The Thucydides Trap describes the high risk of war when a rising power threatens to displace a dominant ruling power. This concept is  named after the Greek historian Thucydides who noted the dynamics between Athens and Sparta leading to the Peloponnesian War.

Thucydides war was further popularized by political scientist Graham T. Allison, suggesting the fear of the rising power by the established nation, coupled with the challenger’s growing confidence, often leads to conflict, though Allison aims to help manage this dynamic (currently U.S.-China) to avoid war through understanding and diplomacy.

The origin of the Thucydides’ trap started in situation where rising power Athens challenged the status of an established, ruling power  Sparta. The war was called Peloponnesian War, The Peloponnesian War was fought in the Eastern Mediterranean between the Athenian-led Delian League and the Spartan-led Peloponnesian League from 431 to 404 BC for domination over Ancient Greece. Thucydides approached ethics with scepticism, viewing morality as shaped by one’s environment rather than universal truths. Thucydides’ observations during the Peloponnesian War led him to develop political realism, the theory that political behaviour is fundamentally driven by fear of war and self-interest.

In the world wars happen due to complex, overlying reasons like disputes over resources such as land, oil, power struggles, political control, influence, and identity clashes  due to religion, nationalism, ideology, often fuelled by economic inequality, historical grievances, resource scarcity exacerbated by climate change, or a breakdown in diplomacy, leading groups to use organized violence when peaceful resolution fails. For example, Pakistan’s frequent conflicts with India stem mainly from the unresolved Kashmir dispute since 1947, leading to wars and ongoing border clashes, fuelled by religious/communal tensions and strategic interests, alongside internal instability and support for militant groups impacting regional security, especially with neighbours like Afghanistan, creating a cycle of conflict. The violent 1947 split by British created a deep-seated hostility between India and Pakistan leading to religious divide between  Hindu-Muslim, and a legacy of distrust.

Wars, often arising from economic, territorial, religious, or political reasons, can leave countries war-torn, requiring decades for rebuilding infrastructure and economic reconstruction. Rebuilding nations after war is indeed a daunting task, involving immense challenges across social, economic, political, and infrastructural domains. It requires comprehensive, long-term strategies and often international cooperation to establish lasting peace and stability.

The Russia-Ukraine conflict, beginning in 2022, it exemplifies the complexities of modern warfare, including unexpected resistance, strategic and logistic challenges, and significant civilian impact. On February 24, 2022, the Russian Federation began a military invasion of Ukraine, escalating a conflict that had been simmering since Russia’s 2014 annexation of Ukraine’s Crimean Peninsula.

Global war statistics reveal a diversity of conflicts, from Myanmar’s long-standing civil war to the ongoing drug war in Mexico, each with unique causes and consequences.

Myanmar’s civil war stems from the military’s 2021 coup, overthrowing a democratically elected government and triggering widespread armed resistance by pro-democracy forces and ethnic groups against the ruling junta, building on decades of ethnic conflict and military dominance over civilian rule. The core reasons are the military’s desire to retain power, suppression of democratic movements, and long-standing ethnic grievances, all exacerbated by the military’s violent crackdown on peaceful protests after the coup.

The Mexican drug war is an ongoing lopsided armed conflict between the Mexican government and various drug trafficking syndicates. When the Mexican military intervened in 2006, the government’s main objective was to reduce drug-related violence. This conflict has resulted in widespread violence, including mass killings and brutal tactics employed by the cartels, such as execution-style murders and the use of mass graves. The conflict known as the Mexican Drug War is still very much ongoing as an intense armed struggle between the Mexican government and powerful drug cartels, despite various government initiatives and claims of ending the “war,” with cartels like the Sinaloa Cartel remaining dominant players in the multi-billion-dollar drug trade, driving violence and instability.

