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Businesses can usually strike bargains based on financial calculations. War and terrorism create new uncertainties that confound ordinary calculations and may deter global commitments. (Samuelson, 2003, p. 41)
With the upsurge in organized, international terrorism, frameworks and tools are needed to help understand the dynamics of this phenomenon and how it affects management decision making in the 21st century. Knowledge of the new political economy, in which terrorism operates, and the manner in which space and time are experienced by managers, are vitally important, as is an understanding that the risks and uncertainties associated with terrorism are not one and the same. Risks can be calculated, whereas true uncertainty defies calculation and demands that managers make judgments. In our modern, networked, international economy, where the activities of firms are interconnected through business operations, organized international terrorism has taken on a new potency. In this research paper, these issues are presented as fundamentals that managers need be alerted of, as they confront this phenomenon and the added complexity it brings to modern, managerial decision making.
The airplane attacks in the United States on September 11, 2001, again highlighted that organized terrorism has internationalized. In the 9/11 attacks, over 3,000 citizens from 78 countries were lost, striking at financial and defense centers of the United States with strong and immediate negative effects on the outlook and attitudes of populations around the world. In March 2004, the Madrid train-station bombings, proclaimed as Spain’s 9/11, saw some 190 deaths and 1,400 persons wounded, again reinforcing the ubiquity of terrorism. More recently, in July 2005, London’s public transport system was thrown into chaos, and 52 lives were lost when suicide bombers simultaneously exploded several bombs.
Directly and indirectly, most global economic activity was affected by the 9/11 U.S. terrorist attacks, notably evidenced by substantial declines in consumer demand, with the value of the stock markets worldwide falling substantially. The 9/11 attacks also led to measurable increases in military expenditures by the United States and other governments. While the world economy was already in a state of decline in September 2001, the overall impact of the 9/11 terrorist attacks was magnified by the context within which they occurred. Overall, organized, international terrorism impacts individual nations and the world economy in terms of loss of life and property, declines in consumer and producer confidence, declines in stock, financial and the all-important commodities markets and affects perceptions of uncertainty.
While scholars have produced considerable literature on terrorism, there does not yet exist an established, widely accepted body of theory on terrorism, nor is there a generally agreed-upon definition of what terrorism is. Research on this topic is noticeably absent in the core management and associated organization and international business literatures. Terrorism is investigated directly in only one publication in the Academy of Management’s suite of journals: the Academy of Management Review, Academy of Management Journal, and Academy of Management Executive. Only eight articles have mentioned terrorism in the Academy of International Business’ journal, Journal of International Business Studies. M. G. Harvey (1993) was the first to focus on the topic, reporting on the preparedness of U.S.-based MNCs for dealing with the terrorist threat. Most recently, Ghemawat (2003) suggested in his semiglobalization paper that global terrorism induces “skepticism rather than optimism about globalization” (p. 150). None of these investigations provides substantive conceptualization, theory development, or empirical research on the linkage between organized, international terrorism and business and its management.
In general, terrorism is the use of threat, force, or violence to attain political goals through fear, intimidation, or coercion, while international terrorism is terrorism involving citizens, or the territory of, more than one country. Organized terrorists direct their attacks against businesses far more than any other target. Terrorism by bombing is by far the most common type of attack, followed by armed attack, kidnapping, arson, and assault on victims who are mainly civilians. While the frequency of terrorist attacks has varied over time, the level of destructiveness of individual attacks has tended to increase in recent years. More ominously, terrorists today employ increasingly sophisticated and destructive methods and weaponry as the 9/11 attacks have revealed, which might suggest how general warfare could be conducted in the future. In locations where the United States and a few other nations enjoy substantial military superiority, malcontents look increasingly to guerrilla warfare and terrorism as the alternative to traditional combat. Moreover, the 9/11 attacks revealed how vulnerable a sophisticated, highly developed, and military-alert country such as the United States is, and other countries may be. These attacks were low-tech but high concept and reveal that even a small contingent of terrorists can wreak tremendous havoc, both directly and indirectly, over a relatively long time frame.
