IB Diplomacy

8/6/2019 IB Diplomacy

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Introduction international business diplomacy

Case of Oil Diplomacy

Saudi Arabia has one quarter of the worlds known reserves and is the largest exporter andsecond-largest producer (after the former Soviet Union) of petroleum. By the early 1990s onecompany, Aramco, accounted for over 90 percent of the Saudi production and more than doublethe output of the two next-largest oil firms in the world, Royal Dutch Shell and Exxon. Aramcosownership, policies, and division of earnings from the outset have depended on interactionsamong: (1) the private oil companies participating in Aramco, (2) the U.S. government, and (3)the Saudi government. As the objectives and power of these three parties have evolved, so havethe operations of Aramco. To understand these changing relationships, we will review someevents that preceded Aramcos first oil output in 1939.U.S. policy toward U.S. oil firms historically has seemed contradictory because governmentalobjectives have involved trade-offs as well as changing priorities among the objectives. U.S.objectives have included preventing domestic monopolistic practices by oil firms, ensuring

sufficient and cheap oil supplies for U.S. needs, and strengthening the U.S. political position instrategic areas worldwide. On the one hand, U.S. action dismembered the Standard Oil Trust inorder to stimulate domestic competition; on the other hand, the U.S. government allowed, evenencouraged, joint actions abroad by oil firms when those actions would help achieve the lattertwo objectives.At least as far back as 1920 the United States realized that in the long run its domestic oilsupplies would be insufficient. In the short term, though, worldwide oil supplies could not easilybe sold as rapidly as they could be produced. In this environment, U.S. oil firms were in aposition to serve both U.S. and Middle East interests. In the 1920s and 1930s the U.S.government wanted U.S. oil companies to gain concessions in the Middle East with the resultthat representatives of the industry were called to Washington and told to go out and get it.

Concessions would help assure a long-term U.S. supply,and an American presence would weaken the relative positions of the British and the French. TheU.S. firms were welcomed in the Middle East as competitors to Shell Oil Company, BritishPetroleum (BP), and Compagnie Franchise des Petroles (CFP) from Britain and France. Theyalso were welcomed because they offered some sales in the United States that would otherwisebe impossible. During the 1920s and 1930s some of the U.S. oil companies also made secretarrangements abroad that proved unpopular with the U.S. public. For example, Exxon (formerlycalled Esso, or Standard Oil of New Jersey) agreed with BP and Shell to a system of world pricesbased on the U.S price of oil . Exxons chief executive was forced to resign in 1942 afterexposure of his restrictive agreements with the I. G. Farben Company, a major participant inHitlers World War II efforts. In situations such as these, the oil companies were not acting as

instruments of American foreign policy as they were originally conceived to do; instead, theywere acting independently of any government. Later they were accused of becoming captive toMiddle Eastern Arab policies.The first two companies to participate in Saudi Arabian oil production were Socal (Standard Oilof California) and Texaco, which formed a joint venture and negotiated large concessions. TheU.S. government had no representatives in Saudi Arabia at this time, and the two companiesconducted some quasi-official diplomacy that continued throughout World War II. Theyorganized construction of a pipeline to the Mediterranean in 1945 and received permission from


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the U.S. government to use steel, which was in very scarce supply. In 1948 Exxon and Mobiljoined the original Socal and Texaco in what became known as Aramco. Mobil owned 10percent, and each of the others held a 30 percent interest.These four firms, along with three others (Gulf, Shell, and BP), were known as the Seven Sisters.Before the 1970s they collectively controlled such a large share of the worlds oil from multiple

sources that they were nearly invulnerable to the actions of any single country. By 1950 theUnited States was entrenched in the cold war, and although it held military supremacy over theformer Soviet Union, the Truman Administration wished to maintain cordial relationships withstrategic countries. When King ibn-Saud demanded substantial revenue increases from Aramco,the U.S. government became directly involved in the negotiations. A plan was devised in 1951whereby the oil companies would maintain their ownership but would pay 50 percent ofAramcos profits as taxes to Saudi Arabia. The companies then could deduct those taxes fromtheir U.S. tax obligations so that, in effect, the increase in revenue to Saudi Arabia was entirelyat the expense of the U.S. Treasury.In 1952 Saudi Arabia learned from Irans experience what might happen if demands on Aramcowere pushed further. Iran expelled Shah Reza Pahlevi and nationalized British oil holdings. All