The conflict between Israel and Palestine is a long-running, complex dispute over land and self-determination with historical roots stretching back over a century. It encompasses a series of wars, numerous military operations, and ongoing political conflict, most notably the current Israel-Hamas war in Gaza. The Palestinians seek to establish their own independent state in at least one part of historic Palestine. Israeli defence of its own borders, control over the West Bank, the Egyptian-Israeli blockade of the Gaza Strip, and Palestinian internal politics currently make the Palestinians’ goal out of reach. The Israeli–Palestinian conflict is an ongoing military and political conflict about land and self-determination within the territory of the former Mandatory Palestine.

Civilization Identity will be increasingly important in the future, and the world will be shaped in large measure by the interactions among seven or eight major civilizations. These include Western, Confucian, Japanese, Islamic, Hindu, Slavic-Orthodox, Latin American and possibly African civilization.

The Soviet-Afghan war and the First Gulf War as the emergence of civilization wars. Huntington interprets the Afghan War as a civilization war because it was the first successful resistance to a foreign power, which boosted the self-confidence, and power of many fighters in the Islamic world says American political scientist Samuel Huntington.

Cold Wars are increasingly appearing at these civilizational divisions. Wars such as those following the breakup of Yugoslavia, in Chechnya, and between India and Pakistan were cited as evidence of inter-civilizational conflict.

Impact of clash of civilization on business

According to a study by the Harvard Business Review, a staggering 70% of international ventures fail due to cultural differences. This alarming statistic underscores the critical need for mastering cross-cultural communication. Because human societies are complex systems, some common factors that may contribute to their decline are economic, environmental, demographic, social and cultural. These factors may cascade into another and build up to the point that could overwhelm any mechanisms that would otherwise maintain stability.

Culture clash in the workplace refers to the conflict that arises when different employee backgrounds, beliefs, and behaviours collide. This can manifest in various ways, including: miscommunication, diverse communication styles can lead to misunderstandings and frustration. Also, cultural clashes disrupt businesses.

Increased Trade Costs and Reduced Flows

Cultural differences act as a significant, and in the post-Cold War era, potentially increasing barrier to international trade. Countries belonging to different civilizations tend to trade less with each other. This is due to higher transaction costs, a lack of trust, and differing business norms which complicate negotiations and collaboration.

Foreign Direct Investment (FDI) Risks

Businesses investing overseas face “cultural risks” in regions with vastly different languages, religious beliefs, legal origins, and values. These risks can lead to potential operational challenges, social tensions, and the need for significant adaptation to local cultural norms, which can be costly and difficult to manage.

Geopolitical Conflict and Instability

The theory posits that conflicts will primarily occur along “fault lines” between civilizations. This increases the risk of regional instability, proxy conflicts, and “tit-for-tat” sanctions (e.g., in trade and finance) which can disrupt global supply chains, catch businesses in the middle of political disputes, and increase compliance costs.

Challenges in Mergers and International Operations

Within organizations, a clash of corporate cultures, often exacerbated by different national or regional operating styles, can lead to communication breakdowns, demotivation, resistance to change, and a lack of cohesion in teams. This makes successfully integrating acquired companies or managing diverse global operations a major challenge.

Reinforced Economic Regionalism

The theory suggests that successful economic regionalism often succeeds only when it is rooted in a common civilization. This trend toward stronger intra-regional trade blocs (e.g., in Europe, East Asia, North America) could lead to the marginalization of businesses from outside those blocs, making cross-regional expansion more difficult.

Weaponization of Trade and Finance

The intensification of civilizational competition can lead to the “weaponization” of economic tools, such as trade tariffs, sanctions, and restrictions on technology transfers, in “nationally sensitive” domains for example,  semiconductors, clean energy. This environment of economic warfare forces businesses to navigate a complex, fragmented international system.

Foreign direct investment (FDI) refers to long term participation by a country into another country. It usually involves participation in management, joint-venture, transfer of technology, managing supply chain, distributing and expertise etc.

