Managing geopolitical value at stake to seize opportunities while mitigating risk

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Rapid geopolitical shifts are exposing multinational corporations (MNCs) to well-documented risks, but they are also opening vital arenas for growth. This presents CEOs with a dual mandate: to seize opportunities in new markets and trade corridors while managing their organizations’ geopolitical exposure and associated risks. Companies that move quickly can use the forces reshaping the global order—from regional realignments to industrial-policy measures—to expand in growing economies such as India and Vietnam, access billions of dollars in industrial subsidies and investment incentives, and gain market share from slower-moving competitors. Conversely, MNCs that don’t respond to geopolitically driven shifts may see their enterprise value eroded by tariff costs, supply chain and operational disruptions, and other challenges.

Two steps can help CEOs gain an edge on competitors, the authors’ research suggests: first, quantify the value at stake linked to geopolitical developments to guide growth strategies and manage risk; and second, develop the organizational agility needed to respond quickly to new opportunities and risks as they arise.

Geopolitical developments can significantly affect MNCs’ enterprise value—both positively and negatively. On the upside, shifts can open new markets or boost demand, rewarding companies that can adjust production volumes and prices quickly.  However, the same geopolitical forces that fuel growth can also erode value.  Despite the magnitude of the value at stake, few MNCs rigorously measure it.

Estimating the enterprise value linked to geopolitical shifts requires first understanding the company’s geopolitical profile. Various tools can serve this purpose, but in this article, the authors rely on the geopolitical distance index, a measure of geopolitical alignment developed by the McKinsey Global Institute (MGI) based on countries’ voting records in the UN General Assembly.  MGI’s research shows that the average geopolitical distance between countries engaged in trade and foreign direct investment has fallen.   Additional analysis indicates that more than 90 percent of MNCs are exposed to countries whose political and diplomatic positions diverge significantly from those of their home governments.

Quantifying geopolitical value at stake combines geopolitical distance and financial-exposure metrics. The process involves assessing the revenue from each market, applying a probability weight based on the market’s geopolitical distance from the company’s home market (a proxy for divergence), and adjusting the result by a severity factor that reflects the impact of stabilizing mechanisms such as free trade agreements, tariff preferences, or more permissive export control environments. The outcome helps inform CEOs’ strategies by providing a directional, order-of-magnitude view of where businesses can protect and unlock value through a proactive geopolitical response.

In practice, exposure to geopolitically distant geographies without stabilizing mechanisms such as trade agreements can translate into materially higher value at stake than when such “shock absorbers” are in place.  

Participating in geopolitically distant markets requires leaders to assess not only the demand and operating costs in those markets but also the durability of relations between the economies.

To assess potential value swings associated with geopolitically distant markets, leaders need to evaluate the impact of shocks on demand, costs, and capital. This means sizing not only demand and operating costs but also the durability of relations across borders and the likelihood of sudden shifts in data localization rules or investment screening policies, for example. What’s more, they should do so not only at the enterprise level but also by function.

Having quantified the value at stake for each function, leaders can set thresholds for the geopolitical exposure they can tolerate. This is typically a three-step process:  Establish baseline concentration guidance.  Quantify how (and where) geopolitical exposure creates opportunities and risks.  And consider actions to lower exposure.

Agility is central to the CEO’s dual mandate—it boosts a company’s ability to capture growth opportunities while reducing risk from exposure to geopolitically distant markets.  Four steps can help CEOs improve their companies’ agility—gathering geopolitical insights and creating dashboards, developing regional intelligence-gathering capabilities, determining preplanned offensive and defensive actions, and ensuring rapid decision-making to respond to opportunities and shocks.

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