China's export drive to the United States is in full swing before tariffs kick in. Illustration: iStock
China's export drive to the United States is in full swing before tariffs kick in. Illustration: iStock

Nowadays isolationist measures, diplomatic tensions, and divisive narratives give birth to the disorder that makes the international scenario particularly unpredictable, with storms on the horizon that require companies to become more aware of societal dynamics in order to interpret adequately and manage the political risk. This specific threat is not a product of modern times, but it has increased the degree of its influence to involve multiple players and markets in virtue of the expansion of foreign direct investment, the proliferation of organizations and phenomena that originate risks, and the evolution of supply-chain networks.

This political uncertainty represents one of the major challenges of the 21st century, and corporates all over the world are obliged to adapt their structures and plans to new contextual features, independently of their size and their market power. Recent cases refocused attention on this topic, stressing the lack of flexible approaches within corporate halls and emphasizing the need for alternative strategies in response to the various types of political risk – and, more generally, in response to the complexity of the entire global system.

The trade conflict between China and the United States is a useful key to understand the geopolitical risk deriving from multilateral sanctions and measures implemented to safeguard economies, strategic sectors, and the leading role held in international exchanges.

Specifically, on August 23 Beijing imposed retaliatory duties on US$75 billion worth of American goods, unleashing the reaction of Washington. On Twitter, US President Donald Trump ordered companies to start looking for an alternative market to China, involving these business actors in the dispute and almost forcing them to repeat the experience of Huawei and several Chinese companies in face of the negative repercussions of the tightening of a state foreign policies.

But not even Silicon Valley’s giants are exempt from financial drawbacks associated with the rise of political dangers. In 2018, Google was hit with a $5.1 billion fine by the European Commission, which alleged that the multinational technology company used the Android system to enforce its dominance as a search engine by undermining fair competition within the EU market. This circumstance highlighted how laws and regulations could be a source of political risk, especially when they are put in place to disadvantage foreign companies in favor of national ones, or in response to political decisions made by other nations.

The bureaucratic obstacles to Google business operations differ from what happened to Versace in recent weeks. The Italian luxury fashion house ran into trouble for mislabeling Hong Kong and Macau as independent territories on new T-shirts sold in China. In the framework of a tense moment characterized by intensified protests in Hong Kong, the People’s Republic of China is strict in policing how foreigners describe the escalation of events, and in spite of designer Donatella Versace’s official apology, the mistake sparked criticism from Chinese consumers.

The pride of Chinese people, driven by a rooted sentiment of collectivism, is something that even Dolce & Gabbana had to deal with. Last year, the iconic luxury fashion firm was involved in a controversy whose object was a marketing video widely considered offensive and racist in representing the image of Chinese women. The debate raised on Weibo demonstrated the exposure to a type of threat amplified by social activism that arises not only at the production level but also at the point of consumption.

Technological transformations play a relevant role in defining the channels to propagate political risk, but not only through the support and instant sharing of opinions among people. Indeed, the era of digital economy we are living in has led to an increase of cyberattacks. In 2017, to mention one example, the Central Bank of Russia was attacked by two hacker groups who stole $6 billion using the SWIFT international payments messaging system.

Financial institutions are often victims of effects boosted by risks within society, but at the same time they can also be the focus around which corrupt activities take place to protect special interest groups. In September 2018, Danske Bank was formally investigated because of 9.5 million suspicious transactions that flowed through its Estonian branch between 2007 and 2015, covering a value of 1,500 billion Danish kroner (US$220 billion).

The cases described above do not provide a complete scenario of all political threats; indeed, other forms could be linked to terrorist attacks, manipulation of natural resources, or defaults. But it is essential to remark the importance of managerial bodies in studying effective approaches to contain and to influence any sort of contextual risk in order to limit financial and reputation repercussions. In their 2018 publication Political Risk, Condoleezza Rice and Amy Zegart suggested a valid model divided into four main areas that should be implemented by modern companies:

  • Understand: It relates to the spread of a “risk culture” to all organization levels thanks to the construction of efficient communication channels. This stage could be supported by insights offered by the Organizational Behavior field with the goal of facilitating the comprehension of external perspectives;
  • Analyze: It means collecting political information in line with the specific needs and plans developed by the firm, and to fully integrate them in the decision-making process;
  • Mitigate: It is synonymous with the identification of vulnerabilities in order to reduce their exposition even establishing key relations with stakeholders;
  • Respond: It is linked to the development of a strategy able to respond to failures, and whose main pillars are represented by cross functional cooperation and employers’ training.

Today’s landscape is constantly shifting, changing the variables that must be taken into consideration to navigate the international economy sea successfully. These ongoing political, cultural, and economical transformations are imposing different ways to read the environment. In fact, solutions to achieve companies’ objectives can be found only if leaders start to adopt a holistic approach oriented toward the understanding of all the components interacting in the global scene, overcoming the demarcation lines between domains. The highly interconnected world requires new visions, flexibility, and a different engagement in front of societal problems.

Federica Russo

Federica Russo is research lead at Navis, an executive search firm which takes an active role to improve how business leaders are selected. Previously, she was director of research at Wikistrat, a consulting firm helping Fortune 500 corporations and governments to brainstorm solutions and obtain an in-depth understanding of their landscape by using a crowdsourcing approach. She is currently based in Kuala Lumpur, Malaysia.

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