Geopolitical risk (GPR) refers to risks associated with wars, terrorist acts, and interstate tensions that disrupt peaceful international relations. Whether predictable or unexpected, geopolitical risks have significant implications for companies introducing new products, especially when business operations span countries in conflict or place firms in a position where they may be perceived as aligned with one party or another.
For decades, institutions such as the World Trade Organization (WTO), international financial institutions like the World Bank Group, and regional trade and investment agreements helped limit these risks by promoting rules‑based global economic integration. Today, however, a new geopolitical landscape is emerging.
Geopolitical risk has intensified significantly over the current decade. In an interconnected global economy, these tensions have triggered cascading effects across supply chains, energy markets, and financial systems.
Figure 1. Key Channels of Transmission for Geopolitical Risk and Prices of Financial Assets (source – www.imf.org)
How Geopolitical Risk Affects New Product Development
To understand how geopolitical conditions influence NPD, companies must examine how these conditions affect the resources, markets, technologies, operations, finances, and timelines that support product development.
Geopolitical risk affects new product development by increasing material and shipping costs, delaying components, forcing firms to reconfigure supply chains, postponing investment and product launches, and altering access to international markets.
Supply Chain and Cost Pressures
Geopolitical instability can disrupt the physical and commercial inputs required for new product development:
- Disrupted transport networks increase raw‑material and shipping expenses.
- Scarcity of critical, non‑substitutable components can halt manufacturing.
- Import restrictions can limit cross‑border technology sharing and product rollouts.
- Supply‑chain disruptions can increase commodity prices and affect firms differently depending on their exposure.
Market, Investment, and Financial Effects
Geopolitical risk can also reshape the economic conditions that determine whether new product development remains commercially attractive:
- Financial‑market volatility can reduce consumer confidence and discretionary spending.
- Firms may delay capital‑intensive innovations to preserve liquidity.
- Regulatory compliance costs may increase as sanctions and tariffs evolve.
- Currency volatility or tariffs can make a product unprofitable.
- Geopolitical disruptions can delay product launches or make commercially attractive products uneconomical.
Importantly, geopolitical risk affects asset classes, sectors, and countries in different ways. Supply‑chain disruptions may increase commodity prices while reducing stock prices if they are expected to harm economic activity. The energy sector may benefit if disruptions raise oil prices, whereas energy‑dependent sectors may suffer. Commodity‑exporting countries may benefit from higher commodity prices, while countries directly involved in geopolitical events may experience more severe effects due to physical damage or trade and financial restrictions. Countries with close economic and financial ties to conflict‑affected regions can also experience significant effects through trade and investment disruption.
Geopolitical Risk, Consumer Spending, and New Product Development
Beyond supply and investment conditions, geopolitical risk can also change consumer behavior. This matters for new product development because firms must align product concepts, features, pricing, and launch decisions with evolving consumer expectations.
Traditional macroeconomic models examine consumption through aggregate indicators such as GDP growth, inflation, and consumer confidence, but these indicators do not fully capture psychological mechanisms that influence individual spending behavior. Some argue that standard macroeconomic models can overlook “animal spirits”–emotions, perceptions, and psychological responses–which leads to an incomplete understanding of consumer behavior during periods of geopolitical uncertainty.
Geopolitical risk can cause consumers to expect higher inflation, lower economic growth, and higher taxes, reducing overall consumption.
- Economic and Financial Expectations
- Expectations of prolonged conflicts can increase fears of inflation.
- Households may anticipate lower stock prices and reduced economic growth.
- Consumers may foresee higher public debt and increased personal tax burdens.
- Elevated geopolitical risk can increase income uncertainty.
- Consumer Spending Effects
During crises such as COVID‑19, consumers shifted to lower‑cost products, delayed discretionary purchases, and prioritized essential goods. This behavior aligns with behavioral decision theory, which suggests individuals adjust behavior according to perceived risk.
Research during periods of high inflation and international conflict found that consumers in Eastern Europe became increasingly price‑sensitive, favoring essentials over hedonic purchases in response to rising prices and instability.
