International Business Strategy under Geopolitical Risk

Introduction

International business strategy traditionally emphasizes market attractiveness, competitive advantage, institutional quality, cost, infrastructure, and access to customers and resources. Geopolitical risk adds a further dimension: the possibility that rivalry among states, political conflict, sanctions, regulatory coercion, military events, or strategic dependencies will alter the conditions under which an international investment creates value.

Geopolitical risk is not confined to war. It includes trade restrictions, export controls, investment screening, diplomatic disputes, political violence, maritime insecurity, cyber operations, contested borders, resource nationalism, extraterritorial sanctions, and sudden changes in state preferences. These events may affect revenues, costs, ownership rights, logistics, financing, technology access, data flows, and the legitimacy of a firm's presence in a market.

The strategic task is therefore not simply to predict crises. Prediction is often impossible and false precision is dangerous. The task is to identify exposure, assess plausible scenarios, design resilience, establish decision triggers, and preserve strategic options. A sound strategy integrates geopolitical risk into market entry, location, investment, partnership, portfolio, divestment, and localization decisions.

Learning Objectives

By the end of this chapter, students should be able to:

1. Distinguish country risk, political risk, geopolitical risk, and operational exposure.
2. Integrate geopolitical variables into international market-entry and investment analysis.
3. Apply scenario analysis, expected-loss reasoning, and real-options thinking to strategic decisions.
4. Evaluate partnership, location, portfolio, divestment, and localization choices under uncertainty.
5. Compare friend-shoring, nearshoring, and China-plus-one strategies.
6. Assess the governance, ethical, legal, and organizational implications of geopolitical resilience.

1. The Strategic Meaning of Geopolitical Risk

1.1 From country risk to geopolitical risk

Country risk concerns the possibility that conditions in a country will adversely affect an investor or business. Political risk is a major component and includes expropriation, policy instability, restrictions on capital movement, discriminatory regulation, and political violence. Geopolitical risk is broader and relational. It arises from interactions among states, alliances, regional institutions, armed groups, and transnational networks.

A firm's exposure may arise in a country where it has no direct investment. For example, a conflict affecting a shipping corridor can delay inputs sourced from several countries. An export-control rule imposed by one government can restrict the sale of products manufactured elsewhere. A sanctions regime can affect a bank, insurer, supplier, or customer even when the firm's home country is not a party to the dispute.

The distinction between hazard and exposure is important. A geopolitical hazard is a potentially disruptive event or condition. Exposure is the firm's connection to that hazard through assets, suppliers, customers, people, data, finance, logistics, or reputation. Vulnerability describes the extent to which exposure produces harm. Resilience is the ability to absorb, adapt to, and recover from disruption.

1.2 Direct, indirect, and systemic channels

Geopolitical risk reaches firms through several channels:

• Market channel: tariffs, boycotts, declining demand, blocked market access, and currency instability.
• Supply channel: interruption of energy, minerals, components, transport, or specialist services.
• Regulatory channel: sanctions, export controls, data restrictions, investment screening, and local-content rules.
• Financial channel: restricted payments, higher insurance premia, credit withdrawal, capital controls, and sovereign stress.
• Operational channel: violence, cyberattacks, infrastructure failure, workforce disruption, and physical damage.
• Reputational channel: accusations of enabling human-rights abuses, sanctions evasion, or political favoritism.
• Strategic channel: loss of technology access, forced transfer of intellectual property, or exclusion from an alliance-based market.

A useful analytical sequence is:

Figure: A practical transmission model for integrating geopolitical risk into strategy.

2. A Framework for Strategic Assessment

2.1 The risk register

A geopolitical risk register should identify the event, affected assets or activities, transmission mechanism, time horizon, potential severity, leading indicators, current controls, and accountable owner. It should distinguish risks that are independent from risks that may occur together. A port closure, for example, may coincide with insurance withdrawal, currency depreciation, and regulatory restrictions.

