GeoTech Wars - Managing Geopolitical Risk with Nirav Patel

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In this episode of GeoTech Wars, Kirti and Andrew discuss how businesses are adapting to increased geopolitical risk in the international economic system. They are joined by guest Nirav Patel, CEO and co-founder of The Asia Group. Nirav has extensive experience in both government and the private sector, having served as Deputy Assistant Secretary of State in the Bureau of East Asian and Pacific Affairs and having founded, invested in, and sold numerous companies across the United Kingdom, North America, and Asia. 

As Nirav explains, over the last several decades, government policy and private business have become far more intertwined. Government policy used to be a relatively small factor within a broad range of considerations for the private sector, but this has shifted as policies driven by geopolitics such as export controls, investment restrictions, and tariffs increasingly impact the business environment. Accordingly, the private sector can no longer afford to passively observe foreign affairs. 

Instead, corporations must actively participate in geopolitical developments in two ways. First, they must assess how geopolitics may impact their operations and communicate this to policymakers. As Biden administration officials acknowledge, the success of the private sector is crucial for American national security. Private sector investment drives the innovation needed to meet economic and national security objectives. Firms must understand and clearly communicate which policies will promote their success and which will undermine their global competitiveness so that policymakers can effectively partner with the private sector to meet their goals. 

Second, corporations must recognize and pursue the new business opportunities that ongoing geopolitical shifts create. Business leaders who creatively identify new markets, manufacturing bases, and suppliers will gain a competitive advantage, whereas business leaders who fail to prioritize geopolitical considerations are unlikely to seize these new opportunities. 

Focusing on new opportunities is critical at the moment because, despite the recent export controls and investment restrictions, we are still early in this transition. Restructuring supply chains and capital flows takes time, and governments are still establishing what is permissible activity. Encouragingly, U.S. policy is becoming more nuanced, prohibiting specific activities in specific sectors instead of outlawing all ties to China. Some sectors will correctly remain undisturbed, while policymakers focus on critical technologies such as AI, semiconductors, and quantum computing.  

The venture capital (VC) industry is a prime example of how these dynamics may play out. The VC industry has consistently adhered to the U.S.-China relationship over the last several decades. In the early twenty-first century when Washington focused on engaging with China to deepen economic ties and promote specific behaviors, VC flowed into China.  

As attitudes have shifted over the last several years, however, VC firms have adjusted their activities. U.S. VC investment into China has plummeted, with some firms completely breaking their corporate structure to separate their Chinese and global operations. Instead, VC is now focusing on trusted markets aligned with the United States, such as Vietnam. This transition was recently reinforced by an Executive Order from the Biden Administration which created the authority for the U.S. government to restrict VC investment into China’s critical technology sectors. 

Other industries will presumably follow this trend, yet they also are unlikely to completely defer to U.S. policymakers. There may be push back on perceived overreaches, which could be challenged in courts. Some businesses will certainly pull out of China to avoid these headaches, while other businesses have significant capital invested in China which they will not easily relinquish. Further, in competitive technology industries with high research and development (R&D) costs, some companies need the revenue available in the Chinese market to fund R&D and remain competitive. Still, these companies, while trying to buy time in China, are beginning to identify potential locations to set up shop in the future. 

Nevertheless, disentangling from China is no simple task. In some sectors, such as hardware production, it will be incredibly difficult to displace China. And in other sectors where dramatic deleveraging is possible, it may simply take time given the realities of creating new factories. Reshuffling is not going to occur in one or two years. Chinese companies remain active as well, for instance increasing their investment into countries such as Vietnam, as they understand that their customers want to see more manufacturing in these countries. Ultimately, there are many different points of contradiction that will make it difficult if not impossible to completely excise China out of the supply-chains of some technologies. 

This piece summarizes the discussion in GeoTech Wars, "Managing Geopolitical Risk with Nirav Patel, CEO of The Asia Group.” It does not represent the opinions of the hosts. 

Kirti Gupta
Senior Adviser (Non-resident), Renewing American Innovation Project
Chris Borges
Program Manager and Associate Fellow, Geoeconomics Center