major oil companies boycotted Iranian oil and brought the Mossadegh government to the brinkof economic collapse. With CIA support, the Shah returned, and the Seven Sisters shared in 95percent of the ownership of the new Iranian oil company.Both Presidents Eisenhower and Kennedy proclaimed the importance to U.S. foreign policy ofthe oil firms Middle East activities and intervened to prevent antitrust action against them intheir joint dealings abroad. In addition to preventing Soviet entry in the Middle East, the UnitedStates was able to sidestep certain Arab-Israeli conflicts by being publicly pro-Israel and havingthe Aramco partners perform most of the direct interactions with Saudi Arabia. Saudi Arabia wasunhappy with U.S. policies toward Israel but could not influence them.When the Seven Sisters gained 95 percent of the Iranian oil holdings, the other 5 percent went tosmaller independent U.S. companies that previously had depended on the Seven Sisters forsupplies. This marked the beginning of greater competition among distributors; it also meant thatcountries could make agreements with the independents to gain a greater portion of the spoils.Yet as late as 1960 the producing countries were still unable to prevent the major firms fromunilaterally abrogating concessions by reducing the price they paid for oil. This price decrease,which reduced government revenues of petroleum exporting countries, led to a meeting inCaracas of five governments and the resultant formation of the Organization of PetroleumExporting Countries (OPEC). OPECs purposes were to prevent companies from unilaterallylowering prices, to gain a greater share of revenues, and to move toward domestic rather thanforeign ownership of the assets. Still, in the early 1960s OPEC lacked the power to flex itsmuscles.In the 1960s three new trends weakened the Seven Sisters and strengthened Saudi Arabiasposition in Aramco. First, there was continued emergence of other oil companies that madeconcessions in countries previously not among the major suppliers, such as Occidental in Libya,ENI in the former Soviet Union, and CFP in Algeria. These smaller companies lacked the SevenSisters diversification of supplies and thus were less able to move to other supply sources if acountry tried to change the terms of agreement unilaterally.Second, because of rapidly expanding industrial economies, oil demand was growing faster thansupply; the earlier oil glut was quickly becoming an oil squeeze. Not even the Seven Sisterscould afford any longer to boycott major supplier countries as they had earlier boycotted Iran.


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Third, there was a lessened threat of military intervention to protect oil investors. The failure ofthe United States to support the abortive efforts of the British and French to prevent the Egyptiantakeover of the Suez Canal demonstrated that the major Western powers were unlikely to unifytheir efforts. Although it had invaded Lebanon successfully in 1958, the United States was lessprone to intervene again in the Middle East because the Soviet Union had grown stronger since

1958, thus presenting a greater risk of a major war resulting from intervention. The United Statesalso was increasing its military involvement in an unpopular war in Vietnam, so it was less ableto lend military support to its oil firms in the Middle East.In 1970 Muammar el-Qaddafi of Libya demanded increased prices from Occidental. SinceOccidental was almost completely dependent on Libya for crude, the company relented. Qaddafithen confronted the major firms that no longer had sufficient alternative supplies and gainedconcessions from them as well. Libyas success was noted in other countries, which used OPECto further strengthen their negotiating positions by dealing collectively with the oil firms. TheTeheran Agreement of 1971 immediately increased prices. The embargo by Arab OPECmembers in 1973 demonstrated that they had sufficient power to impose further economicdemands and to