Terrorism And Business Management
Business is increasingly global, with about ten trillion U.S. dollars’ worth of goods and services traded internationally in any given recent year. International business is particularly vulnerable to terrorism because terrorism is known to occur throughout the world and to hold ominous consequences especially for international supply chain and distribution activities, as well as demand for both industrial and consumer goods by buyers worldwide. The 9/11 terrorist attacks in the United States contributed to significant declines in consumption around the world and to the enactment of government policies and regulations that hinder the efficient operation of global transportation and logistical systems, one of the key contributors to our modern, internationalized economy, which has brought unsurpassed and prolonged periods of prosperity to most of the world.
All major participants in business activity are affected by organized, international terrorism such as the terrorists themselves, producers, buyers, consumers, and public agencies. Interestingly, while the property damage of the 9/11 attacks was less than that of Hurricane Andrew in Florida in 1992, the Northridge, California, earthquake in 1994, and Japan’s Kobe earthquake in 1995, the psychological impact worldwide has been far more severe. While earthquakes and hurricanes, for example, are natural events for which people can prepare, organized, international terrorism is far less predictable, potentially more harmful, and strikes more deeply at the emotions of populations, thereby heightening feelings and perceptions of uncertainty. The mass psychological implications of terrorism have widespread effects on buyers’ propensity to consume. Industrial demand derives from consumer demand, and retail consumers are typically susceptible to the psychological effects of terrorism. Producers’ revenues are likely to contract in the wake of falling consumer demand, and producer expenses tend to increase due to various direct and indirect effects of terrorism. In the short term at least, shortages of key raw materials, parts, components, and supplies may occur to the extent that supply chains are interrupted following terrorist attacks. Producers incur unplanned expenses associated with increased insurance, advertising, and public relations activities, among others, as they attempt to plan for and control the damage of terrorist events.
In addition, public agencies such as government bodies, associations, international organizations, and other public entities typically impose new regulations and policies, intended to preemptively avert terrorism or manage its consequences. These additional regulations generally restrict companies that are in particularly susceptible industries (e.g., airlines, tourism) and those with long international supply chains, increasing transactions costs. Creeping security measures that governments impose tend to decrease the efficiency with which international value and supply chains function, and these measures have the ability to substantially increase business operating costs and insurance premiums and force firms to hold higher levels of inventory. In general, producers, buyers and consumers, and public agencies are all affected by, and will usually have to respond to, the actions of organized terrorism. That is, the indirect effects of terrorism can lead to the emergence of various types of market imperfections that increase the costs of performing business activities internationally.
The direct effects are the most obvious impact that a terrorist event has on a firm. The destruction of the World Trade Center had a devastating impact on firms such as Cantor Fitzgerald, which had staff in offices within the building, or other multinational firms, such as Westfield Holdings, which owned part of the World Trade Center through Westfield America. Other firms that had insurance exposure to the 9/11 attacks were also directly affected by the event. For example, when stock markets simply suspected that QBE insurance, an Australian insurer, had exposure to the World Trade Center attack, its share price fell by 70% on the presumption of crippling liabilities. Even though many firms were directly and in several cases, such as Cantor Fitzgerald, tragically impacted by the World Trade Center attack, they are not a material part of the U.S. economy and are an even smaller part of the global economy. By extension, the chances of a single firm being subjected to a terrorist attack are in fact very small. The implications are that the effects of terrorism cannot be understood by gauging the likelihood and impact of a direct attack on a particular firm. Firms are more likely to experience the effects of terrorism through links to buyers and suppliers of goods and services that are themselves affected by terrorism.
Indirect Effects On The Firm Through Its Interfirm Arrangements
Dunning (1995) has previously suggested that we have moved into an era of alliance capitalism with greater levels of interdependence between firms. Moreover, Langlois (2003) has proposed that the large vertically integrated firms described by Chandler (1962), which dominated the 20th-century industrial landscape, were a temporary historical episode in a larger Smithian process of the division of labor. Accordingly, as markets have become thicker (more of them) and more efficient, the hierarchical, vertically integrated mode of coordination becomes less prevalent. Furthermore, changes in technology that better coordinate production between firms and lower the minimum efficient scales of production, have made the use of the market a more favored mechanism to coordinate production in both domestic and international situations than was the case some decades ago.
