More than two-thirds of corporate CEOs are optimistic about globalization, believing that cross-border mergers, acquisitions, and business in general will keep on increasing through 2009. Imminent recession in the advanced industrial economies may even increase their spread abroad. Consider these growth projections made by IMF. In 2008 and 2009, the US economy will grow at most by 0.6 percent. China and India will register 9.5 and 8 percent respectively. If you wanted profits and growth, where would you rather be?
Thus we have CEO optimism about globalization despite slowdown in the US. The problem is that politically there are reasons to be cautious. The past few months I have been highlighting what I consider the single biggest gathering risk to doing business across borders: political action. This has several aspects.
First of all, voters in the West have become cautious about globalization and free markets. The 2007 Pew Global Attitudes Survey (PGAS), involving 45,000 people across 47 countries, reports that people have begun to take a more cautious approach to free markets, compared to 2002. US electoral rhetoric is adding fuel to their fear.
Support for globalization and capitalism have also been decreasing outside the West. The 2007 Globescan survey (see figure on the right) reports a downward trend in 10 of the 18 countries monitored regularly. And this survey was done before the current credit crisis hit the markets to further dampen mood.
Moreover, people in every country surveyed in PGAS (2007) felt a strong need to protect their cultures from foreign influences. This means that globalization will become expensive, for foreign companies have to strive more, including greater product and service variation, to become accepted locally. My February post, “Enter a market (and be accepted)“ talks more about this.
Their fear is heightened by inequality, both real and perceived, which has been increasing across emerging markets. In places like India, mass voters have openly reviled conspicuous consumption by the elite. And foreign influence is seen as agents of this inequality. The global food crisis is compounding matters, and hunger-induced riots are threatening even pro-investment authoritarian governments.
Not only are people becoming wary of foreign investors and traders, but they are expecting more politically from business firms. This expectation will only intensify through the Olympic Games and in the coming years. After criticism of China by the French government, the French supermarket chain Carrefour has been passing tense times, having unwittingly provoked both Chinese nationalists and European human rights activists. The norms of corporate governance are in a period of significant transition, as corporate political responsibility is being added on top of corporate social responsibility. Whether CEOs like it or not, business firms are political actors too, and ignoring this transition will heighten political risk.
So business calculations that go into cross-border strategy need to expand far beyond the traditional financial and legal focus. They will have to become politically sophisticated, requiring careful analysis and political variables, and informed to a greater degree by local political realities. This coming recession will likely thrust a demand for greater political action on the part of globally expanding businesses.
I like your concept of corporate political responsibility (CPR, no pun intended), and this relates also to another idea that has been taking shape: lobbying for good. Large MNCs have been engaging with government actors, at least in their home countries, for many years, primarily to advance their business concerns. But as more companies go global, particularly into emerging economies still facing widespread poverty, there’s an opportunity for companies to create social impact through their political activities. These could include lobbying for changes in working conditions, property rights, or anti-corruption laws — issues that will benefit both the companies but also the societies in which they seek to operate. The large MNCs may be more suitable to engage in such activities early; but for the slightly smaller, still semi-global, firms whose roles as political actors are still fairly new, it will be important to identify their approaches quickly as they adapt to the global marketplace.
I agree that companies engaged in cross-border businessess need to be informed (or aware) of local political realities, but there is a difference between being just “informed” and planning to manage the risk. Companies expanding globally would do better to transfer the political risk to a public or private insurer, rather than assuming the risk internally because managing political risk is not their core business. It’s best transferred to a firm or company whose core business it is to manage political risk. Of course there is a cost involved. But the cost of the premium can be offset by better financial terms from lenders and the peace of mind that comes with knowing that you are protected in the event of a loss. The World Bank Group’s MIGA for instance is a political risk insurer with a substantial portfolio in high-risk, low-income countries.