International Corporate Finance

INTERNATIONAL CORPORATE FINANCE EXECUTIVE SUMMARY

Today, borders among countries no longer

stand for unconquerable restriction. Geo-

politics as a notion has become extremely

important and crucial to all kinds of bu-

siness. In January 2016, the World Econo-

mic Forum pointed out those multinational

enterprises’ concerned, by categorizing

geopolitical risks into those resulting from

geography, economy, and the environment.

Indeed, unrest in the Middle East, territorial

disputes in the South China Sea and the re-

fugee and fiscal crises that shroud Europe

in gloom have caused tremendous ups and

downs for global business.

Here is the question: Are executives pre-

pared to consider geopolitical risks as one of

the major factors in their decision making,

and identify ad-hoc solutions for investors?

Geopolitical risks can cause sudden yet

fatal harm to firms’ core business. From a

micro perspective, unstable interstate envi-

ronments drive away foreign direct invest-

ments and increase the likelihood of capital

flight, they also build high entry barriers for

companies. High volatility usually affects

traditional industries such as oil and gas

and may lead to irreversible consequences.

From a macro perspective, while emerging

markets become ever more important, they

are also the countries that are putting up

obstacles in light of increasing global ten-

sion. Rising nationalism makes govern-

ments in emerging markets set stricter regu-

lations thus companies have to absorb extra

costs in order to enter those markets, losing

economies of scale. The trend could affect

all kinds of industries. Take Pan American

Airways as an instructive example: It faced

overwhelming fixed costs stemming from

the 1973 oil crisis which was exacerbated

by a severe decline in customer numbers.

These problems, followed by the Pan Am

Flight 103 terrorist attack in 1988, were the

key reasons that led to airline’s bankruptcy

in 1991.

Executives with keen business minds have

certainly noticed the importance of iden-

tifying geostrategic risks. A recent survey

conducted by McKinsey indicates that 49%

of executives identify geopolitical instability

as ‘very important’ when assessing impact

on global business, double the figure of

2015 (23%). More than half of the execu-

tives in the financial industry responded

that an uncertain regulatory environment

and political instability would affect their

organizations’ profitability. Leveraging

knowledge of geopolitics has rapidly gained

in importance.

However the same survey also reveals that

only 13% of executives have taken steps to

address geopolitical risks, suggesting one

core issue: Companies have not yet deve-

loped the capabilities to manage global un-

certainties.

Geopolitical instability is a challenge, yet it is

also an opportunity to grow: Adopting com-

prehensive research in the operating coun-

tries and including geostrategic risks into the

strategic-planning process not only mitigates

the hazard of an asset bubble, but doing so

may put companies in the blue ocean and

thus enjoy greater first-comer advantages

such as abundant resources or prompt infor-

mation. With rising uncertainty in every cor-

ner in the world, what doesn’t change is that

knowledge is power.

Geostrategic Risks on the Rise