Professional Documents
Culture Documents
The cables, obtained by the New York Times from the whistleblower website WikiLeaks,
document several incidents in which diplomats were involved in haggling over the billion-dollar
deals seen as key to US economic growth.
In another incident, Bangladesh's Prime Minister Sheikh Hasina demanded landing rights for its
national carrier at New York's John F. Kennedy International Airport as a condition for a Boeing
deal.
"If there is no New York route, what is the point of buying Boeing," she was quoted as saying in
a November 2009 cable.
The deal went through, but so far Biman Bangladesh Airlines has not been given the landing
rights, the Times said.
The Times said such practices have continued despite decades-old agreements between US and
European leaders to keep politics out of airline deals.
But State Department officials interviewed by the newspaper defended their involvement, saying
such high-value exports were crucial to US President Barack Obama's efforts to pull the country
out of its economic slump.
"That is the reality of the 21st century; governments are playing a greater role in
supporting their companies, and we need to do the same thing," Robert Hormats, under-
secretary of state for economic affairs, told the Times.
Airbus may receive similar aid: other US cables cited by the Times describe the Bush
administration and French President Nicolas Sarkozy's government scrambling to win a jet deal
from oil-rich Bahrain in 2007.
In the end, US diplomats convinced Bahrain to buy from Boeing after linking the signing of the
deal to an upcoming visit by Bush in January 2008, the first-ever by a sitting US president, the
Times said.
International Business Diplomacy
Venturing into new markets should begin with understanding the universe of opportunities and
externalities involved, while analysing their potential effects on future corporate assets and operations.
Business diplomacy is the art of thinking strategically about cross-cultural business ventures and dealing
adaptively with stakeholders who have different views of the world.
Successful international business diplomacy has to start with recognition that business and government
have different, but equally essential roles, to play in society. The role of business is to organize the
economic resources needed for the production of goods and services desired by consumers in the most
efficient manner possible. The role of government is to establish the regulations and standards necessary
to ensure that the production of these goods and services does not harm the environment, human health
and safety, the physical and social infrastructure, and other social values. Since there is usually more than
one way of achieving desired social objectives, and since business usually has a better understanding of
the product and production technologies involved, there is considerable space and need for business and
government to discuss how the legislated social objectives can be achieved in the most economically
efficient manner.
Bargaining Process
Acceptance Zones
Before becoming involved in overseas negotiations, a manager usually will have some experience in a
domestic bargaining process that is somewhat similar to that in the foreign sphere. For example,
collective-bargaining negotiations with labor, as well as agreements to acquire or merge facilities with
another firm, usually start with an array of proposals from both sides, just as in negotiations with a
foreign country. The total package of proposals undoubtedly includes provisions on which one side or the
other is willing either to give up entirely or to compromise. These are used as bargaining tokens,
permitting each side to claim that it is reluctantly giving in on some point in exchange for compromise on
the part of the other, as well as face-saving devices, which allow either side to report to interested parties
that it managed to extract concessions. On certain other points, it is unlikely that compromise can be
reached. As in a domestic situation, the foreign negotiation will rely partly on other recent negotiations,
which serve as models. The domestic model, such as on whether to give a group of workers an additional
holiday, may be the economy as a whole, the industry, the local area, or recent company experience
elsewhere. Abroad, what has transpired recently between other companies and the government or between
similar types of companies or the same firm in similar countries may serve as a common reference, and
negotiations are not likely to stray too far from established precedent. Finally, there are zones of
acceptance and non-acceptance on the proposals presented. If the acceptance zones overlap, there is a
possibility of a resulting agreement. If there are no overlapping zones, there is no hope for positive
negotiations. For example, if General Motors insisted on 100 percent ownership in Japan and the Japanese
insisted on 51 percent local ownership, there would be no zone in which to negotiate. If, on the other
hand, Chrysler insisted on a “controlling” interest in Mexico but would take as much as it could get, and
the Mexicans required “substantial” local capital and wanted to maximize it, there would probably be a
wide zone of ownership that would be acceptable to both parties. Assume that Chrysler is willing to go as
low as 25 percent and the Mexican government will let Chrysler go as high as 90 percent, the acceptance
zone is 25-90 percent for Chrysler’s ownership. The final decision will be based on the negotiating ability
of each company, their strengths, and other concessions that each makes in the process. Since each side
can only speculate on how far the other is willing to go, the exact amount of ownership may fall
anywhere within the overlapping acceptance range. Even after an agreement is reached, it is uncertain
whether the maximum concessions have been extracted from the other party.
