Dr. Shan Nair, President of Nucleus.
Previously a secondary consideration, geopolitical resilience has become an important investment criterion in international expansion planning. Let’s examine this shift in thinking with five ways we see these strategies changing.
1. Companies are delaying large investments that involve geographical commitment.
Some companies are delaying plans to invest heavily in foreign markets while still operating in the region. This is now being done through the development of strategic partnerships, the establishment of licensing or franchising arrangements or the establishment of distributor networks. Additionally, in the case of companies seeking talent, employers of record (EORs) are being used to hire employees, even if it means a potential local country taxation (permanent establishment) risk.
2. Regional headquarters are being reconfigured.
Previously, many multinational companies viewed the Gulf States as a haven of prosperity and stability and had their regional HQs established there. In light of recent crisis, the view has also changed in line with the exodus of key personnel, many of them expats.
Companies are splitting their commercial and operational functions, setting up dual or triple regional hubs, and maintaining management teams outside the region to support customers there. Based on our client base, Turkey and India seem to be particularly popular destinations for remote management support.
3. Supply chains are being redesigned to reduce risk.
Oil supply shocks will result in shortages of a wide variety of products, such as naptha, plastics and fertilizer, all of which we take for granted in our daily lives. Bearing this in mind, companies are taking protective measures in various ways.
Some are building inventory buffers and diversifying to reduce dependence on key suppliers. Others are shifting production to less risky geographies and committing to alternative transport/logistic routes, all part of a “bunker down” mentality.
4. Energy prices are changing market selection.
Businesses that previously treated energy prices as a second-tier variable when developing international expansion plans now have to factor them in as a key variable. While manufacturing, logistics and airlines will obviously be affected sectors, other energy-intensive sectors, such as data centers and chemicals, are now also directly impacted.
The net effect, therefore, is not that these companies do not expand internationally, but that they expand to locations different from what may have otherwise been seen as obvious destinations.
5. Cybersecurity investments are driving global talent needs.
Conflict in the 21st century is directly linked to cyber threats to supply and infrastructure. As a result, companies are now investing more heavily than before in cyber resilience, cloud security and distributed data hosting, all as part of a multitiered business continuity planning program. This increased investment leads to higher demand for specialist software skills, in turn prompting international expansion to hire personnel in-country amid tightened U.S. immigration restrictions.
The expansion motto has shifted.
Bearing the above in mind, the motto for international expansion has now changed from “go where growth is highest” to “go where there is little chance of geopolitical disruption.” This understanding certainly holds in our client base, where we have seen a significantly increased number of U.S. companies setting up or expanding their operations in India, both to hire talent and to sell.