A compact assessment can use four dimensions:

Risk scores should not be treated as objective facts. A numerical score is a structured judgment, not a substitute for evidence or debate. Senior decision makers should examine the assumptions behind a rating and ask whether a low-probability event has catastrophic consequences.

2.2 Scenario analysis

Scenario analysis is especially useful when historical data are sparse or when structural change makes past frequencies unreliable. A scenario is a coherent description of how several conditions could evolve. Scenarios should not be confused with forecasts. A forecast identifies what is expected; a scenario tests what would happen if a plausible configuration occurred.

A robust set often includes:

• Base case: tensions remain manageable and existing restrictions continue.
• Adverse case: targeted sanctions, transport disruption, or regulatory escalation occurs.
• Severe case: prolonged conflict, broad technology controls, or loss of market access occurs.
• Opportunity case: diplomatic stabilization or a new trade agreement improves access.

For each scenario, managers should estimate effects on volume, price, variable cost, fixed cost, working capital, tax, financing, and exit value. They should also identify which decisions are reversible and which create path dependence.

2.3 Quantitative tools

A simple expected-loss estimate is:

Here EL is expected loss over the selected period, pᵢ is the probability assigned to scenario i, and Lᵢ is the monetary loss if that scenario occurs. Probabilities must sum to one when the scenarios are mutually exclusive and collectively exhaustive. If losses occur across multiple periods, discounting and dependence should be considered. Expected loss is useful for comparison but can conceal catastrophic downside and does not represent the most likely outcome.

For an investment, a risk-adjusted net present value can be expressed as:

I₀ is the initial investment; E(CFₜ) is expected net cash flow in period t; r is the discount rate; TV is terminal value; and n is the number of periods. Cash flows and the discount rate must be expressed in consistent currency, price basis, and time units. This formulation is appropriate when scenario probabilities and cash-flow estimates are sufficiently credible. It is not a precise answer when geopolitical uncertainty is deep, probabilities are disputed, or strategic options have significant value.

A scenario-weighted cash flow can be calculated as:

where CFₜ,ᵢ is cash flow in period t under scenario i. The calculation assumes that the scenarios are defined consistently and that probability weights reflect the decision maker's information set.

Worked example: location choice

An enterprise is comparing two locations for a five-year project. Location A requires an initial investment of $40 million and has an expected annual cash flow of $13 million. Location B requires $32 million and has an expected annual cash flow of $11 million. In Location B, there is a 20% probability of a sanctions-related disruption that reduces annual cash flow to $4 million for the five-year period. Assume a discount rate of 10%, no terminal value, and that Location A has no comparable disruption in this simplified example.

For Location A, the five-year annuity factor at 10% is approximately 3.791. Therefore:

NPV_A = −40 + 13 × 3.791 = $9.283 million

For Location B, expected annual cash flow is:

E(CF) = 0.80 × 11 + 0.20 × 4 = $9.6 million

Thus:

NPV_B = −32 + 9.6 × 3.791 = $4.394 million

Under these assumptions, Location A has the higher expected NPV. However, the decision should not end there. Location B may offer strategic access, lower future expansion costs, or an option to scale gradually. Conversely, the disruption may be correlated with severe losses in the firm's other markets. The example illustrates disciplined comparison, not mechanical decision making.

2.4 Real options and strategic flexibility

Geopolitical uncertainty increases the value of flexibility. A staged investment, pilot operation, contractual exit right, modular plant, or dual certification may cost more initially but preserve the ability to wait, expand, switch, or abandon. This is a real-options perspective.

The option to defer is valuable when uncertainty is high and investment is largely irreversible. The option to expand is valuable when demand and political access may improve. The option to switch suppliers is valuable when qualification and tooling costs are manageable. The option to abandon is valuable when assets can be sold or redeployed.

Real-options reasoning has limitations. It can become overly abstract, and option values depend on assumptions about volatility, timing, exercise costs, and the ability to act. Political decisions may also be discontinuous: a permit may be revoked regardless of gradual changes in indicators.

