Global game of risk

The world has become a much riskier place to do business. Get used to it.  From natural calamities to man-made ones such as piracy, bribery or even outright expropriation, the traditional risks for global businesses have multiplied and magnified.

Photo: Scott Wilson

Add in the economic shock waves still spreading throughout the globe and not even the safe bets can be counted on any longer.  “Not long ago, preparing for a riskier world meant emerging markets. Now, most of the risk in the world is in the developed, so-called richer economies,” said Leo Abruzzese, director of global forecasting for the Economist Intelligence Unit (EIU).

Abruzzese was speaking at a recent panel discussion Preparing for a Riskier World: Frontier Opportunities. The Boston event was hosted by the EIU and Business without Borders, and sponsored by HSBC Bank. The panel of experts included Raj Subramaniam, senior vice-president, global marketing for FedEx; Tarun Khanna, professor at Harvard Business School; and Mike Cahill, managing director for Marsh, a global insurance broker and business risk advisor.

The EIU and panelists outlined some of the growing risks in an increasingly integrated global economy and reward strategies for business seeking higher returns from more speculative foreign markets.

The next 12 months will remain challenging ones, with no powerful engine driving the global economy, Abruzzese said. Although Greece appears to have stepped back from the abyss, Europe, which represents one-third of the global economy, has plunged back into recession. The effects are being felt far and wide, especially in emerging markets whose economies are dependent on exports.

The United States has also lost momentum. “Jobs are the anchor holding the economy back,” said Abruzzese, noting the U.S. is still 2.5 million jobs short of when the global recession began four and a half years ago. “At this pace, it will take another two-and-a-half years to get back to where we were.”

And the BRICs, too, have hit a wall. China’s slowdown — it will still grow around 8% this year — is the country’s first in a 20-year run of double-digit growth. Brazil’s red-hot economy has also cooled off, and is expected to grow a mere 2% this year.

In its latest outlook, the EIU is forecasting a 60% probability of slow, uneven growth for the global economy over the next year.  However, it is also assigning a 30% chance of a global shock “if the wheels come off in Europe,” Abruzzese said. There’s a slim chance, around 10%, of a miniboom fueled by a flood of equity as governments try to stimulate economies.

While the macro-economic picture is darkening, the risks on the ground are also getting worse. “We are seeing a plethora of risk and the scale is incredible,” Marsh’s Mike Cahill told the audience of Boston business executives. Last year’s disasters — Japan’s earthquake, floods in Thailand — tallied $100 billion in insured losses. “The uninsured losses were multiple times that,” he said.

Political risks, such as changes in regulations, property rights or, worst-case, expropriation, are on the rise. Consider the Repsol YPF case in Argentina this spring, when Argentina President Christina Fernández de Kirchner nationalized the Spanish petroleum company.

“That sparked a flurry of people trying to buy political risk insurance, which of course you can no longer buy because the price is through the roof,” Cahill said.

Business risks, from piracy and cyber attacks to running afoul of bribery rules, are also increasing — along with the costs. Cahill estimated the cost to Avon, for example, to investigate possible bribery overseas has climbed to $200-$300 million.

Sensors on the ground

While the odds seem stacked them, there are ways for companies to mitigate risks abroad. Harvard’s Khanna discussed the importance of becoming an engaged corporate citizen in foreign markets. “This has the collateral benefit of managing risk so things are not coming out of the blue,” he said. For example, by working with officials to educate a market about a new product or technology, a company would be in a position to know if regulatory changes affecting its business are on the horizon.

But a sure way to develop sensors on the ground is to invest in local talent, the panelists said. “Companies have to do something seriously about the talent,” said Khanna. Hiring locally is “fiendishly difficult,” he admits, and requires a big commitment by companies, but it adds diversity in the decision-making, which can help management to better anticipate risks. As well, if a foreign company is willing to engage locally and provide good quality jobs, it is viewed as a better entity for the local authorities to deal with.

FedEx, which operates in 200 countries, subscribes to that practice, said Raj Subramanian. Managers are local, although they are schooled in the FedEx global culture. He said this practice not only results in more loyal employees and better service for local customers, it also provides better insight into local issues that could become problems. “Managing the global-local mix and being part of the local culture is very important,” he said.

Mother of all risks

Of all the risks to global business, the greatest of them is fear. If the ongoing turbulence – the new normal — causes businesses to retreat from trade and regulators to erect protectionist barriers, the result would be a “complete disaster,” said Khanna.

“Much of the world’s economic growth over the past 30 years has been driven by interconnectivity and the free movement of people and goods. If you remove interconnectivity, that would pull the rug out from millions of people. And the person who would suffer the most is the poor person.”

Business without Borders’ exclusive Global Opportunity Tool available free to members, provides extensive risk profiles of 55 countries where U.S. companies are most likely to trade or expand.