Anyone talking to the CEOs will find an issue that is currently top of their mind: changes in the levels of global cooperation and how they will affect trade, investment and growth.
Fears about the direction of globalization are nothing new. However, these fears eventually got codified into a stricter policy.
The creation of supportive incentives to produce two important pieces of legislation by the US government in 2022, the Semiconductors and Science Act and the Inflation Mitigation Act, ushered in a new era where geopolitics shape corporate strategies. In this changed global operating environment, geopolitical dynamics play an increasingly important role in business decisions.
CEOs seem ready to capitalize on this challenge and lead from the front. Nearly all 1,200 CEOs (97%) surveyed in the latest quarterly EY CEO Outlook Pulse have changed their planned investment strategies in response to these challenges, with nearly a third (32%) pausing planned investments. Others are opting to optimize supply chains, relocate operational assets and even exit particular markets.
For the first time in three years, restrictive regulatory, trade and investment policies have overtaken ongoing COVID-19-related issues as the leading reason for changing international investment plans, with 28% citing it as their main driver Is.
CEOs are examining their global footprint, operations, assets and addressable markets through a geopolitical lens. CEOs are looking deeper into their value chains and positioning to overcome the increasing hurdles being raised by the government.
They are doing this from a risk management perspective – if they can no longer do business with a particular country – as well as looking for opportunities to assess the level of support or barriers to doing business if they want to do business with a country. choose to move from to another country. They are correctly weighing the risk and reward and positioning their companies to create maximum optionality and drive rapid growth.
These changes are also affecting cross-border mergers and acquisitions (M&As). The average share of deal value allocated to cross-border deals in 2022 was just 25%. For the decade before 2022, it was 30%. This figure for the year 2007-2011 was the height of 34% in the current phase of globalization.
A key feature of the planned transaction in 2023 is “friendliness”, with the CEO’s investment plans aligned with geopolitical considerations. Most CEOs (78%) will conduct M&A in countries geopolitically and economically aligned with their home country. Of those planning an acquisition in the next 12 months, less than one in 10 would now consider an acquisition in a market where their home country does not have strong geopolitical and economic ties.
The biggest reversals in M&A flows have been between China and the US and Europe. In 2016, Chinese investors accumulated $135 billion in wealth in these sectors. In 2022 it was just $8 billion. With increasing oversight and intervention by governments, especially with regard to Chinese companies buying assets abroad, it is difficult to see these flows soon returning to the levels seen at the height of the globalization phase.
The CEO and the board cannot wait for clarity before deciding on their future course of action. Political risk analysis is an important part of today’s strategic planning – not least in looking at current and future geographic footprint risks and opportunities, such as tax credits. By taking bold action now, CEOs can make strategic investment and operational decisions across their markets, business models and supply chains that will position their company to thrive during potentially turbulent times.
Andrea Guerzoni is Global Vice President of Strategy and Transactions at EY.
The opinions expressed in Fortune.com commentary are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Luck,
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