The growth of cross border trade and investment over the past few decades has shed light on various influences of international business. In general, these influential factors can either be categorized as controllable factors or uncontrollable factors. Controllable factors are internal, while uncontrollable influences of international business are external in nature. In the international business environment, internal factors such as access to capital, land, and business location can be controlled effectively through sound management practices. External factors comprises of influences that cannot be controlled by the management. Concerns such as technological advancement, cultural influences, political forces, demography, legal practices, global competitiveness, and security issues cannot be controlled by the management (Abdin, 2005). This paper focuses on the effects of security on international business as well as the measures that companies and national governments are putting in place to counter the potential adverse effect of security issues on international business.
Security and International Business
Even though multinational companies operate their businesses across borders, the influence of interstate security relations and its impacts on international business is rarely studies. The accumulation of knowledge on the links between international relations and international business has not helped to bridge the knowledge gap caused by lack of studies on the effect of security on international business. Nonetheless, it should be noted that interstate security relations determine the nature of government policies towards international business, particularly, these policies attempt to shape investors expectations of the level of political risk and the business climate. In most cases, security alliances serve as an important tool in security relations. Establishing security alliances is important because bilateral investment flows largely depends on the level of political risk (Li & Vashchiko, 2010). Due to the connection between interstate security, international relations, and international businesses; states must enhance their political risk assessment mechanisms and understand the nature of state-business interactions.
At the national level, the political environment determines the level of national security and the flow of cross border trade and investment. Instable political climate adversely affects the health of the business environment. With sound political decisions, responsible and skilled leadership, and political stability; security concerns can be resolved hence promoting a healthy business environment. At the regional level, global security is maintained through cooperation between trading nations. For instance, regional business organizations such as the European Union (EU), the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN) and South Asian Free Trade Area (SAFTA) influence international business within jurisdictional regions. At the international level, international business is determined by a set of international rules and regulations, United Nations activities, and the World Trade Organization (WTO). Finally, the extent of international business also depends on the current world order (Abdin, 2005).
In the 1990s, the world was controlled by two competing superpowers; the United States and the Soviet Union. With the collapse of the Soviet Union, the United States has risen to build a monopoly world order. It follows that all international business operations are more often controlled by the power of the hegemony. Understanding the effect of global balance of power on international business is a necessary prerequisite for investigating the effect of security on international business.
One of the most serious security concerns in the 21st century is the threat of terrorism and terrorism related activities. Unlike most security issues, terrorism is a global security issue that affects both the developed and developing economies. Terrorist activities are a new form of risk that businesses have to deal with when engaging in international business transactions. Across the world, policymakers are making new security measures intended to contain terrorism while at the same time promoting global trade and investment. For individual companies, the link between security and international business is the premise upon which companies are engaging in reducing global poverty and advocating against hatred as a way of abating terrorism. Other multinational enterprises have been involved in direct negotiation with terrorists to keep their business running. Government and private sector partnership has made it possible to develop technologies with the capability of countering terrorism (Jain & Grosse, 2009).
In the aftermath of the September 11, 2001 terrorist attacks on the United States soil and the subsequent impacts of the attacks on international trade, both the federal, state, and local governments have embarked on a thorough assessment of the safety of assets, operations, and personnel. United States companies operating global businesses have been forced to contend with the additional security related costs. Companies routinely examine their vulnerability to security risks before taking appropriate measures to safeguard against possible loses in the eventuality of insecurity, such as terrorist attacks. Apart from training and education employees, various national legislations require companies operating both at home and abroad to carry out background checks on their partners, customers, and employees (Martyka, 2002). In essence, despite the extra costs involved, international security has been recognized by many international business operations as being a top priority.
