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It's the politics, stupid! Politics as a risk factor for businesses

10/05/2018

by Patricia Klopf, Prof. Dr. Phillip Nell & Dr. Johannes Leitner

People are tirelessly discussing the pros and cons of free trade, but in reality businesses have to respond to new political challenges today.

 

Trump, “Brexit” or other political developments in Europe - everybody is talking about “free trade”. The advocates and critics of free trade are putting forward their arguments. However the discussions, which have a strong economic focus, address the fears of the public only to some extent. In addition, the concerns of people and the arguments for and against free trade are just one aspect of a complex issue. Another significant factor is that there are new political challenges that businesses, in particular, cannot afford to ignore. To what extent and in what ways they respond to such “political risks” will be crucial. Large businesses like voestalpine and Zumtobel demonstrate how this challenge can be met successfully (Links to German articles). That said, managing political risks strategically is both important and essential for Austrian SMEs with limited resources.

Picture of a freighter
Yes or no to free trade? While the public debates, businesses must respond to political challenges. Photo © CC0 Licence

Fresh political bickering

As the world got increasingly globalized, the fundamental order became more liberal and trade restrictions were eased. Economic integration made the international environment less uncertain for businesses. However, ever since the global economy ran into trouble in 2008, we have seen a comeback of policies with a national focus. It seems that under President Trump protectionism is gaining ground and free trade is being curbed. The Brexit debate is based on a similar national agenda. In Austria, there are also calls for policymakers to foster national sovereignty and intervene in business.

The words Brexit and EU are on path signs showing into different directions
Policies with a national focus are experiencing a comeback: The Brexit discussion and Trump's economic and geopolitical strategies are based on this focus. Photo © CC0 Licence

Instead of strengthening supranational systems, countries tend to focus on a plethora of interventions and restrictions at the national level, making it harder for businesses to predict the environments they operate in. In which direction will the trade war between the USA and China develop? What about the Iraq sanctions? And what about the harsh punitive tariffs from the USA on European companies in the future? Questions such as this show how massive and fragmented today's political uncertainties are. Internationally active businesses have to again devote more of their attention to national politics and disjointed regulatory requirements.

 

Managing political risks gives businesses the certainty they need to succeed

Businesses cannot cope with these challenges and avoid negative political influences unless they engage in political management. What does this mean? More than ever before, they are required to keep abreast of politico-economic developments; they have to analyze them and need to anticipate what consequences they may have for them. So political management is about the strategy-driven analysis of existing and potential threats facing businesses in an international context. These threats, which are the result of political and governmental/institutional factors, all have an effect on business success. Not only are compliance standards, but investments and profitability are also threatened by geopolitical risks like war and terrorism.

In addition, these aspects are particularly susceptible to politico-institutional problem factors such as clientelism, corruption, lack of legal certainty, and patriarchal loyalty ties. Hence, businesses need to do both, analyze the global context and keep track of macropolitical and micropolitical risk factors. This allows them to develop political strategies in a targeted manner and decide whether they want to avoid political risks or whether they are willing to accept them and minimize possible consequences.

 

Managing political risks and interventions includes building relationships with parties involved in shaping the framework for doing business. Although frowned upon by many, lobbying politicians, interest groups or NGOs becomes the order of the day.

Two people shaking hands
With rising political influence on the economy, lobbying becomes the order of the day. Photo © CC0 Licence

Political management makes a vague environment more predictable and gives businesses the certainty they need to succeed, as is illustrated by the experience of companies in politically volatile countries. Yet political strategies are costly. Their effectiveness is hard to anticipate and the benefits they bring remain invisible as long as there is business as usual; and that is the problem: Political management can result in a competitive advantage, but its costs and benefits are hard to forecast. Large businesses are more likely to harness the power of political strategies given their resources and the experience they (possibly) have. SMEs, by contrast, first of all face the challenge of realizing the usefulness and value of political management and then investing in its development, irrespective of the fact that their resources are limited. At any rate, developing expertise in managing political risks and political strategies, or bringing in external know-how, is crucially important. Ignoring the issue is not the way to go, for “It’s the politics, stupid!"

About the authors:

Portrait Patricia Klopf

Patricia Klopf, MSc. is a PhD student at WU Vienna's Institute for International Business. Her research focuses on the strategic management of political risks.

 

 

Portrait Phillip Nell

Prof. Dr. Phillip Nell is a professor at WU Vienna's Institute for International Business and heads the university's Competence Center for Emerging Markets & Central and Eastern Europe. He researches global and political strategies.

Portrait Johannes Leitner

Dr. Johannes Leitner heads the Competence Center for Black Sea Region Studies at the University of Applied Sciences bfi Vienna. He investigates how businesses in the Black Sea region manage political risks.

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