Not Even a Pandemic or a Recession Can Stop Globalization
Tuesday, August 23, 2022 12:32 PM
By: Dr. Shan Nair
The world is currently in an unprecedented state of flux. A two-year pandemic that has killed more than 6 million people worldwide continues to propagate, albeit with reduced ferocity. A war is raging in Europe for the first time since 1945 with a ripple effect on food supplies, which could cause famine and instability in Africa.
Inflation continues to rage across the world, eroding middle-class living standards while the U.S. – the driver of the world economy – looks likely to tip into recession.
In these circumstances, should companies globalize, and if they are already international, what are the new risk areas they should be alert to?
To globalize or not to globalize?
A primary motive driving many startup and medium-sized companies to globalize arises either from the need to show their product or service has international appeal or to find lower cost skilled labor to enable them to run key aspects of their business more efficiently. Companies will, therefore, continue to expand internationally. It is simply the volume and pace that will vary with economic cycles and consequential availability of capital, as well as where they choose to go when they expand.
The current tightening economic cycle may also cause many manufacturing companies to tool up for robotic production in the home country earlier than they otherwise would have done as a way not just of reducing exposure to foreign political and economic risks but also to reduce costs both of the raw material supply chain as well as production.
The world is currently dividing into three groups as it did during the Cold War. First, we have the Western democracies that also have significant leverage with international institutions such as the OECD, the World Bank and the IMF.
Then we have a “mixed bag” group of “non-aligned” countries, which includes the world’s most populous democracy – India – but also includes China as well a grouping of quasi-democracies and dictatorships. Some of these lean to the West, others to Russia and some are truly neutral. Lastly, we have the sanctioned countries of which Russia is now fully a part.
Start with a risk assessment
Companies with international operations, therefore, need to reassess their risk assessments. In particular, companies with operations in Russia, in lock step with the sanctions that the U.S. and its allies have imposed following the Ukraine war, have had to sell off, relocate or close down these operations. This has caused considerable business dislocation. Many tech companies with engineering support offices in Russia have relocated their employees to locations such as Turkey, UAE, Kazakhstan, Finland and Bulgaria, to name a few.
Furthermore it has become incumbent on companies to check if their products or services are being used to support businesses or governments in sanctioned countries further up the customer/supplier chain. A failure to do this could result in serious civil and criminal exposure.
Many companies have decided not to take on a customer who has customers in sanctioned countries, but this approach becomes more difficult, owing to likely customer resistance, if one also has to go further up this chain. Company risk managers will, therefore, need to apply subjective judgement in these cases.
In addition to anti-money laundering and terrorist financing regulations, many countries have introduced or are introducing proliferation financing regulations. This refers to or means the act of providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear (CBRN) weapons, including the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanctions obligation. These risks are particularly relevant to tech companies in specific tech sectors.
Monitor manufacturing risks
U.S. companies that have manufacturing operations in China could also be at significant risk given current geopolitical tensions.
It makes sense to start planning now for alternative manufacturers in countries less likely to be impacted by these tensions, and begin diversifying the supplier portfolio.
Alternative countries where companies are relocating parts or whole manufacturing processes and operations are India, Malaysia, Indonesia, Philippines and Mexico.
Ultimately, there are many factors that must be considered when evaluating the benefits and drawbacks of globalization. For organizations needing to spread out past their country of origin, carefully evaluating each country in which they do business with a mindset of assessing the likelihood of having to prepare to weather the storms of future conflicts is mission critical.
For decades, companies worldwide have enjoyed a long and prosperous period of globalization. This is now reversing and being dogged with increasing red tape and regulation. In these circumstances, it is very important for companies to employ competent advisors who can identify and help businesses exploit international business development opportunities while controlling and minimizing international business threats.
Dr. Shan Nair is president of Nucleus, an international expansion consultancy.
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