FDI is an important source of private external (foreign) finance for developing countries. It is different from other major types of external private capital flows in which it is motivated largely by the investors’ long-term prospects for making profits in production activities that they directly control.

Why FDI is important?

FDI helps in diversifying investor’s portfolio, it promotes stable long term lending. It infuses new technology in developing nations, it provides financing to developing countries. Most importantly, it brings in technological knowhow and managerial expertise, it creates more jobs and opportunities, it also helps in improving infrastructure in the developing countries, and it helps in raising living standards in emerging economies. So overall, it facilitates economic growth or repair.

Today, India has become one of the most attractive destinations for foreign direct investments thanks to liberalised norms, easy policies and subsidised rates. Foreign investors are also willing to invest in the country due to lower labour costs, market diversification, subsidies, and preferential tariffs. A foreign investor can invest in an Indian business through some of these routes: acquiring voting stock in a foreign company, mergers and acquisitions, joint ventures with foreign corporations and starting a subsidiary of a domestic firm in a foreign country.

What does FDI Comprise?

The foreign direct investment shows the transfer of technological innovation between two countries such as India and America on the basis of transfer of knowledge, policies between two countries. So we can conclude that this foreign direct investment helps two countries to innovate their technology and liberalizing the policies between each country.

FDI is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are seen increasing sharply.

There are two forms of FDI

One is inward foreign direct investment and the other is outward foreign direct investment. Inward stocks are all direct investments held by non- residents in the reporting economy; outward stocks are the investments of the reporting economy held abroad.

Inward Foreign Direct Investment  

It is the value of foreign investors’ equity in and net loans to enterprises resident in the reporting economy. For example, some key companies functioning in India include Emaar (Real Estate), DP World (Dubai Ports World) is a logistic company, Abu Dhabi National Oil Company, Abu Dhabi National Energy Company, Drake and Scull International (Engineering).

Outward Foreign Direct Investment

It is an outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country. This can take form as a green field investment, a merger/acquisition, or expansion of an existing foreign facility.

A Greenfield project is simply a new project, not building on anything existing. The analogy is to building on a green field – there are no existing buildings or infrastructure. This is opposed to brownfield projects – which would involve changes and maintenance to an existing piece of work.

Some examples of ODI are the Indian firms which have done outward FDI are Tata Motors Ltd., Suzlon Energy Ltd., Tata Chemicals Ltd., United Phosphorus Ltd., Wipro Ltd. and Dr. Reddy’s Laboratories Ltd. Tata-Coros, Suzlon Energy made an investment of USD 674.79 million in its wholly owned subsidiary in Netherlands. Bharti Airtel committed USD 3.35 billion in its joint venture in the Netherlands that is into the business of transport, storage and communication services. GMR Infrastructure invested USD 306.93 million in its wholly-owned unit in Mauritius and Amtek Auto made an investment of USD 286.72 million in two separate projects in Germany and Singapore.

What is India’s FDI policy

India’s FDI policy allows foreign investment in certain sectors under the automatic route and up to the limit set out in that sector. For instance 100 per cent FDI is permitted under the automatic route in manufacturing, oil and gas, Greenfield airports, construction, railway infrastructure etc.

But, it is worth noting that on 17 April 2020, India changed its foreign direct investment (FDI) policy to protect Indian companies from “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic”, according to the Department for Promotion of Industry and Internal Trade.

What are the various types of FDI?

Horizontal FDI

It refers to investing FDI in similar sector of business, for example, an automobile company investing in another automobile company overseas. Toyota assembles cars in both the United States and China.

Few other examples of horizontal integration in recent years include Marriott’s 2016 acquisition of Sheraton (hotels) AstraZeneca’s 2015 acquisition of ZS Pharma (biotech), Volkswagen’s 2012 acquisition of Porsche (automobiles), Facebook’s 2012 acquisition of Instagram.

Vertical FDI

Vertical foreign direct investment occurs when a multinational acquires an operation that either acts as a supplier or distributor.  Companies engaging in vertical FDI typically seek to either lower the cost of raw materials or gain greater control of their supply chain.

