they would “lose the technology race by default.”Footnote 33 But the firm in question (Fairchild) had already been purchased unopposed by the French-controlled Schlumberger in 1979.Footnote 34 In other words, it was not that foreign ownership itself was problematic, but foreign ownership by a company that was from a perceived rival was the real challenge. Similarly, while the UAE-based company Dubai Ports World had to eventually sell off its US operations to an American company, the ports in question had already been operated by the British-owned Peninsular and Oriental Steam Navigation Company (P&O). Again, to the Americans, control by a British entity was not particularly concerning, but control of an American port by a middle eastern company might have been.
Taken together, geopolitical risk depends on where the firm is from, or its corporate nationality. If two companies – say “Alpha” and “Beta” – want to expand to another country, the company that comes from a geopolitical rival will face greater risk. Alpha and Beta might be comparable in their technology, competitiveness, cost, and other factors, but if Alpha’s home country is a geopolitical rival to the host country, but Beta’s is more friendly, then Alpha will face greater geopolitical risk. Simply being from a country that is viewed as a geopolitical adversary may be enough to engender government mistrust, lower customers’ willingness to buy, and increase regulatory restrictions.
Thus, a core theme that I will return to several times in the book is this. The geopolitical risk that a company faces depends on its corporate nationality. Whether the company has an advantage or disadvantage in global competition will depend on its nationality. Simply put, companies from rival countries face greater geopolitical risk than companies from friendly countries.
Impact of Geopolitical Tensions
How can companies, managers, and employees of global businesses make sense of rapidly evolving geopolitical tensions? How can they assess whether their risk is increasing or decreasing? What impact will it have on their companies, roles, and jobs?
Most analyses of geopolitical risk are centered around specific events, such as wars, trade disputes, or global pandemics. They emphasize the presence or absence of either cooperative or conflictual events between countries. A global company will expect geopolitical risk to be high if war breaks out between two countries and the risk to be low when the two countries establish a military alliance. A more sophisticated metric of geopolitical risk could classify the relevance and sentiment of each event into an index. This approach is helpful in generating a broad picture of whether a particular geopolitical event receives outsize attention in markets, the media, or among pundits.
But focusing only on specific events has two disadvantages. First, it does not account for structural changes that occur even when the attention to the specific event itself dies down. Consider, for instance, the events-based geopolitical risk indicator developed by BlackRock, an American investment company. In April 2023, the company argued in its note, distilling the insights of its specialist analysts, that deteriorating US–China relations posed high geopolitical risks. However, their geopolitical risk indicator did not seem to back this conclusion; it sat close to the historical average. This must mean one of two things: Either markets were underappreciating the potential impact of geopolitical risk or that some element of the risk was not being captured by the index.Footnote 35 The second issue with an events-based approach is that it fails to help companies determine how geopolitical events will affect their businesses. If US–China strategic competition is an important geopolitical event, what implications does it have for a company’s strategy and operations? How should multinational companies across industries evaluate the risk? On what dimensions will a company’s operations and profitability be impacted?
A structural perspective offers an alternate approach to evaluating geopolitical risk. The starting assumption is that during periods of heightened geopolitical tensions – when two or more countries contest for power in the international arena – economic statecraft becomes a key policy tool for great powers as well as other countries. Governments focus on specific policies to limit the influence of foreign firms from adversarial countries. The tools are many, but they are all designed to give domestic companies and those from friendly countries an advantage over adversarial foreign rivals. Despite their varied forms, policy tools tend to cluster around four levers that reshape the basic market structure for global companies: market access, level playing field, investment security, and institutional alignment. These dimensions critically influence whether companies can operate internationally and sustain global strategies. In other words, policies chosen by national governments along these dimensions can be more (or less) enabling for foreign companies to operate. Further, these dimensions vary significantly across firms and industries, signifying that risk varies by actor. Together, these dimensions offer one path for systematic analysis of the impact of geopolitics on different firms, industries, and employees (Figure 1.1).
Figure 1.1 A firm’s geopolitical risk
Market Access
In international transactions, market access refers to the ability of a company to enter a foreign market and operate or sell its goods and services there. However, governments can impose specific conditions and requirements for firms to access their domestic markets. Indeed, every country has some restrictions on cross-border trade and foreign direct investment. Common instruments to control market access include tariffs or customs duties, subsidies, import quotas, local content requirements, administrative policies, and technical requirements.
