Navigating the troubled waters of the current economic and political situation is challenging. This is also the case for M&A professionals looking for opportunities and market trends. The latter may be volatile and unpredictable, however, the driving forces behind them are relatively easier to analyze. For instance, geopolitics that define the long-term strategies of states, and inevitably impacts the economic actors.
To dive deeper into the topic, the M&A Community talked to Klisman Murati, Founder and CEO of the Pareto Economics. Being an expert adviser to the European Commission, he is described by some as the savant of geopolitics. In our conversation, we looked at the US/China rivalry, M&A connections to politics, the impact of populism on investments, as well as the future of the UK after Brexit.
One of the classical thoughts in geopolitics is based on the dichotomy of land power vs. sea power. Does this dualism remain relevant in the current circumstances, i.e. in the digitalized and globalized world?
Geopolitics is certainly a phenomenon that M&A practitioners must understand. This is harder than it looks, however. As a firm, we’ve unfortunately noticed that many professionals rely on general and unspecific insights from newspapers and TV to keep them informed on the day to day ongoings of world affairs, this is nowhere near enough to really be ahead of the curve and to ultimately succeed in this brave new world. A lot more needs to be understood which is why the Pareto Economics exists.
The land vs. sea dichotomy was indeed a classical fundamental of geopolitics. We have Mackinder’s Heartland Theory to thank for that, but the world has changed significantly since 1904. Fundamentally, to truly understand why the world is the way it is today and why its trajectory for the next 100 years is somewhat already determined we must have an understanding of what the fundamental drivers of power are.
The world and global business will be changed and challenged by four fundamental themes in the next 100 years, including Globalisation, Geopolitics, Transformative Technology, and Societal Change, we call these the Global 4 (G4). No matter what industry you are in or where in the world you live, you will be significantly impacted by at least one of the G4 throughout the lifecycle of your business. Pareto Economics is at the cutting edge of this global transformation, and by having a unified theory of global change we are starting from a simple but powerful place.
If you leave with one thing after reading this interview let it be this: A nation’s relevance and influence are predicated on developing, maintaining, and leading in five primary interrelated and interconnected ways—“centers of power (CoP)”. These include economic growth, size of the active consumer market, production of systemically important resources (this includes significant production of natural resources as well as data resources), geostrategic positioning, and military balance. Every nation, empire, and principality throughout history can be ranked against these five measures to determine their power and influence.
Different nations develop these CoPs at different rates which is the fundamental driver of why there is rising geopolitical risk in the world. We call this phenomenon the ‘developmental differential’. This theory explains the rise of globalized power as the natural outcome in world affairs when nations begin to develop stronger CoPs, to a point where they are in a better position to have a bigger voice in regional/international affairs. The pie hasn’t changed because the US is taking a smaller slice (as some analysts promote), it has changed because the pie has grown larger with more active players who have the financial capital to develop and pursue more ambitious regional and global agendas.
Do cross-border M&As and the activities of transnational corporations change today’s geopolitical landscape or is it vice versa, i.e. geopolitics is dominating business questions?
I think M&A has the power to shape the geopolitical landscape, and it has always played a significant role. From the age of Renaissance when Medici money fundamentally created the blueprint of the modern-day holding company which went on to shape the political landscape of Florence and the Catholic Church in the 1430s, to the explorations and exploitations of the UK through the formation of the East India Company of the 17th century, the establishment of the Bretton Woods agreement in 1944 and the subsequent status quo of American exceptionalism to the Chinese Belt and Road Initiative now.
What makes cross-border M&A relevant in the game of geopolitics however is a nation-states’ intention to deploy private enterprise for its own ambitions. The hybrid nature of warfare requires companies to realize the intended and unintended consequences of its operations and to really understand how its involvement in cross-border M&A is perceived and welcomed by both its home nation and foreign host.
Politics in several developed democracies, as well as in non-democratic countries, seems to be heavily influenced by populism these days. Do populists change the geopolitical trends as well? How can such rhetoric impact the M&A sphere?
This very question reinforces the importance of the G4. Societal change is a major development that the M&A community has a better understanding of compared to the others but is woefully unprepared for its modern evolution.
M&A traditionally trades on societal change and consumer trends. For example, due to things like a rising middle class, consumers in X country are changing their buying behavior, therefore, efforts are made to capitalize on this. However, as the gap between the rich and the poor grows, we have seen and will continue to see more varieties of societal change that present more than growth/development opportunities for firms. Due to the compounding effects of the developmental differential, we will see a continuing trend of wealth gap inequalities which will affect immigration patterns in ever more extreme ways and result in ever more complex socio-economic and political societies emerging in the high growth nations and regions of Europe, Asia, and parts of Africa.
As some countries and cities become ever more multicultural and populated, we will also see other countries suffer from labor flight and brain drain. This vicious circle will only compound. Societal change, therefore, becomes more nuanced and particular.
