How to factor geopolitics into technology strategy

Geopolitics and technology are inseparably intertwined in today’s geostrategic environment, but many CEOs who focus on digital transformation are paying comparatively little attention to geopolitics.

According to the EY CEO Imperative Study, 63% of Forbes Global 2000 chief executives view technology and digital innovation as one of the top trends impacting their company. And digital transformation ranks as the top business concern among CEOs. However, the same CEOs ranked geopolitics last in terms of trends impacting their company – and only 28% point to political risk management as a top business concern. 

The impact of this disconnect could be considerable. As a CEO, you need to have a full grasp of the geopolitical risks that will impact your organization if you want your technology adaptation and digital transformation plans to succeed. Your organization’s ability to thrive depends on it. Indeed, technology and the geopolitics of trade are two of the five themes EY teams have highlighted as critical to purpose-led growth.

The CEO Imperative series addresses critical issues and actions to help CEOs reframe the future of their organizations. As part of that reframing, addressing these four geopolitical risks should be a strategic priority in your technology and digital innovation agenda:

1. Cybersecurity risks

Cybersecurity is one of the clearest examples of the interconnection between technology and geopolitics. Recent high-profile, large-scale hacks appeared to target US Government intellectual property and intelligence. But the effects were far wider because the attackers hacked widely used software, exposing tens of thousands of companies and government agencies, and revealing back doors other hackers can infiltrate.

Geopolitically driven cyberattacks can have significant implications for cybersecurity, risk management and digital transformation strategy. While no company is immune to cyberattacks, companies with strong cyber defenses and data protection systems, and those with employees that exercise good cyber hygiene, are likely to be less at risk.

2. Industrial policy risks

Governments are increasingly using industrial policy to promote self-sufficiency in strategic technologies, driving geopolitical competition. For example, US President Joe Biden is pushing to expand domestic production and improve supply chain resiliency for large-capacity batteries, semiconductors, and mineral inputs critical to digital technologies. The Chinese government is also prioritizing self-reliance in key technologies, providing incentives for domestic production of semiconductors. And seeking to bolster the bloc’s digital transformation, the EU has offered production targets for semiconductors, a plan for production of its first quantum computer by 2025 and support for expanding 5G infrastructure.

Companies may have to contend with governments preventing foreign companies from competing in certain areas of a domestic market. And competing standards for 5G, the internet and other technologies could create a more fragmented and networked, rather than global, digital economy.

While companies should still be able to operate across these different networks, CEOs should expect diverging technological standards to increase operating costs.

3. Changing technology regulations

Policymakers are imposing new rules and regulations on the technology sector. Australia recently passed a law requiring digital platform companies to pay publishers for posted news content, while China is increasing regulatory pressure on big fintech companies. The EU is considering additional data privacy regulations and continues to charge big tech companies with antitrust violations. And in the US, several antitrust bills have been introduced to curtail further consolidation of digital technology companies. Plus, momentum is building around the global tax reform initiative led by the Organisation for Economic Co-operation and Development (OECD), which includes coordination on new digital tax rules.

Executives appear to be aware of at least some of these risks, as 46% say data privacy and localization regulations are a top concern in the next 12 months. The proliferation of data localization and data privacy rules in different markets will make moving or sharing data across borders more difficult for many companies. CEOs of multinational companies in sectors that use data extensively, particularly personal or consumer data, should expect to be most affected by these regulations.

4. Increasing geostrategic competition

Finally, tech and non-tech CEOs alike must remember that technology is at the core of US-China geostrategic competition. The US has expanded export controls in strategic technologies and restricted US market access for Chinese companies in the telecommunications and semiconductor industries. And the Biden Administration is using this strategic competition with China to promote investment in domestic capabilities in which it believes the US has fallen behind — most notably, 5G wireless networks, AI and clean energy.

Despite the growing political risks to the sector, technology company CEOs discount the materiality of geopolitics to their business. Tech CEOs are least likely to say geopolitical risk requires new or increased C-level attention to ensure their company’s growth over the next five years and beyond. They are much less focused on the impact of geopolitics than CEOs in sectors such as energy and manufacturing.

Tech CEOs should learn from the geopolitical risk experience and approaches of other sectors to lessen the impact of political risk events on both their operations and their customers — which include companies across all sectors.

Risk management as a strategic opportunity

CEOs are increasingly focused on fundamentally rethinking how they manage risks. More than 40% of executives surveyed revealed they intend to adjust their risk management practices in the next three years – the top area of change overall. CEOs are prioritizing data-driven analytics (61%) and resilience to strategic external risks (49%) within the context of planned changes to risk management.

There is a strategic imperative to incorporate political risk into your broader risk management upgrade. The EY Geostrategy in Practice 2021 survey found less than one-quarter of global executives say their company integrates political risk management into broader risk management on a regular or proactive basis.

To help your company’s digital strategy implementation, encourage risk management teams to take three actions to improve resilience to geopolitical risks affecting technology adoption and digital transformation:

• Analyze technology-specific geopolitical risks as part of their risk registry. Companies across all sectors can identify the politically driven risks to the technologies they currently use or might adopt. They should monitor these risks – at the geopolitical, country, regulatory and societal levels – as part of their enterprise risk management (ERM) system or other risk dashboards.
• Assess the resilience of the company’s technology systems to geopolitical risks. Risk teams can collaborate with operations and compliance teams to determine how diverging technological regulatory standards in key markets will affect the company’s international footprint. They can then consider whether more localized technology and data would create more resilience for globalized operations.
  
• Engage the C-suite and the board of directors in understanding and managing these risks. Since more than two-thirds of CEOs are planning a major investment in data and technology, the C-suite and board need to understand the effect of geopolitics on these investments so any risks can be managed effectively. By working with risk teams, together they can demonstrate the strategic importance of incorporating political risk into technology decisions.