cause Western powers to modify their political positions, particularly in relation to Israel. OPECnow had eleven members and controlled about 93 percent of the worlds oil exports.As the largest OPEC producer, Saudi Arabia has been able to utilize its new-found strengths inseveral ways. Between 1972 and 1980 the government of Saudi Arabia bought a 100 percentownership in Aramco operations. As smaller firms gained a larger share of the world oil salesand as national governments in Sweden, the former West Germany, Japan, and France beganbuying directly from oil-producing countries, Saudi Arabia has increased the number ofcustomers for its crude from the original four Aramco partners.How has Aramcos government-owned status affected Exxon, Texaco, Socal, and Mobilsoperations in Saudi Arabia? The companies have been able to exploit their many assetssuccessfully in order to maintain a profitable presence vis-a-vis Saudi Arabia. They have realizedthat Saudi Arabias increased oil revenues enable the Saudis to be a lucrative customer; they alsoknow that Saudi Arabia is closely allied to the West, particularly the United States, on whom itdepends for technical and defense assistance.The four oil companies continue to help manage the Saudi oil industry because they can makecontributions that the Saudis cannot acquire easily from other sources. As the major employerbefore government purchase into Aramco, the American partners had demonstrated an ability toattract qualified personnel from abroad, to train Saudis, and to run an efficient operation. AsAramco has expanded and moved into new activities, the oil firms have been able to continuethese efforts through lucrative contract arrangements. For example, in 1990 Mobil was a jointventure partner in a refinery and a petrochemical complex with the Saudi government, eachworth over $1 billion. By 1991 about 12,000 (one quarter) of Aramcos employees were non-Saudi workers, but foreigners had been replaced in nearly all top managerial positions. Therewas a near consensus that foreigners would be needed in increasingly technical positions, such asin finding and extracting oil, but engineering firms, such as Bechtel and Fluor, were competingwith the oil firms for major contracts.The oil firms contributions to Aramcos success thus include some continued day-to-daymanagement, the contracting of foreign workers, the infusion of technology, the training of Saudipersonnel, and the marketing of crude oil exports when sales are not made directly to a foreigngovernment. The marketing contribution took on more importance in the late 1980s, when there


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was a glut brought about by new supplies (e.g., from Mexico) and decreased demand. To ensurefuture sales, in 1988 Aramco entered a joint venture by buying a 50 percent interest in Texacosrefining assets and marketing system in 23 U.S. states. However, in 1990 Saudi Arabias futureability to supply petroleum was brought into question when Iraq occupied Kuwait and amassedits armed forces on the Saudi Arabian border. The

threat to Saudi oil supplies was an important factor in the U.S. decision to push for the UnitedNations 1991 liberation of Kuwait.The oil firms also have been important in molding U.S. foreign policy through lobbying andadvertising campaigns that proclaim, We would like to suggest that there is only one realisticpossibility: that the United States adopt a neutral position on the Arab-Israeli dispute and a pro-American rather than a pro-Israel policy in the Middle East. Given these contributions to SaudiArabia, the oil companies have been able to sell their Aramco interest at prices reported to beabove the net book value of assets. They have successfully secured a continued source of crudeoil, although sometimes at a contract price above the world spot price, and have profited frommanagement and technical contracts.In the aftermath of Kuwaits liberation, the future strength of the Seven Sisters is in question.

The destruction of oil facilities in Iraq and Kuwait may make consumers (including the oil firms)even more dependent on Saudi oil, thus strengthening the Saudi governments power inrelationship to consumers. But there was no shortage of world oil during the war with Iraq. Atthe same time, the growing dependence of Saudi Arabia on U.S. military assistance might lead tomore government-to-government negotiations, thus bypassing the Seven Sisters.The Aramco case illustrates that the terms under which companies operate abroad are greatlyinfluenced by both home- and host-country policies and that the terms change over time asgovernmental priorities shift and the relative strengths of the parties evolve. The relativestrengths were shown to be affected by such factors as competitive changes, the resources thatparties have at their disposal, validating public opinion, and joint efforts with other parties.Companies foreign operations may have diverse effects on home and host countries, but there issubstantial disagreement as to what these effects are and how to deal with them. There is,however, agreement on the point that governments and businesses frequently attempt to followconflicting courses. In fact, a discord, if carried to the extreme, may result in a cessation of theparticular business-government relationship, as either (1) firms refuse to operate in the locale, or(2) governments refuse to grant original or continued operating permission. Short of the extremeare practices that, although not deemed ideal by either party, nevertheless are sufficientlysatisfactory to permit an evolving relationship. This chapter examines the means by whichinternational businesses and governments attempt to improve their own positions vis-a-vis oneanother.