If it is accepted that the increasing thickness of markets and technology enabling rapid responses to changes in the market are part of our business landscape, it could also be argued that the market could be an effective mechanism for responding to the threat of terrorism. If one supplier of an input into another firm’s production process is affected by an attack, then other firms can step in to fill the resulting demand. Consequently, it is argued that the impact of terrorism on a firm’s buyers and suppliers is neither the most pervasive, nor the most devastating outcome of terrorist activity, because it is not the impact upon immediate buyers and suppliers in the network that creates the risk and uncertainty for firms. The most substantial effects of terrorism arise from the nature of the interconnected and networked global economy. This interconnectedness takes on both tangible and intangible forms.
We need a conceptual understanding of how producing firms in our networked international economy (i.e., international firms involved in production across borders) might best deal with the threat of organized, international terrorism. The principles for assisting firms in their response to the threat of international terrorism cannot be developed without an appreciation of the wider economic environment in which these firms now operate. In this section, we discuss two interrelated phenomena. First, we examine the debate over the definition and extent of globalization, and second, we introduce the nature of the connectedness created by globalizing forces. While there is disagreement over the speed and pattern of the globalization process, the increasing degree of interconnectedness between geographically dispersed actors is key to understanding the indirect effects of organized, international terrorism.
Globalization is a broadly defined term, used to describe increases in flows of trade, capital movements, investments, and people across borders. Some scholars who have examined globalization from a quantitative perspective have concluded that the assumption of the hyperglobalization school, which sees the pattern of globalization as exponential, unhindered, and geographically homogeneous is misleading (Perraton, Goldblatt, Held, & McGrew, 1997). Indeed, there is evidence that the movement of trade, capital, and people is a geographically heterogeneous and historically episodic process that can be interpreted to support regionalization rather than globalization (Rugman, 2001). Irrespective of this controversy, globalization is driven by economic factors that are not uniform across economic space. The patterning of globalization is a complex and subtle process that is neither conveyed in the borderless world thesis, nor in the opposing view of self-contained national economies or discrete regions. Perraton et al. (1997), state of this complexity of globalization that “the world does fall short of perfect globalized markets, but this misses the significance of global processes. Rather than rising regional activity being contradictory to globalization, as the skeptics claim, it appears to be part of a more general rise in international economic activity” (p. 274).
Thematic throughout the globalization literature is the increasing degree of cross-border connectedness between people, organizations, and other entities. Connections take on a number of different forms. Basic among these are two-way communications that occur directly with face-to-face contacts, or indirectly via telephone, fax, and e-mail, such as with trade in goods and services. In addition, one-way monological communication occurs via the mass media. These connections are not globally homogeneous because the pattern of globalization is not homogeneous. However, recent developments in understanding the dynamics of networks demonstrate that the sheer number of links is not the prime determinant of connectedness.
Complexity theory, previously applied to the behavior of nonlinear and networked iterative loops, which produce order and adaptation in systems (Kaufman, 1996), provides insight into the nature of this connectedness. Prominent mostly in the physical and biological sciences, complexity theory has received some attention as a lens for investigating economic and organizational systems (Arrow, Anderson, & Pines, 1988). Because complexity theory is a broad literature, a focus on the complex networks field that uses a network perspective to examine the way that dynamic systems evolve and interact is appropriate. An area of current, intense interest in the complex networks field is the “small-world phenomenon” that formally examines the anecdotal notion of the so-called six degrees of separation between any and all persons, anywhere in the world (Watts, 1999). Small worlds have been shown to be a ubiquitous property of networks (Watts, 1999).