Zara retains more control over their supply chain than most retailers globally, because it is vertically integrated, meaning they have ownership of their supply chain.

Apple builds great hardware, owns the core software experience, optimizes its software for that hardware, equips it with web services (iTunes and iCloud), and finally controls the selling experience through its own retail stores.

Conglomerate FDI

It is a conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Thus, in conglomerate investments, a business acquires an unrelated business in a foreign country.

Warren Edward Buffett is an American investor, business tycoon, philanthropist, and the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of US$78.9 billion as of August 2020, making him the world’s seventh-wealthiest person. Through years of acquisitions and mergers, Berkshire Hathaway is responsible for the ownership of companies that provide utilities, retail goods, transportation, and other services, as well as the insurance and other financial services it is perhaps most well known for.

Who are the Largest recipients of FDI in world

The United States remained the largest recipient of FDI, attracting $251 billion in inflows, followed by China with flows of $140 billion and Singapore with $110 billion. (Jan 2020)

Singapore emerged as the largest source of FDI in India during the last fiscal with $ 14.67 billion investments. It was followed by Mauritius ($ 8.24 billion), the Netherlands ($ 6.5 billion), the US ($ 4.22 billion), Caymen Islands ($ 3.7 billion), Japan ($ 3.22 billion), and France ($ 1.89 billion). (May 2020)

Gold: It is considered the most important of all stocks even today; its store value keeps increasing. It is the most important components of the global economy since 1945. Most often gold’s value remains fairly constant and increases over time. It is therefore used as an ideal hedge against (boundary) inflation. Many investors have never seriously considered gold to be a long-term investment, but the topic of investing in gold did come to the forefront of during the 2008–2009 recessions. People invest in gold because despite high inflation, its value does not depreciate. Gold is also a safe asset. Remember this point always, that increasing gold prices are a traditional indicator of a recession or a downturn in an economy. People are very scared when it comes to the pricing of gold; they get worried that if price of gold falls, they might lose because the value of other investments may also go down in the future. Indians traditionally hold the yellow metal in very high esteem; they hoard lot of gold for the same reason. And, why not, gold saving has helped people to get their children married, their education, clearing healthcare bills etc.

US Dollar: The strongest currency in the world is this currency. The virtual strength of the U.S. economy supports the value of its currency. It is the reason the dollar is the most powerful currency. Around $580 billion in U.S. bills (bank notes) are used outside the country. That’s 65 percent of all dollars. That includes 75 percent of $100 bills, 55 percent of $50 bills, and 60 percent of $20 bills. Most of these bills are in the former Soviet Union countries and in Latin America. They are often used as hard currency in day-to-day transactions. More than one-third of the world’s GROSS DOMESTIC PRODUCT (GDP) comes from countries that peg (bringing up to scale) their currencies to the dollar. That includes countries that have adopted the U.S. dollar as their own; they are Ecuador, East Timor, El Salvador, Marshall Islands, Micronesia, Palau, Turks and Caicos, British Virgin Islands, Zimbabwe. Another 89 keep their currency in a tight trading range relative to the dollar. In the foreign exchange market the dollar rules. Ninety percent of forex trading involves the U.S. dollar. The dollar is just one of the world’s 185 currencies according to the International Standards Organization List. But most of these currencies are only used inside their own countries. Theoretically, any one of them could replace the dollar as the world’s currency. But they won’t because they aren’t as widely traded. The chart below shows the 10 most traded currencies in 2018.