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CaseAircraft Business: A case of heavy diplomacy

US diplomats have on several occasions intervened to convince foreign governments to buyaircraft from Boeing rather than its European rival Airbus, newly released diplomatic cables

show.

The cables, obtained by theNew York Times from the whistleblower website WikiLeaks,document several incidents in which diplomats were involved in haggling over the billion-dollardeals seen as key to US economic growth.

In another incident, Bangladesh's Prime Minister Sheikh Hasina demanded landing rights for itsnational carrier at New York's John F. Kennedy International Airport as a condition for a Boeingdeal.

"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 landingrights, the Times said.

The Times said such practices have continued despite decades-old agreements between US andEuropean leaders to keep politics out of airline deals.

But State Department officials interviewed by the newspaper defended their involvement, sayingsuch high-value exports were crucial to US President Barack Obama's efforts to pull the countryout 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 Bushadministration and French President Nicolas Sarkozy's government scrambling to win a jet dealfrom oil-rich Bahrain in 2007.

In the end, US diplomats convinced Bahrain to buy from Boeing after linking the signing of thedeal to an upcoming visit by Bush in January 2008, the first-ever by a sitting US president, the

Times said.


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International Business Diplomacy

Venturing into new markets should begin with understanding the universe of opportunities andexternalities 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 governmenthave different, but equally essential roles, to play in society. The role of business is to organize theeconomic resources needed for the production of goods and services desired by consumers in the mostefficient manner possible. The role of government is to establish the regulations and standards necessaryto ensure that the production of these goods and services does not harm the environment, human healthand safety, the physical and social infrastructure, and other social values. Since there is usually more thanone way of achieving desired social objectives, and since business usually has a better understanding ofthe product and production technologies involved, there is considerable space and need for business andgovernment to discuss how the legislated social objectives can be achieved in the most economicallyefficient manner.

NEGOTIATIONS IN INTERNATIONAL BUSINESS

Increasingly, negotiations are used as a means of deciding the terms by which a company may function orterminate operations in a foreign country. At one time these negotiations prevailed only for directinvestments; more recently, however, they have sometimes been extended to other operatingarrangements, such as licensing agreements, debt repayment, and large-scale export sales. Although thefollowing discussions highlight investment negotiations, most of the points apply to otherforms of operations as well. The negotiation process often leads to two-tieredbargaining: An MNE must first come to an agreement with a local firm in order to purchase an interestin it, sell technology or products to it, or loan money to it; once that accordance is set, a governmentalagency may approve, disapprove, or propose an entirely different set of terms. Even when the governmentis not directly involved in a negotiation, its needs may be taken into consideration by the participants.

Bargaining Process


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Acceptance Zones

Before becoming involved in overseas negotiations, a manager usually will have some experience in adomestic 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 withanother firm, usually start with an array of proposals from both sides, just as in negotiations with aforeign 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 onthe part of the other, as well as face-saving devices, which allow either side to report to interested partiesthat it managed to extract concessions. On certain other points, it is unlikely that compromise can bereached. 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 additionalholiday, may be the economy as a whole, the industry, the local area, or recent company experienceelsewhere. Abroad, what has transpired recently between other companies and the government or betweensimilar types of companies or the same firm in similar countries may serve as a common reference, andnegotiations are not likely to stray too far from established precedent. Finally, there are zones ofacceptance and non-acceptance on the proposals presented. If the acceptance zones overlap, there is apossibility 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 Japaneseinsisted on 51 percent local ownership, there would be no zone in which to negotiate. If, on the otherhand, Chrysler insisted on a controlling interest in Mexico but would take as much as it could get, andthe Mexicans required substantial local capital and wanted to maximize it, there would probably be awide zone of ownership that would be acceptable to both parties. Assume that Chrysler is willing to go aslow as 25 percent and the Mexican government will let Chrysler go as high as 90 percent, the acceptancezone is 25-90 percent for Chryslers ownership. The final decision will be based on the negotiating abilityof each company, their strengths, and other concessions that each makes in the process. Since each sidecan only speculate on how far the other is willing to go, the exact amount of ownership may fallanywhere within the overlapping acceptance range. Even after an agreement is reached, it is uncertainwhether the maximum concessions have been extracted from the other party.

