Framework for navigating political risks in business
Published 10 February 2020
Tapping opportunities in foreign countries calls for careful balancing of what can be achieved with what might go wrong – and planning for both.
While today’s emerging economies are expected to become economic powers in the future and some frontier economies to become significant players, planning for volatility is essential when entering these markets.
For enterprises seeking to establish cross-border businesses where opportunity exists alongside geopolitical factors, planning strategy needs to include scanning, evaluating and adapting to risks that may take unexpected forms.
Using past history for modelling and forecasting outcomes is often insufficient and can even be misleading. Sophisticated data analysis gave Donald Trump a 15% chance of winning the United States presidency in 2016!
Instead businesses should assess the target country in terms of the political, economic and social influences. Are there signs of political instability? Is the infrastructure adequate to support your needs? Is there access to financing and unobstructed channels for repatriating currency? Are there inflation and debt economic concerns? Are there corruption issues to be dealt with?
As well as looking at external factors, an organisation needs the capability to spot, evaluate and manage political challenges to their enterprise. What might a change in political leadership of the target country mean in terms of
How can a business best plan or prepare to deal with impacts on the economy, regulations, stability and its own risk mitigation arrangements?
Dr Jason Thomas, Director, Frontier Investments, an organisation that provides field assessments, strategic guidance and implementation plans in key locations, says success is more likely to be achieved through a continual cycle of risk adaptation, rather than fixed processes.
His suggestions for navigating volatile, uncertain, complex and ambiguous environments involve understanding the influences at work and responding appropriately. Factoring these into your planning strategy can help businesses effectively deal with the prevailing conditions. Rather than remaining locked into conventional risk management solutions, foster the agility to meet challenges as the environment changes.
Navigating volatility, uncertainty, complexity and ambiguity in political risk environments
These influences should be key areas of focus for businesses considering investment in any foreign country. Political risks can arise everywhere. The key components are
volatility ‒ rate of change. Respond by remaining fluid, perhaps you can take advantage of the situation.
uncertainty ‒ inability to know everything about a situation and the difficulty of predicting the nature and effect of change. Meet this by maintaining an open system that can detect subtle signals.
complexity ‒ a structure with multiple connections across a network where emergent behaviour can’t be determined exactly. Create a community web of protection across your network, understand the key nodes of influence across that web and learn how to make those relationships work for you. Don’t neglect relationships with weak ties, this could change.
ambiguity ‒ difficulty of interpreting meaning when the context is unclear.
Adapt to survive
Since eliminating risks entirely isn’t feasible in many environments that also offer business opportunities, an adaptable strategic approach is the key to agility. Some pointers include
immersing yourself in the local, regional and country’s environment to help you understand the context of the challenges
being willing to innovate. What worked in one location may not work in another
being prepared to modify your approach to achieve incremental changes through evolution of your strategy
building a network to act as an early warning system, enabling you to receive subtle signals across your business, the project and country that you can act on to protect yourself and your enterprise.
The people factor
The underlying drivers of political risk usually flow from people. This can be at the project, business or country level.
Consider how to better make use of the people across your network. This requires constantly working by, with and through leadership at all levels to build reciprocal relationships. Networks outside your own system could provide the clearest indications of emerging risks ahead.
Learning how to manage known and unanticipated risks political risks enables you to prepare for surprise and to recognise opportunities that may arise from the changing conditions. Capitalising on those opportunities requires the right approach, backed up by offsetting your risk exposures ‒ and that is where insurance has a key role to play.
“Political risk is one of the major headaches faced by multinational businesses involved in cross-border investments,” says Gallagher National Head of Credit, Surety & Political Risks Racheal Tumelty, naming Africa, Latin America and some areas of the Middle East as regions prone to rapid fluctuation.
Foreign government intervention can affect investors’ liquidity, assets, ability to source materials, secure and manage contracts with manufacturers and set terms of trade. Other risks include civil unrest or war, violence, forced abandonment and currency transfer blockage. Bear in mind that legal recourse or compensation may not be accessible, she warns.
Political risk insurance is designed to protect your offshore projects, investments or funds flow and the Gallagher political risks team is a leading specialist in country risk, well positioned to provide insurance solutions and advice to a broad range of organisations and industry sectors.
So before you venture into investing in offshore project do your research, establish your relationship networks, put your risk management program in place and be prepared to seize and run with opportunities.
To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.