Semiconductors are one of the foundations of any modern economy. They’re used in everything from home appliances to automobiles to weapon systems. During the Covid-19 pandemic, however, they suddenly became very hard to acquire. Production of semiconductor chips is concentrated in Taiwan and South Korea, and disruptions to global supply chains meant U.S. companies faced year-long waits for chips. This past summer, Commerce Secretary Gina Raimondo warned that an inability to access Taiwan’s semiconductors would lead the U.S. to a “deep and immediate recession.” In other words, dependency on foreign production is a national security risk for the United States.
This vulnerability is one example of what we call the new national security economy. This paradigm is defined by four factors: 1) deep connectivity within and between societies, which has yielded benefits like globalization while introducing risks related to interdependence; 2) geopolitical competition between the West and China, in which 3) the primary arena is advanced technologies, such as AI and semiconductors; and 4) the private sector is a primary actor in this fight. Semiconductors are just one of many fields in which this dynamic is evident and intensifying.
To navigate this new world, leaders need to update their operating assumptions. Most CEOs came of age during a period of globalization when free markets and trade were assumed to be net goods. But the ground has shifted. Many of the key issues that businesses and leaders are grappling with — supply chain obstacles, trade policies, and the competition for access to technology and markets — are often considered individually, but they’re increasingly driven by the new national security economy. Understanding this paradigm is essential to navigating it.
Going forward, businesses should use this lens to make decisions around who is on their board, how they vet plans, how they weigh politics and national interest in their decision making, and how they think about risk.
Holistic Risk in the New National Security Economy
Connectivity, geopolitical competition, technological innovation, and the evolving role of the private sector all shape business leadership and decision-making. It’s not hard to see how each affects hiring practices, intellectual property protections, location strategies for production facilities, or efforts to secure supply chains. But the ways that they interact, the intensity of their interaction, and the consequences of these changes have created a new paradigm.
One effect of this shift is that companies need to look at risk differently. Most organizations approach risk function by function. For example, a financial institution will employ teams to monitor credit risk, legal risk, market risk, operational risk, and regulatory risk, to name a few. This approach has significant shortcomings. For example, the 2008 Global Financial Crisis demonstrated how this kind of siloed risk management can obscure the cumulative vulnerability in a system.
To be more effective at considering risk in this new paradigm, organizations should consider how the four factors identified above work in concert. This means that they not only need to incorporate a deeper understanding of the impact of geopolitics, but also be able to connect the various dots between political risk and other traditional business risk factors. Politics in some form, be it domestic or geopolitical, now meaningfully impact all forms of business risk today.
Consider two examples:
First, look at how growing tension between the U.S. and China is creating problems for Apple. Concentrating manufacturing in China, where labor costs are lower, and having access to its growing market, made Apple a leading success story of globalization. At present it manufactures some 90% of its devices in China. However, as relations between China and the U.S. have deteriorated, intervention by both governments threaten this success. Recently, for instance, the Biden administration restricted the sale of semiconductor technology to China, and put restrictions on a Chinese memory chip company whose products Apple was reportedly considering using in some iPhones.
The result is that Apple is having to navigate more uncertainty and complications because of the four factors of the national security economy. The connected nature of the world created an opportunity, but also risk for Apple’s business. As U.S. anxieties around China’s advanced manufacturing capabilities — which can be used in weapons systems and supercomputing — have grown, the U.S. government has tried to limit Chinese companies’ access to these technologies. As a result, this geopolitical competition is playing out in the private sector.
Navigating the New Paradigm
While every industry and market is different, there are several steps companies can take to better navigate this new paradigm.
Companies should not only build geopolitical expertise internally, but also look for board members who can improve their ability to interpret and navigate how geopolitics intersects with business. From selecting new board members to hiring recent graduates to ongoing executive training, companies must look to people and learning opportunities to enhance this experience. Many executive education programs focus on traditional business disciplines, but few engage with the intersection of business and geopolitics. The average business executive who studied business administration, engineering, or a similar discipline will likely have a hard time gaining this understanding, so companies should consider hiring board members with more interdisciplinary backgrounds who demonstrate significant exposure to geopolitics along with business insight An additional benefit of this approach is that it can broaden a company’s pool of potential candidates, as recruiters consider candidates who may not have traditionally recruited or hire from programs and schools that have not historically recruited.
Ask the right questions.
A national security economics lens should be applied to most plans an organization makes, from the feasibility of a potential foreign investment to the selection and due diligence of entities in a company’s supply chain. Many things that are seemingly mundane can be risky or complicated when viewed through the lens we offer. This is as simple as asking when considering a decision, “What are the geopolitical implications of the choice we are making?” When you ask a question like this, people can only consider possible events that are low probability, but high impact and plan for contingencies accordingly.
Accept that politics is unavoidable.
Historically, many companies, especially in the West, have tried to separate business and politics. This is now a false dichotomy in many situations, especially in international contexts. Companies are many political actors, in many situations, with a national identity and as such need to understand what constitutes their identity, as well as that of the companies they deal with. For example, a Chinese company may make a deal primarily to acquire new technology, while its Western counterpart is only looking to make money. These are very different assumptions than many western market participants are used to, and require these western companies to update their assumptions.
Consider reputational risk holistically.
The new economy of national security gives rise to other forms of increased reputational risk that can affect a company, whether it is Nokia selling technology to Russia, pressure on companies to withdraw from Russia, Chinese consumers avoiding Western companies that criticize China, etc. . This risk is amplified in our model and companies should be more sensitive to the impact of reputational risk. Doing so requires the ability to connect the dots by giving meaning to seemingly unrelated events, which together can have compound and significant business impact.