Tech Giants Who Keep Ignoring Geopolitics Do So at Their Peril

Prime Minister of India Narendra Modi, left, speaks next to Facebook CEO Mark Zuckerberg at Facebook in Menlo Park, Calif., Sunday, Sept. 27, 2015.

Prime Minister of India Narendra Modi, left, speaks next to Facebook CEO Mark Zuckerberg at Facebook in Menlo Park, Calif., Sunday, Sept. 27, 2015. Jeff Chiu/AP

High-flying technology companies are being brought down to earth.

High-flying technology companies are being brought down to earth by the deep-rooted forces of geopolitics.

Apple—already under political fire in the US for evading taxes on its global operations—is in a standoff with the Federal Bureau of Investigations (FBI) over its refusal to unlock the iPhone of an American terrorist inspired by the Islamic State in Iraq and the Levant (ISIL).

ISIL has also threatened to attack Facebook CEO Mark Zuckerberg and Twitter counterpart Jack Dorsey after their networks cracked down on terrorist communications. Meanwhile, Facebook’s high-profile rollout of its “Free Basics” internet program in India has been blocked by local political opposition due to concerns over “internet imperialism.”

Mexico’s legislature recently passed an “Uber law” to regulate the taxi-hailing app following vociferous (and sometimes violent) opposition from local drivers—now a regular occurrence from Paris to Beijing. And last week mobile giant MTN paid a $250 million “good faith” down payment on a $3.9 billion fine levied by the Nigerian government for failing to disconnect unregistered SIM cards potentially used by terrorists. The fine, originally set at $5.2 billion, shaved 20% off the company’s share price in four days.

The list goes on, and it is getting longer.

Technology companies have generally relied on diffuse, almost borderless supply and viral demand to steer clear of geopolitical risks, even as their products play larger and larger roles in major world events, like transnational cyber attacks, popular uprisings, and political campaigns. Yet as recent developments show, geopolitical risks will be a growing concern for the technology sector. Indeed, the same reasons that tech companies have generally been able to avoid geopolitics in the past will make political risks especially pressing in the future.

First, consider how rapidly growing technology companies—especially those specializing in software—can become “instant” multinational corporations (MNCs), expanding into global markets far quicker, and thus with far less experience and infrastructure, than more traditional companies. Given that even these more established companies (in extractives, manufacturing, finance, retail and consumer, etc.) often struggle to understand and mitigate political risks, the learning curve for new tech entrants is bound to be steep.

This is especially true because technology companies often enter (and in some cases create) markets and industries in which regulatory regimes are barely formed—the “rules of the game” are unclear not only to the company, but also to the regulators themselves. While this kind of blank slate certainly brings opportunity, it also brings unpredictability—especially when the broader political, cultural, and economic dynamics in a market are unknown. Just ask Facebook’s “Free Basics” team.

Second, technology products are more difficult for states and governments to control because of their diffuse and decentralized nature. Again, while these features allow for easier expansion and growth, they also challenge two core functions of sovereign states. The first is the state’s mandate to provide “national security” and social order for its citizens, and the second is the state’s ability to tax and distribute resources among them—otherwise known as “guns and butter.”

When it comes to “guns,” governments and technology will clash on a number of fronts. New communication technologies erode state monopolies on surveillance and disrupt abilities to monitor terrorists and insurgents, while cyber attacks weaponize technology directly, posing potentially catastrophic threats to state infrastructure and personnel (see the recent blackout in Ukraine, allegedly perpetrated by Russian hackers). This is ample rationale for stricter regulation on national security grounds, and the tech sector—including giants like Apple—should expect as much going forward.

Tech companies will also have to contend with governments’ overarching concern with keeping political power, which often requires not only maintaining social order but also regulating—or at least influencing—citizens’ access to information. It is no mistake that coup leaders and revolutionaries of all stripes nearly always try to seize national television and radio stations, nor that existing governments will protect these interests with particular ferocity. Who can protect (or seize) the internet? The Chinese Communist Party has some good answers; the previously-entrenched regimes before the Arab Spring do not.

On the “butter” front, tech companies challenge governments’ abilities to tax, generating two sets of political risks.

The first emerge from so-called “home country” governments—i.e., authorities in countries where tech companies are based—that try to tax company earnings even if they are made abroad. On the flip side, foreign “host country” governments aim to tax all economic activity within their borders, even if said activity is virtual or online or the goods and services originate outside the country. Online goods brokers like Amazon have of course faced these risks for years, with variable results. But the explosion of software-as-a-service (SAAS) products in global markets will likely extend conflicts over taxation to many more governments and tech firms in the future.

What’s more, as technology makes up larger shares of home country economies, governments will be tempted to extend protectionist barriers to trade and investment in the sector—especially if the technology relates to the national security concerns outlined above. Restrictions on foreign investment, exports or the import of inputs may well be in the “national interest”—just not in the interest of the technology firms themselves.

At the end of the day, technology companies—like other MNCs—will need to mitigate political risks with reliable intelligence and analysis and effective diplomacy with governments and communities. Employing consultants and/or enhancing in-house analytical and government affairs capabilities can help, as can joint ventures with domestic companies and effective community development projects; there are a number of options for tech companies to anticipate and manage political risks. They cannot, however, continue to avoid geopolitics, no matter how disruptive their product or how viral their demand.

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