Political risk in the age of multinational corporations

• Author: Thomas A. Hemphill,Keith J. Kelley
• Published date: 01 November 2019
• DOI: http://doi.org/10.1002/tie.22041
• Date: 01 November 2019

BOOK REVIEW

Political risk in the age of multinational corporations

POLITICAL RISK: HOW BUSINESSES AND ORGANIZATIONS CAN

ANTICIPATE GLOBAL INSECURITY

Condoleeza Rice and Amy B. Zegart

2018. New York: Twelve (Hachette Book Group). 307 pages

Political risk should be an increasingly important component of any

multinational enterprise's (MNE) global strategy, as the post-cold war

era has created a political and social environment that is less predict-

able for executives to manage—and plan—their corporations' futures.

The authors, Condoleeza Rice, former U.S. Secretary of State under

President George W. Bush, and the Denning Professor in Global Busi-

ness and the Economy, Stanford Graduate School of Business, and her

coauthor, Amy B. Zegart, the Davies Senior Fellow at the Hoover

Institute, and former management consultant at McKinsey & Com-

pany, come to this project with impressive credentials. In the book, an

outgrowth of an M.B.A. class they co-teach at Stanford, the authors

argue that governments are no longer “the only important arbiters of

business”(p. 4); today, there are multitudes of important stakeholders

who are capable of creating political risk for MNEs.

In chapter one, Rice and Zegart define 21st century political risk

as “the probability that a political action could affect a company in sig-

nificant ways (p. 5).”Presumably, the perpetration of this “political

action”can be by the firm or by one of its many stakeholders. Here,

the authors unveil their basic political risk framework and present

their guiding questions for effective risk management. This chapter

also lays out the topics they will cover in the remainder of the book,

including understanding and prioritizing political risk, taking advantage

of global opportunities and efficiencies without unduly increasing vul-

nerability, and creating a continuous learning cycle to anticipate, han-

dle, and recover from political risk crises, to name a few.

Chapter two illustrates that political risk, which in the 20th cen-

tury was primarily driven by government actions, is now a crowded

landscape of different actors (in addition to governmentally generated

political risks). These actors now employ the latest information and

media technologies to virtually organize collectively and have their

political message “go viral.”The authors identify five intersecting

levels of action generating political risk: individuals, local organiza-

tions, national governmental actors and their institutions, transna-

tional groups, and supranational and international institutions.

Moreover, Rice and Zegart have conveniently cataloged their political

risks under ten topics: geopolitics, internal (country) conflict, public

policy change (including laws and regulations), government breaches

of contract, public corruption, national extra-territorial reach, natural

resource manipulation, social activism, terrorism, and cyber threats.

In chapter three, Rice and Zegart explain the megatrends in busi-

ness, technology, and politics since the end of the Cold War. While

MNEs now have greater business opportunities, they also face greater

variation in political risk. For example, globalization has allowed MNEs

to create longer, leaner global supply chains to take advantage of

lower wages and shipping costs, coupled with improved inventory

management to customize products for different market segments.

The downside of this increasing efficiency, product differentiation,

and profitability, however, has been MNE supply chains operating in

higher risk locations, thus exposing firms to cumulative risk vulnerabil-

ities often difficult to recognize. In addition, social activism, practiced

by individuals and through collective action, has been facilitated by

low-cost, connective technologies that both governments and busi-

nesses must deal with as events “go viral”without warning. Further-

more, Rice and Zegart identify “four shocks”affecting the political and

business worlds. First, the attacks of September 11, 2001, showed

that nonstate actors were capable of great harm. Second, the 2008

financial crisis resulted in increased government intervention and the

rise of political populism. Third, the Arab Spring's political unrest

placed further stress on Middle Eastern and North African govern-

ments. Fourth, China's rise and the re-emergence of Russia in interna-

tional affairs have challenged the international order when America is

turning inward.

Chapter four explores why good political risk management is so

difficult to undertake. The authors conclude that, while studies consis-

tently find that company executives know that they are not good at

political risk management, many companies still do not integrate politi-

cal risk analysis into their overall risk management. Rice and Zegart

explain why this scenario so often exists with their “Five Hards”:

Political risk is hard to reward (especially for fixing problems that

never happened), hard to understand, hard to measure, hard to

update, and hard to communicate. There are underlying reasons that

contribute to these “Five Hards”, including that political risk usually

involves difficult to measure qualitative factors, such as the national

mood or policy stability, while cognitive biases are capable of distort-

ing human probability calculations. Also noteworthy is that once an

MNE investment decision is made, many companies simply do not

update their political risk assessment on it.

In chapter five, Rice and Zegart discuss their political risk frame-

work. While acknowledging that political risks are context specific,

they argue that core competencies for management to get right

include: understanding risk, analyzing risks, mitigating the residual risks

that cannot be eliminated, and then establishing a response capability

that enables effective crisis management and continuous learning.

DOI: 10.1002/tie.22041

Thunderbird Int. Bus. Rev. 2019;61:943–945. wileyonlinelibrary.com/journal/tie © 2019 Wiley Periodicals, Inc. 943