Why businesspeople need to think about politics (part 1 of 2)
By Alex Snedeker | Marketing Manager l Faculty Research
Renato Lima de Oliveira, an Assistant Professor of Management at Asia School of Business, thinks more businesspeople should be thinking about politics.
“My course prepares students to become CEOs,” he says. “When you’re in a position to allocate investments, both over time and among different countries, you need to consider more sources of risk, including political risk.”
Renato teaches two courses at ASB. One is focused more broadly on political economy and its applications in business. The other focuses specifically on the energy industry.
In his political economy course, he teaches students how to understand and articulate the rules, both written and unwritten, under which businesses operate in different jurisdictions. He claims it is essential to understand political processes and develop a “nonmarket strategy” to ensure success.
He looks at firms as political actors that have to deal with multiple stakeholders when managing their environmental, health, and other impacts.
Business leaders must also understand how regulations are developed and passed in order to make informed decisions. When they fail to consider the political environment, there are often huge consequences.
“For example, there are cases of US companies investing in China that misread the rules of the game of Chinese capitalism,” Renato notes. “They complain about the government stealing trade secrets, being forced into joint ventures, or expropriated. This could have been avoided with a knowledge of political economy.”
A new outlook on energy
Renato began his unconventional career as a business reporter, covering many industries including the energy sector. From his reporting, he saw firsthand the massive influence the industry had on other parts of the economy, as well as on people’s lives.
In particular, he saw how policies designed to promote the energy supply chain changed the lives of workers who had moved to the sector from other industries such as agriculture. This shift happened because oil and gas companies were required to invest in local manufacturers.
After talking to these workers and their families, Renato knew this was an industry in which he wanted to work. He earned his Master’s degree at the University of Illinois and his Ph.D. at MIT before joining ASB.
His research focused on which factors helped maximize the benefits of energy production, especially the “spillover” effects the industry had on research and development, manufacturing, and the supply chain. Until now, these effects had been left out of the literature.
Not all oil is created equal
To Renato, the way the oil and gas industry is currently studied assumes the same difficulty of extraction in every country. But he has found that differences in accessibility shape the way that energy policy is written, as well as the economic outcomes.
To demonstrate this, he studies three countries and their differing approaches to energy policy: Mexico, Brazil, and Malaysia.
“I chose these three countries because they have a similar per-capita GDP over time,” he explains. “However, Mexico’s oil production spiked in the late seventies and has been much higher over the past four decades.”
Despite higher production, Mexico’s economy grew no faster than Brazil’s or Malaysia’s. The ease of extracting oil in Mexico meant there was little need to innovate or further develop the economy.
On the other hand, oil companies in both Malaysia and Brazil expanded abroad and developed new technologies. Both countries also required the use of local firms to provide equipment and services, stimulating local economies.
Renato found that it was harder for countries with easy access to resources to have an alignment of interests that could lead to investments in technology development and cost efficiency, one potential outcome of a phenomenon called the “resource curse.”
“When you’re under constraints, you have to overcome them, and that’s where ingenuity comes from,” he says. “There are extra benefits from putting the right incentives and policies in place.”
The role of the government
“The energy industry invests 1.8 trillion dollars annually, three-fourths of which is influenced by government or made directly by state companies,” Renato says. “This huge industry is also one of the most political industries in the world.”
According to him, the government has three main responsibilities when it comes to energy: accessibility, affordability, and reliability. In other words, citizens must have access to electricity with few to no outages at a reasonable price, ideally without relying too much on subsidies.
It is also important for energy production to be sustainable over time, both environmentally and financially. Governments should invest in the future of energy and help prepare their countries for a transition to lower-carbon energy sources.
Stimulating technology development is also an important part of this responsibility, accomplished by providing both the environment and incentives for innovation. In particular, the business environment must invest in both human resources and research, rewarding not just the incumbents but disruptive firms as well.
The second installment of this article will focus on how renewable energy providers can benefit from the use of political economy, as well as how Renato came to teach at ASB.