Political Capital: Why North Korea Matters
While it is easy to classify North Korea as a far-away land with a controversial, uneven leader, the impact an unstable Korean peninsula can have on business is considerable. When geopolitical tensions rise due to events such as the recent actions on the Korean peninsula, the topic of “political risk” is inevitably brought to the surface. These events not only require geographically-close nations and trading partners to re-evaluate strategy and relationships, but companies are forced to reconsider their plans for international investment as well. Given that this was the first direct artillery attack by North Korea on South Korean soil since the Korean War, the situation warrants close attention for those doing business in the region.
Where China Comes In
China, North Korea’s neighbor, is the world’s largest emerging market. Therefore, any major conflict involving North Korea may well ripple into China and could significantly affect business interests and foreign investment. When political risk is such a material concern in a market of interest, we advise clients to make risk evaluation part of the initial business case and in frequent, ongoing business reviews. Also, clients can review our emerging risk update for the Asia Pacific region and examine previous instances of political turmoil in the same or similar markets.
China’s close relationship with North Korea (in both geography and economy) and China’s place in the global economy put the recent events on the Korean peninsula squarely in the middle of any multi-national company’s “political risk heat map.” For this reason, strategy is of the utmost importance when contemplating market entry into China, and we advise clients to align their market entry strategy with specific product and market goals. Corporate Strategy Board members can learn more about “winning in emerging markets.”
Leading companies tend to address political and economic unpredictability with a mix of careful planning and flexibility. Some companies are concerned that if heightened tensions on the Korean peninsula continue, South Korea’s sovereign credit rating may be reduced and companies could face difficulties conducting business internationally. Thus far, global credit rating firms have not lowered Seoul’s credit standing. However, the escalating geopolitical risks continue to cause trepidation among investors and businesses have begun to cancel long-planned visits to South Korea due to the situation.
At a time when some are concerned about inflation in emerging market countries due to high food and energy prices, combined with the U.S. Federal Reserve’s easing tactics forcing emerging-market central banks to raise interest rates more aggressively than expected, tensions on the Korean peninsula are the last thing needed. While markets have become relatively immune to North Korean provocation, the current political climate could leave the South Korean won, stocks and bonds more sensitive to geopolitical crises. Additionally, in the unlikely scenario that war breaks out and North Korea implodes, leading to sudden reunification, the South Korean government would likely be stuck with enormous fiscal costs and an influx of millions of refugees. South Korean President Lee Myung-bak has even proposed a new tax to help fund the eventual bill for reunification, but the plan met a tepid response.
When tensions slowly escalate in an area for years, markets tend to become impervious in response. However, every escalation has a tipping point when it can spill over into world markets; companies should ensure that their business interests are not getting too close to that line.