Steering a global business through the political, economic, social, and technology landscape is challenging at the best of times. Looking ahead to 2018, key planning assumptions are changing fast, according to recently launched research by the Frontier Strategy Group. Political transitions and policy incoherence, a brittle economic recovery, localization pressures and digital disruption all factor into an increasingly challenging environment for companies of all sizes.
In a recent webinar, the Center for Responsible Enterprise And Trade (CREATe.org) joined the Frontier Strategy Group (FSG) to discuss what to watch for the year ahead. I decided to have a chat with FSG’s director for global economics Antonio Martinez to hear more about two key areas for those working with global value chains: localization and digital disruption.
Passman: The FSG Events to Watch for 2018 report mentions that there is increased pressure for technology transfers and local partnerships. What will be the resulting impact?
Martinez: As governments confront increasing pressures on providing employment and faster growth, companies should expect growing pressures (and incentives) to increasingly provide technology transfers and local partnerships to gain access to more opportunities, particularly in large enough markets. These pressures, already present in large emerging markets such as China and Brazil, will only get stronger, requiring companies to invest more heavily in market access knowledge and capabilities in an increasing number of markets, creating further pressure on profitability for global businesses.
Passman: The report also notes that we are likely to see the weakening protections of intellectual property (IP). At CREATe, in working with companies on IP and trade secret protection, we have found that some of the greatest risks come from third parties. There is a trend among companies to assess third parties to determine whether partners have the policies and associated procedures – the business operations –in place to protect confidential and proprietary information. Based on your research, what do companies need to factor into planning?
Martinez: The greatest medium-term danger is that the U.S. government will lose influence and interest in pushing for global standards when it comes to protecting IP and trade secrets as the current administration pushes for weakening multilateral organizations such as the World Trade Organization and weakening binding transnational investment protections. Multinationals will continue to be threatened by cybercrime and IP theft, and the capacity to get recourse will be much more susceptible to political decision-making than before. With increased digitization intellectual property protections will confront greater disregard, and emerging market governments are unlikely to be consistently supportive, especially for multinationals that have not developed a significant local presence. And for companies that work predominantly through third-party distributors and partners, risk will become more elevated of potential IP infringement and cybercrime, given the often uncertain standards that these companies may have from a cybersecurity standpoint.
Passman: In the year ahead, increased digitization is also set to drive both new opportunities…and risks. In our work, we are urging companies to be more proactive is building cyber risk management capabilities and focus on cybersecurity. How did this square with your research?
Martinez: Targeted cyberattacks against corporations through ransomware are becoming more prevalent, and have the potential to do significant operational and reputational damage. As cybersecurity becomes an increasing focus for emerging market governments, new regulations are bound to become a potential disruptor for multinationals. Whether it is increasing data localization requirements, or simply more complicated standards for privacy, companies are going to have to navigate a much more complex operating environment, especially as more of their business incorporates digital customer engagement strategies.
Passman: On the topic of companies needing to work more closely with third party partners on cybersecurity, Gartner predicted that by 2018, 50% of organizations in supply chain relationships will use the effectiveness of their counterpart’s security policy to assess the risks in continuing the relationship. We are finding that many companies take a risk-based approach to third party risks. For strategic partners, a company may do an assessment, some level of verification of the assessment and follow-up to ensure improvements are made. For business partners with lower risk profiles, it may be less involved, such as an assessment to get a sense of the third party’s approach. What does your research suggest about third party risk?
Martinez: Local partner and distributor compliance with data and digitization standards will become a more pronounced pain point and vulnerability even for companies with solid cyber standards. Most multinationals pursue a hybrid or indirect channel approach to reaching end customers, and these local partners often do not have even minimal standards for cybersecurity. Global businesses will need to incorporate into their partner identification, contracts, and quarterly reviews assessments of the cybersecurity risks inherent to each partnership.