1. US dollar (USD)
2. Euro (EUR)
3. Japanese yen (JPY)
4. Pound sterling (GBP)
5. Australian dollar (AUD)
6. Canadian dollar (CAD)
7. Swiss franc (CHF)
8. Chinese renminbi (CNH)
9. Swedish krona (SEK)
10. New Zealand dollar (NZD)

Most of the trade in oil is invoiced in US Dollar. Whenever India buys oil from Iran, natural gas from Russia and electronics from China, we do not pay them in Rial, Rouble or Yuan, we pay them in Dollars. Similarly, when India sells leather to Australia, they pay us in Dollars. Dollar Rupee exchange rate is thus very important for both imports and export health of a country. If it goes high, consumers suffer, it goes low exporters suffer.

Oil Prices:  Oil prices are higher because of high demand and low supply; it depends upon OPEC (Organization of the Petroleum Exporting Countries) quotas, or a drop in the dollar’s value. India is a heavy importer of oil and it is the most important energy resource. An increase in the global oil prices hurts the Rupee and the Indian economy. Demand for oil and gas follow a predictable seasonal swing. Demand rises in the spring and summer due to increased driving for summer vacations. Demand drops in the autumn and winter. Low supply occurs when war or natural disaster curtail exports from oil-producing countries. Traders often bid up prices when they hear of impending disasters or the threat of war. Oil prices decline once production resumes. When commodities future traders anticipate increased demand, they usually start bidding oil prices higher in January or February. Around 70 percent of gas prices are based on oil prices. U.S plays a major role in fixing oil prices.

Stocks (Share market): Though it is called stock market or equity market and is primarily known for trading shares/equities, other financial securities – like exchange traded funds (ETF), corporate bonds and derivatives based on stocks, commodities, currencies and bonds which are also traded on the stock markets. When the economy is doing well or is expected to do well, the share prices of stocks in that country rise, and when the economy is doing badly, their value drops. India’s individual stock ownership rate is quite low; this adds an extra layer of risk to the Indian stock markets that are affected by global shocks. An important aspect to note is that stock markets are determined by the other three factors noted above: gold, dollar and oil prices. India is an odd economy. It’s highly included with the global economy but does not have enough leverage to affect it in any way. It is hence vulnerable to external shocks a lot, things that the government cannot control.

Connection between Gold, Oil Prices, Dollar and Stock Market: Now coming to the original question, what is the relationship between these four assets? They react to each other in a variety of ways. If the future expectations of the global economy are bad, people run to the safety of the US Dollar and Gold and sell stocks. The price of gold rises, the value of dollar rises against the Rupee. FII’s (foreign institutional investors) and FDI’s pull money out of the Indian stock market causing it to decline. When the price of dollar rises, oil prices increase for India. This puts strain on the economy as inflation increases. Because of high inflation people invest more in gold and less in stocks causing the stock markets to fall. When the price of oil decreases, energy costs reduce. This will reduce the costs of energy, we will spend less Dollars buying oil and the Rupee strengthens. When the price of dollar goes down, price of oil goes down reducing energy company shares costs.

There are many other permutations and combinations to note. Gold and oil are positively related. A rise in oil prices is an indication of bad times and gold prices rise correspondingly. Gold and stocks are negatively correlated. If stocks go up, gold goes down and vice versa. These effects are collective. If we break down the stock market into individual stocks, they react differently to change in oil and gold prices. An increase in oil prices causes the energy stocks to rise because of higher expected profits, an increase in gold prices will cause Gold ETF’s and banking stocks to rise but other stocks might fall or remain stable. An increase in the value of the dollar causes IT stocks to rise because their revenue comes in Dollars but cause energy stocks to fall.

It is of no use to study the price of these assets in isolation as they heavily depend on the prevailing macroeconomic conditions. For example, when the business cycle is positive i.e. the GDP is rising, stocks rise, but, gold falls. If inflation is rising along with GDP, then both gold and stocks rise, stocks rise on FDI infusion and gold rises because of inflation. Add an external change in oil and this relationship becomes even complex. Add U.S Dollar and we have got ourselves in a commotion. In conclusion, no one can say for certainty how one or the other price might react to a change in the other. Modern financial markets function on volatile conditions. Because of this very uncertainty, they trade based on expectations of how prices might react.