Crisis‑induced spending behavior represents an adaptive response to heightened uncertainty during large‑scale external events such as recessions, natural disasters, or pandemics. It often involves reduced overall consumption, fewer non‑essential purchases, and greater emphasis on necessities and savings.
Protection Motivation Theory (PMT) and Consumer Responses
Protection Motivation Theory provides a useful framework for explaining why consumers change spending behavior when geopolitical uncertainty increases.
Rogers (1975) developed PMT to explain factors that predict risk‑adaptive behavior and to support risk‑protection communication and behavioral change. PMT proposes that individuals form responses to threats through a combined evaluation of threat appraisal and coping appraisal. Individuals are more likely to engage in protective behaviors when they perceive higher levels of threat and have sufficient coping resources. These appraisals reflect subjective perceptions of risks and benefits, which may differ across individuals.
Although PMT has traditionally been applied to health‑related protective behaviors, it has also been used to explain responses to acute and slow‑onset risks. In acute‑risk scenarios such as wildfires and earthquakes, PMT has helped explain and encourage protective actions. Its threat and coping appraisals also identify factors such as social norms and information access that influence preparedness and adaptive behavior.
Applying PMT to Spending Under Geopolitical Risk
Within this framework:
- Perceived vulnerability reflects consumers’ assessment of their exposure to geopolitical risks and potential impact on financial stability. Higher perceived vulnerability is associated with conservative spending behaviors, including increased savings and postponed discretionary purchases (O’Connor et al., 2019; Lu et al., 2020).
- Perceived severity reflects assessment of potential harm. Higher perceived severity increases motivation for protective actions such as emergency savings and reduced discretionary spending (Mansour‑Ichrakieh & Zeaiter, 2019).
- Self‑efficacy strengthens conservative financial strategies.
- Response efficacy reflects belief that modifying spending behavior–reducing discretionary spending or increasing savings–will protect financial well‑being.
Trust and communication serve as important anchors for consumer expectations.
Implications for New Product Development Risk Assessment
Companies should translate geopolitical uncertainty into concrete new product development decisions. Rather than treating geopolitical risk as a general background issue, new product development teams should evaluate specific exposures at each stage of development.
- Supply
- Where are critical components produced?
- Does the company depend on a single country or supplier?
- Can the component be substituted?
- How concentrated is the supply chain?
Buyer‑supplier relationships (BSRs) are essential to firm success because they can help firms gain competitive advantages. One key aspect of BSRs is supply‑chain concentration (SCC), which has been examined across finance, accounting, strategic management, and supply‑chain management. A concentrated supply chain occurs when a customer relies heavily on a small number of suppliers for essential inputs or when a supplier derives a significant portion of its revenue from a few key customers.
- Market
- Which countries are essential to the sales forecast?
- Could sanctions, tariffs, or regulations prevent market entry?
- Could political instability reduce demand?
- Technology
- Are any technologies subject to export controls?
- Could the company lose access to critical IP or suppliers?
- Could import restrictions limit cross‑border technology sharing?
- Operations
- Can manufacturing be moved to another country?
- How quickly could the company recover from disruption?
- Could shipping or transport disruptions affect production?
- Finance
- Could currency volatility or tariffs make the product unprofitable?
- Could financial‑market volatility affect investment decisions?
- Might the company need to delay capital‑intensive innovation to preserve liquidity?
- Timeline
- Could geopolitical disruption delay the product launch?
- Could component shortages or regulatory changes extend development timelines?
New Product Development Geopolitical Risk Matrix
After identifying relevant exposures, new product development teams can prioritize them through a simple risk matrix:
Risk | Probability | Impact | Overall |
New tariffs | Medium | High | 🔴 High |
Supplier disruption | High | High | 🔴 High |
Political instability in target market | Medium | Medium | 🟠 Medium |
Shipping disruption | Medium | High | 🔴 High |
Regulatory change | Low | High | 🟠 Medium |
For more sophisticated analysis, teams should consider velocity–how quickly a risk can affect the business. The CFA Institute highlights likelihood, velocity, and the size/nature of impact when assessing geopolitical risk.
