Why Businesses Need a Strategic Approach to Political Risk Analysis

Political risk is a term that refers to the potential for political instability, terrorism, civil unrest, or war to affect investment and business operations negatively. Political risk analysis can help businesses assess their exposure to political risks and manage them effectively.

As with any other risk factor, some companies may choose not to invest in political risk analysis, while others will find it crucial for success. The face of business is changing: successful companies must be prepared for an uncertain future by incorporating strategic political risk analysis into their corporate culture.

Why Is Political Risk Important for Business?

When you think about political risk, the first thing that comes to mind is probably war and conflict. But this is a narrow way of looking at it. Political risk analysis is about a company’s ability to do business in a country, regardless of peace or war. It’s about the impact of government policies and regulations.

It includes corruption, bribery, tax rates, and labor laws. It also consists of any internal conflict or external conflicts between nations. You should consider the political risk if:

  • You’re investing in new markets overseas
  • Doing business with foreign governments
  • Sending employees abroad
  • Forming joint ventures or partnerships with companies based outside your home country
  • Sourcing suppliers from overseas countries
  • Holding conferences outside your own borders

The Face of Business Is Changing

The face of business is changing. From the challenges posed by climate change to the rise in digitization to a shift in consumer behavior, companies face new challenges daily. They need to be proactive instead of reactive, innovative instead of traditional, agile rather than rigid, flexible rather than inflexible, responsive as opposed to traditionalist, and adaptable as opposed to fixed-minded.

A study published in the Harvard Business Review found that when geopolitical risk rises, business innovation declines. This makes sense. Businesses tend to stick with what they know and avoid risk when things are uncertain. But that’s not always a good thing.

Political Risk Analysis Has Become a Necessity for Modern Businesses

Political risk has become a growing concern for businesses today. It’s a broad term that can encompass anything from sanctions to trade embargoes, but at its core, it’s about the potential impact of government action on the bottom line.

The US National Intelligence Council’s report “Global Trends 2040: A more contested world” predicts a more conflict-prone and volatile geopolitical environment in which China competes with a Western coalition led by the United States.

When you or your company makes decisions about international operations or investments, you need to be aware of political risks and how they could affect your business. Your options are limited if you don’t analyze and plan.

Businesses Can No Longer Afford to Ignore Political Risks

Political risk is a growing concern for companies, and it’s no longer just a matter of whether or not you need to consider political factors in your business decisions. Business leaders must consider it a critical factor when making those decisions.

The EY Geostrategy in Practice 2021 survey found that 94% of companies experienced political risk impacts in 2020. Businesses can no longer afford to ignore the political risks they face, nor should they be blind to their potential impact on operations in other countries.

A New Approach to Political Risk Analysis Can Help Companies Succeed

When making decisions about their futures, companies face various strategic choices that require thoughtful consideration. However, many businesses still lack an effective way to analyze future scenarios and make decisions based on the best available information.

Political risk consultants can help companies with this by providing information about what political risks are most likely to affect them, how those risks have affected other companies in similar situations, and how they can be mitigated or avoided altogether.

Political risk consultants can also advise business owners on what steps they should take to ensure their company’s success despite these threats. Hence, political risk consulting can help businesses plan for political risks and hazards, such as war and terrorism.

Companies Need to Incorporate Political Risk Analysis Into the Fabric of Their Business Operations

Political risk analysis should be a part of the company’s strategic planning process. It should also be integrated into the corporate culture and embedded in daily operations. Companies must consider political risks, not just when facing them but also before they happen.

If you’ve identified potential political risks, you can build buffers around your business so that it’s less likely to be affected by those risks or recover more quickly from their effects if they do occur. This will help ensure that your company can operate effectively despite uncertainty surrounding geopolitical events and issues.

For example, a survey by Edelman found that the conflict in Ukraine has raised the profile of geopolitics, and it is now front and center on many business agendas. In fact, 47% of respondents have boycotted or bought brands based on the parent company’s response to the invasion of Ukraine. Many companies have announced they will leave Russia or suspend business there since the war began.

Strategic Political Risk Analysis Should Be Incorporated Into Corporate Culture

Political risk analysis is vital to the success of a business in any country. It’s also important for companies to integrate political risk analysis into their corporate cultures to become an integral part of decision-making processes.

Businesses must also incorporate political risk analysis into employee training; otherwise, employees who are not aware of the risks may make poor decisions or fail to recognize potential problems.

Taking a Strategic, Proactive Approach to Assessing and Managing Political Risk

As demand for access to the oceans’ resources, strategically essential minerals, and space continue to grow, political risk will continue to increase, according to Marsh’s Political Risk Report 2022. The best way to mitigate risk and ensure that your organization can weather any political storm is by taking a strategic, proactive approach to assessing and managing political risk. Here are some tips for managing political risk:

  • Stay informed and keep an eye on the horizon. The first step in any assessment should be staying up to date on worldwide developments that could affect your company’s business interests. Monitor news sources, consult with industry experts, follow government publications and participate in relevant conferences, so you know what’s happening before it happens and plan accordingly.
  • Prepare for the worst-case scenario. In addition to keeping abreast of developments in your region or industry, it’s essential to consider how they might play out if they become more severe or widespread than expected. Evaluate how each potential scenario would affect you financially, strategically, or operationally. Then identify ways for your company to respond effectively when something does happen, before it does.
  • Don’t panic! While preparing for potential adverse outcomes is an essential part of political risk analysis, overthinking about all possible worst-case scenarios can cause undue stress among employees who may not fully understand what’s going on at first glance, potentially leading some people within teams not be able to do their jobs properly due.

Conclusion

Today, political risk is an unavoidable part of doing business. A strategic political risk analysis approach can help you minimize the risks associated with doing business in a volatile region or geopolitical climate and maximize your potential for success.

Adam Hansen