Strategy to Mitigate Political Risk
Historically, political risk has been linked to dictators who could suddenly seize foreign assets (like the way the US seized Russian assets following the start of the Russia-Ukraine conflict). However, today political can come from just about anywhere, including peoples use of cell phones, local officials, or lone wolf terrorists (Rice & Zegart, 2018). The definition of political risk has thus evolved to mean the likelihood that a political action will have a significant impact on a business, either positively or negatively.
This all began after the end of the Cold War, which ironically fostered a more unpredictable geopolitical environment. The open hostility of the Cold War went underground in a way, and seeped into various aspects of society so that political risk became less obvious but nonetheless present. On top of this, the evolution of supply chains increased companies' vulnerability to disruptions.
In response to this new terrain of political risk, companies need to hone four core competencies: understanding, analyzing, mitigating, and responding to political risks (Rice & Zegart, 2018). These competencies are based on understanding the company's appetite for political risk, ensuring that this understanding is shared across the organization, and identifying potential blind spots. They also emphasize the importance of gathering quality information about potential risks, ensuring rigorous analysis, and integrating this analysis into business decisions (Rana et al., 2022). Moreover, the Rice and Zegart (2018) point out the new forces shaping political risk. In the post-Cold War era, the geopolitical landscape is very crowded. The efficiency of supply chains has also introduced weaknesses in that they are now vulnerable to sudden disruptions in distant locations.
Overall, Rice and Zegart (2018) categorize political risks into various types, including geopolitics, internal conflicts, changes in laws and regulations, breaches of contract, corruption, extraterritorial actions, manipulation of natural resources, social activism, terrorism, and cyber threats. To mitigate these risks, they advise companies to disperse critical assets, create surge capacity, and build redundancy.
References
Rana, N. P., Chatterjee, S., Dwivedi, Y. K., & Akter, S. (2022). Understanding dark side of
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Rice, C., & Zegart, A. (2018). MANAGING 21ST-CENTURY POLITICAL RISK TODAY'S
THREATS ARE MORE COMPLICATED, BUT THE REMEDIES DON'T HAVE TO BE.Harvard Business Review,96(3), 130-138.
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