Want to go global? Why You Need an Economic AND Political Assessment
Date: November 26, 2019
As a complement to our article “Going global: everything SMEs need to know,” we explain here how to make sure you have the perfect political assessment as part of your export strategy. Most companies will devote resources and money to have the perfect economic assessment, but they forget how important the political context is. Here’s why…
Politics is a crucial factor of the global economic landscape. Your capacity to enter a foreign market and to make a profit will largely depend on factors such as political stability, the attitude towards foreigners and foreign trade, the state intervention level, etc. (Source: Trade Ready and FITT). Goods have been crossing borders for centuries, but they’re doing so today with an unprecedented velocity and in unprecedented volume. And they’re not the only ones: ideas, knowledge, people, services, and information are all moving from place to place at higher speeds. SMEs that want to expand in countries that are socially, culturally, and politically alien will have to use both economic and political risk assessments. (source: Harvard Business Review)
For example, many firms see emerging countries as ideal targets for expansion. Their general rank in the world’s leading exporters and importers is rising and the level of trade between each other is also increasing (source: WTO, p. 5). Their share of services imported gained almost 7% point over the past ten years (source: WTO, p. 47). They also offer low production costs and proper infrastructure. The drawback, however, is that they are usually more unstable. In non-democratic countries, firms also run the risk of expropriation or property seizures, policy changes, currency restrictions, changes in government, corruption, and government interference (source: EDC).
And that’s not to mention all the unforeseen events that can suddenly make your life a lot harder, like the actual trade war between the United States and China. Or the nightmare that Brexit has become. The effects are not always direct ones. Economies who are more embedded in China and the United States supply chains, mostly in East Asia, could see their global value chain severely disrupted. And if the trade war results in slower growth in bigger economies, that could affect African and Latin American commodity exporters (Source: United Nations, p. xix).
There’s no way around it: politics is everyone’s business. International markets are more interconnected than ever. Right now, some major countries like the United States, China, and the United Kingdom are contributing to the system’s volatility and instability, and we also depend more and more on energy sources from countries troubled by political instability and risk (source: Harvard Business Review).
In fact, any event that could destabilize a state can eventually become an economic threat, such as war, sanctions, terrorism, etc. When countries are in conflict, firms can face obstacles in the form of regulations, border taxes, embargo, disrupted transport networks, etc. These are all political risks, or, in other words, the “impact of politics on markets” (source: Harvard Business Review).
Any export business plan or strategy must then rely on both the economic and political contexts. Data such as country per capita, growth, and inflation can hide potential threats from other sources. Something as simple as Brazil pressing their agencies and citizens to adopt open-source software could have damaging impact on many technology companies, including Microsoft itself (source: Harvard Business Review).
That doesn’t mean you should not export. Or that you should not export to emerging countries. There are ways to protect yourself, and some brilliant entrepreneurs even manage to make the best out of difficult situations. In the United Kingdom, some executives are just paralyzed, waiting for the uncertainty to be resolved before making any strategic decision. Meanwhile, Scottish firms thrive on the uncertainty and are looking for new market opportunities arising from their competitors’ paralysis (source: Harvard Business Review).
So, what should you do?
- Find a specialist. They can help you navigate unexpected political or legal issues when you need it the most.
- Analyse carefully. Most political events won’t affect your company. Compare yourself with competitors over time. And get some advice from locals, people who live and do business there. Strong connection on the ground will help you mitigate political risk during time of instability. And consult your government’s reports and assessments as part of your own research.
- Use data. Your research will help you gather a lot of data. Use it. It will help you categorize different events as risks, and measure your vulnerability and the nature of your scope of uncertainty.
- Get your business insured. Because you don’t need an insurance until you REALLY need it. Being positive is great, but no one is going to blame you for being forward-thinking. And make sure you take the time to shop for the right one. There are many options out there, and some will better suit your needs than others.
- Open an account in a local bank or a local branch. That could help deal with currency instability.
- Have a plan B. Think about how you could reduce your expenses in times of instability, as to not affect your profit margin. Or what are your options in case your supply chain is affected. This assessment should also include a worst-case scenario and an emergency cost assessment, like the need to repatriate your employees.
Politics is influenced by human behavior. Some people spend their lives trying to understand it, but because of their very nature, political risks are more difficult to measure. The secret is to protect yourself as much as possible, to have all the resources necessary to adapt yourself to changing situations, and to make plans to help you deal with the worst-case scenario.