As the most pressing security issue in the world economy today, it should be noted that terrorism has crucial implications for international business. Terrorist attacks always target business establishments more than any other target. Again, terrorists are more likely to target businesses that are committed to establishing strong counter terrorism measures. On the other hand, terrorist activities directly influence consumer purchasing behavior. Therefore, terrorist activities pose both direct and indirect effects on multinational firms involved in global business. Direct threats on individual international firms mainly comprise of the immediate effects such as death and destruction of property. Direct effects are always concentrated on individual firms and may not cause great harm to the world’s economy. Indirect effects such as a decline in consumer demand, an upsurge of new regulations and laws, unpredictable interruptions in the value of products, shifts in supply chains, deteriorating international relations, and other harmful macroeconomic phenomena are the most important potential threats to international business; with regard to the adverse effects these threats pose to free flow of investment and trade across borders (Knight & Czinkota, 2006).
An upsurge of new policies, laws and regulations is an important indirect effect of security on international business. Certain legislations passed by national governments in the name of national security may hinder the free flow of trade and investment. For example, the United States has retained and continues to pass laws aimed at promoting national security. However, some of these laws have been major trade and investment barriers between the United States and the European Union: the United States largest bilateral trade partner. Using the US and the EU as an example is based on the fact that the trade and investment between the US and EU is the largest bilateral trade partnership in the world. Trade between these two regions accounts for more than 58% of the world’s GDP (European Commission, 2007).
Despite the existence of bilateral trade agreements such as the Doha Development Agenda and the Transatlantic Economic Initiative, some national security legislations are counterproductive to the objectives of these agreements. Some of these laws are; the Security and Accountability for Every (SAFE) Port Act of 2006, the Bioterrorism Act of 2002, the Trade and Expansion Act of 1962 (Section 232), as well as other legislations covering investment, import, and procurement restrictions in the name of national security greatly hamper international business (European Commission, 2007). Thus, even though the globalization and market liberalization have continued to promote and expand the scope of international business, the mere existence of national security related laws which directly impact on global trade and investment confirms the fact that security has a direct or an indirect influence on international business.
As governments continue to make and implement laws and measures aimed at tightening public security, business establishments are becoming more attractive targets to security threats. These threats greatly affect the overall performance of international businesses (Czinkota et al., 2010). The nature of the current security issues such as terrorism and internet security calls on governments and businesses to develop strategies which improve the global political and business climate, enhance the security of global distribution and supply chain channels, and nurture organizational preparedness.
Security concerns influence supply chain costs, insurance costs, the speed of business activities, and policies, legislations, and regulations governing international business. The most important global security concerns such as terrorism and internet security requires governments and businesses to work together in developing a comprehensive approach that not only recognizes the link between security and international business, but also lays a firm framework for implementing effective countermeasures.
Abdin, J. (2004). Influential Factors of International Business and International Business Environment in Bangladesh, Social Science Research Network (SSRN)-id1123404, 1-15
Czinkota, M. R., Knight, G., Liesch, P. W., Steen, J. (April 8, 2010). Terrorism and International Business: A Research Agenda, Journal of International Business Studies advance online publication 8 April 2010; doi: 10.1057/jibs.2010.12
European Commission (EC). (2006). United States Barriers to Trade and Investment Report for 2006, European Commission, Brussels: Belgium, 1-18; http://trade.ec.europa.eu/doclib/docs/2007/february/tradoc_133290.pdf
Jain, S. C. & Grosse, R. (January 1, 2009). Impact of Terrorism and Security Measures on Global Business Transactions: Some International Business Guidelines, Journal of Transnational Management, 14, 1, 42-73
Knight, G. A. & Czinkota, M. R. (2006). Terrorism and International Business: The Corporate Response, Proceedings-AIB-SE (USA) 2006 Annual Meeting: Clearwater Beach, Florida
Li, Q & Vashchilko, T. (January 7, 2010). Dyadic Military Conflict, Security Alliances, and Bilateral FDI Flows, Journal of International Business Studies, doi:10.1057/jibs.2009.91
Martyka, J. (December 20, 2002). International Business Security Made a Priority, Despite the Costs, Minneapolis/St. Paul Business Journal; http//:ad.doubleclick.net