3. Integrating Risk into Major Strategic Decisions

3.1 Market entry

Market attractiveness should be assessed together with political access and strategic durability. A country with rapid growth may still be unsuitable if sanctions, ownership restrictions, weak dispute resolution, or severe policy volatility make value capture uncertain.

A structured entry assessment asks:

1. What political and regulatory conditions are necessary for the business model?
2. Which revenues, technologies, data, and personnel are exposed to state action?
3. Can the firm repatriate profits and obtain foreign exchange?
4. What is the effect of a sudden suspension of operations?
5. Can the firm exit without abandoning people, customers, or critical assets?
6. Does entry create reputational or human-rights concerns?

Entry mode should reflect risk. Exporting may limit sunk assets but expose the firm to tariffs and logistics. Licensing reduces capital exposure but increases control and intellectual-property risk. Joint ventures provide local knowledge and access but create governance and partner exposure. Wholly owned subsidiaries provide control but concentrate capital and political exposure. A staged entry can combine learning with limited commitment.

3.2 Location and footprint design

Location decisions should move beyond labor and tax costs. Relevant variables include energy security, transport redundancy, cyber resilience, proximity to customers, legal enforceability, access to skilled labor, alliance relationships, environmental regulation, and the feasibility of transferring operations.

A resilient footprint does not necessarily mean duplicating every facility. Duplication can be uneconomic and may create excess capacity. The objective is proportionate redundancy: protect critical components, processes, and capabilities while avoiding unnecessary complexity. Firms may maintain a primary site, a qualified secondary supplier, safety stock for selected inputs, and documented relocation procedures.

3.3 Foreign direct investment and capital commitment

Investment committees should require a geopolitical risk section in the business case. It should explain:

• ownership and approval rules;
• sanctions and export-control exposure;
• local-content and data-localization obligations;
• tax, capital-repatriation, and currency risks;
• security of land, licenses, and intellectual property;
• insurance availability and political-risk coverage;
• exit restrictions and stranded-asset scenarios.

Contracts may include stabilization clauses, arbitration provisions, currency mechanisms, termination rights, material-adverse-change provisions, and force-majeure language. These tools reduce uncertainty but cannot guarantee performance where courts, regulators, or borders are inaccessible.

3.4 Partnerships and alliances

A partner may provide government relationships, distribution, labor, legitimacy, or technical capability. The same partner may also create sanctions, corruption, data-security, or reputational exposure. Due diligence must therefore examine beneficial ownership, political connections, litigation, export-control history, labor practices, cybersecurity, and the partner's ability to operate under alternative scenarios.

Governance design matters as much as partner selection. Agreements should specify decision rights, audit access, compliance duties, information sharing, deadlock procedures, intellectual-property ownership, customer treatment, and termination or transition arrangements. Monitoring should continue after entry because a partner's political exposure can change.

3.5 Portfolio management

Geopolitical diversification is not identical to geographic dispersion. Several subsidiaries in different countries may depend on the same port, currency, technology supplier, shipping route, or political bloc. Managers should map common dependencies and concentration by:

• country and region;
• supplier and raw material;
• transport corridor;
• currency and banking system;
• technology platform;
• customer and government buyer;
• legal jurisdiction.

Portfolio decisions should consider correlation. If two markets are affected by the same sanctions regime, they do not provide effective diversification. A portfolio can be geographically broad yet geopolitically concentrated.

3.6 Divestment and exit

Divestment is not simply a financial transaction. In a politically sensitive environment it can affect employees, customers, creditors, national-security interests, and the firm's reputation. Exit may be triggered by deteriorating risk, inability to comply with law, unacceptable human-rights impacts, persistent losses, or a change in strategic priorities.

A responsible exit plan identifies buyers, regulatory approvals, employee obligations, data deletion or transfer, customer continuity, environmental liabilities, and sanctions screening. Firms should avoid hurried asset transfers that appear to evade regulation or abandon vulnerable stakeholders. In some cases, a temporary suspension, local management transfer, or ring-fencing arrangement is preferable to immediate sale.

