Why Your Company Needs a Foreign Policy

After a relatively quiet period following the end of the Cold War, geopolitics is back. With the United States displaying a reduced appetite for violent confrontation, there are now no world policemen, few effective “neighborhood watch” schemes, and a growing number of vigilante groups and countries eager to challenge the existing rules of the game. Companies cannot assume, in any region of the world, that the strategic status quo will be sustained by neat balances of power or unbreakable promises of foreign-policy assistance from superpower states.

In this new reality, the most successful multinational companies will be those that make expertise in international affairs central to their operations, adopting what John Chipman, the chief executive of the International Institute for Strategic Studies, calls a corporate foreign policy.

A corporate foreign policy has two components. Geopolitical due diligence involves the assessment of local, regional, and transnational risks facing a company. Corporate diplomacy aims to enhance a company’s ability to operate internationally and to ensure its success in each particular country with which it is engaged.

Chipman lays out the principles of geopolitical due diligence and corporate diplomacy and argues that their successful execution can be a new source of competitive advantage for multinational businesses in a time of increased geopolitical volatility.

Idea in Brief

The Challenge

Several global forces are complicating the geopolitical environment for multinational companies: increasing global instability combined with a decline in U.S. intervention, the proliferation of economic sanctions as a tool of statecraft, and increased trade among developing nations.

The Solution

To navigate the geopolitical complexities of the modern world, companies have to “privatize” foreign policy, internalizing many of the elements traditionally employed in statecraft.

In Practice

A corporate foreign policy has two components. Geopolitical due diligence involves the assessment of local, regional, and transnational risks facing a company. Corporate diplomacy aims to enhance a company’s ability to operate internationally and to ensure its success in each particular country with which it is engaged.

In February 2014, Russia invaded the Ukrainian peninsula of Crimea, and the following month, it announced Crimea’s annexation. This sudden act marked the beginning of the first major strategic crisis in Europe in a generation and served as a wake-up call to business leaders. As the crisis was unfolding, the Bank of England surveyed business executives on their views of systemic risk and in June published the striking results: 57% cited geopolitical risk as the greatest challenge facing their business, up from 13% the previous year. Subsequent Bank of England surveys have all ranked geopolitical risk as the most challenging risk to manage—above cyberattacks, financial disruption, and even an economic downturn.

A version of this article appeared in the September 2016 issue (pp.36–43) of Harvard Business Review.

John Chipman is the director-general and chief executive of the International Institute for Strategic Studies. He serves on the board of the Abraaj Group, a global growth-markets private equity firm based in Dubai, and as special adviser to the chairman of Reliance Industries, based in Mumbai.