Over the past 15 years, the international business world has become more complex. Previously, for companies operating, exporting, importing and investing in international markets, the basic criterion of action was efficiency: reducing costs and increasing business volume and profits.
With the crisis of 2008, things started to change. The growth rate of international trade slowed down. Over the past two decades, international trade has grown at twice the rate of global GDP. Beginning in 2008, international trade and GDP began to grow at roughly the same rate. A new term has become popular, “deglobalization”, and some people exaggerately claim that this is the future trend of the international economy.
Then came the pandemic, which wreaked havoc on production, transportation and supply chains. And this year’s war in Ukraine has dramatically exacerbated those disruptions.
Pandemics and wars make the second measure of company performance critical: resilience, security, and minimizing disruptions that could lead to disruptions such as wars, pandemics, or natural disasters.
When relocating production facilities or finding suppliers of intermediate products abroad, in addition to cost-related factors, companies must also consider the security of their supply chains. There are origins of new concepts, reflow, nearshoringFor example, the shortening of global value chains.A more recent term might be support friends: Refers to the procurement of own facilities and external suppliers from “friendly” countries that share political values.
In the near future, in addition to the above two criteria, companies will have to consider other criteria: efficiency and resilience. I refer first to human rights standards. Germany has passed a law requiring companies to put in place mechanisms to ensure respect for human rights in their supply chains. The EU is studying legislation in this area.US has approved Uyghur Forced Labor Prevention Act (UFLPA), This requires companies to certify that products imported from Xinjiang (China) do not involve forced labor.
New requirements for companies and governments
Broadly speaking, the rise of geopolitical factors implies important demands on corporate and government behaviour. Let’s briefly review some of them.
First, companies must develop risk maps in their supply chains. On the one hand, this means identifying the key points in it, the links in the supply chain that affect the company’s essentials, without which its activities would be severely distorted.
On the other hand, it means identifying the main risks or vulnerabilities they may face. To take an extreme example, a European and American textile company that relies on importing cotton from Xinjiang must realize that this is a critical point in its supply chain and is vulnerable to punitive measures by (US or EU) governments.
What applies to companies also applies to countries. They must, like companies, identify critical points and risks in their supply chains. Gas dependence on Russia is the most obvious example that can be given (some critics say that if Germany had done this analysis before, it would not have such a high dependence on Russian gas. But of course… It’s easy to make these criticisms of past bulls).
Second, businesses must develop intelligent systems. The concept of intelligence is somewhat ambiguous and is often used loosely to refer to non-intelligence issues such as terrorism or cybersecurity. In economics, intelligence has two components: the collection of information and the analysis of said information (to identify risks and forecasts). In the more specific field of international business, we must talk about the intelligence of internationalization, which has its essence.
Third, businesses and governments must take a long-term view. Everything seems to point to a future of epidemics, natural disasters (first caused by climate change), armed conflicts, and, in short, a wide range of geopolitical risks.
In recent weeks, for example, various media outlets have said that a large number of multinational corporations have requested reports on the war risks posed to them by China’s invasion of Taiwan. Companies operating in China (exporting or importing products, not to mention if they have production facilities in China), must use the intelligence system I mentioned earlier to analyze possible future situations and risks, and how to prevent them.
Finally, fourth, we have entered a stage where the government will play a more active role in economic activity. First, use the tools at their disposal to promote or protect strategic sectors.
Energy (especially renewables), defence, cybersecurity, logistics and transport are some of the strategic sectors where the government will intervene in various ways: monitoring the entry of foreign companies that depend on authoritarian or “unfriendly” political regimes” , through subsidies, tax breaks and other economic policy instruments to support private sector investment, direct participation in companies, etc.
Gone are the days when the role of government must be reduced. The ideas of Thatcher and Reagan, so popular at the time, have given way to more interventionist positions.
Image: Top view of international logistics and freight. Photography: Tridsanu.