The restrictions on foreign transactions vary by jurisdiction and industry, but in the immediate post-Cold War era, they were rapidly dismantled. Across the developing world, policymakers’ beliefs that attracting more foreign direct investment was in the best interest of their country led to widespread liberalization of laws and regulations affecting inflows of foreign direct investment: About 95 percent of FDI policies between 1992 and 2001 were liberalizing rather than restrictive.Footnote 36 With increased market access, foreign companies began to invest in new markets and industries.Footnote 37
That trend changed. In 2021, the ratio of FDI policy measures that were less favorable to investment over those more favorable was the highest on record at 42 percent.Footnote 38 An increasing number of countries, predominantly developed economies, adopted additional screening of foreign investment in strategic sectors due to security concerns.Footnote 39
These changes serve as a powerful reminder that geopolitical competition can close markets and limit market opportunities for firms.
The US–China trade war was, in essence, about market access. The Trump Administration in the US argued that making imported goods more expensive by imposing tariffs (or additional taxes) on them would encourage consumers to buy American products. It was supposed to protect domestic industry, especially those considered vital for national security, and incentivize foreign countries to change their practices. Over four rounds of tariffs between 2018 and 2019, Chinese imports worth more than $360 billion ranging from meat to musical instruments were hit with tariffs.Footnote 40 The Chinese government retaliated with additional tariffs on more than $100 billion of US imports. This changed the extent to which companies from either country could sell their products in the other country.
There are other types of measures, including ones that focused on particular companies and their continued access to specific markets. In late 2022, Canada ordered three Chinese companies to divest their stakes from Canadian mineral companies after concluding that the investments threatened national security. Tellingly, the Canadian Industry Minister was reported to have noted that the country welcomed foreign direct investment from companies that “share our interests and values” but would “act decisively when investments threaten our national security and our critical minerals supply chains.”Footnote 41 China, on the other hand, launched a review into US chip manufacturer Micron Technology on “national security” grounds, as the country retaliates against increasing US curbs on Chinese access to semiconductor technology.Footnote 42 China is an important market for the company, generating about a quarter of its $30.8 billion revenue in 2022.Footnote 43 Anticipating the headwinds, Micron cautioned in its March 2023 quarterly report that “the Chinese government may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies.”Footnote 44
In June 2020, following a border clash with China, India banned dozens of Chinese apps citing national security and data privacy risks. The list included ByteDance’s TikTok, which was the top downloaded app in India on the Android platform the previous year.Footnote 45 For ByteDance, India was among the largest markets outside China. Being shut out of this market meant the company faced financial losses of over $6 billion.Footnote 46
Restricting market access for geopolitical advantage is not a new phenomenon. At one point in the 1980s, France required all imported video tape recorders to arrive through a small customs entry port that was both remote and poorly staffed. The nine-person customs depot was ostensibly ensuring that new taxes on video recorders were collected. However, the checks were done in such minute detail that virtually none of the machines ever reached the French market. The Trade Ministry called the restrictions to be “interpreted as a signal to Japan that it make the necessary efforts to re-establish the balance of trade with France, either by developing imports or moderating its exports.”Footnote 47
Level Playing Field
In May 2017, when the US government was reportedly seeking dramatic funding cuts to the State Department, a group of about 200 business leaders advocated for a robust diplomatic budget, noting that American companies depended on embassies and consulates around the world to ensure that they “competed on a level playing field.”Footnote 48 The idea that firms from different countries would compete in global markets under the same rules was powerful, even if it was never fully true in practice. Bound by the same set of rules, competition between firms could be fair.
A level playing field needs both a commonly agreed upon set of rules and a mechanism by which those rules are arbitrated consistently. In the post-Cold War era, the rules of the game were mostly clearly defined, although they were driven by US and Western interests. There were also institutional arrangements to enforce these rules. For example, the World Trade Organization provided a forum to not only negotiate agreements reducing obstacles to international trade but also adjudicate disputes that would eventually arise. Similarly, foreign investment was governed by a set of international investment agreements that specified each country’s obligations toward foreign investors, especially in terms of their treatment in a fair manner and on par with domestic investors. Importantly, these agreements allowed foreign firms to exercise those guarantees through an international legal mechanism.
