There is some evidence that political relationships support company innovation – likely due to reduced political uncertainty fostering greater investment in innovation. An analysis of patents and political contribution data of more than 6,500 American companies found that those that support more politicians, winning politicians, politicians with jurisdiction over their industry, and those who join congressional committees innovate more.14 A similar result was found with relation to high-tech firms’ affiliation with higher levels of government in China.15
But there is countervailing evidence as well. A study focused on transition economies found that managerial time invested in political ties can weaken the relationship between organizational innovation and productivity.16 One study found a potential solution for companies with less international experience is to co-locate R&D activities with production activities, which can substitute for the ability to coordinate complex and dispersed organizational structures.17
Incorporate political risk analysis into business decisions
With material impacts from political risk on a wide array of business activities, the case for incorporating political risk analysis into C-suite decisions is clear. This is especially important for maintaining competitiveness because researchers have found that the vast majority of political risk impacts that companies report are firm specific (91.7%), rather than shocks that occur at the sector (7.5%) or market (0.8%) level.18
There are several specific actions executives can take to reduce their company’s political risk exposure and more effectively manage the political risks they still face. They should use scenario planning or other strategic foresight tools to assess how political risks may affect their workforce mobility and cross-border supply chains in the coming years. They should also incorporate political risk analysis into market entry and global footprint decisions. And as CR and ESG continue to rise up the C-suite agenda, executives should determine how stakeholder relationships could improve the effectiveness of their political risk management. Finally, companies should consider how their political risk management and innovation decisions may be intertwined – and make any adjustments necessary to foster greater innovation in the future.
These political risk management actions are especially important in the midst of the COVID-19 crisis, as governments play a more active role in managing their economies. Companies need to ensure that they have the necessary governance frameworks to integrate political risk analysis into their strategic planning and broader risk management processes in order to mitigate the potential negative impacts of political risk and also seize any opportunities that the shifting political environment may generate.