We're going to use the general principles for analysis of political risk.

As the one said developed by John Chipman from

the International Center of Strategic Studies that are

summarized in an article published in Harvard Business Review in the year of 2006.

These principles basically lay out

some general elements that are not that easily to quantify and

require due diligence by managers and in how they explore a particular country.

The first element developed by Chipman in this article in

Harvard Business Review is what he's called as their assessment of transnational risk.

What do we mean with this?

Usually, we've been told about a contrary risk like,

is this country risky or not,

is it unstable, does it have a war.

All of these elements that tell us how risky our country is,

but we need to take into account that our country is part of

a larger neighborhood that affects whatever happens within that country.

So when analyzing a particular country,

a manager also needs to really understand how the relationships

between that country and its neighbors or sometimes far away countries are,

and how these relationships affect the operations of multinational corporations.

The reason why we need a transnational analysis is partially because

globalization has made us more integrated both economically and politically.

The economic integration has also led to a situation in which we

are affected by the political environment of another country that is not our own.

So again this is one of the main points of Chipman,

do not just conduct a contrary risk analysis but a wider one.

Let's illustrate this with a few examples.

Let's start with the example that this author actually uses in the article.

Is the example of the attack by some jihadists against the property of Norway's statoil,

their oil firm in Norway owned by the state in Algeria.

Now, who conducted this attack and how was this conducted?

This was developed by people from al Qaeda,

that many of the planners actually were from Saudi Arabia not from Algeria.

Now, the whole planning of this attack was conceived in Mali in the African continent,

but the attack was launched from Libya.

So if you don't understand how easy at that point for example,

it was to cross the Libyan on Algerian border and how jihadists could transfer

resources from Mali to Libya then their analysis is going to be incomplete because again,

this is what happened to statoil.

That risk did not necessarily come just from Algeria but from the fact that Algeria

is located in a wider network of nations with all these political complexities.

Another example can be an important country in the world economy like Pakistan.

Investing in Pakistan without taking into consideration

their very complicated relationships between Pakistan and India would be a mistake.

Are you going to invest if you're invested in

both countries and your investments in one of the countries,

let's say in India,

strengthen the India's militaries,

this is going to be something that will create problems for you in Pakistan.

So it's not just like how the politics in India are or in Pakistan are,

but the relationships between the two of them.

This is something that we can see in countries that are

considered highly stable like Israel.

Okay. Democratic country with a very functioning government.

But the politics in Israel,

the internal politics in Israel,

are highly dependent or contingent on whatever happens in the Arab world.

There is this decades long conflict between Israel and its neighbors.

We know about the whole situation of the Palestinian people in that area of the world.

So investing in both places like the Arab world and Israel is going to be

very determined by whatever happens in terms of their relationships between these two,

these two, these two, these two peoples.

The Israeli people, the Israeli government and their... and its Arab neighbors.

And we can go to other places of the world.

Let's look at Colombia in South America and its neighbor Venezuela.

During the first decade of the 21st century,

Colombia was considered a very strong ally, political ally,

of the United States while Venezuela was actually

the opposite-- a country that was confronting the United States.

Whatever happens in Venezuela certainly affects Colombia.

So the different conflicts that have taken place in Venezuela,

that took place in Venezuela,

during those years manifested themselves in let's say Colombians

rei-mmigrating to Colombia after having immigrated to Venezuela years ago.

Venezuelans immigrating to Colombia,

a border are becoming more and more tense.

The possibility of an international conflict existing there

that you cannot see just by analyzing one country or the other one.

So again, just to summarize here

the transnational assessment needs to be part of the analysis

and we need to go beyond

the contrary risk analysis because the risk is interconnected as well right now.

Another example is a case of South Africa and Zimbabwe.

South Africa for a long time,

a relatively stable economy in the African continent with

micro-economic... with the micro-economic policies

that did not lead to lots of instability,

with a neighbor that has had some of

the most unstable macroeconomic environment in the world,

in the early 21st century.

What has happened as a result?

Well, South Africa cannot isolate itself from whatever happens in Zimbabwe.

They trade with each other a lot.

This has also generated from brain drain to Zimbabwe to South Africa,

to just large scale migration movements

from low skilled people into South Africa as well.

So this has generated problems of immigration in South Africa and again,

problems for those firms producing in

South Africa and buying from Zimbabwe or selling to the Zimbabweans.

So this is something that again just by analyzing South Africa alone,

we cannot look at... we cannot understand the effects of the neighboring Zimbabwe.

We could go with more examples.

Mexico and Central America for instance,

Eastern Europe and Western Europe,

the Middle East and Turkey in the middle and Europe on the other side.

All these elements certainly need to be taken into account when analyzing country risk.

A war in Syria in the early 21st century,

generated a lot of immigrant... migration movements into Europe that eventually

determined partially their electoral processes

in Europe and even at the other side of the ocean,

in the United States.

So these links are there.

The world is interconnected.