3.7 Localization and selective decoupling

Localization can involve local sourcing, local production, local data storage, local staffing, local ownership, or local research and development. It may reduce cross-border exposure and improve legitimacy, but it can also increase cost, reduce economies of scale, and make knowledge transfer more difficult.

The strategic question is not whether to localize everything. It is which activities are strategically sensitive, legally required, politically salient, or operationally critical. Firms may localize final assembly while retaining global design, or localize data processing while maintaining common cybersecurity standards. Such arrangements require clear boundaries for intellectual property, quality, compliance, and technical support.

4. Friend-Shoring, Nearshoring, and China-Plus-One

4.1 Friend-shoring

Friend-shoring relocates or develops supply capacity among countries considered politically aligned or strategically reliable. Its rationale is that political trust can reduce the probability of coercion, sanctions conflict, or sudden restrictions.

Advantages include improved alignment with home-country policy, access to trusted technology ecosystems, and potentially stronger cooperation during crises. Limitations include higher cost, narrower supplier pools, alliance instability, and the danger of treating political alignment as permanent. Friend-shoring can also exclude capable suppliers and create new concentrations within a favored bloc.

4.2 Nearshoring

Nearshoring places activities in geographically proximate countries, often within the same region or trade agreement. It can reduce transit time, inventory requirements, coordination costs, and exposure to distant maritime routes. Nearshoring does not automatically reduce geopolitical risk. Neighboring countries may have different political systems, infrastructure constraints, labor shortages, or exposure to the same regional conflict.

The relevant comparison is total landed and risk-adjusted cost, not wage cost alone. A nearshore site may have higher wages but lower inventory, transport, disruption, and monitoring costs.

4.3 China-plus-one

China-plus-one retains a significant Chinese operating base while adding at least one alternative production or sourcing location. It is not necessarily an exit from China. The strategy may preserve access to China's suppliers, skills, infrastructure, and domestic market while reducing single-country concentration.

Successful implementation requires more than announcing a second factory. The alternative site must have qualified suppliers, tooling, engineering capability, labor, utilities, logistics, regulatory approvals, and capacity that can actually be activated. Firms must also determine whether the second site is a true substitute or merely performs low-value final assembly while critical dependencies remain in China.

Comparison of strategies

A rigorous evaluation should compare total cost, resilience, time to qualify, scalability, legal exposure, customer requirements, carbon effects, and reversibility. The preferred solution may be hybrid: critical components from trusted suppliers, regional final assembly, and a maintained China presence for the Chinese market.

5. Governance, Compliance, and Ethical Responsibility

Geopolitical strategy is inseparable from governance. Boards should define risk appetite, approve exposure limits, review concentration, and ensure that management can escalate rapidly. A cross-functional committee should connect strategy, legal, compliance, procurement, security, finance, human resources, technology, and communications.

Compliance systems should monitor sanctions, export controls, anti-bribery rules, investment screening, customs requirements, data protection, and forced-labor restrictions. Screening must cover customers, suppliers, intermediaries, beneficial owners, vessels, banks, and technology transfers where relevant. A compliance program that operates only at contract signing is inadequate; ownership and political status can change.

Ethical responsibility includes the safety of employees and communities, respect for human rights, avoidance of forced labor, responsible handling of personal data, and transparent communication. Withdrawal decisions can harm local workers, while continued operation can expose them to danger or contribute to abuses. Firms should use human-rights due diligence, stakeholder consultation, grievance channels, and remediation plans rather than treating ethics as a public-relations exercise.

Artificial intelligence can support monitoring of regulatory changes, media, logistics signals, and supplier networks. However, AI outputs may reproduce source bias, misinterpret political language, or generate false alerts. Human validation, source traceability, privacy protection, model governance, and clear accountability are essential. AI should augment expert judgment, not determine sanctions compliance or employee-security decisions without review.

