Doing Business

A Strategic Approach to Vietnam’s Geopolitical Vulnerability and Policy Risk

Trường Lăng

April 12, 2023

Doing Business

A Strategic Approach to Vietnam’s Geopolitical Vulnerability and Policy Risk

Trường Lăng

April 12, 2023

The global geopolitical panorama has never been more uncertain. Political upheaval, social unrest, and economic instability can spell disaster for the unwary business that isn’t prepared for what lies ahead. This is no time to find your way in the dark. If you’re operating in one of the world’s most volatile regions, you owe it to yourself and your people to be informed. Not the garden variety of information that offers a general view of political events, but a condensed and in-depth analysis based on a unique understanding of the regions you’re working in, and your place in it.

What is Geopolitical & Policy Risk?

When considering investment opportunities in emerging or volatile foreign markets, whether through acquisition, merger, or organic expansion, it is crucial for investors to be aware of the potential impact that geopolitical events may have on their business operations. 

Source: Internet. Geopolitical and Investment Risks

In general, geopolitical risk is defined as a wide array of risks associated with any sort of conflict or tension between countries that affect the normal and peaceful course of international relations. It typically arises at the intersection of geographical factors, policy decisions (e.g. restrictions on FDI, tolerance of corrupt elites), local cultural climates and has a clear impact on global trade, security, and political relations. 

Geopolitical risks are always present in all economies and markets, and could always potentially disrupt economic narratives and reshape market expectations without prior notice. Their impact can be pernicious, filtering through the economy in erratic ways.

For those reasons, acquiring a thorough understanding of overseas markets with the help of geopolitical and policy risk analysis plays a pivotal role in the success of any investment deal.

Why is Studying Geopolitical Risks Important? 

Investors study geopolitical risk because it has a tangible impact on investment outcomes. 

On a macroeconomic level, these risks impact capital markets conditions, including economic growth, interest rates, and market volatility. Changes in capital markets conditions can, in turn, have an important influence on asset allocation decisions, including an investor’s choice of geographic exposure. 

On a portfolio level, geopolitical risk can influence the appropriateness of an investment security or strategy for an investor’s goals, risk tolerance, and time horizon. A higher likelihood of geopolitical risk can raise or lower an asset class’s expected return or impact a sector or company’s operating environment, affecting its attractiveness for an investment strategy.

Geopolitical Risks’ Impact on Corporate Innovation 

How Geopolitical Risks Derail Innovations 

Geopolitical risk does not just affect security, global trade, and political relations, it also hampers private sector innovation. 

Research published in Harvard Business Review by a trio of researchers from the United States and Australia has shown that in years with higher GPR, a smaller proportion of companies’ products were in the early stages of development, suggesting that geopolitical risk leads companies to launch fewer new, innovative product development projects. In other words, companies became more risk-averse and less likely to pursue multidisciplinary, highly impactful innovation. 

Geopolitical risk has a greater impact on companies with larger exposure to foreign markets 

In the same analysis published in Harvard Business Review, researchers looked at two metrics to measure the impacts of geopolitical risks on companies with more foreign customers, which are: the proportion of a company’s major customers that were foreign (versus domestic), and the proportion of a company’s revenue that came from those foreign customers.

Researchers found that with 1% increase in the foreign proportion of a company’s customers and revenue corresponding to 0.63% and 0.78% decreases respectively in the average number of patents filed. This suggests that companies who sell to customers in foreign countries likely experience greater uncertainty and will thus be more risk-averse in times of higher geopolitical risk.

The Impact of Geopolitical Risk on Innovation is Long Lasting.

Despite the short-lived nature of many geopolitical conflicts and risks, the effect on private sector innovation is long-term. In general, the negative impact of geopolitical risk on innovation typically persists for three to five years, on average reaching its peak a full two years after the initial rise in GPR. While a conflict may be short-lived, its repercussions are likely to be felt for years to come. 

Top Geopolitical Risks Affecting Vietnam’s Investment Landscape 

Most foreign investors, after investing in Vietnam, share the common opinion that although Vietnam possesses many strengths, especially in economic potential, there remain several geopolitics-related limitations that hinder their investment decision. Domestic investors also report the same inadequacies and difficulties that hamper their business potential. 

Source: Internet. 10 Biggest Geopolitical Risks by Likelihood and Impact in 2022. 

Specifically, the most recent report by Kroll identified the 10 biggest geopolitical risks for 2022, with high inflation risks resulting from unceasing political conflict between Russia & Ukraine and China’s Zero Covid policy presenting the biggest impact on Vietnam’s investment panorama. 

High Inflation pressure

Inflation risks still exist as the Russia-Ukraine conflict continues to be prolonged, which causes severe disruptions to global supply chains. It poses a stealth threat to investors since it chips away at real savings and investment returns. Higher-than-expected inflation could hamper economic growth and lead to tighter monetary policy. In such a case, the State Bank of Vietnam (SBV) will have less room to maintain a loose monetary policy to support the economy. 

Zero Covid-19 Policy 

The closure of factories in China due to the Zero COVID-19 policy can create a negative impact on Vietnam’s manufacturing sector as Vietnam is highly dependent on input materials such as textiles, metallurgy, chemical, and electronics from China. Therefore, if the supply from this market continues to be interrupted, enterprises are forced to import from Japan and Korea at 15-20% higher prices. With this input material price, investors are at risk of not being profitable, making their products difficult to compete in the global market. 

Turning geopolitical & policy risk into strategic advantage  

The volatile economy has taught businesses one thing that it’ll never be enough just simply to acknowledge the existence and likelihood of political risks. What’s more important is that they must take a further step in mapping out the impact of political risks across their company’s activities to better anticipate and prepare for potential disruptions, mitigate their impact, and even turn them into advantages. 

That the presence of a “risk” does not automatically mean that the worst case will happen or that the resulting events will even be negative at all. The potential consequences of geopolitical risk can be either positive or negative. 

On the one hand, a risk can potentially lead to economic and political instability, which can, in turn, lead to violence and conflict. On the other hand, they can also spur innovation and creativity as countries attempt to mitigate the risks. But that’s just the theory. Bringing it to reality is a totally different story. But with Viettokin, we can make it happen. Our GPR analysis solution can help decision-makers stay ahead of potential issues and get clarity on how the region may respond.

Geopolitical risk analysis framework. Source: Viettonkin 

With a team of highly competent experts, we’re confident to deliver risk consulting and advisory solutions that are timely, market-relevant, and forward-looking. We help organizations understand these geopolitical risks and their interrelationships, to quantify and model their impact, and to design risk mitigation strategies that will result in better market acquisition. We also identify political drivers that move markets and forecast outcomes and scenarios. This way, Viettokin assists clients in incorporating political futures into their business and investment strategies.

Final Thoughts

In today’s era where business and transnational political events are increasingly intertwined, geopolitical and policy risk analysis has better be done timely, accurately, and ultimately produce actionable guidance. That is why leading companies and organizations, from domestic to foreign agencies, have come to rely on Viettokin for analysis they can directly link to vital decision-making. 

Geopolitical & Policy risk analysis based on data insights provided by Viettokin’s team of experts can be a really powerful edge to take over your competition. Our comprehensive advisory service platform enables a holistic approach to help both domestic and foreign investors address these issues within the context of their own unique operations.

Harness the full potential of your business with Viettokin Consulting today.

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