Provisions
The major difference in investment negotiations abroad and the domestic experience is a matter of degree.
Negotiations may continue over a much longer period of time abroad and may include many provisions
unheard of in the home country, such as a negotiated tax rate. Likewise, governments vary widely in their
attitudes toward foreign investors; therefore, their negotiating agendas also vary widely.
Most countries in recent years have given incentives to attract foreign investors. These incentives are
usually available to local firms as well; however, local firms often may lack the resources to be in a
strong bargaining position. For example, when the Hyster Corporation announced that it would build a
$100 million factory in Europe, the company was wooed by representatives of various European
governments. The company finally decided on Ireland, whose government agreed to pay for employee
training, made an R&D grant, and set a maximum income tax rate of only 10 percent until the year 2000.
Other recent incentives have included tax holidays, accelerated depreciation, low-interest loans, loan
guarantees, subsidized energy and transportation, and the construction of rail spurs and roads.
Governments also provide indirect incentives, such as the presence of a trained labor force that is likely to
accept employers’ work conditions tranquilly. When companies negotiate to gain concessions from a
foreign government, they should understand some of the problems that the incentives might bring. First,
companies may encounter more domestic labor problems because of claims that they are exporting jobs in
order to gain access to cheap labor. Second, the output from the foreign facility may be subject to claims
of dumping because of the subsidies given by the host government (e.g., Toyota forgoing British
governmental assistance for fear that other EC countries would not as readily allow its sales). Third, it
may be more difficult to evaluate management performance in the subsidized operation. Finally, it should
be noted that there is always a risk that promises will be broken as situations change.
Negotiations are seldom a one-way street; companies agree to many different performance requirements.
Those requirements on foreign investment that companies find most troublesome are foreign-exchange
deposits to cover the cost of imports and capital repatriation, limits on payments for services,
requirements to create a certain amount of jobs or exports, provisions to reduce the amount of equity held
in the subsidiaries, and price controls. Requirements considered less bothersome include minimum local
inputs into products manufactured, limits on the use of expatriate personnel and on old or reconditioned
equipment, control on prices for goods imported or exported to controlled entities of the parent firms, and
demands to enter into joint ventures.
In the nineteenth century the home country ensured through military force and coercion that
prompt, adequate, and effective compensation would be received for investors in cases of
expropriation, a concept known as the international standard of fair dealing. The host countries
had little to say about this standard. As late as the period between the two world wars, the United
States on several occasions sent troops into Latin America to protect investors’ property. The
1917 Soviet confiscations without compensation of Russian and foreign private investment led
the way to non coercive interference by home countries in cases of expropriation. In conferences
attended by developing countries at The Hague in 1930 and at Montevideo in 1933, participants
concluded a treaty stating that “foreigners may not claim rights other or more extensive than
nationals.” On the basis of this doctrine, Mexico used its own courts in 1938 to settle disputes
arising from expropriation of foreign agricultural properties in 1915. This same doctrine formed
the precedent for later settlements and, in the absence of specific treaties, remains largely in
effect today.
Except for the abortive attempt by British, French, and Israeli forces to prevent Egypt’s takeover
of the Suez Canal, there has been no major attempt since World War II at direct military
intervention to protect property of home-country citizens. (There have been, however, threatened
or actual troop movements by large powers to developing countries during this period. Property
protection possibly was a surreptitious factor in the movements.) The concept of nonintervention
has been strengthened by a series of UN resolutions. A secondary factor has been that most
expropriations have been selective rather than general, that is, involving a few rather than all
foreign firms. In these cases it is thought that intervention might lead to further takeovers and
jeopardize settlements for affected foreign firms.
To improve the foreign investment climates for their investors, many industrial countries have
established bilateral treaties with foreign governments, often as a result of long and difficult
negotiations. Although these agreements differ in detail, they generally provide for home-
country insurance to investors to cover losses from expropriation, civil war, and currency
devaluation or control and to exporters to cover losses from nonpayment in a convertible
currency. The recipient country, by approving a contract, agrees to settle payment on a
government-to-government basis. In other words, Gillette could insure its Chinese investment
against expropriation because of the bilateral agreement between the United States and the
People’s Republic of China. If China expropriated Gillette’s facilities, the U.S. government
would pay Gillette and then seek settlement with China. Other types of bilateral agreements
include treaties of friendship, commerce, and navigation as well as prevention of double taxation.