6. Implementation: From Assessment to Action

A practical implementation cycle contains six stages:

1. Map exposure. Identify assets, suppliers, customers, people, technologies, routes, and legal entities.
2. Prioritize scenarios. Select plausible events using internal expertise and external evidence.
3. Quantify consequences. Estimate financial, operational, legal, human, and reputational effects.
4. Design options. Consider diversification, inventory, contracts, insurance, localization, partnerships, and staged investment.
5. Set indicators and triggers. Define observable conditions that initiate escalation, pause, relocation, or exit.
6. Test and revise. Conduct tabletop exercises, supplier simulations, and post-event reviews.

Leading indicators may include diplomatic rhetoric, military mobilization, legislative proposals, sanctions designations, insurance withdrawals, unusual customs delays, cyber incidents, capital controls, protests, and changes in port or airspace access. Indicators should be linked to decisions. Monitoring without predefined action thresholds produces information overload rather than preparedness.

A decision dashboard can combine exposure, impact, preparedness, and option value. It should show which risks are owned, which controls have been tested, and how long the firm can operate under disruption. Business continuity plans should specify authority, communication channels, employee protection, alternative suppliers, cash requirements, data backups, and recovery priorities.

7. Applied Case: Helios Mobility Components

Background

Helios Mobility Components, a fictional European manufacturer of power-electronics modules, sells to vehicle producers in Europe and Asia. It operates a large plant in China, sources specialized ceramic substrates from one Chinese supplier, and performs final testing in Europe. China provides an efficient supplier ecosystem and access to a major customer market, but rising export-control uncertainty and shipping disruption have increased board concern.

Problem

The board must decide whether to retain the existing structure, build a second plant in Vietnam, nearshore selected operations in Eastern Europe, or adopt a staged China-plus-one strategy. The company cannot duplicate all capacity immediately. It also faces customer pressure to demonstrate supply continuity and must comply with export controls affecting advanced components.

Analysis

The management team maps four dependencies. First, the ceramic substrate has only one qualified source. Second, production software and calibration tools are controlled by the European headquarters. Third, the Chinese plant depends on a regional port. Fourth, several customers require evidence of traceability and labor compliance.

Three scenarios are developed:

• Stable competition: current restrictions continue and logistics remain reliable.
• Targeted escalation: selected components require licenses and shipping delays increase.
• Severe disruption: the Chinese plant cannot supply European customers for six months.

The team estimates that a second site would reduce expected disruption loss but increase fixed cost. It also recognizes that a new site would not be useful unless the substrate supplier were diversified and engineers could transfer process knowledge. A financial model alone would overstate resilience if it treated the second plant as independent while both sites relied on the same substrate.

Approach and solution

Helios adopts a staged China-plus-one program. It qualifies a second substrate supplier in South Korea, establishes a small pilot line in Vietnam for selected modules, and retains Chinese production for the Chinese market and for products not subject to heightened controls. It creates a regional European finishing and repair capability rather than duplicating the entire manufacturing process.

Contracts include audit rights, compliance warranties, notification duties, and termination provisions. The company establishes a trigger: if licensing delays exceed a specified operational threshold for two consecutive months, European customer orders are shifted to the Vietnamese pilot line, subject to quality approval. It also conducts a human-rights assessment of suppliers and creates a board-level quarterly review.

Outcome

The program costs more than the original single-site structure, but it reduces single-source dependence and gives customers a credible continuity plan. The company does not eliminate geopolitical risk; it redistributes and partially absorbs it. Its most important improvement is not the additional factory alone but the combination of supplier qualification, modular production, governance, and predefined activation triggers.

Learning points

1. A second location does not create resilience if critical inputs remain single-sourced.
2. China-plus-one is a portfolio and capability strategy, not merely a real-estate decision.
3. Staging can preserve flexibility when full duplication is unaffordable.
4. Compliance, human rights, and operational resilience must be designed together.
5. Trigger-based governance converts monitoring into action.

8. Limitations and Critical Evaluation

No framework eliminates uncertainty. Geopolitical events are shaped by political agency, misperception, domestic pressures, and strategic interaction. Probabilities may be unavailable or contested. Quantitative models can imply a level of precision that the evidence does not support. Scenario sets can omit novel events, and risk registers can become bureaucratic documents disconnected from decisions.

