Managing the Authoritarian Business Risk

China is a market of one billion consumers. We need to find that market. That’s where most of our future growth will come from. To enter a market, we were willing to do whatever it took – start a joint venture, share intellectual property – whatever.

So claimed a C-suite executive in a leading multinational company during a recent conversation.

The feelings are understandable. But besides being a promising market, China (and others) is also a country under authoritarian rule. While I will leave the difficult ethical questions associated with supporting these regimes to those more qualified than I, success in such countries requires a good understanding of authoritarianism and how this affects opportunities and risks.

The Russian invasion of Ukraine and the sudden withdrawal of many corporations from Russian operations is a great example of the unpredictability of working in such markets. Of course, China is a very large market and a sudden change would have an even bigger impact on corporate earnings – perhaps a power risk premium that should be reflected in the stock prices of corporations that rely on authoritarian markets.

So how can boards and executives assess such risks? Are they manageable?

Authority thinking

It all starts with a clear-eyed understanding of the dictator’s psychology and mindset.

Psychologists have described tyrants as having narcissistic and psychopathic traits, a “grossly exaggerated sense of self-importance” and a deep need for recognition and appreciation. Over time, they tend to develop more layers of paranoia. They see threats to their authority everywhere and act as necessary to deal with real or imagined threats of brutality.

Dictators see themselves as the embodiment of the government. L’Etat Case Moi (I am the government) in a famous phrase attributed to Louis XIV of France. In a totalitarian system, the government and its expression in the form of the dictator’s leader are dominant. Everyone should know their place.

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Most Western businesses see their role as serving their customers and making profits for their shareholders. However, in authoritarian regimes, what is more important is the service or benefit of the government. The people—the corporations’ customers—couldn’t care less. They have no meaningful speech and are subservient to the perceived needs of the government. In this, as we see in the war with Putin in Ukraine, they can be called to be cannon fodder, or they are expected to tolerate any kind of trouble if it is considered to protect the interests of the state – as in North Korea.

Knowing location is also important. Corporations, and especially foreign corporations, do not have the same status as authoritarian governments in Western democracies. Their main value is that they are tools for the government. Even successful local businesses are banned if they are deemed to threaten government dominance (where’s Jack Ma?).

Finally, the psychological make-up of the dictator’s leader makes his actions (always ‘he’) unpredictable through Western eyes. It is dangerous to think ‘he will never do this’. Actions that we consider extreme and irrational—even the unthinkable—may be committed, perhaps in some cases.

Working in the jurisdiction

As always, success depends on seeing yourself through the eyes of others. Instead of the usual questions about customer service and shareholder value creation, corporations operating in such states must ask themselves different questions. How much do I think of a dictatorship? How long will this price last? What happens when that perceived value is reduced or taken over by other political priorities?

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Only by developing objective answers to these questions, untainted by Western democratic thinking, can companies assess the opportunities and risks of engaging in these markets or evaluating their deals with companies owned or directed by authoritarian regimes.

For Chinese and other foreign corporations, the core value lies in knowledge and intellectual property transfer, FDI industrial base and employment development, and providing access to foreign markets. All of them can waste assets when more is transferred to local corporations – especially those that are government or state-run.

Public access to desirable Western brands can also be an important source of value, particularly at the luxury end. That advantage may be longer, only threatened by the slow pace of local brand development. or boycotts, often temporary, explosions or nationalism or some slight to the government; or when defeated by political events.

For China, perhaps the future of Taiwan is the elephant in the room. My understanding is that Taiwan’s reunification is considered an existential issue by the Chinese leadership and is now directly linked to President Xi’s legacy. The apparent failure of the ‘one country, two systems’ approach has been made even more serious by the events in Hong Kong. It is unclear how, or if, the issue of Taiwan will be resolved. Western businesses operating in China would do well to have contingency plans for various possible scenarios and how they might affect their operations and dealings with Chinese businesses.

Some corporations, such as England’s Brompton Bicycles, are planning for such arrangements by diversifying their supply chains and asking existing suppliers to set up manufacturing facilities outside of China and Taiwan.

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Browse for math

According to the V-Dem project, seventy percent of the world’s population lives under some form of autocracy – either by law or by election. For many, it is difficult to completely let go of the opportunities offered by authoritarian regimes, especially in China.

It might be fair to say that the initial unbridled enthusiasm has been more subdued. Progressive merger initiatives in the US and elsewhere are there for all to see. National security issues affect many sectors. Above all, business plans and future opportunities must be evaluated in the context of the dictator’s psychology and thinking. The risks are realistically evaluated and prepared as much as possible.

Let us not be blinded by what seems unimaginable to Western minds.

Written by Dr. Joe Zammit-Lucia.
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