Globalization and Emerging Risks (Part 1)

Over the past decade or so, globalisation has presented both opportunities and risk to businesses. New developments in technology and the opening of global markets has allowed many businesses to grab opportunities in international markets, and still continues to do so.

As the recent Global Financial Crisis has shown, the global business environment has become so interconnected that one event in one part of the world can have a disastrous impact in another part of the world. Risk is inevitable. In order to achieve their strategic objectives, managers and leaders need to be aware of the various risks their organisations are exposed to, their probability of occurring as well as their severity.

Risk management should be aligned with business strategy. During the strategy setting process, questions should be asked about what could go wrong and how best the organisation can prepare for such events well in advance. Identifying and managing risk calls for a proactive approach at an enterprise level as opposed to a reactive approach at a departmental or functional level.

As the global economy continues to slowly recover from the global economic downturn, various risks still still stand in the way and seek to derail the progress. Having knowledge of such emerging risks is very essential for surviving in a volatile and uncertain macro-economic environment.

Some of the risks that organisations need to be aware of and how they could affect their operations include:

1. Sovereign Risk: What started as a housing bubble in the US has crippled businesses in many parts of the world. In Europe alone, Greece had to receive a bailout from the International Monetary Fund (IMF) and the European Union (EU) in order to stabilise its economy and avoid a calamitous economic crash. On 21 November, Ireland, one of the Eurozone economies which gambled heavily on the property market which almost paralysed the country’s banking sector requested emergency aid from the European Union and the International Monetary Fund.

Bloomberg, the business and financial news channel, reported early this morning that the Irish rescue plan is shifting focus to Portugal, Spain and other high-budget deficit nations of Southern Europe. With these nations still highly indebted and having barely grown at all since the onset of the financial crisis, the risk of defaulting on their debt is still high and the after-effects will no doubt affect business and consumer confidence.

Sovereign risk should not be ignored when formulating and implementing business strategies. Such risks will affect not only the global financial markets but also the operations of the business. For example, the supply chain will be disrupted if one or more of your suppliers are directly or indirectly linked to the involved parties which in turn will also affect your business cash flow.

Governments that are highly indebted are more likely to resort to tax hikes to reduce budget deficits. If your business is domiciled in such jurisdictions, such tax hikes will be borne by you and the main question to ask will be whether it is still viable to continue operating from there or not. For example, Hewlett Packard (HP), Microsoft, Bank of America Merrill Lynch and Intel have all signalled the “damaging impact” on Ireland’s “ability to win and retain investment” should the country’s corporation tax rate be increased from 12.5pc. While the companies are not threatening to leave at this stage, the statement does directly point out that although Ireland’s tax rate may be low in European terms, it is not when compared with locations such as Singapore, India and China.

2. Political Violence: Over the past decade or so, acts of political violence and attempted terrorism have increased tremendously. Statistics from the The Memorial Institute for the Prevention of Terrorism (MIPT reveal that Around 20% of international terrorist attacks are directed against business. Firms that wish to invest overseas need to understand that economies and businesses benefit from stability. Acts of terrorism have the effect of destroying jobs, killing skilled irreplaceable employees as well as forcing the surviving employees to relocate to other locations perceived as safe. In an era of globalisation, understanding and preparing for political violence is crucial for business success and survival.

As political violence evolve, business leaders need to understand the key threats that are also emerging. These could be supply chain risk, cyber-terrorism, or home-grown terrorism which will in turn require the organization to tighten up procedures in areas such as employee vetting, the choice of sub-contractors and location of operations. Other measures also include investment in IT security, continuity plans and insurance spending. Thus in order to fully understand and comprehend the impact of political risk, business leaders should adjust their perception. Perception of political risk should be driven by rigorous analysis rather than media headlines. This means there should be a systematic gathering of all the necessary information on conflict risks from various sources such as specialist consultants, academics, or non-governmental organisations (NGOs) that could help in making and improving the analysis.

In the next posts I will look at other emerging risks presented by globalisation.

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