For the purposes of our argument, two features of small-world networks are most salient for understanding the effects of international terrorism. One of these is the observation that clustering is a common property of systems that has been identified in a variety of network structures, such as the World Wide Web, ecosystems, and molecules within cells (Barabasi, 2002). The other feature of small-world networks is that clustering does not diminish the small-world phenomenon of connectedness between entities. Significantly, the imposition of a relatively small number of random links between nodes in the clustered network dramatically reduces the separation between all nodes on the network (Watts & Strogatz, 1998). For example, assume an artificially ordered network of 6 billion people (the world’s population) arranged into clusters of 50 directly associated neighbors. If each of these clusters is linked into a network, so that the clusters form the perimeter of a circle, then the number of degrees of separation in the population of 6 billion is about 60 million. However, if a small fraction of random links between members of these different clusters is added to the network, the number of degrees of separation decreases markedly. If two members out of every 10,000 of a population have links beyond their clusters, the number of degrees of separation collapses from 60 million to about eight, whereupon the network becomes a “small world” (Buchanan, 2002).
In the study of the geography of globalization, this has profound meaning because the valid observation of regionalization does not necessarily disprove the thesis of greater interconnectedness on a global scale. While international economic activity is clustered into regional networks, these clusters are not independent from each other. In fact, a recent study of the world trade web indicates that the pattern of trade between nations can be described as a complex network, importantly including the features of clustering, evidenced as regionalization, and the “small world” property of globalizing linkages (Serrano & Boguna, 2003). Kastelle, Steen, and Liesch (2006) applied complex systems network analysis to a purposefully compiled set of world-wide trade-flow data, assembled from 1938 through 2003, and produced interesting findings, which contributed to the so-called strong globalization hypothesis through a comparison of various features of globalization and the evolving nature of the trade network over time. While this study has shown that the world, as represented by trade flows between countries, is statistically no more interconnected in the 21st century than it was previously, regional interconnectedness has increased. Importantly, flow through this world trade network (the ability of the network to transmit goods and ideas) has improved significantly over time. This very connectedness, particularly trade flows through the system, creates a special vulnerability to terrorism because it allows for the impact of an individual attack to reverberate through indirect externalities, thereby magnifying the effect of the initial incident. Firms may indeed be clustered in industries or regions, but a smaller number of links between clusters dramatically reduces the degrees of separation between firms in distant clusters, thereby dispersing externality effects.
There is an additional feature of complex networks, which is fundamental to the investigation of the interaction between globalization and international terrorism. Modeling the effect of attacks on these complex networks has shown that they are surprisingly resilient to random failures and, importantly, highly susceptible to informed and organized attack (Barabasi & Bonabeau, 2003). Within complex networks, most nodes have few connections and if many of these nodes are removed, the network continues to function normally. For example, up to 80% of randomly selected Internet routers can fail without causing the collapse of the World Wide Web because there will still be a path between any two nodes (Barabasi & Bonabeau, 2003). However, some nodes are densely linked to other parts of the network and thus become hubs. In contrast, the simultaneous elimination of 5% to 15% of all hubs has been shown to destroy the functioning of the system (Barabasi & Bonabeau, 2003). While firms may not be aware of these network dynamics, we conjecture that the targeting of hub
nodes within industries or international trade networks by terrorists could have dire consequences for other firms in the network. Clearly, further research needs to be undertaken to understand the susceptibility of industrial networks to attack, as little is known about the network properties of international trade and investment network economies.
Systemic Effects Resulting From Perceptions Of Uncertainty
Going beyond the tangible interconnections between firms and consumers presents an attractive and possibly crucial research agenda for understanding the implications of organized, international terrorism for business and its management. Even though it is unlikely that an individual firm or consumer will be directly affected by terrorism, it is the perceived threat and consequences that give terrorism its potency. Psychology may assist in explaining this phenomenon through an understanding of reactions to risk and threats. For example, prospect theory suggests that decision makers are likely to put more emphasis on probable risks than on definite risk (Mukherji & Wright, 2002). Such theories offer some insight into managerial perceptions of terrorist threats, but they cannot explain why the indirect effects of a major terrorist event are now so geographically pervasive and rapid. While the attacks on the World Trade Center caused a significant decrease in business and consumer confidence in the United States, despite the localized nature of the attack a significant fall in consumer confidence was also reported in Canada, France, Italy, Japan, the United Kingdom, and elsewhere. Predictions made in early 2002 suggested that real gross domestic product (GDP) would diminish not only in the United States but also in Europe. Developing nations, dependent upon these countries for trade and investment, were also adversely affected. The consequences for them were especially dire, since in the developing world a decline in GDP translates into loss of life for people who are already living on the margins of survival.
