MARTYN DAVIES: Understand this about geopolitical tensions

I recall reading a thoughtful article in the Harvard Business Review in 2016 titled "Why Your Company Needs a Foreign Policy". In it, John Chipman, from the International Institute for Strategic Studies, states: "The most successful multinational companies (MNCs) will be those that make expertise in international affairs central to their operations, adopting what can best be described as a corporate foreign policy."

Chipman based this on the rising prevalence of geopolitics in the global economy and how MNCs need to react to volatile and risk-elevating trends. At the time of writing, these included the destabilising impact on business of Brexit, intrastate conflict in the Middle East, Western sanctions against countries such as Iran and Russia, and rising political tensions between the US and China.

I believe Chipman’s assertion is now more valid than ever, when one takes into consideration the seismic impact of Covid on the global economy. Statecraft has traditionally been the domain of sovereigns. But corporates are increasingly having to contend with the rise of new geopolitical and geoeconomic factors.

I believe there are five forces contributing to the rise of geopolitics as they relate to MNCs:

It’s become apparent that geopolitical tensions between the US and China are irreconcilable. There appears to be no difference in the Republican and Democratic administrations’ strategies to counteract China’s rising influence. Targeted Chinese companies continue to be in the strategic crosshairs of US foreign policy.

Since its launch in 2013, China’s Belt & Road Initiative (BRI) has been a lightning rod for Western countries to counter, particularly in the developing world, where BRI projects are most prevalent. The contestation around geopolitical interest in Africa has resulted in fallout for a number of companies in the infrastructure, telecommunications, technology and transport sectors.

• Huge supply chain disruptions are resulting in many governments rushing towards protectionist positions. Import substitution is the order of the day, with "industrial policy" back in vogue. With states actively seeking to take advantage of these trade disruptions, there will be huge implications for supply chains. Corporates can no longer rely on existing bilateral or multilateral free trade arrangements to guarantee their supply lines.
• The pursuit and scaling of battery technology and production is resulting in a scramble to secure vital metals, and countries that possess these are increasing in geopolitical importance. Manufacturing companies are having to maintain or increase their competitive advantage by investing in mission critical resources in a manner not dissimilar to those pursued by Japanese and Chinese corporates investing in their own resource supply chains.
• Fourth is the rise of mercantilist practices from state actors. This has been led by China’s state-owned enterprises, financially supported by Beijing’s so-called policy banks. Western countries are increasingly countering China’s rising global presence. Sovereign wealth funds — often serving as instruments of foreign policy — are also investing in assets in Africa. Private corporations are now often competing (or aligning) with state commercial actors. To do this they require strategies that are both politically informed and astute.
• Finally, geopolitical forces are particularly prevalent in countries that are rich in vital resources but weak in institutional governance. MNCs operating in such geographies need to ensure they comprehend the dynamics of geopolitics there, often compounded by the lack of the application of the rule of law. In countries with rigid political models and a lack of pluralist electoral systems, foreign investments are often susceptible to personal political influence. Corporations need to balance caution and assertion to successfully navigate these institutional voids.

Escalating tensions

Today, there is a heightened sense of geopolitical competition among the world’s largest industrial powers. This is manifesting in a zero-sum mentality, which is negatively affecting MNC strategies and supply chains.

Though Africa is on the bottom rung of the supply chain, its key strategic metals are becoming more highly contested. This will increase as the West more actively seeks to counter China’s pervasive presence.

Also, the rapid scaling of clean energy technologies and their essential metals inputs will be a contributory factor. And so geopolitical tensions will thus escalate.

Corporations will increasingly have to become more adroit at navigating the new disruptive dynamics of geopolitics. As we begin to exit the Covid tunnel, the environment of business may just become more complex, not less.

Davies is MD of emerging markets & Africa at audit, consultancy and advisory firm Deloitte