Geopolitical Risk

Question 1

What is geopolitical risk?

Answer 1

Tensions between countries that have the potential to spark conflict

Question 2

Geopolitical risks are rising due to globalization, the deep connections between business and governments in
many countries, and the impact of business on national security in all countries.

Answer 2

true

Question 3

Geopolitical risk can exacerbate others risks (e.g., related to markets, operations, and
regulations); different forms of risk should be considered in combination, not in isolation.

Answer 3

true

Question 4

Political risk (i.e., unexpected but consequential shifts in government policy) may emerge
both from the usual sources (e.g., authoritarianism) and from national security concerns.

Answer 4

true

Question 5

list 4 factors that characterize the national security economy

Answer 5

1. Connectivity: interdependence among economies.
2. Competition: rivalry among powerful countries.
3. Advanced technologies: semiconductors, artificial intelligence, satellites, digital
   connectivity, and other technologies have both civilian and military applications.
4. Private firms: often develop these technologies and shape their dissemination.

Question 6

List examples of geopolitical risks in China

Answer 6

1. Many of the largest firms are state-owned; all firms with at least 50 employees must
   have a Communist Party representative on the board.1
2. Apple benefited from globalization for decades; it now faces restrictions on what it
   can sell in China and is prohibited from doing business with certain Chinese firms.
3. Some organizations face competing pressures. Many Americans supported an NBA
   owner’s criticism of China’s policies in Hong Kong. But in response, some Chinese
   firms ended ties with the NBA and some NBA broadcasts in China were cancelled.

Question 7

List examples of geopolitical risks in Russia

Answer 7

1. Western firms faced immense pressure from their stakeholders and governments
   pressure to stop doing business in Russia following its invasion of Ukraine.
2. The downsides would be greater if Russia were a bigger market.
3. Major questions about the possible impacts of conflict involving larger markets
   (e.g., the U.S., China, and the EU are the world’s largest economies).

Question 8

List examples of geopolitical risks in the US

Answer 8

1. U.S. multinationals often develop technology for commercial purposes that also is
   used by the U.S. military (e.g., Lockheed Martin, McDonnel-Douglas, and Boeing).
2. U.S. firms, which tend to emphasize efficiency, depend heavily on other countries
   for manufacturing, sourcing, and research and development.
3. The U.S. regularly uses sanctions to advance its agenda (e.g., Chinese firms Huawei
   and ZTE cannot do business in the U.S.; restrictions on business with Iran; etc.).
4. Almost by definition, these sanctions affect U.S. businesses too.

Question 9

List examples of geo-political risks in other countries

Answer 9

1. Firms that are central to the economic power of South Korea (e.g., LG and
   Samsung) and Japan (e.g., the automobile firms) often benefited from state funding.
2. Firms that control much of the world’s energy supply (oil companies) in the Middle
   East, Brazil, Nigeria, and other countries are predominantly state-owned.

Question 10

What are sovereign wealth funds (SWFs)

Answer 10

1. Controlled by governments.
2. Can accumulate real estate and ownership stakes in firms around the world.
3. Can use this influence to further the governments’ objectives.
4. Harder to track if SWFs invest in firms or funds (e.g., venture capitalists) with
   stakes in other firms (e.g., that produce technologies with military applications).

Question 11

List ways to manage geopolitical risks

Answer 11

1. Accept the reality of geopolitical risks (business - government distinction is a false dichotomy, partners may be interested in accessing technology with military applications)
2. Add human capital with geopolitical expertise (and training programs)
3. Incorporate geopolitical factors into business decision making (home Govs may limit firm activities in certain countries, i.e. liability of foreignness)
4. Be mindful of reputational risk (Stakeholders may hold firms accountable over geopolitical issues (e.g., Nokia has
   faced backlash because its technology is the basis of Russian surveillance systems), Criticizing foreign governments can limit firms’ prospects in those countries)