When China joined the World Trade Organization in 2001, the US assumed that it would commit China to play by the rules of the international trading system. Twenty years later, many in the US believed membership in the World Trade Organization allowed China to participate in global markets on its own terms – benefitting from access to international markets but still playing by its own rules. At the same time, US support for the World Trade Organization’s arbitration system was waning, and many countries began to opt out of international investment treaties.
With an eye on geopolitical competition, most governments seemed to have abandoned the idea of a level playing field. Support for “their” companies, often at the expense of “other” companies, was seen as essential if were to retain power and relevance in the international system. In the United States, industrial policy came back. A $280 billion CHIPS and Science Act and $370 billion Inflation Reduction Act aimed to expand US semiconductor and green energy industries and reduce American dependence on China. Korea passed its own bill to give “its” semiconductor firms tax breaks.Footnote 49 Germany planned an estimated €25–30 billion subsidy for power hungry industries in sectors such as chemicals, steel, metal, glass, solar panels, and semiconductors. The German Economy Minister was reported to have observed that these subsidies were needed to respond to the “tough international competition” that was “not taking place on a level playing field.”Footnote 50 Indonesia banned exports of nickel ore to promote its electric-vehicle battery industry and looked to impose further restrictions on raw materials such as copper and bauxite.Footnote 51 China was long accused by the West of subsidizing its state-owned companies with unfair advantages and forcing foreign firms to share their technologies in exchange for access to the Chinese market. In the signature Belt and Road Initiative, the Chinese government was a key player in selecting projects, financing them with preferential loans from state-owned banks and relying on state-owned companies for their construction.Footnote 52
Geopolitical competition also creates a second form of uneven playing field. Beyond supporting domestic firms against foreign competitors, state policy will also tend to treat foreign firms differently based on their corporate nationality, that is, whether they come from friendly or adversarial countries. In the US, for example, foreign companies such as Samsung Electronics and Taiwan Semiconductor Manufacturing Company were poised to receive tax breaks and subsidies from the CHIPS Act to bring their manufacturing to the country. These companies may have been the most sophisticated memory chip manufacturers in the world, but their success in the US was partly also because they came from South Korea and Taiwan, respectively, longstanding US allies. At the same time, a Chinese company’s plan to build a corn mill in North Dakota was seen as a significant threat to national security.Footnote 53 Leading Chinese renewables firms rushed to open factories in the US after the country passed a landmark climate bill to support local clean energy manufacturing but remained worried about not getting the same treatment as their South Korean or European counterparts.Footnote 54 Similarly, India’s 2020 FDI regulations explicitly stipulated the need for prior government approval for investments from countries that share a land border, a move seen as mainly targeting China.Footnote 55 This meant Chinese companies faced greater investment restrictions in the country than their peers from other countries.
A third form of uneven playing field is by company ownership. Compared to private sector firms, state-owned companies investing in foreign markets are especially sensitive to geopolitical tensions. State ownership generates the perception that the company’s investments reflect the controlling governments’ political and geopolitical interests. National security externalities are exacerbated, and investment by state-owned companies generates more scrutiny, greater restrictions, and lower legitimacy. In one study with my collaborators, we examined the foreign acquisitions by sovereign wealth funds relative to private firms.Footnote 56 We found that despite sovereign wealth funds’ expectation of limited managerial control of the acquired firms, state ownership was a red flag when geopolitical relations between two countries were adversarial. State ownership made companies’ internationalization more sensitive to interstate relations.
Investment Security
In 2019, the World Bank conducted a survey of more than 2,400 business executives of multinational companies in 10 large middle-income countries.Footnote 57 They asked respondents to identify the top three factors influencing their investment decisions. In other words, they wanted to know what factors companies thought were important in choosing one country over another for an investment. Nearly nine in ten businesses considered political stability, macroeconomic stability, and a country’s legal and regulatory environment to be important or critically important. For large firms, with more than 250 employees, legal and regulatory environment was the top investment consideration. Investors encountering major legal and regulatory obstacles were more likely to say that they will reduce or withdraw investment from the country.Footnote 58
Why is the legal and regulatory environment so critical for foreign operations? Greater stability and consistency in these elements allow firms to develop higher trust and closer collaborations with partners, buyers, and suppliers. Firms can focus on their operational and commercial activities with confidence that the system will ensure that they are paid and that their investments are secure. As countries competed for foreign investment in the post-Cold War era, they went to great lengths to convince foreign investors that their assets were safe in the country. Governments adopted new reforms, strengthened institutions, and even signed away some of their sovereignty through investment agreements.
