How Geopolitics Is Rewriting the Rules of Global Strategy

In the global race for AI and technology leadership, a Forbes headline recently attributed a company’s success to a seemingly odd attribute: its nationality. The headline, “How France’s Mistral Built A $14 Billion AI Empire By Not Being American,” underscored a growing pivot away from the traditional playbook for achieving global business success. Over the last 30 years, we have come to expect that the global marketplace rewards businesses that focus on efficiency, product quality, innovation, and customer service, regardless of where they come from. But we need a new way to make sense of this new world in which corporate nationality confers competitive advantage, and companies strategically leverage their origins and alignment with countries’ political goals.

A new paper published in the Global Strategy Journal offers a framework to understand our current moment. The study authors, Daniel J. Blake of IE University in Madrid, Srividya Jandhyala of ESSEC Business School in Singapore, and Quan Li of Texas A&M University and Princeton University, developed a geopolitical-economic order framework that suggests that the severity of geopolitical competition incentivizes states to create one of two types of economic order: a market-based order or a state-based order.

The former is built on laissez-faire and mutually beneficial voluntary exchanges, when states need not have serious national security concerns; the latter is focused on state power and government intervention in the economy, when national security concerns are acute. Understanding the order in which a firm operates is crucial for managers of multinational enterprises (MNEs), as each order rewards different strategies and sources of competitive advantage.

The research team’s work began as a way to better make sense of the changing global political environment for companies. They found that there is no clear picture of what geopolitical risk really is and how it shapes global companies, so they wanted to provide a common foundation for scholars and managers to decipher how geopolitics shapes MNE strategies.

“Management and international business scholars often borrow big theories or paradigms from international relations to make sense of the impact of geopolitics for business,” the researchers say. “But those theories and paradigms often have conflicting assumptions and claims.”

The team went back to the basics and considered what makes international politics different from domestic politics: anarchy. And because there is no world government that can safe-guard countries’ interests, governments prioritize geopolitics, depending on their security environments. This creates an incentive for countries to cooperate at times and compete at other times, which then also shapes the state-market relationship that global companies encounter.

When governments perceive a greater threat to their countries and heightened geopolitical competition, they are more likely to intervene in MNEs’ affairs, which increases transaction costs. This prompts a state-based order, in which firms’ competitive advantage comes from their bargaining power and corporate nationality. Therefore, when operating overseas, they should highlight their relevance to the host country’s national goals and mitigate security concerns. This fosters a state-based order under which large firms or those from more powerful home countries are most likely to succeed.

But when geopolitical competition is more muted, governments may promote cross-border investments by lowering barriers to entry, limiting discrimination against foreign firms, securing MNEs’ property rights, and aligning regulations. This fosters a market-based order, in which MNEs focus heavily on exploiting global efficiencies. And because firms from both powerful and non-powerful home countries can compete in the global marketplace, the scope for strategic success is broad.

The two orders reward different sources of competitive advantage, thus incentivizing companies to utilize different market and non-market strategies, while also suggesting different scopes for strategic success. However, sometimes the world is in transition, and the order may not be clear.

“When firms cannot predict the future prevailing state-market order, they prioritize strategic flexibility, redundancy, and resilience,” the authors explain.