In many respects, the world is now a smaller place because of the perceived closeness of everything. This is also a consequence of the speed at which events happen and the rapidity of their flow-on effects. The phenomenon of the compression of distance and time makes intuitive sense and is also a central consequence of the forces of globalization, but the management literature has yet to give this any serious attention. This could be due to the absence of theory in management that can describe the global political economy of the early 21st century and the consequence of this landscape for managerial perceptions of terrorism and its uncertainty. In the following section, we discuss these changes in global political economy by drawing primarily upon the work of D. Harvey (1989) who describes the transition from the Fordist postwar era to a different environment, characterized by change and flexibility.
The Changing International Political Economy
If the problems of the Fordist production regime prior to 1973 could be summarized in one word, then that word would be rigidity (D. Harvey, 1989). This includes the rigidity of fixed investments in mass-production systems, which inhibited necessary innovation in product design and manufacturing processes. Prior to the 1970s, it was presumed that the highly diversified conglomerate form would continue to expand, and indeed, this would be a reasonable prediction, given that in 1958 just 38 of the 100 largest U.S. industrial corporations were diversified, compared with 60 in 1960 and 76 in 1970 (Guillen, 1994). Whilst the diversified conglomerate enabled firms to chase developing markets, in order to sustain their own growth, the result was the increasing appearance of labyrinthine firms, which could no longer be governed effectively by senior management.
The rigidity of production was based upon the existence of stable and continuous growth in consumer markets. Further rigidities existed in the labor markets, labor allocation, and in labor contracts, with attempts to overcome these rigidities resulting in the strike waves of the 1968-1972 period. The rigidities of state commitments to entitlements, such as pensions and social security, became more intense as corporate profitability declined and these commitments prevented a fiscal response to the looming crisis. Thus, the only flexible tool to postpone the crisis was monetary policy, which eventually stimulated an inflationary wave that was to end the postwar boom with the creation of the deep 1973 global recession (D. Harvey, 1989).
The 1970s and 1980s became a period of dramatic economic restructuring and both social and political readjustment. This readjustment, unlike Fordism, is characterized by flexibility and is termed by D. Harvey (1989) as flexible accumulation. This mode of growth relies upon flexible labor processes, labor markets, products, and consumption patterns. Manufacturing became more focused on economies-of-scope than on economies-of-scale, with the Fordist tendency toward mass production countered by an increasing capacity to produce a variety of goods cheaply in small batches (Castells, 1998). This flexibility extended to product, process, and organizational innovation and reduced the turnover time in both production and consumption. The standard half-life of a Fordist product was typically 5 to 7 years, while the current half-life of a personal computer may be less than a year (D. Harvey, 1989).
Flexible accumulation may represent, at least in the medium term, a sustainable mode of capital accumulation, by circumventing an accumulation crisis.
To understand why flexible accumulation may achieve this, it is necessary to understand the reasoning behind different mechanisms for surmounting accumulation crises. D. Harvey (1989) suggests that overaccumulation crises may be averted in a number of ways. The first approach is the devaluation of commodities, productive capacity, money, or value. Put simply, devaluation means the writing down of the value of capital equipment, the cut-rate disposal of goods, or the inflationary erosion of money power. For example, World War II saw the massive write-off of both human and material capital. The second approach is the use of macroeconomic control through the institutionalization of some system of regulation, while the third involves the absorption of overaccumulation through temporal or spatial displacement.
