The world economic environment has been roiled by the impact of a lengthy trade war, the far-reaching impacts of the COVID-19 pandemic, and social protests which have ramped up consumer scrutiny of company practices. This new and volatile arena presents stiff challenges requiring different skills from business leaders.  While some companies will fold under the strain of the lockdowns and global stagnation, others will survive but face a brave new world where many of the trade norms and logistics habits of previous years will have disappeared. Navigating this terrain successfully will, of course, require agility and innovation but also a profound understanding of global trends, diverse cultures, and the rapidly changing political and regulatory structures of international markets.

The growing importance of cultural intelligence in business leadership will sharpen in this multi-faceted trade environment, and political risk analysis will take a critical role in shaping company strategies. Leaders with strong cultural intelligence and an understanding of political risk in this unsettled business environment will have a significant edge in finding new customers, identifying strong partners for mergers and acquisitions, and in comprehending and partnering with the new political forces that will spring up in the wake of this global disruption.

The trade conflict between the U.S. and China forced many companies to decouple their production from established facilities in Asia and reevaluate business opportunities and partnerships in the global market. The tariffs alone caused some businesses, living as they were on slim margins, to fold. Others scrambled to develop, on short notice, new production facilities, and hurried global partnerships. Savvy companies recognized the crucial importance of properly vetting the political risk of potential new locations to ensure that they would welcome new investors for the long-term. They also had to make a sober assessment of which countries might be in the crosshairs of trade conflict in these uncertain times.

On top of the political risk concerns, leaders had to ensure that the working cultures of these new sites and new partners would align with their company values and communication preferences. How would they match up culturally?

Following on the heels of this abrupt and wrenching change to the global economy came the pandemic shutdown. The challenges that were brought on by the trade conflict pales in comparison to the economic impact we’ve seen over the last few months as businesses are cut off from their producers, employees and customers in ways never previously seen in the modern global economy. For the companies that survive this shutdown, the concern is urgent – how can they best position themselves to not only survive but thrive in the new international business environment? Only leaders with a firm understanding of the tenets of cultural intelligence and the tools of political risk analysis will be able to grasp and exploit the opportunities that are developing in the ‘new’ global market.

“Common Sense” is not a Common Currency

When working globally in this volatile environment, it is not possible to prepare for any and all potential outcomes, especially when there are such unpredictable variables in people. What may be “common sense” to one person may not be common to another. Each person is influenced by culture, personal experiences, and cognitive interpretation which impacts values, attitudes, and behaviors. So how do global business leaders prepare for the unexpected when there is no playbook for every situation and every person? They develop their cultural intelligence skills.

Cultural intelligence is an interpersonal skill that has emerged in the last two decades from the same body of research as emotional intelligence. It is the capability to function and relate effectively with others in culturally diverse contexts. Cultural intelligence is a crucial tool to help leaders adapt and work effectively with people who have different cultural orientations, values, and expectations.

How do political risk and cultural intelligence go together?

When leaders get involved in a foreign culture, there are many cues that can be easily missed or misunderstood. Most leaders will be familiar with objective culture cues, such as a country’s economic performance, political system, and social institutions. They may become familiar with social customs, history, arts, language, food, and kinship relationships. Market analysis reports and “Doing Business in…” books look at this objective data, comparing national measurements and the visible artifacts between two or more cultures. However, the subjective culture cues are harder to interpret and certainly challenging to measure. These cues are hidden psychological inputs such as values, beliefs, norms, and assumptions. For example, a leader may be well-read on the legal, political, and social frameworks of foreign culture but understanding how conflict is expressed (or not expressed) and resolved in a particular culture is the crucial domain of cultural intelligence.

Leaders with an individualistic and confrontational communication style may struggle when working with a counterpart who prioritizes relationships and harmony. If leaders are not aware of the subjective cultural cues, deciphering “silence” in those contexts may leave a wide interpretive space between compliance and defiance. If any leader assumes his or her own cultural perspective and behaviors are superior ways to “get things done”, that leader will almost certainly fail to build trust and succeed in a foreign environment.

Even great cultural intelligence does not deliver business success if politics threaten market stability. Thus, cultural intelligence needs to go hand-in-hand with an understanding of the relevant global and local politics and risks. A definition of political risk for global leaders is whether business interests and market stability are threatened by unexpected or chaotic government action. Those terms – unexpected or chaotic – highlight the difference between government action detrimental to business interests that is normal, and which can be forecast (regulations, new taxes, changes in currency exchange rates) from government action that is unexpected. This issue of ‘expected’ and ‘unexpected’ is a clear nexus between the arts of cultural intelligence and political risk: a profound understanding of a culture can help navigate political risk and reactions to outside pressure.

Everything is ‘unexpected’ if leaders do not understand the culture, but savvy and adept practitioners are much more capable of responding appropriately, in culturally intelligent ways, in the face of government actions and reactions.

How can global leaders sharpen their cultural intelligence?

Cultural intelligence and political risk analysis can be learned and share certain key characteristics. An ability to speak a foreign language not only improves your cultural knowledge, it also gives you a key tool to understanding the risk factors in a foreign market as you can delve into primary sources of political and business reporting.