Populism is simply what happens when the world and business leaders fail to respond to these changes. History has shown just how contagious the spread of populist formations is. From the American and French revolutions in the 18th century to the Arab Spring of 2011, to discontent in Ukraine, Belarus, and Europe and the engineered chaos of the United States now. The grievances are diverse, but their impacts can be equally transformative.
What’s relatively new however is that citizens and consumers are becoming more informed which is altering their buying behaviors and consequently are demanding a lot more from their government and business to reflect their needs and attitudes in the policies they enact and products they produce. This is perhaps the essence of the glocal world we are living in, where both governments and industry need to understand, anticipate, and respond to the growing needs and wants of the people. Their voices will only get more powerful, become more diverse, and spread more widely.
Whether rightly or wrongly, both public and private companies are compelled to develop stances and opinions on social issues, this is because consumers are expecting companies to reflect in their operations, actionable initiatives that reflect the concerns and aspirations of their consumer base. This is especially true and relevant for industries that are seen as exacerbating a social cause, for example, the fashion industry and ecological denigration.
This is all very new to business leaders. The lack of experience of engaging with these new responsibilities is leading management and boards to make rushed and unexamined decisions which will inevitably end up working against them if perceived to only be paying lip service to social causes or even worse when they totally misjudge the sentiment of their customers and produce a response which exposes their lack of understanding. Having the right experience and expertise around you is essential to understanding the role your companies can play in the global conversation of values and ideals.
Arguably this is how the phenomenon of ESG investing arose, and we can already see the mismanagement currently occurring with the adoption and standard setting of this movement. As investors, it is imperative that this new world be investigated and understood in order to form a more precise understanding of societal change and consequently the effects it has on the investment landscape.
The work of the media has drastically changed in the past 10-15 years. In the world of fake news and media manipulations, how can the press influence economics and geopolitics?
Firstly, the phenomenon of “headline risk” is prevalent in the financial capitals of the world. This is where trading decisions are made or not made based on headlines read in the papers or watched on the morning segments of business news shows. Rarely is the full story heard or examined which leads to misinformed financial allocations. Short-termism and short-sightedness seem to be the metrics used now. This is no way to invest in the long-term future.
The media can be a real asset if you know how to use it to your advantage, especially as a tool to anticipate and reflect on public sentiment for any issue you are interested in understanding. Like the age-old question of which came first, the chicken or the egg, one must ask: does the media reflect the opinions of its readers or does it shape the opinions of its readers.
For the investment and political classes, there seems to be a cult following for certain publications that do both. Brand names that are bought into and “inform” the decisions of its readers have also simultaneously created the archetype of the kind of person who would be interested in the points of view of said publication. And the circle continues, with little to no critical analysis of what is presented to them as sacred knowledge.
New media however trades on different fundamentals. Their USP comes from a variety of perspectives and delivery medium which appeals to the social tendencies of the target market. They can reach a far wider demographic which can impact the world in a more rapid and visual way. The prevalence of “fake news” is one we all believe we can spot if we see it, but rarely do.
This compounded by the velocity of opinions, theories, and perspectives has created a hive effect where the algorithm knows what will generate the most clicks and public chaos ensues. We afford our clients the following insights when it comes to the news media goliath and how to tackle it.
The media should be used in one and only one way: as a way to gauge public sentiment. Content needs to be understood as the nutrients which are being fed to the demographic you are interested in. Opinions and behaviors will naturally follow on from there.
Secondly, in order to expose the truth, you must go to the source. Meaning instead of reading the summary of a piece of research from a newspaper or watching a clip of a speech and then allowing the author to derive a conclusion for you, you must endeavor to read the study yourself, or listen to the entire speech to gain a more holistic understanding. From there you build a more relevant conclusion of what it means for you and your company. This will better inform your strategy and confidence in your decision making. This is something we start with at Pareto Economics as the basis of our research and insights and have developed the best methodology to help your teams select, understand, and formulate conclusions of industry impacting developments.
Recent governmental initiatives in several countries have created a higher barrier for Chinese capital to enter. Can Beijing leverage its soft power (if any) to change the situation? And in a long-term perspective, can China become a global superpower if it lacks the soft power that American has?
China’s rise to prominence on the international stage was slow then all at once. The trend of legislation and policy by major nations and blocs to protect markets and industries of national security concern is a result of what they see as aggressive moves by nations who have less than good intentions.
China has slowly and successfully accumulated CoPs over the past 60 years which has entrenched her as a rival to the United States. The catalyst for its rise arguably can be attributed to them joining the World Trade Organisation in 2001, from there on it set sail realizing the five CoPs. Some important landmarks include launching their first manned spacecraft in 2003, overtaking Germany as the world’s largest exporter in 2009, city dwellers outnumbering the rural population for the first time in 2012, naval skirmishes with the Philippines in the same year, and the IMF including the Renminbi in a new Special Drawing Rights valuation basket in 2016.