Under heightened geopolitical competition, however, private firms’ investment security will be secondary to leveraging those assets for geopolitical advantage. Governments worry less about whether firms believe their investments are protected and focus instead on how those investments can be used to improve their geopolitical position. The US passed a law that kicked off a 270-day countdown for TikTok, a Chinese app that was one of the most popular platforms in the United States, to either be sold or banned from US app stores and the internet hosting services that support it.Footnote 59 TikTok wasn’t much different from other social media apps in its data collection and privacy policies, but its parent company’s relationship to the Chinese government was raised as a cause for concern. China also turned up the heat on several western companies and industries. New sanctions have been slapped on US weapons companies Lockheed Martin and Raytheon, investigations launched into US chipmaker Micron, raids conducted on US due diligence firm Mintz, and fines slapped on the UK-based company Deloitte.Footnote 60 Chinese police visited Shanghai offices of the consulting company Bain & Co. and questioned employees at the US management consulting firm.Footnote 61 An executive of the Japanese pharmaceutical company Astellas was detained.Footnote 62
A particular form of investment security is the exit ban, which prevents a foreign executive from leaving a country if their company gets involved in a dispute. While some disputes may be purely commercial, others involved national security concerns. Courts or other regulators may impose restrictions on the movement of foreign executives, who sometimes only find out that they are subject to such a ban when they try to board an international flight.Footnote 63
Amid western sanctions following the Russia–Ukraine conflict, European and American companies found their assets in Russia being seized.Footnote 64 A Russian court imposed the seizure of about $250 million in securities, real estate, and bank accounts of Deutsche Bank. A Presidential decree put the St Petersburg’s Pulkovo Airport under the management of a Russian company, taking control from the German airport operator Fraport, Qatar’s sovereign wealth fund, and other investors. The Dutch beer maker Heineken exited the country following a sale of its business there for a symbolic $1.Footnote 65
At least some of these examples are striking because government actions are targeted at companies that are not in sectors such as oil, energy, defense, or advanced manufacturing – industries traditionally considered to be “strategic” for a country. Instead, these are levers to pull in a complicated set of intertwined competition. For multinational companies, the threat of being pulled into the conflict, even as a bystander, or a specter of hostage diplomacy dampens their ability and appetite to undertake global strategies. Managers will rightfully be asking many questions. Who will ensure that investments are protected? Can we guarantee the safety of our employees or expatriate managers? Should we invest in countries that limit the repatriation of profits? Will uncompensated expropriations increase? When the US Commerce Secretary Gina Raimondo visited China in the summer of 2023, these were some of the concerns she raised with her Chinese counterparts: “Increasingly I hear from businesses, ‘China is uninvestible’ because it’s become too risky. There are the traditional concerns that they’ve become accustomed to dealing with. And then there’s a whole new set of concerns, the sum total of which is making China feel too risky for them to invest.”Footnote 66
Institutional Alignment
Since the mid 2010s, India’s Ministry of Corporate Affairs has been pushing forth new accounting standards to better align the reporting requirements of Indian companies with the International Financial Reporting Standards (IFRS).Footnote 67 The latter are designed as a common global accounting language so that company accounts are understandable and comparable across international borders. This has some big advantages for Indian companies expanding abroad: better access to global capital markets, easier cross-border listing, and minimizing reporting effort in multiple markets. Global standards – not just in accounting – are important for interoperability in international firms, to lower barriers to trade, and minimize costs for companies and customers. Thanks to these standards, a USB stick made by one company can fit into a USB port built by another. A laptop computer can connect to Wi-Fi anywhere in the world. Shipping containers can be neatly stacked, easily lifted, and quickly loaded onto ships. Websites communicate with servers around the world to show you content. Compare this to the frustration in charging your phone on different types of power outlets.