While macroeconomic controls underpinned the Fordist-Keynesian era, D. Harvey (1989) argues that flexible accumulation is more reliant upon the absorption of accumulation through temporal or spatial displacement of capital, or through a combination of both. Temporal displacement of capital entails a switch from using resources to address current needs, to exploring future uses. Excess capital can be absorbed by long-term investments in tangible and intangible resources. On the other hand, spatial displacement of capital results in geographical expansion and the relocation of capital to new uses. D. Harvey (1999) importantly notes that capital should be defined as a process, rather than a thing. Capital must assume the forms of money (exchange value) and commodities (use-values) at different moments, but capital can also be formed by converting money and use-values, putting them into circulation and producing surplus value (D. Harvey, 1999).
Time And Space
A significant outcome of this regime of accumulation is what D. Harvey (1989) refers to as the annihilation of space through time (Hassard, 2001). In the shift from Fordism to flexible accumulation (post-Fordism), time and space are represented in new ways. Flexibility, instantaneous mobility, and change create a time-space compression of physical and human processes and experiences (Urry, 1996). While the transition to flexible accumulation as a means for underpinning economic growth has produced rewards for advanced economies that have largely justified the pain of adjustment and deregulation during the 1970s and 1980s (Yergin & Stanislaw, 1998), another outcome of this change has been the way that consumers, investors, and managers perceive the world—in a very real sense, the world has become a smaller place (Urry, 1996). In the United States, Denmark, and the United Kingdom, for example, South African wine is available at the local supermarket; reports from investment funds announce good returns that have arisen from an astute investment in India; and cable television provides images of wars on the other side of the globe, with the same detail as a news story from a nearby township.
Time is also experienced differently. The rates of change in lifestyle, product innovation, and competition, mean that time is perceived to move faster. A significant event that took place 3 years ago will often seem as distant as if it had occurred 30 years ago. The future seems to be compressed, particularly in industries that endeavor to produce superior long-term returns to shareholders in such a difficult and changing environment. Time horizons for decision making have shrunk and investors increasingly demand immediate returns on their invested capital. In major international financial markets, decision time frames have shrunk to a matter of minutes, whilst contracts are increasingly temporary, due to a shared culture of industrial short termism (Hassard, 2001). The result of these shared perceptions is a paradigm of expectations (or a growth regime), underpinned by a reconceptualization of space and time (D. Harvey, 1999).
Another consequence of this growth regime is what Lash and Urry (1994, p. 56) call the subjectivization of space and time, arising from the spatial and temporal compression that is part of flexible accumulation. This process is especially carried out through the transformation of communications, information, and transport, where shrinking time frames for activities also compress the dimension of space (Lash & Urry, 1994; Hassard, 2001). The significance of the subjectivization of these fundamental dimensions is that it contributes to the general subjectivization of organization itself (Hassard, 2001). With respect to the strategic use of markets, as opposed to hierarchies, in production, Lash and Urry (1994) identify distinct changes in the experience of time and space.
The shift from early modern objective space, rigidly fixed by hierarchies, to the more subjective, flexible space is also instantiated in the transformation of the firm in vertically disintegrated production systems. The context of this is the more flexible and subjectively cast space of transaction-rich market networks of postorganized capitalist agglomerations. (p. 56)
Bringing this discussion back to the effects of terrorism upon firms, it becomes apparent that the post-Fordist political economy is far more vulnerable to terrorism now than it was previously. One reason for this susceptibility is derived from the disintegrated production systems of modern business and the consequent interdependency between firms. However, an equally important reason for the susceptibility to terrorism of firms in the present global economy is the compression of time and space and the way that this compression creates a perceived threat, as well as the consequent uncertainties for international trade and investment. Because of the change in the key dimensions of space and time, terrorist threats not only seem closer to a firm’s activities but also impinge upon management’s analysis of the future. Lash and Urry’s (1994) description of this time-space compression and its impact on uncertainty appears to be almost prophetic.