Today in 2020, the state of power politics as it concerns China is a congested picture of activity. We see China active on many different fronts, including Chinese’s regional military expansion via the South China Sea, global economic projects like the Belt & Road Initiative, technological players like Huawei and TikTok, all under the background of a global pandemic with its beginnings in China.
It’s hard not to see China as a global power, but it is also vital we do not mistake their outward engagement for cooperative development. Regionally China has few friends. More than seven official land/sea disputes are ongoing between China and her neighbors which has caused problems and continues to do so.
Its staunch stance on national sovereignty has seen a very consistent display of this value concerning disputed territory such as Kosovo, Palestine, Kashmir, Catalonia, and more. This however does not come from any deep philosophical reasoning but rather a strategic move that serves to benefit her own agenda.
China does not see herself as having any allies of equal stature as herself and thus does not do foreign policy like any other nation. Its attempts at soft power again serve its own purpose, it has successfully traded on the hopeful ambitions and aspirations of its Western counterparts to instill a sense of Chinese exceptionalism which promised to pay dividends down the road.
Furthermore, it uses one of the CoPs very successfully, that being the size of its active consumer market which can be used as bait with international business, and uses it to make sure foreign firms toe the line especially when it comes to its territorial sovereignty and governing legitimacy.
Its strategy to rival the US is based on taking advantage of the current state of world affairs by presenting itself as a viable alternative to what they want to promote as lackluster US leadership and engagement, this strategy however is not the best when compared to the fundamentals and beginnings of US power.
The characteristics of United States leadership which sees them take center stage can be explained by two main things. Firstly, they led in the creation of the global financial system and rules-based order of the developed world since the end of World War 2. Secondly, they remained militarily unchallenged since the early 90s when they defeated the Soviet Union. It is the compounding of these two characteristics over time that can explain its influence and power. The United States had buy-in from the west and even offered financial support to a fatally injured Soviet Union. For that buy-in, the United States promised to be the torch-bearer of the rules-based order which included democratic values and free-market economics. This quid-pro-quo has shaped and motivated US leadership and with its unchallenged military power following the fall of the USSR, cemented the transition from pax-Britannica to pax-Americana.
Post-Brexit Europe: should we expect an M&A surge and competition for the ‘British succession’? Where is the new place for London on the geopolitical and financial map of the world?
Unfortunately, we will not be able to judge the success of Brexit without also assessing the inevitable contribution COVID-19 will have on investor sentiment and confidence in the months and years to come. Detaching the effects of both phenomena is hard. What has proven to be even harder is building a consensus between the EU and UK on what a future relationship will look like.
Brexit has become the most-watched European telenovela for international business and trade, rivaled only by the blockbuster that is Trump. With a cast of characters with gripping interactions, plots, and subplots. Notwithstanding trade, its difficult to see what kind of relationship the EU and UK will have in the coming months and years.
In the short term, no doubt a relationship of necessity will need to be formed to help combat COVID- 19 collectively, however, the current reality does not match expectations.
Taking a step back, however, it’s important to see what is happening in the macro and what the shifting sands of geopolitics look like. Fundamentally, as the UK removes itself from the political and economic union of the EU, they will naturally become an independent power base and voice in the theatre of western power brokers. This opportunity has been preemptively met by Prime Minister Boris Johnson with much jubilation and high spirits. They have also followed up with early substantive actions that mark the change, such as developing their own independent sanctions body which will be used as a tool of British power and standard-setting.
What will emerge if the UK plays its cards right is tryptic of western powers including the US, UK, and EU. Although on things like sanctions and trade they have and will continue to develop distinctly divergent standards and policies which for those who wish to commercially operate in all three jurisdictions will make it more complex and costly to do so.
However, on a macro security level however, there are broad agreements among the three where we see homogenous cooperation and policy alignment on. For example, on the question of China’s growing ambitions in world affairs, competition, and state subsidy assistance they all agree this is something they need to react to. Global National Security legislation is a response to a perceived threat from a growing number of nation-states who are seen as capable and willing to dominate/undermine established powers and take advantage of more vulnerable/fledgling countries.
Legislation like the 2018 US Foreign Investment Risk Review Act (FIRRMA) put into play a template for allies to adopt. The UK has responded with their version of state investment protection in the form of the National Security and Investment Bill. Undoubtedly it is still early days for the UK on this new road of identity and regional relevance, there are many challenges and forks in the road that it has faced and will continue to face. Its place on the international stage is neither compromised nor embolden by Brexit. It will still reserve a seat as a P5 member at the UN, its historical significance is not erased, nor will their state institutions and investment experience be undermined.
The UK’s importance and attractiveness for M&A practitioners will be based on two fundamental pillars. Firstly, the relationship they will foster with the EU and the mutually beneficial trading relationship they will enjoy as a result. Secondly, their ability to develop a USP for business and international investment that has a long-term horizon whilst simultaneously protecting its essential industries from nefarious actors will need to be shaped and promoted.