Yet, standards are another area of contestation in geopolitical competition. As Werner von Siemens, the founder of the eponymous German conglomerate noted: “He who owns the standards, owns the market.”Footnote 68 You might remember the bruising standards wars between companies – Microsoft and Netscape over internet browsers, the video cassette recorder duel pitting Matsushita’s VHS over Sony’s Betamax formats, or Toshiba’s HD-DVD versus Sony’s Blue Ray. These companies fought tooth and nail because their very survival depended on the format and standards adopted in the market. If their format or technology became the de facto standard in the market, more customers would choose their products, and third parties would build apps, software, and technologies that were compatible with their standard, forcing even more customers to choose their products over competitors. The company also controls the intellectual property rights of certain features or applications related to the technology; so other companies have to obtain licenses and permissions for use. This means the firm has a technological advantage, with all other competitors playing catch up to their level of innovation.
The same dynamic is relevant in geopolitical competition.
In 2017, the United States withdrew from the United Nations Educational, Scientific and Cultural Organization (UNESCO), following years of reducing funding to this agency. After a six-year absence, however, the US wanted back in. While UNESCO is probably best known for designating world heritage sites (think of the Grand Canyon in the US, Angkor in Cambodia, or the Taj Mahal in India), it also plays a crucial role in setting standards on a range of issues, including artificial intelligence and technology education around the world. This important role was instrumental in bringing the US back. As reported in the New York Times, US officials worried about creating a vacuum that competing powers, especially China, were filling and undercutting US advantages.Footnote 69 By 2023, the US announced plans to rejoin the organization and increase its financial contributions.
Outside of UNESCO, there are hundreds of standards-setting organizations across industries where different specifications are discussed, and some endorsed. Historically, major American and European companies have dominated discussions at these organizations, where they generally tended to represent their own companies’ interests. This reflects the core principles of most standards organizations, where decisions are industry-led and consensus-driven. The standards they endorse are also nonbinding. But there has been a steady increase in state participation and advocacy in these bodies. The Chinese government asks Chinese firms to vote as a bloc to support China’s proposals and to support Chinese nationals for leadership roles at standards bodies.Footnote 70 As the number of Chinese technocrats, officials, and business leaders take over key leadership positions at these organizations, they have pushed for Chinese businesses’ standards as the de facto international technical standards in crucial sectors.Footnote 71 Some have also argued that Beijing was also using its Belt and Road Initiative to promote Chinese standards in industries such as rail and power transmission; it uses Chinese standards to lock in partner nations who would face major switching costs to change to other international standards.Footnote 72 Chinese influence has, not surprisingly, led to significant concern in the US as the country looks at ways to counteract it.
The risk for global companies is that widely accepted, consensus-driven standards will be abandoned. This will make it much more difficult to operate across countries and markets. And it will increase costs as firms will have to adapt to different standards in different markets.
Corporate Diplomacy
In 2022, American and foreign carriers flew nearly 190 million passengers and carried 12.4 million freight tons between the United States and the rest of the world. That is roughly an increase of about 33% in passenger numbers and 50% in freight compared to the year 2000.Footnote 73 This increase was driven, in part, by international treaties negotiated by the American government called Open Skies Agreements. Since the 1990s, the US government, through a series of bilateral agreements, essentially eliminated government interference in the commercial decisions of air carriers about routes, capacity, and pricing. There was more competition in the aviation industry, and airlines were free to provide more affordable, convenient, and efficient air service for consumers. The agreements also removed restrictions on the number of designated airlines, capacity, frequencies, and types of aircraft that can service a route. Any fare offered by an airline could only be disallowed if both governments to the agreement concurred (and for specific reasons). All carriers of both countries could establish sales offices in the other country, provide their own ground-handling services, and convert and remit earnings. Over two decades, US passengers witnessed greater competition in aviation, lower airfares, and more flights to hundreds of destinations such as Seoul, Singapore, Istanbul, Beijing, and Rio de Janeiro. One study found that a more competitive air transport market, driven by the Open Skies Agreements, reduced air transportation costs by about 9% and increased the share of imports arriving by air by 7% within 3 years after an agreement was signed.Footnote 74
US carriers were initially enthusiastic supporters of Open Skies agreements as liberalization offered access to new markets, routes, and profits. But that enthusiasm waned as competition increased from Middle Eastern and Asian carriers. Since Russia’s invasion of Ukraine, however, US carriers significantly changed their tune, demanding more government restrictions rather than openness.
