Over the past three decades, boards of directors considered globalization and the new emerging markets as significant corporate growth opportunities. Western companies’ huge bet on BRICs (Brazil, Russia, China and India) and other emerging countries – with their growing number of middle-class families –, became the paradigm for international expansion. Moreover, the trend towards greater globalization and the search for low cost and arbitrage opportunities pushed companies to offshore many of their manufacturing activities and locate them in these low-cost countries. Efficient global supply chains – from sourcing to final product manufacturing – became the new gold standard of management effectiveness. Globalization seemed unstoppable and, with a few exceptions, boards of directors did not spend much time on assessing political risks.

Moreover, when the 2008 financial crisis dealt a strong blow to Western economies – whose banking systems were badly hit – it was a positive surprise that many emerging countries weathered the storm reasonably well. In this situation, globalization showed resilience. Many companies quickly forgot about international operations’ risks and focused even more on how to exploit market opportunities in emerging countries. This is how a strong presence of Western companies in China, Russia and Brazil, in particular, grew even more robust after the 2008 crisis. 

Boards of directors overlooked geo-political risk since the emerging countries were growing and becoming economically more integrated with the West. These – countries had been admitted as members of the World Trade Organization (WTO) and adhered to the rules of free trade.  There was a shared perception that the adoption by the countries of the key principles and rules of the WTO protected companies from non-tariff trade barriers and any form of asset expropriation. Some risks remained, but most companies behaved as if they were non-existent.

The human and social tragedy of the Russian invasion of Ukraine has dealt a death knell to globalization as we knew it. Nevertheless, the crisis in Ukraine is not the first signal that geo-political risks have not disappeared. Over the past few years, a number of political and social crises sent clear indicators of this. The invasion of Crimea and eastern parts of Ukraine by Russia in 2014; Brexit in 2016; the election in 2016 of a US president who did not believe in an international system based on rules and principles; the challenges of Brazil, India and other emerging countries in reforming and sustaining internal  growth; the increasing role of the Chinese government in controlling the economy and private companies; the effects of offshoring and international logistics and transportation on the environment due to growing CO2 emissions; and the disruptive  effects of Covid-19 in global supply chains. These were all signals that the global system, developed since the 1990s, was not in good shape and that the economic model based on globalization had weaknesses in its foundation. 

The harsh reality of Russia’s invasion of Ukraine has awakened a new sense of political risk throughout boardrooms. Assessing political risk is even more complex than measuring financial risk. The main reason is that political risk is clearly associated with governmental decision-making in countries whose political system deviates from the rule of law and is driven by a leader or a few people at the top of the system. In such cases, people’s behavior becomes unpredictable and can have a disproportionate impact on political and economic outcomes. Consequently, companies should take political risk into account.

Boards of directors and senior managers should understand the factors that shape political risk, make a reasonable risk assessment, define the levels of country risk that the board considers reasonable and consistent with shareholders’ and other stakeholders’ preferences, and plan scenarios based on different assumptions. In today’s volatile world, boards of directors should work with senior management teams to stress-test their strategies, particularly their presence in emerging countries with unstable political systems.
A final reflection is necessary. Some analysts still predict that once the war in Ukraine is over, the world will go back to the previous trajectory of globalization. No one truly knows. Nevertheless, as IESE Professor Pankaj Ghemawat pointed out in his 2011 book, Wold 3.0, available data indicates that the global economy is not fully integrated. The international flow of goods and services, as well as the movement of people across countries, remains stronger with neighboring countries and regions, suggesting that the international economy is in a state of semi-globalization. In this world, economic regions represent a significant part of international trade and investment. This observation does not exclude that some industries are more global, but they may be more the exception than the rule.

The effects of geo-political tensions, protectionist trade policies, economic nationalism, and the Ukraine-Russia conflict on global supply chain disruptions suggest that the semi-globalized world is here to stay. The main implication is that companies should consider that investing in emerging markets is not risk-free, as the tragic recent events have shown. Boards of directors should consider political risk a top area of concern when analyzing investments outside of their home countries, and integrate it coherently into the firm’s strategy and sustainability plans. Boards should develop the ability to understand and analyze political risk in detail to survive in this semi-globalized world.