Complex Risks Without Boundaries

Limited regional view can obscure opportunities

You might expect that businesses in countries at similar stages of development would share similar concerns. Companies in developed economies, for example, might be more concerned by technology-related risks simply because they have more access to technology, while businesses in developing countries are focused on a lack of employment and job opportunities.

That is true in part, but “The Global Risks Report 2016” published by the World Economic Forum reveals that it also misses a larger point.

The report shows that business leaders in Germany, Switzerland and Netherlands, are more concerned about the effects of cyber attacks than any other risk to their companies. Companies in France, Italy, Spain and Portugal, however, have more in common with their peers in Sub-saharan Africa, where the developing economies of Namibia and Botswana are among more than 10 tightly grouped countries in which unemployment and underemployment are seen as the main risk to doing business.

“Unemployment is a big concern in developing countries, and also the top concern in many European countries,” says David Anderson, Director, Global Business Development, Zurich Credit & Political Risk. “On the other hand, risks for emerging economies are strongly driven by economic considerations that are seemingly removed from a given region, such as the macroeconomic drivers of tightening monetary policy by the U.S. Federal Reserve, the strengthening of the U.S. dollar relative to emerging market currencies, the waning of the commodity super cycle and the China slowdown. In both Europe and emerging markets, the political consequences of unemployment can be severe and have a direct effect on investors, as we’ve seen with the rise of nationalism in Europe and uprisings in the Middle East and North Africa.”

Regional Misperceptions

When a business is looking at where its growth opportunities could be, and considering owned assets or suppliers, it might want to consider the potentially higher rewards of emerging markets. Yet, assuming a region’s risks correlate to the level of its economic development can create misperceptions that may leave a business vulnerable. “Sometimes when you take a strictly regional view, there can be a lack of understanding about the potential effects of global risk interconnections and how a business should respond to them,” says Linda Conrad, Head of Strategic Business Risk, Zurich Global Corporate in North America. “For example, you might hear a business leader say: ‘What am I supposed to do about something like the price of oil?’ People feel powerless in the face of risks that they can’t control, but they still need to have a strategy to create resilience and lessen the effects of them.”

“In terms of return or lower costs, it’s important to see the opportunity side of a growth perspective,” says Conrad. “You might not necessarily want to rule out a risky region as a source of growth. What I would say is go in with your eyes wide open, which you can do through a deeper type of risk analysis. This includes understanding the countries, cultures and specific locations that you might target for growth, and determining where your dependencies might lie. When you do that, it can help you make better decisions with respect to cost of capital, expected return on your investments and risk mitigation.”

“What am I supposed to do about something like the price of oil? People feel powerless in the face of risks that they can’t control, but they still need to have a strategy to create resilience and lessen the effects of them.”