The interconnectivity was highly celebrated in the 1990s and early 2000s

because these negative elements and

their political results of these elements were not taken into consideration.

So just this... this just to summarize

the importance of a transnational assessment that is carefully done.

We just talked about the importance of a transnational assessment,

okay, looking at the neighborhood of the country.

But, what we're going to talk about now is the opposite type of analysis,

the in-country risk analysis.

Now, I mentioned for the transnational assessment,

we should go beyond the national borders of a country to

understand the level of stability of that country,

but countries are complex.

And when analyzing how stable or unstable a countries,

just looking at a number developed by the World Bank might not be enough,

and it depends highly on the industry you are operating it.

Let's look at the example of Mexico.

Mexico in the 1990s and 2000s started becoming

a highly violent country because of

the competition between drug gangs for the market of the United States.

Now the violence around drug trade was horrible and it was

manifested itself mostly in areas close to the American border.

However, many corporations still flooded to Mexico

because not all Mexico was equally violent.

Let's look at southern Mexico for instance,

where the city of Cancun is located.

Cancun is famous for being a beach resort,

or you say, has a lot of beach resorts.

That target or cater mostly to American or European tourists.

Even during the worst times of violence of

Mexico between drug gangs, Cancún actually flourished.

There is the city south of Cancun called Tulum that became

a center for vacation for

very wealthy families particularly in New York in the United States and Europe.

So this is something that tells you if you're in

the tourism industry in Mexico in the 1990s and 2000s,

yeah you probably were not going to open a resort in northern Mexico where

the gangs were fighting but also where there

were not many attractions for tourists as well.

But southern Mexico has

lower lower levels of violence than many cities in the United States.

For example, it is been said,

by the year 2000,

by the first decade of the 21st century,

Cancun was safer than Baltimore in the United States.

So this shows you again,

how things need to be analyzed.

If you were let's say,

an entrepreneur that wants to open a chain of coffee houses in Mexico,

Mexico City would offer a lot of opportunities.

Yeah. It is less safe than a European capital or

an American city but it does not have the levels of danger other parts of Mexico have.

So when analyzing again these levels of

violence or instability for this... example of Mexico,

we cannot analyze Mexico as a whole.

Let's look at another example that was used by

Chipman in his Harvard Business Review article and look at it a little bit more detail.

Iraq. Iraq was ruled for decades by Saddam Hussein and well,

it was not a democratic regime but it was very stable,

a highly stable regime.

Iraq became one of the most unstable countries of

the world after the U.S. led invasion that toppled Saddam Hussein.

Afterwards, a horrible civil war started that by the 2010s still had not gone away.

So Iraq for sure is a highly unstable country in any way you want to measure it.

However, once you start looking within Iraq,

things start looking very complex and more different.

Let's look up in the north of Iraq,

the Kurdistan region, a region that was attacked by Saddam Hussein,

ferociously in many locations and that was one

of the areas that more... opposed more strongly to Saddam Hussein.

After the U.S. invasion,

the Kurdish area actually became one of the most peaceful ones in Iraq.

It became a place where, let's say,

an American civilian would feel safe at walking around

the streets and it had many potentials in the oil industry and that the service industry.

So as long as you in the 2000s wanted to invest in a stable place in Iraq.

The Kurt area, the Kurdistan,

was a highly safe area,

safer than many countries that as a whole are considered unsafe.

So this is something that had led many corporations,

American corporations and European corporations,

to go to the Kurdistan area to invest while the rest of Iraq

was hellish place of a horrible civil war.

Now, let's keep focusing on this Kurdistan area.

Yeah. Looks safer within Iraq.

Now let's zoom out again,

I look at the transnational part.

The Kurds in Turkey have a very uneasy relationship with the Center Government,

with the Central Government partially because the Kurds have

been advocating for the creation of their own republic,

independent republic, from Turkey.

Now, for the Turkish government for a while these stable Kurdistan region in

Iraq was seen as a potential source of instability within their own territory.

So again, when looking at it from the Iraqi side,

the Kurdistan area was a highly stable peaceful region.

From the Turkish part, yeah,

it's stable and peaceful but potentially the source of more problems.

Another country with a reputation of being an extremely violent place and

unstable for the decades between 1980s

and the early century... the early 21st century has been Colombia.

The drug trade created a lot of instability and violence in that country.

Communist guerrillas were fighting also within its territory.

So of course, it was considered an extremely dangerous place to go.

Now, the war between the guerrillas and

the government usually took place outside the urban areas.

So this is why you can find... you could find in a place like Colombia,

in moments of high violence, a French firm,

a French multinational like Carrefour,

investing in opening the supermarkets they've been investing in other places.

Why? Because the war, that kind of war,

did not really affect these types of operations.

But if you were an oil multinational,

the story was different.

The oil multinationals operated where the violence was

or actually the guerrillas went where the oil multinationals where in

order to extract money from them through kidnappings or

just the extortion and that created a source of instability.

So here we see at the regional level,

countries are very very complex.