In his 2022 State of the Union Address, the US President announced that the country would “join our allies in closing off American airspace to all Russian flights.”Footnote 75 In retaliation, Russia banned US airlines from flying over Russian territory. But Russia’s ban did not extend to many other countries, including China and India. As flight connectivity between China and the US increased, Chinese carriers took advantage of shorter routes to offer more attractive fares and shorter flying times to passengers. Not surprisingly, American carriers complained about facing an uneven playing field. But how could they fix this?
To make the playing level again, US carriers such as Delta, United, and American Airlines turned to their government and stepped up lobbying campaigns in Washington DC. But this time, they advocated for more restrictions. They pressed the White House and Congress to fix the problem by subjecting foreign carriers from countries not banned from Russian airspace to the same restrictions as US airlines. An industry representative demanded that the US government “take action to ensure that foreign carriers overflying Russia do not depart, land or transit through U.S. airports.”Footnote 76 This effectively forced all international carriers to fly the same routes as their American competitors, even if they are able to offer faster flights at lower costs. And their lobbying was effective. When the US government negotiated an increase in round-trip flights with their Chinese counterparts, all new flights by Chinese carriers avoided Russian airspace.Footnote 77
This is one example of a broader picture where managing geopolitical risks means CEOs and top managers spend more time and resources in lobbying the state for preferential treatment. US chip company executives lobbied against more restrictive China curbs.Footnote 78 The largest US technology and manufacturing companies lobbied their government to urge India to reconsider its new technology import licensing regime.Footnote 79 Chinese e-commerce and tech companies such as Shein and TikTok also stepped up their lobbying efforts to win government approval in global markets.Footnote 80 Companies around the world sought personnel to assess and respond to geopolitical risks. More than 40 percent of chief legal officers in Asia and Europe and nearly a third in the US expected political developments to be their top challenge in business, while the function of providing legal advice to only be about a quarter of their roles.Footnote 81
Increasingly, successful firms rely on government actions to support their market activity. This was always true. In a globalizing and liberalizing world, firms relied on governments to open markets and provide new avenues for growth. With increased geopolitical tensions, however, successful firms will be ones that are able to ensure preferential policies work in their favor. Managing governments is going to be critical for global businesses, and perhaps more important than market competition in some instances. One study, for example, found that politically connected American companies were more likely to receive exemptions from having to pay higher tariffs on Chinese imports.Footnote 82 McKinsey, a consulting firm, noted that geopolitical risk is at the top of CEO agenda,Footnote 83 and many clients “invest in their classic corporate affairs capabilities, their legal teams, and given the uptick in regulatory changes, their government affairs teams.”Footnote 84 It calls for board members to upgrade their capabilities to conduct more nuanced discussions and decisions around managing geopolitical risk.Footnote 85 There are increasing calls for CEO diplomats, ones who can walk the fine line between managing business interests and external governmental stakeholders. Overall, businesses are devoting more time and attention to dealing with global politics, its impact, and consequences. Large companies such as Microsoft have built a legal, policy, and influence staff of around 2,000 people and costs more than $1 billion a year to run.Footnote 86
Unintended Consequences of Corporate Diplomacy
Managing political and geopolitical tensions is increasingly a part of the job for many mangers, especially at higher levels of an organization. Yet, this comes at a cost. When firms are unable to determine which policies will endure or what form they will ultimately take, managers will tend to withhold or underinvest in key areas. When they do engage in nonmarket activities, they may be rewarded with better information and greater clarity, but these activities make significant demands on firms’ managerial resources, which comes at the expense of other more routine activities.