All these efforts help promote factor mobility for MNEs.
A major problem with these agreements to protect foreign investments is that they do not
normally provide a mechanism for settlement. The host governments simply may lack the
financial resources to settle in an appropriate currency, for example. Even if they have the
resources, it is unclear whether the amount of payment should be settled in local courts, in
external courts, or through negotiations. Many recipient countries resist treaties because they
imply the abrogation of sovereignty over business activities conducted within their borders and
provide more protection for alien property than for that of their own citizens. Another problem is
that the agreements do not protect against gradual changes in operating rules, which can reduce
substantially the profit of foreign operations. Revere Copper and Brass, for example, was forced
by Jamaica to make payments greater than those provided by the original investment agreement.
The result was an operating loss that the investment insurance did not cover.
MULTILATERAL SETTLEMENTS
When international firms or home governments are unable to reach agreement with a host
country, they may agree to have a third party settle the dispute. In cases of trade disputes, the
International Chamber of Commerce in Paris, the Swedish Chamber of Commerce, and
specialized commodity associations in London frequently are asked to assist the parties. Since
the trade transactions are generally among private groups, the disputes do not create the type of
widespread emotional environment often attendant upon foreign investment disputes.
Examples of active involvement by third parties in settling investment questions are extremely
rare, for such involvement requires a relinquishment of sovereignty by host governments over
activities within their own borders. Among the notable uses of external organizations have been
the World Bank’s agreement to arbitrate the compensation and to act as transfer agent for
payments involving the Suez Canal nationalization. Another involved a World Bank nonbinding
arbitral award that was accepted by both French bondholders and the City of Tokyo. The
International Center for Settlement of Investment Disputes operates under the auspices of the
World Bank and provides a formal organization for parties wishing to submit their disputes.
However, both parties must agree to its use, and countries have been reluctant to do so. In 1974
Jamaica refused to use the center after seizing foreign bauxite holdings, although the investors
and the Jamaican government had agreed in earlier years to use the center in case of disputes. As
yet there is no effective means of imposing international law on nations; however, as a result of
the center’s failure to offer potential investors sufficient confidence about LDCs, the World Bank
established the Multilateral Investment Guarantee Agency in 1988. This agency offers insurance
against expropriations, war, and civil disturbances.
A notable example of multilateral settlement involved claims between the United States and Iran.
This situation differed from many other attempted settlements inasmuch as each country had
large amounts of investments in the other’s territory. In fact, when the two governments froze
each other’s assets, Iran had substantially more invested in the United States than the United
States had in Iran. The two countries agreed to appoint three arbitrators each to an international
tribunal at The Hague, and those six selected three more. Part of the assets that the United States
had held were set aside for the payment of arbitrated claims.
In limited cases, courts in third countries may be used by international firms or by governments
as leverage. In 1972 Kennecott Copper, whose investments in Chile had been nationalized,
successfully contested in French courts payment from French importers to the Chilean
government on the grounds that Kennecott still owned the operations. In 1987 Britain’s High
Court ruled that the Libyan government could withdraw $292 million from the London facility of
Bankers Trust, even though $161 million of this was on deposit in New York and the U.S.
government had frozen Libyan assets in U.S. banks at home and abroad.
After expropriation of their Libyan facilities, California Standard, Texaco, and Arco placed
notices in the leading newspapers and periodicals of the major oil-consuming countries warning
that they might file lawsuits against purchasers of Libyan oil that the oil firms claimed for
themselves. They also had arbitrators appointed by the International Court of Justice at The
Hague who ruled in the firms’ favor and set an amount of compensation. A problem with the
International Court of Justice (the World Court) is that there have been many examples of
countries failing to consent to judgments. As a result, the Court handles few cases.
Of the numerous bilateral and multilateral organizations, treaties, and agreements in existence,
the United Nations (UN) is one of the most visible and extensive. Its major purposes are: (1) to
maintain international peace and security; (2) to develop friendly relations among nations; (3) to
achieve international cooperation in solving international problems of an economic, social,
cultural or humanitarian nature; and (4) to be a center for harmonizing national efforts in these
areas.
