How Changing International Relations Could Affect Business Location Decisions

With Vladimir Putin’s war on Ukraine in its second year, and the U.S. and China carrying out military exercises in the Taiwan straits, geopolitical tensions have moved from the economic realm to the military battlefield. Just one of the business consequences of these changes can be seen in Russia, where companies pulled out, as economic sanctions were levied. The result was that investments made there, over nearly 30 years, were wiped away in a matter of months.

This experience, said Manuel Muñiz, Provost of IE University in Madrid, and Dean of its School of Global and Public Affairs, is now causing companies to think more strategically about the political risks of locating and establishing operations in some countries versus others. Speaking at this year’s ULI Europe Meeting, Muñiz set the stage for the annual conference by providing his perspective on the conditions that led to this moment and what can be expected in the future.

“We're living through a … moment in international politics, that is probably as important as the end of the Cold War and the fall of the Soviet Union,” he said. This time frame “may not be as visually compelling [as that period] because nobody's taking down a wall, but the changes that we're living [through] are as significant as the ones that we saw 30 years ago.”

Muñiz said “we're probably moving to a world with a U.S. led block, and a China led block,” with companies choosing to locate in some countries and not others, as they factor in political risks, in ways they did not need to, at least for the past 30 years. He emphasized that future geopolitical strategy “is going to have a very deep technological underbelly, [so] it's going to be almost impossible to understand global politics and economics without understanding the tech dimension to it.”

This much more fractured world presents risks to areas involving global governance, the climate agenda, trade policies and international economic development, said Muñiz. He added that “we have lived from the end of the Cold War to the invasion of Ukraine in a world that was rapidly globalizing, where economic logic was central to decision making, both in government,” and in business, with newfound efficiency leading to the opening of new markets.

“But I think that world is gone,” Muñiz said. I think we're moving into a much more geopolitical world where the geostrategic, regulatory and political lenses “are going to be much more significant in decision-making. That is a world that is less efficient, more inflationary, and more complex to navigate. It's not desirable. But I think that's where we are headed.”

Muñiz noted that for centuries, society progressed and changed in a generally linear fashion. But during the scientific and industrial revolutions, metrics such as world population and the social development index — which is a compound measure that captures material wealth — skyrocketed. Currently, he said we live on the cusp of exponential change that has immense implications for governance.

Focusing on GDP by region of the world over a 2000-year period, Muñiz indicated that almost all the relevant economic growth of our societies occurred in the last 150 years, “due primarily to the impact of tech on social and economic processes.” He added that the next wave of change is going to be fed by the deployment of very advanced Artificial Intelligence systems.

Muñiz noted that 2023 may well be remembered as a watershed year for AI. “When we look back to this year … particularly the last two weeks of March, I think we're going to be convinced that that was the time when we really entered the AI era.”

He noted that in the space of about 10 to 14 days, “we saw the most important rollout of generative AI tools and technologies to date.” In fact, he said most of the tech that was deployed came out 10 to 15 years sooner than anticipated, at least in terms of capacity. He cited “super powerful tools” like GPT-4, Midjourney and Bard as examples and added, “it was just astonishing.”

An example of how AI is affecting real estate was provided by Javier Sánchez, chief technology officer of AEDAS Homes, a new home builder headquartered in Madrid. At a separate conference session focusing on AI advances, he said that the search function currently dominated by Google is about to change significantly. Results will no longer be presented in the form of a list of links; instead, a single response that is highly tailored will be delivered.

Sánchez added that “specialized real estate portals … in the U.S., are launching apps powered by Open AI ChatGPT,” and he gave examples of how it can be used. “You can prompt things like, ‘show me all the houses with three or four bedrooms, for sale in the San Martin district, near a school where I can take my children, with an open kitchen.’”

This type of search can be done right now, he said, adding that soon, a similar search will be doable simply by uploading a photo and asking the system to search for a similarly designed house.

Moving away from AI, Muñiz focused on three key political changes affecting the future geopolitical landscape, and potentially, location decisions: the return of China, Russian revisionism, and challenges to democratization of the Islamic World.

With China, Muñiz said he intentionally uses the term “return” because China is reverting to a position of permanence that it held for centuries. For 18 of the last 20 centuries, China had the world's largest economy and the last two centuries have been an oddity. For most of us, he said China’s reemergence is a big change “because we haven't lived in a world where China was that significant for almost 200 years.”

Focusing on global GDP data, Muñiz said that at the end of 2022, the U.S. economy measured $25 trillion, and the Chinese economy approached $20 trillion. Providing a sense of what a challenge China’s reemergence might mean, Muñiz said “the U.S. has not faced a geopolitical competitor for over a hundred years whose economy was larger than 40% of the U.S. economy. So Nazi Germany's economy was never larger; the Soviet Union’s was never larger. With China, the U.S. faces competition from an economy that is essentially the same size.”

Focusing on Russian foreign policy since 2008, “it is deeply revisionist of the international liberal order, questioning fundamental principles like territorial integrity and the sovereignty of countries,” Muñiz said, citing war with Georgia in 2008 and annexation of Crimea in 2014 as examples. He added that “Russian activities in cyberspace are very indicative of this revolutionary sort of willingness to up-end part of the [international] order.”

In Arab and Islamic countries, Muñiz said challenges are stemming from the failure of those societies to incorporate the “processes of democratization after the Arab Spring.” In fact, he said that looking at the Arab Spring countries, not one of them is better off in terms of freedoms and liberties than they were before.

Countries like Syria, Libya, Yemen and Egypt, are “all worse off.” From a business perspective, this means that hope has diminished that these countries will open new markets and create opportunities for international business expansion.

Looking at the economic performance of the last 30 years among advanced economies, there have been very successful stories of GDP growth, Muñiz said. However, in most cases, we've seen “a hollowing out of the middle of our income distribution,” through either wage stagnation or wage decline, across most countries.

The driver of this implosion, Muñiz said, has been "fundamentally technological."

He shared data illustrating that over the last 150 years, the agricultural sector basically disappeared as a major generator of employment in the United States. Agriculture employment in the U.S. from the 1850s to the 1970s — over about a hundred years — went from 60% to about 5% today.

The same thing happened with manufacturing. From the 1980s to today, the number of industrial jobs in the U.S. were cut by half, while during the same period, industrial output in the U.S. exploded by about 250%, Muñiz said.

He added that with emerging tech changes like AI, there's going to be a transition period with displacement of workers and changes in income “and we're already seeing that in the economy.” Providing productivity and compensation data for the U.S. — that he said is very similar in Germany — he illustrated that between 1948 and about 1970, as productivity rose, compensation rose in tandem.

But starting in the 1970s, as productivity climbed, median income and non-supervisory wages flattened or even fell. This means, Muñiz said, that in industrialized economies, “we've been able to be more productive without employing more people,” or increasing their wages.

Muñiz said that tech essentially “undermines job creation and makes productivity go up,” noting that as AI matures, “nobody really knows if we're going to create more jobs than the ones we're going to displace,” a question looming large over future demand for various types of commercial space.