While cultural competency is one component of Cultural intelligence, it is a skill that goes well beyond just facts and knowledge. It is made up of four capabilities, each of which can be developed and sharpened:

Motivational

What is it: This relates to the leader’s desire and ability to direct attention and energy toward learning about and functioning in intercultural situations.

One tip to improve it: Leaders who connect deeply with their motivation, it helps them persist and be open to work with people who think and behave differently from them. Some leaders enjoy travel. Others enjoy watching how other people solve daily problems. For others still, it may be the prestige of a successful merger & acquisition.

Cognition

What is it: This refers to a leader’s knowledge of the norms, practices, and conventions in different cultures. This is commonly addressed in trainings and in books on objective and subjective culture.

One tip to improve it: Learn the language, read about the culture, read the local news, and understand the socio-economic and political history of a culture. Be aware these are meant to build archetypes for understanding the mindset of a culture and not stereotypes to judge or question other cultural norms.

Metacognition

What is it: This refers to the leader’s cultural consciousness and awareness during intercultural encounters.

One tip to improve it: The culturally intelligent leader plans prior to an engagement. They ask questions about the culture, who they are going to meet, and about different possible cultural scenarios. During an engagement, they evaluate and assess what is familiar and what is not familiar and adjust accordingly. After an engagement, an effective leader will write down their thoughts and debrief from their cross-cultural experience. One of the most important assets to a culturally intelligent leader is having a trusted cultural attaché who is independent and can give a leader unbiased feedback, interpret, and connect some of the cultural dots.

Behavior

What is it: This refers to the leader’s ability to exhibit appropriate verbal and nonverbal actions appropriate for the intercultural interaction. A culturally intelligent leader must know when and be willing to adapt to most situations. They also must know and be able to communicate why they are unwilling to adapt in a given situation.

One tip to improve it: A leader must be aware of their own beliefs and behaviors. If a leader comes from an individualistic, competitive culture and is working in a culture that is more community-oriented and cooperative, they need to adjust how they give praise. Calling out an individual for an accomplishment may not be received well by the individual or the group.

While these may seem like “common sense”, when a leader is out of their cultural element, a leader with low cultural intelligence may become overwhelmed, disoriented, angry, or frustrated. Some leaders may retreat and appear withdrawn, while others may magnify their behaviors and come across as ignorant and insensitive. I’m sure we’ve all seen and maybe been that “Ugly American” at some point. Cultural intelligence helps leaders be more confident and effective in foreign and sometimes uncomfortable situations.

Moving forward in the coming decade

The 2020 Bloomberg Innovation Index selected the top 20 most innovative countries. The U.S. is #9. It is tempting to think that your own experience and common sense has shown you “the right way” to get things done. While that may be true in a familiar environment, it may not be the most effective way to get things done in other contexts (other families, companies, communities, or social systems). Great innovations come from harnessing divergent thinking. While the US emphasizes agile methods and shared leadership, other top innovative countries like Germany emphasize cooperative planning; South Korea culturally emphasizes hierarchical, top-down decision making. Both have outranked the US in innovation for the last five years of this index. None of those cultural approaches are necessarily superior. They are simply different ways innovation occurs in other cultural contexts.

As we look out over the next fifty years, with nearly 77% of the world’s population living in Africa and Asia, these economies will continue to benefit from young workforces, improvements in infrastructure and education, and a growing middle class. If you want to work in these regions, regardless of culture, people generally prefer to do business with people they can trust. Building trust requires both parties to adapt and find agreement on values, respect, and mutual outcomes. Understanding why how to adapt in each situation are hallmarks of a culturally intelligent person.

Peter Diamandis recently noted that if companies ‘are not disruptively innovating now, you are done. The old ways of working are done. We are going to see 20% of companies go out of business’ as a result of the pandemic lockdown. However, innovating successfully also requires that you use the tools of cultural intelligence and political risk analysis to establish your business in the right locations. Disruptive innovation will not pay dividends if you suddenly lose your valuable intellectual property in a country that does not value and support the rule of law.

Your global teams will not be successful or engaged in producing new solutions and innovative products if you cannot break down the communication and collaboration barriers using cultural intelligence. The U.S. represents only 5% of the world’s population. Despite being a wealthy, critical market for any conceivable service or product, it is just a sliver of the available total global market. Companies, stressed by an economic collapse which is unlike anything seen in a generation, must boldly jump into the global market with both feet to thrive. To succeed in this new world, modern leaders need to bring an analytical tool kit which is well-stocked with political risk insights and cultural intelligence methodologies. If business leaders don’t apply these key perspectives in their global strategies, the volatile market forces that continue to churn around us will disrupt even the best of business plans.

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Scott Rencher, a former Regional Director and Country Manager at Euromonitor International, is a CQ Certified, Cultural Intelligence evangelist and business strategist.

Kirk Samson, worked as a U.S. diplomat and international law advisor and is the head of Samson Atlantic LLC; a Chicago-based consulting company providing global political risk analysis.