The UN comprises a Secretariat, General Assembly, Security Council, and Economic and Social
Council. The Economic and Social Council is responsible for economic, social, cultural, and
humanitarian facets of UN policy. This group organized a Commission on Transnational
Corporations to secure effective international arrangements for the operations of transnational
corporations and to further global understanding of the nature and effects of their activities. The
commission has studied a variety of topics, such as transfer pricing, taxation, and international
standards of accounting and reporting.
The UN has also established several regional economic commissions to study economic and
technological problems of different regions of the world and recommend courses of action for
resolving these problems.
A number of other bodies have been established by the UN, some dealing with issues relating to
MNEs. Two such groups are the United Nations Conference on Trade and Development
(UNCTAD) and the International Sea-Bed Authority. UNCTAD, has been especially active in
dealing with the relationships between developing and industrial countries with respect to
commodities, manufacturing, shipping, and invisibles, and financing related to trade.
The International Sea-Bed Authority, organized in October 1986 following discussions that
began in 1973, is aimed at determining coastal water rights and setting policy on the exploitation
of resources on the sea bed. Unfortunately, few countries have ratified the Convention.
Finally, the UN has organized a number of specialized agencies to influence the world economy:
the General Agreement on Tariffs and Trade (GATT), the World Bank, the International Labor
Organization, the International Monetary Fund, and the World Intellectual Property
Organization.
CONSORTIUM APPROACHES
As mentioned earlier, a company may at times be able to play one country against another, or a
government may be able to do the same with international firms. When in a relatively weak
position, companies or countries may be able to join together in a consortium to present a united
front when dealing with the previously more powerful entity.
Petroleum
The Aramco case at the beginning of the chapter offers a good example of how companies have
banded together on one side and countries have joined forces on the other side. The unity has
strengthened both sides and at different points has helped to give advantages to one over the
other.
ANCOM
ANCOM, sought a common policy toward foreign capital, trademarks, patents, licenses, and
royalties. By unifying the policy the aims were to limit the role of MNEs and to prevent them
from serving all the member countries by locating in a country with less stringent regulations.
This attempt to get ANCOM members to adhere to the common stance has been less than
successful; nevertheless it contrasts to the approach of the European Community, which has not
had a common policy. When France wished to restrict the growth of MNE penetration within its
market by withholding ownership permission, that country was helpless. MNEs could serve the
French market through production in Belgium, Ireland, or Spain, where they were welcome.
Arab Boycott
In the Arab boycott efforts have been made to weaken Israel by boycotting purchases of Israeli
goods and by refusing to do business with firms that sell strategic tools and certain resources to
Israel. This is a loose agreement among participants rather than a highly structured agreement;
the looseness of the boycott is in some ways a strength in that it has allowed Arab countries to
buy from some firms selling to Israel when they desperately needed the goods themselves. The
prevention of trade between Israel and Arab states is not an unusual type of practice, nor does it
have much impact on MNEs. What is different about this arrangement is that it often forces
MNEs headquartered in other countries to make a choice of selling either in the Arab
countries’or in Israel, but not in both. (China at times has also retaliated by disallowing certain
business with a given country whose firms did sensitive business with Taiwan.) By banding
together, the Arab countries represent a very formidable market. Although it is impossible to
measure the precise impact of the boycott activities, the big difference in market size
undoubtedly has caused many MNEs to think twice about doing business with Israel.
A second distinguishing feature is the nature of a so-called secondary boycott. For example, Ford
Motor Company is boycotted by the Arab League. Ford was involved in negotiating a joint
venture in the United States with Toyota; however, Saudi Arabia threatened retaliation against
any firm that concluded a joint venture or production-licensing agreement with Ford. Since Saudi
Arabia was the world’s second-largest importer of Japanese cars, the Saudi warning had to be
considered seriously. Toyota subsequently broke off the negotiations with Ford but did not
indicate that the threatened boycott was a factor in the decision.
A third distinguishing feature for U.S. firms is that they are prohibited by the U.S. Export
Administration Act from providing information on their directors when registering operations in
Arab countries. Both Sara Lee and Safeway Stores received fines for breaking this law, even
though the information they provided was available from public sources. A fourth feature is that
U.S. firms are prohibited from terminating Israeli business in order to do business in Arab
countries, which brings up questions of motives. For example, Baxter International, a company
blacklisted by the Arab League, divested from Israel and signed a joint venture agreement in
Syria a year later. Baxter officials claim the Israeli move was made simply because of inadequate
financial performance; however, critics have contended that the motive was to gain the ability to
operate in Arab countries.