The Norwegian telecommunications company Telenor, attracted by the growth potential in India, began operations there in the late 2000s by partnering with a local company and investing approximately $2 billion in the venture. Only a few years later, the company found itself in challenging circumstances. The Supreme Court of India concluded that the telecommunications license allocation process (that pre-dated Telenor’s entry) was flawed and directed the State to cancel all 2G licenses issued in the arbitrary and capricious process. This was a major setback for Telenor – the company would lose all of its telecommunication licenses in the country and would have to bid for and acquire them in a new license allocation round. Not only was this going to be expensive, but it also threatened the company’s survival in the market. In the weeks and months that followed the Court’s decision, the company devoted significant time, expertise, and attention to diplomatic, legal, and strategic activities to contain the fallout. On the diplomatic front, the company emphasized the support of the Norwegian government, which owned 54 percent of the firm. Within days of the ruling, they pursued the Norwegian Embassy to raise the issue with the Indian government. The Norwegian Minister of Government Administration and Reform and the former Prime Minister and the United Nations Special Envoy met with Indian officials to raise the issue. A few weeks later, the CEO and other managers, along with the Norwegian Trade and Industry Minister, met Indian officials in the Finance Ministry, the Planning Commission, and the Communications and Information Technology Minister to urge the Indian government to protect the firm’s investment. Separately, Telenor prepared a legal challenge to the license cancellation and investigated the possibility of a court review. They sent a formal notice of their “intent to invoke” international arbitration proceedings over what they saw as the Indian Government’s failure to protect the company’s investment and were seeking $14 billion in damages. At the same time, Telenor was also trying to shape the rules of the new licensing round. The firm planned to participate in the Court-directed reauction but wanted the Indian government to limit the auction to companies that lost licenses. They also lobbied to relax the stringent rules proposed by the Telecom Regulatory Authority of India (TRAI) regarding spectrum allocation, infrastructure requirements, and reserve pricing in the new auction.
All the nonmarket activities won the company some important concessions in the subsequent licensing process. However, the range of new and complex activities in the nonmarket domain also made extensive demands on the firm’s managerial resources. Significant time, attention, and expertise of Telenor’s management – which would otherwise have focused on the firm’s operations – was spent dealing with political, legal, and diplomatic issues. The diversion of resources was reflected in the firm’s relative operational and network performance. On the other hand, telecom companies that were not affected by the Court ruling – and hence presumably not diverting additional managerial resources to political, legal, and diplomatic actions – saw a significant improvement in their network performance. In other words, Telenor’s operational performance declined but that of its unaffected peers improved in the same time period.Footnote 87
With many balls in the air, something is bound to fall.
Previewing the Path: Chapters Ahead
The rest of this book will unpack the many ways by which global politics shapes companies, managers, and work. In Chapter 2, I will first take a closer look at corporate nationality, a key element of geopolitical risk. Even though it is challenging to define a global company’s nationality, it will shape how companies compete, the resources they have access to, and their relative advantage (or disadvantage) in global operations. For managers, an important question is whether and how to distance their companies from their home countries as well as shaping others’ perceptions of their company’s nationality.
Next, I focus on innovation as one of the central arenas of geopolitical tensions (Chapter 3). As geopolitical tensions increase, governments strive to keep innovations at home and increase barriers to cross-border flows of cutting-edge knowledge, technology, and information. Companies withdraw or scale back foreign innovation efforts and the flow of ideas, talent, and resources slows. The promise of global innovation – that unlikely combination of knowledge and information from different sources and locations – is challenged.
In the following section, I turn to questions that many may be concerned about, including chief executives and heads of business units but also line managers and employees: What are the strategic and managerial implications of geopolitics for global companies? I highlight risk mitigation strategies and discuss how decisions regarding resources, competitive advantage, and firm organization will allow companies and managers to buffer against geopolitical risk (Chapter 4). But getting it done also means having the right skills, employees, and organizational setup. In Chapter 5, I offer a four-step process – scanning, personalizing, planning, and pivoting – that combines internal and external expertise to allow companies to be better prepared. Then, I examine how geopolitical tensions are reshaping the future of work, influencing who works, how work is performed, and where it takes place (Chapter 6).
Stepping back, in Chapter 7 I highlight the broader information revolution to examine some leading methodologies in assessing and quantifying geopolitical risk. Computational geopolitics is an attempt to integrate quantitative methods and geopolitical analysis to understand and predict trends, while taking advantage of the explosive growth of data, improvements in computational power, and access to cloud computing.
The ideas discussed in different sections are then brought together in two case studies – on e-commerce (Chapter 8) and green energy (Chapter 9). In each case, I highlight how geopolitical forces are fundamentally shaping industry pressures. National security concerns have led to governments adopting a range of policies to alter the behavior of companies in these sectors. Government actions influence market access, level playing field, investment security, and institutional alignment. In response, companies in these sectors have adopted various strategies to manage geopolitical tensions.
Finally, I wrap up the discussion in Chapter 10 by highlighting the main features of geopolitical risk for companies as well as its impact on managers, employees, and work. To respond effectively, global companies must recognize the systemic changes underway and develop capabilities to address them.
