If you’re ready to take the plunge and expand your business into a foreign market, any signs of political instability in the host country can be worrying. No one wants their business growth plans to be at the whims of changing political climates. However, as conflict in the Middle East and China’s economic woes affect markets around the world, US businesses with global aspirations must be able to adapt to this new zeitgeist of political and social change.
The term ‘political instability’ might stir up images of protests and armed conflict, but Dealing with political instability in foreign marketsany significant shift in political power can impact foreign investment – for example, the recent decision by Poland’s new ruling party to increase taxes on its largely foreign-owned banking and retail sectors.
Political strife can have many consequences within the local economy. They can range from bureaucratic obstacles, such as border taxes and trade embargoes, to disruptions in transport networks that threaten supply chains or property losses that force a halt in trading or production.
It can also reduce customer demand, and make it harder to secure financing, obtain insurance or settle bad debts. It’s also likely to affect the host currency, reducing the value of assets invested in the host country, along with future profits generated by them.
The importance of planning ahead
When political instability puts staff and property in the line of fire, the most rational strategy is to temporarily suspend operations until order has been restored. This is what General Motors and Electrolux did when political unrest and street violence struck Cairo during the 2013 Egyptian coup d’état.
For large global firms such as these, the impact of a local closure can be easily absorbed by increasing production elsewhere. However, for smaller businesses that are only just starting to go global, such disruptions can be harder to manage.
The best place to start is a risk–benefit analysis. Do you expect the rate of return to be high enough to offset the risks of entering that market? If so, the next step is to minimize those risks with business continuity planning, which can include:
- Monitoring the political situation by regularly consulting news outlets and government travel advisories.
- Identifying ways to reduce operating expenses during business disruption, such as negotiating rents, reducing staff hours or renegotiating supplier contracts.
- Creating a worst-case-scenario action plan for safe passage of expatriate staff out of the country during volatile periods.
Strong connections on the ground are also important for mitigating political risk, whether they take the form of ties into local business, the government or the broader community. During times of political instability, your local relationships are likely to be put to the test – so it makes sense to find a business partner with whom you can forge a strong, synergistic alliance.
Trading with emerging economies
Many businesses see emerging economies as ideal launching pads for global expansion, as they often combine low production costs with adequate transport and utility infrastructures.
The downside is that they tend to be more politically unstable than developed countries, with a Financial Analysts Journal study finding their asset returns to be more sensitive to political risk than in developed markets.
If you’re planning to go into business with an import/export partner in an emerging market, logistics company DHL recommends having a robust risk management plan. The firm highlights an estimated $7 billion cost to US retailers in 2015 due to port delays alone.
Lessons can be learned from the United Nations World Food Programme (WFP), which conducts region-specific gap analysis to find ways to speed up emergency response. Their highly collaborative approach includes sourcing personnel from partner organizations and training local governments in emergency logistics.
For commercial supply chains, DHL recommends building resilience through the use of strategies such as dual vendor sourcing of critical components, flexible product designs that allow for component substitution and segmented transportation networks that facilitate faster shipping to high-priority customers.
With globalization and lean production approaches exposing an increasing number of US companies to the effects of global political change, strong collaboration with foreign partners is instrumental to reducing risk.
Finding the right global business partners is now much easier thanks to the benefits of business-matching services like Powerlinx.
Want to know how to increase the success of your global partnerships? Here are 5 things to consider before expanding internationally.