Events often of an appallingly tragic character are dramatically brought into people’s everyday experience. There is thus a literal time-space compression as this collage of disconnected stories intrudes and shapes everyday life. And instantaneously people are “transported” from one tragedy to another in ways that seem out of control. This then appears to be a world full of risks and where there is little likelihood of even understanding the temporally organized processes which culminate in the newsworthy tragedies that are routinely represented every day. (p. 244)
However, this perceived uncertainty is accompanied by another layer of uncertainty, which involves managerial attempts to respond to other parties’ reactions to these events. The real difficulty arises with the creation of a “circuit” of uncertainty, where firms must estimate and preempt the reactions of other stakeholders to such shocks, while these stakeholders themselves are attempting to react to their own stakeholders. The application of complexity theory may help in the understanding of these interactions where differing cognitive schemata exist within actors who are affected by a systemic terrorist-induced shock (Anderson, 1999).
Managing In A Terrorism-Induced Uncertain Environment
International terrorist incidents can be considered in this framework as incidents that are accentuated in our modern, globalizing international economy by the perceived compression of geographic space through the heightened speed of information transmission and general economic exchange processes. This compression of space is lubricated by modern information and communication technologies. Such perceptions inveigle managers to recalculate their international trade and investment decisions as this perceived heightened uncertainty can alter assessments of business opportunities, subject to managers’ changed understandings of risk-return possibilities. These heightened uncertainties impact international business decisions by altering perceptions of expected returns and the levels of risk, not only in those locations traditionally assessed as being more susceptible to terrorist activity, but also more generally.
In a conceptualization of varied firm preferences and capabilities, and modeling a firm’s set of potential business opportunities through identifying attractive and attainable opportunities, Liesch, Steen, Knight, and Czinkota (2006) have theorized that the effect of escalating, organized, international terrorism will be to eliminate potentially attractive business ventures with a high perceived risk from the firm’s otherwise attractive internationalization opportunities set. Further, the higher perceived risk relative to expected return, dependent upon escalating international terrorism, can be overestimated by management because of the systemic uncertainty created by perceptions based upon the compression of space through time. Worthwhile but nonetheless risky business ventures can be forgone in these contexts, and this is likely to impact differentially across the globe, often to the detriment of development opportunities in countries possibly needing these most.
While the potency of organized international terrorism has been accentuated in our modern international political economy through the more highly developed and sophisticated interconnectedness that our networked system of internationalized sourcing, production, and distribution has spawned, this same interconnectedness may provide a partial solution for managers who strategize for the possible eventuality of a terrorism incident interrupting their international business activities. As Sanchez (2003) has speculated, managers of firms in some industries where markets are thicker may be able to forestall these adverse interruptions by investing in flexible assets and through internalizing this flexibility. However, where markets are thinner and where information asymmetries are prevalent, managers may not be able to retreat to these sources of flexibility.
Management research into these, and other as yet uncovered, aspects of organized international terrorism on the behaviors and decision-making characteristics of business managers has been constrained by a basic fundamental of terrorism and its impacts: what is risky and what is uncertain in the context of terrorism and in accommodating terrorism in a firm’s strategic mind-set? While it may be possible, but nonetheless problematic, for some firms to estimate the risk of a terrorist attack to the local part of their network, it becomes far more difficult to estimate the probability of an attack on a more distant part of the network. More so, due to a lack of knowledge about the extent of connections within a system, it is even more problematic to estimate the effect of that attack upon the other physically distant, but nonetheless connected, parts of the network. Managers, in these contexts, have to readjust from managing calculable risk to taking decisions under conditions of true uncertainty. Irrespective of whether the world beyond the firm might be an extensive and intricate industrial network, in a typical Williamsonian world, it is nonetheless fixed and ultimately knowable (Slater & Spencer, 2000).