Diversification also has costs. Multiple suppliers may reduce bargaining power, increase quality variation, and complicate cybersecurity. Friend-shoring can produce political complacency, while nearshoring may shift rather than reduce exposure. Localization can fragment standards and create inefficiencies. Insurance may exclude the most severe events, and contractual protections may be weak against sovereign action.

Managers should therefore combine quantitative analysis with judgment, red-team challenge, local expertise, historical knowledge, and stakeholder engagement. They should distinguish resilience from profitability, and preparedness from prediction. The strongest strategy is usually not the one with the lowest modeled risk, but the one that preserves essential capabilities and credible choices under several plausible futures.

Chapter Summary

Geopolitical risk is the risk that international political relationships and strategic conflicts alter a firm's markets, assets, supply chains, technologies, financing, legitimacy, or ability to operate. It differs from ordinary country risk because it is relational, cross-border, and often systemic.

Effective assessment separates hazard, exposure, vulnerability, impact, and resilience. Risk registers, scenario analysis, expected-loss calculations, risk-adjusted NPV, and real-options reasoning help managers compare strategies, but none should be treated as mechanically precise. Assumptions, correlations, catastrophic downside, and reversibility must be examined.

Geopolitical considerations should be embedded in market entry, location, investment, partnerships, portfolio design, localization, and divestment. Friend-shoring emphasizes political alignment; nearshoring emphasizes geographic proximity; China-plus-one reduces single-country dependence while retaining selected Chinese capabilities. Each strategy has benefits, costs, and residual risks.

Resilient international strategy requires mapping dependencies, qualifying alternatives, setting decision triggers, strengthening governance, protecting people and human rights, and testing continuity plans. The objective is not complete insulation from geopolitical change. It is the disciplined preservation of value, legitimacy, and strategic options.

Key Terms

Geopolitical risk: The possibility that interstate rivalry, conflict, coercion, or political realignment will affect business activity.

Country risk: The risk that conditions in a particular country will adversely affect an investment or operation.

Political risk: Risk arising from government action, political instability, regulation, or political violence.

Exposure: A firm's connection to a geopolitical hazard through assets, people, markets, suppliers, finance, or technology.

Vulnerability: The degree to which exposure can produce harm.

Resilience: The capacity to absorb, adapt to, and recover from disruption.

Scenario analysis: Examination of business consequences under coherent alternative futures.

Expected loss: Probability-weighted estimate of losses across defined scenarios.

Risk-adjusted NPV: Investment value calculated using expected cash flows and an appropriate discount rate.

Real option: The value of managerial flexibility to defer, expand, switch, or abandon an investment.

Friend-shoring: Locating supply activities among politically aligned or trusted countries.

Nearshoring: Moving activities to a geographically proximate country or region.

China-plus-one: Retaining China-related operations while adding at least one alternative location.

Localization: Adapting ownership, production, data, staffing, or sourcing to local conditions.

Concentration risk: Exposure created by dependence on one country, supplier, route, technology, or political bloc.

Sanctions: Government restrictions on transactions with specified countries, entities, persons, or sectors.

Export control: Regulation of the transfer of goods, software, technology, or services across borders.

Divestment: Sale, closure, or transfer of an investment or business operation.

Decision trigger: A predefined condition that initiates escalation, contingency action, or exit.

Review Questions

Short Answer Questions

1. Distinguish geopolitical risk from country risk.
2. What is the difference between exposure and vulnerability?
3. Why might geographic diversification fail to reduce geopolitical concentration?
4. Identify two advantages and two limitations of nearshoring.
5. What is the purpose of a decision trigger?

Long Answer Questions

1. Explain how geopolitical risk can affect an international investment through market, regulatory, financial, operational, and reputational channels.
2. Discuss how scenario analysis and risk-adjusted NPV can be combined in a foreign-location decision.
3. Compare exporting, licensing, joint ventures, and wholly owned subsidiaries as entry modes under geopolitical uncertainty.
4. Evaluate the governance and ethical responsibilities of a multinational considering divestment from a politically unstable country.
5. Explain why China-plus-one should be understood as a capability and dependency strategy rather than simply as building a second factory.