Nigeria has areas controlled by Boko Haram,

while other areas of the country are controlled by the government.

So, zooming in and zooming out.

The transnational analyses would be this zoom out, look at the environment,

and then you need to zoom in to see how the situation is at the regional level

within countries something particularly important

for large countries or relatively large countries.

John Chipman also developed another concept in the,

in his framework which is what is called the Near Home Risk.

What do we mean with this?

We tend to think,

okay, maybe there are neighborhoods that we don't know.

Let's say you're a European multinational

and following what I mentioned before, you think, okay,

if I'm going to Latin America,

I'm going to Central America for instance,

to El Salvador I need to see what it's going on in Honduras or Guatemala and the like.

Or similarly, if you're a Chinese company, okay,

if I'm going to Mozambique maybe I need to

really try to understand what is going around that country.

One element that we tend to forget is our own neighborhood.

The reason why we tend to forget about

our own neighborhood is because we think we know it well,

and experience has shown that when you think you know something really well is when you

are more likely to miss important changes or important events taking place.

For example, let's look at Mexico.

For years, the Mexican elite planned its economy around the idea that in enough time,

the North American Free Trade Agreement between the U.S.,

Canada, and Mexico was going to be there to stay.

So we have corporate Mexico basically reorganized itself around this idea.

An integration with the world's most powerful economy,

the United States economy, and therefore,

it assumed that it really

knew what happened in the United States because of its proximity.

There was a large diaspora of Mexicans in the United States.

Mexicans studying in the United States,

going back into their country.

The Mexican elite highly focused on the United States.

So there was this idea we know how the Americans operate,

we know everything about the U.S. And when they actually studied,

when they did their due diligence at studying countries,

they focused on operations in places like China,

in places like Africa because,okay,

those were the exotic places.

But we know how the operation... how things operate in the United States.

It was a big shock in the year of 2016,

when a presidential candidate Donald Trump was elected as president of

the United States and started questioning whether NAFTA should continue or not,

whether it needed to be renegotiated or dropped.

This was a huge shock to corporate Mexico.

Corporate Mexico again, had assumed for

decades that it needed to operate under the NAFTA rules.

It created a lot of confusion,

even a political crisis in Mexico because they

did really not know how to operate and forced

corporate Mexico to relearn about this country that they

thought they knew really well which was the case of the United States.

Chipman also mentions the case of their Brazilian multinational Mining Corporation, Vale.

One of the largest firms in the world in the mining industry.

Vale at some point started expanding in the African continent.

It went to places first,

where there was some affinity with Brazil.

First one was Mozambique.

Okay. They both speak Portuguese and there is this historical...

historical connection between both countries.

So okay, a relatively lower cultural distance and in a way administrative distance.

However, Vale was aware that the fact that the Mozambican spoke

Portuguese did not may mean that things are going to be the same.

So they did their due diligence at really understanding internal politics in Mozambique.

At trying to understand their relationships between Mozambique and its neighbors.

At really understanding the legislation of Mozambique

and the debates around mining legislation in Mozambique.

While Vale was doing that,

the firm also invested in Argentina.

Now we find the situation,

Argentina is a neighboring country of Brazil.

They have their economies very closely linked,

Argentines invest a lot in Brazil and Brazilians invest a lot in Argentina.

For decades, this has been happening.

Now what took place in the year of 2011 was that after several elections in Argentina,

the political environment changed a lot.

And all of a sudden, they found

a hostile government in Argentina that changed their rules almost overnight.

Changed their regulations around the multinational corporations and we

found the situation in which Brazilian

firms that had been so used to operate in Argentina,

kind of like forgot about keeping a close analyses of how things in that country were.

And they were more careful about their analyses in

Africa because they thought Africa is going to be very different.

We're new there, they were aware they were new there.

Well we've been forever in Argentina and this is where the problem emerged.

This is something that also happened in rich countries.

Let's look at... they also deem to look at the European Union and

the surprising triumph of their boat to

abandon the European Union that took place in the United Kingdom.

When many people voted to abandon,

to withdraw from the European Union.

Many European multinationals were caught by surprise, in all industries.

This was something that nobody actually predicted.

And even more importantly,

nobody really prepared for it.

So we have these European multinationals, thinking we're alright.

When we talk about uncertainties, political uncertainties,

this is something that happens like in Africa or in

Latin America or in more exotic places.

It happened next door,

in a highly stable country like the United Kingdom.

They we're not prepared for that and in the months afterwards,

they were desperately trying to reconsider their strategies,

their organizational forms, all these kinds of things because of the BRICS involve.

Similarly, to what happened to corporate Mexico with the triumph of

Donald Trump which also happened to

many Chinese corporations investing in Mexico that took,

that found that the triumph of Donald Trump as a surprising outcome.

So again don't forget your neighborhood,

don't forget your next door neighbors because sometimes the surprises can come

from them because we think or we assumed we know who they are and how they operate.

General Principles of Geopolitical Risk

Global Strategy II: Doing Business in The Global Economy

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