Over the past century, increasing cross-border trade and investments have not only allowed firms to grow and benefit from economies of scale, but have also played a crucial role in promoting peace and strengthening relationships between nations worldwide. This has also contributed to the growth of businesses. However, recent events such as the trade war between China and the USA, the Russia-Ukraine conflict, and tensions in the Middle East are posing significant threats to the global economy and businesses, particularly multinational corporations (MNCs), as indicated in the Global Risks Report 2024 by the World Economic Forum. This report ranks societal polarization as the 3rd biggest risk and interstate armed conflicts as the 5th biggest risk currently facing the global economy. The questions we aim to address are how the recent increase in global conflicts is affecting businesses and how the risk can be mitigated.
Businesses always aim to minimize their costs by securing affordable inputs and outsourcing operations to different locations. However, a disruption in the supply chain due to a conflict or trade war, as we have seen in the case of the Russia-Ukraine war, makes it difficult for firms to continue with such operations and to supply in some markets. Countries involved in trade wars may choose to impose restrictions on the flow of investments to or from their opponent countries. This not only adds to the difficulties of the firms but also negatively impacts consumer welfare, as both are involved in making a transaction. This situation makes it challenging for firms to develop long-term strategies and plans and execute them for the growth of their businesses.
In addition, escalating tensions result in higher risks. Financial markets respond by increasing the risk premium, which makes securing financial flows more expensive. Likewise, companies with ties to the countries or communities involved in conflicts face additional backlash from consumers and investors, leading to reputational risks. For example, companies like McDonald’s, Coca-Cola, and Pepsi-Cola are experiencing backlash in Muslim-majority countries due to the ongoing conflict in the Middle East.
Dealing with these challenges involves creating strategies to minimize their impact within the corporate systems. These strategies can be developed by expanding into different markets for both purchasing inputs and selling products. Depending on multiple supply chains instead of just a few provides companies with more options during difficult times. Similarly, diversifying financial resources will also help decrease the risks associated with financial inflows, which are essential for keeping the business operational during unexpected events.
Effective and transparent communication with key stakeholders such as employees, consumers, partner firms, and investors is essential for maintaining their confidence in the company. Working in challenging times can affect the mental health of employees, lower investor confidence, undermine consumer trust, and strain relationships with partner firms. Strategically communicating and sharing relevant company plans with these stakeholders can help maintain their support and navigate through difficult time
Leveraging strategically planned Corporate Social Responsibility (CSR) initiatives can help companies mitigate reputational risks and societal conflicts that may lead to large-scale law and order situations. Strong interaction with the local community and offering help in rehabilitation and relief activities in conflict-impacted areas can help position the business as impartial in conflicts.
Unilever, for example, has designed multiple strategies and plans to build strong relationships with the communities in which they operate. The company’s strong commitment to sustainability and their tailored programs, such as living wages, have helped the company foster strong community ties. Similarly, Coca-Cola’s investment in community water programs and Nestle’s focused approach to improving nutrition and lives in rural areas have helped them strengthen their relationships with local communities, enhance their brand image, and build resilience in markets affected by geopolitical tensions.
However, all these strategies can be useful if the management takes a proactive approach to foreseeing and assessing the impact of the risk and making plans to mitigate it. The role of leadership and management is of significant importance.
In conclusion, although companies may not have the ability to directly intervene in conflicts and offer a moderating role to help resolve them, they can reduce business risks associated with geopolitical situations through a proactive approach, effective planning, strategic communications, and well-coordinated CSR initiatives.
