STRATOS Symposium Reveals First-Hand Insights on How to Manage Political Risks in Emerging Markets
On 16 May, the Competence Center for Black Sea Region Studies hosted a public symposium on political risk, dedicated to the complex and multifaceted question “How to Seize Business Opportunities in Emerging Markets.” At this event, the organizers presented first research results from their STRATOS project on strategic political risk management of Austrian enterprises in the Eastern Partnership Region and in Russia, followed by a panel discussion with well-recognised international political risk experts on different world regions.
The four pitfalls of neglecting political risk managment
In his keynote speech, STRATOS project leader Johannes Leitner stressed the importance of political risk management. As he underlined, business success depends considerably on the non-market environment, in particular factors related to the political, regulatory and societal contexts of a country. Associated political risks largely shape the business environment, determining a company’s every action. Leitner further highlighted that managers increasingly recognise the significance of political risk management. The overall picture shows, however, that at the same time four dangerous attitudes still exist: 1) ignorance, meaning managers’ belief that political risks cannot be managed and therefore do not need to be considered; 2) misconception, which occurs when managers misinterpret their problems as market factors when they are in fact rooted in the political context; 3) choosing to ignore political risks – in such cases, political risk management often is the sole responsibility of local staff in the subsidiaries, whereas headquarters do not care to know how problems are solved on site; and 4) wrong lessons learned – due to bad experiences in the past, managers leave promising opportunities unused.
Starting from the conclusion that there is a great need for political risk analysis and management, senior researcher Hannes Meissner subsequently moderated a discussion with four panelists, each of them a recognised expert on a world region with important emerging markets. Elkhan Nuriyev is a political scientist with a strong track record in political analysis in Russia, the Commonwealth of Independent States (CIS), the Eurasia Region and the Caspian Sea Region. Heinrich Matthee is a scientist and political risk analyst who has lived and worked in the Middle East and North Africa for many years. International consultant David Morris holds a number of senior positions in Asia Pacific and Europe, including with the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). Scientist Cecilia Sottilotta deals with political risk including security issues, state-MNC relations, trade, regionalism and development with a strong focus on Latin America.
MNC major challenges in Emerging Markets
In the first round, Meissner asked the panelists about the biggest challenges for MNCs in their region of expertise. For Latin America, Sottilotta highlighted that the constellation always differs from country to country. However, “fundamental political and economic structural risks, including failure of national governance like in the areas of rule of law and corruption, as well as socio-economic inequality and fiscal imbalances” are common political risks. For the post-Soviet space, Nuriyev came to a similar conclusion. “Major challenges such as unresolved territorial conflicts, domestic instability, systemic corruption, social unrest, coups, revolutions and socioeconomic crises strongly impact multinational companies and pose political risks to their business activities in the Eastern European neighbourhood.” As Nuriyev further concluded, “the rules of the game for European enterprises in post-Soviet territory are changing fast. Emerging markets in this part of the world present a unique set of challenges, as multinational companies are facing demand for new business models.” Similarly, in North Africa and the Middle East multinational companies encounter a huge variety of political risk factors, as Matthee highlighted. “The impact of political models on domestic productivity and the responsiveness to the needs of all citizens and communities, conflict and rumours of conflict, and economic mismanagement and corruption” are common features. For Asia Pacific, Morris particularly underlined the importance of political risks coming from the global level. “We are in a time of great geopolitical change and uncertainty, with opportunities as well as risks from the next phase of globalisation in the Asia Pacific, but we must continuously invest in understanding the dynamics of the business environment so that we are not blindsided.”
Managing the non-market context is a crucial task for MNCs
In the second round of questions, Meissner wanted to know how multinational companies could manage these political risks. Sottilotta underlined that political risk analysis empowers companies. “When it comes to investments, knowledge is power.” She therefore concluded that “MNCs interested in the region need to equip themselves with the necessary business and political expertise, keeping in mind that although all Latin American countries share important historical, cultural, socio-demographic traits, each country is really unique in the mix of risks and opportunities it offers.” Given the fact that “there are significant new supply chain realignments as a result of investment in infrastructure and new trade relationships in Asia,” Morris underlined that “a competitive strategy demands the right relationships and attention to managing risks.” In a similar manner, Matthee pointed to the importance of relationship management and mitigation strategies. “Multifaceted risk management ranging from diverse mitigation measures to business diplomacy and strengthening social contracts” are important tools MNCs have to apply. Nuriyev emphasised that there is a particular need to analyse “the character of the political system”. At the same time, “multinational companies should consider diversifying their foreign investments so that all their risk is not concentrated in just one or two emerging markets.” Similar to Matthee, Nuriyev stressed the importance of political risk mitigation. MNCs “should have a clear political risk mitigation strategy that can enable [them] to know ahead of time how to respond to a range of risks.” Given this background, there is a need for innovative political risk management tools. “MNCs need new management tools that provide careful planning, bold and innovative solutions to problems of today and challenges of tomorrow. Comprehensive due diligence investigation, ongoing research and political risk analysis are the most important foundational elements of any emerging market business strategy.”
Expert know-how is available
All panelists subsequently agreed with Nuriyev’s conclusion that “multinational companies should speak with experts on the ground to prepare and protect themselves against sudden political risks.” A number of managers attending the symposium made use of exactly this opportunity in the following open round of questions from the audience.