This approach to the analysis of uncertainty as a form of bounded rationality, which is constrained only by the limited capacities of the human mind to make calculations, provides a very limited interpretation of Knightian uncertainty (Slater & Spencer, 2000). The modern, networked international business systems are complex systems, and complex systems have the potential to produce unpredictable (unable to be calculated) future outcomes. In these systems that characterize the world of complex industrial networks in which organized, international terrorism has found its potency, “the past does not provide a guide to the course of future events, (and) agents are truly uncertain as there currently does not exist information that will help them discover the future. Decisions have to be made and choice is genuine” (Dunn, 2000, p. 427). This is where managerial judgment is called upon.
Policymakers around the world have increasingly come to recognize that it is very difficult to isolate domestic economic activity from international terrorist events. Decisions that once were clearly in the domestic purview only, have now become subject to revision by terrorism repercussions from abroad. Domestic policy measures may be counteracted or possibly nulled by terrorism activities. Policymakers also are coming to the recognition that there are Janus-like repercussions from the frailty of corporate and human memories. Over time, impressions shift. During the days following a terrorist event, there is typically the feeling of “but for some good fortune, it could have been me.” However, eventually, this feeling may change to “this was an aberration and cannot happen to me.” While such a shift is instrumental to restore human confidence and encourage the resumption of “normal” activities, it is also likely to lead to a widespread underestimation of the likelihood of future exposures to new risks and uncertainties associated with terrorism (Greenberg, 2005) and therefore, to insufficient policy measures.
Hence, policy actions are increasingly limited in their effectiveness, longevity, and public support. In light of organized, international terrorism, policymakers therefore find themselves with increasing responsibilities, yet with fewer and less effective tools to carry out these responsibilities. In many instances, the long-term repercussions are also difficult to ascertain, which often leads to unintended consequences. For example, new visa security rules have dissuaded a large number of international travelers from visiting the United States. The tighter restrictions have also reduced sharply the international flow of students and faculty and thus caused major problems in the U.S. higher education sector, while serving as an engine for growth for universities in other nations (Czinkota, 2005). As more components of domestic economies become vulnerable to organized, international terrorism, these parts are becoming less controllable. Terrorism has changed many previously held notions about nation-state sovereignty. On the policy side, ultimately, the greatest threat may be the fear that organized, international terrorism incites as it may lead to unplanned, hasty, and not fully understood policy measures. As earlier in history, one key dimension for public policy to fear is fear itself—unreasoning, unjustified terror, which paralyzes needed efforts (Roosevelt, 1938). This same interdependence that has returned the affluence much of the world has realized over the past decades has also left that world more vulnerable.
In setting out the international landscape in which the now pervasive effect of organized terrorism has found application, we have drawn upon literature that examines the political economy of the late 20th century. In particular, we suggest that globalization and the process of flexible capital accumulation have affected the way in which geographic space and time are experienced. Geographic space has become compressed so much so that there is a closer interconnectedness between virtually every facet of economic activity today than was the case only a few decades ago. Aligned with this so-called compression of space is the compression of time. The future becomes more immediate as strategies and investments demand faster decisions with uncertain outcomes despite the application of planning and forecasting. In this environment, organized, international terrorism takes on unprecedented potency. This is not a consequence of the availability of military technology and more adept planning, but rather it is a result of the way in which the immediacy of these events is felt around the world, and the uncertainty that this brings to decision makers and others in the population more generally. It is a paradox in that the changes in the international political economy that have been contrived to create the international economic conditions that have sustained considerable growth in recent decades have also spawned the conditions that accentuate the impact of globalized, international terrorism.
Harvey’s (1989) analysis of these changes in the 20th century political economy of our world provide an astute understanding of the conditions that have enabled modern organized terrorism to have the effect of inducing systemic uncertainty into the internationalized business environment, which demands more of managers than mere calculation— it demands of managers considered judgment. As introduced at the commencement of this research paper, “Businesses can usually strike bargains based on financial calculations. War and terrorism create new uncertainties that confound ordinary calculations and may deter global commitments” (Samuelson, 2003, p. 41). In a world increasingly affected by organized, international terrorism, it remains that managers must grapple with the most difficult of all variables they confront in their decision making namely uncertainty, as it is uncertainty that organized, international terrorism relies upon for its potency.
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