EXCHANGE: The Magazine for International Business and Diplomacy No. 1 September 2010
One of the major challenges for any business is communicating with government
bureaucrats responsible for enforcing all the rules and regulations that apply to the
operation of a business – both where the goods or services are produced and where they are
sold. In today’s global economy where production facilities and clients are located all around the world,
this is a special challenge and involves communicating across languages, cultures, and political systems.
How a government official applies a law or a regulation to a particular business or a particular transaction
can make a huge difference in what it costs the business to satisfy the regulatory requirements or in what
the business can sell to whom and for how much, and therefore the profits it can generate.
In order to be successful in business a manager therefore has to learn how to communicate effectively
with the officials involved, and to manage these relationships through skilled international commercial
diplomacy. Increasingly, managing the relationship with governments at an international level also
involves forming coalitions with business partners at home and abroad on particular regulatory issues,
and in some cases working with various stakeholders inside and outside of government to develop
standards that will satisfy business, social and other governmental objectives.
The globalization of production and markets is increasing the need for the development of global
regulatory standards, but the globalization of economic activity has outpaced the development of
institutions for global governance. This gap in global governance has put a greater responsibility on
business to work with stakeholders in developing the global standards needed for global production
platforms and global markets.
Successful international business diplomacy has to start with recognition that business and government
have different, but equally essential roles, to play in society. The role of business is to organize the
economic resources needed for the production of goods and services desired by consumers in the most
efficient manner possible. The role of government is to establish the regulations and standards necessary
to ensure that the production of these goods and services does not harm the environment, human health
and safety, the physical and social infrastructure, and other social values. Since there is usually more
than one way of achieving desired social objectives, and since business usually has a better
understanding of the product and production technologies involved, there is considerable space and need
for business and government to discuss how the legislated social objectives can be achieved in the most
economically efficient manner.
The first requirement of effective international business diplomacy is to perform a thorough and
comprehensive analysis of the particular regulatory or policy decision under review, including the
commercial and policy issues at stake, the legal ramifications, the stakeholder politics, the broader
macroeconomic implications, and public attitudes. A government decision maker needs to factor all of
these dimensions into a decision that will withstand potential challenges, and the best way of establishing
some common ground is by communicating to the official involved that you understand all the various
dimensions that need to be factored into a decision, and that you can contribute to the underlying analysis
of the issues and the potential solutions. Such an analysis requires at least rudimentary training in a
number of disciplines including economics, law and political science, beyond the various subjects taught
under a business management rubric.
The second requirement of effective international business diplomacy is to help build a consensus among
key stakeholders on the desired regulatory or policy decision. Aside from relatively minor adjustments in
the interpretation or implementation of a regulation to a particular transaction, the government official
involved in the decision you desire will require the support of other key stakeholders. A sure way to make
it easier for the official to agree with your proposal is to help build the required support from the other
stakeholders. Some of the most successful negotiation in international trade has followed extensive
international coalition building by the business community. What successful practitioners of business
diplomacy need to understand is that consensus and political support is as important to government
decision makers as profit is to decision makers in business.
Depending on the gravity of the issue and the number of directly affected stakeholders, building
consensus can involve as little as talking to a official in a number of departments with overlapping
jurisdictions, or as much as mobilizing international opinion leaders in business, government, academia
and civil society. Accomplishing the latter may require sponsorship of academic studies and round table
discussions, development of white papers, communiqués, press releases and proposals, and organizing
conferences, testifying at public hearings, and giving speeches.
A third requirement for successful international business diplomacy is to build a reputation for personal
integrity, product quality, and social awareness. A business leader’s reputation and the firm’s public
image is likely to have a considerable impact on the receptivity of both government officials and
stakeholders to requests and proposals.
One might well ask which business leader has the time to do all of that and run the business. The answer
is that this function has to be increasingly seen as part and parcel of successfully running a business, and
that the amount of time and resources devoted to this activity should be a function of its contribution to
reducing costs or increasing the revenues of the business. The cost to a business of failing in its
international diplomacy has been glaringly obvious in a number of recent cases.