Analytical / Application Questions

1. A firm has two suppliers in different countries, but both depend on the same port and banking network. Assess whether the arrangement provides genuine geopolitical diversification and recommend improvements.
2. Design a three-scenario geopolitical risk assessment for a proposed data-centre investment, including exposure pathways, indicators, business impacts, and strategic responses.
3. Using the Helios Mobility Components case, propose criteria for deciding when the firm should expand, pause, or exit its Vietnam pilot operation.

Multiple Choice Questions with Answers

Question 1

Which statement best distinguishes geopolitical risk from ordinary country risk?

A. Geopolitical risk concerns only military conflict within a country.

B. Geopolitical risk arises from interactions among states and can affect firms across borders.

C. Geopolitical risk is limited to exchange-rate movements.

D. Geopolitical risk applies only to government-owned companies.

Correct Answer: B. Geopolitical risk arises from interactions among states and can affect firms across borders.

Question 2

In the chapter's risk framework, vulnerability refers to:

A. The existence of any political event

B. The probability that a scenario is forecast correctly

C. The extent to which exposure can produce harm

D. The number of countries in a firm's portfolio

Correct Answer: C. The extent to which exposure can produce harm

Question 3

A firm has scenario losses of $2 million with probability 0.7 and $8 million with probability 0.3. What is the expected loss?

A. $2.6 million

B. $3.8 million

C. $5.0 million

D. $6.0 million

Correct Answer: B. $3.8 million

Question 4

Which entry mode generally provides the greatest operational control but may concentrate capital and political exposure?

A. Exporting

B. Licensing

C. Wholly owned subsidiary

D. Unaffiliated distribution

Correct Answer: C. Wholly owned subsidiary

Question 5

What is the central purpose of a China-plus-one strategy?

A. To eliminate all Chinese operations immediately

B. To retain selected Chinese capabilities while reducing single-country dependence

C. To ensure that all production occurs in neighboring countries

D. To replace supply-chain management with political lobbying

Correct Answer: B. To retain selected Chinese capabilities while reducing single-country dependence

Question 6

Why may a second production site fail to create meaningful resilience?

A. A second site always increases labor costs.

B. The alternative site may depend on the same critical supplier or infrastructure.

C. Customers never accept production from two sites.

D. Diversification prevents firms from using contracts.

Correct Answer: B. The alternative site may depend on the same critical supplier or infrastructure.

Question 7

Which feature most clearly reflects real-options thinking?

A. Committing all capital immediately regardless of uncertainty

B. Choosing the lowest-wage location without scenario analysis

C. Using a staged investment that preserves the ability to expand or abandon

D. Ignoring reversibility because geopolitical events cannot be measured

Correct Answer: C. Using a staged investment that preserves the ability to expand or abandon

Question 8

Friend-shoring primarily seeks to:

A. Locate production close to final customers regardless of political relations

B. Align supply capacity with politically trusted partners

C. Eliminate all local production requirements

D. Maximize dependence on one low-cost supplier

Correct Answer: B. Align supply capacity with politically trusted partners

Question 9

Which is an appropriate governance practice for geopolitical risk?

A. Reviewing risk only after a crisis occurs

B. Assigning no executive owner because risk is collective

C. Linking leading indicators to predefined escalation and response actions

D. Treating numerical risk scores as objective facts

Correct Answer: C. Linking leading indicators to predefined escalation and response actions

Question 10

In the worked location example, why did Location A have the higher expected NPV?

A. It required no initial investment.

B. Its expected annual cash flow was higher and it avoided the modeled disruption penalty.

C. Its discount rate was zero.

D. Location B had no strategic flexibility.

Correct Answer: B. Its expected annual cash flow was higher and it avoided the modeled disruption penalty.