ProvisionsThe 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 provisionsunheard of in the home country, such as a negotiated tax rate. Likewise, governments vary widely in theirattitudes toward foreign investors; therefore, their negotiating agendas also vary widely.Most countries in recent years have given incentives to attract foreign investors. These incentives areusually available to local firms as well; however, local firms often may lack the resources to be in astrong 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 Europeangovernments. The company finally decided on Ireland, whose government agreed to pay for employeetraining, 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 toaccept employers work conditions tranquilly. When companies negotiate to gain concessions from aforeign 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 inorder to gain access to cheap labor. Second, the output from the foreign facility may be subject to claimsof dumping because of the subsidies given by the host government (e.g., Toyota forgoing Britishgovernmental assistance for fear that other EC countries would not as readily allow its sales). Third, it


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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-exchangedeposits 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 localinputs into products manufactured, limits on the use of expatriate personnel and on old or reconditionedequipment, control on prices for goods imported or exported to controlled entities of the parent firms, anddemands to enter into joint ventures.

HOME-COUNTRY INVOLVEMENT IN ASSET PROTECTION

The Historical Background

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 ofexpropriation, a concept known as the international standard of fair dealing. The host countrieshad little to say about this standard. As late as the period between the two world wars, the UnitedStates on several occasions sent troops into Latin America to protect investors property. The1917 Soviet confiscations without compensation of Russian and foreign private investment ledthe way to non coercive interference by home countries in cases of expropriation. In conferencesattended by developing countries at The Hague in 1930 and at Montevideo in 1933, participantsconcluded a treaty stating that foreigners may not claim rights other or more extensive thannationals. On the basis of this doctrine, Mexico used its own courts in 1938 to settle disputesarising from expropriation of foreign agricultural properties in 1915. This same doctrine formedthe 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 Egypts takeoverof the Suez Canal, there has been no major attempt since World War II at direct militaryintervention to protect property of home-country citizens. (There have been, however, threatenedor actual troop movements by large powers to developing countries during this period. Propertyprotection possibly was a surreptitious factor in the movements.) The concept of noninterventionhas been strengthened by a series of UN resolutions. A secondary factor has been that mostexpropriations have been selective rather than general, that is, involving a few rather than allforeign firms. In these cases it is thought that intervention might lead to further takeovers andjeopardize settlements for affected foreign firms.

The Use of Bilateral Agreements

To improve the foreign investment climates for their investors, many industrial countries haveestablished bilateral treaties with foreign governments, often as a result of long and difficultnegotiations. Although these agreements differ in detail, they generally provide for home-country insurance to investors to cover losses from expropriation, civil war, and currencydevaluation or control and to exporters to cover losses from nonpayment in a convertiblecurrency. The recipient country, by approving a contract, agrees to settle payment on a


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government-to-government basis. In other words, Gillette could insure its Chinese investmentagainst expropriation because of the bilateral agreement between the United States and thePeoples Republic of China. If China expropriated Gillettes facilities, the U.S. governmentwould pay Gillette and then seek settlement with China. Other types of bilateral agreementsinclude 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 notnormally provide a mechanism for settlement. The host governments simply may lack thefinancial resources to settle in an appropriate currency, for example. Even if they have theresources, it is unclear whether the amount of payment should be settled in local courts, inexternal courts, or through negotiations. Many recipient countries resist treaties because theyimply the abrogation of sovereignty over business activities conducted within their borders andprovide more protection for alien property than for that of their own citizens. Another problem isthat the agreements do not protect against gradual changes in operating rules, which can reducesubstantially the profit of foreign operations. Revere Copper and Brass, for example, was forcedby 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 hostcountry, they may agree to have a third party settle the dispute. In cases of trade disputes, theInternational Chamber of Commerce in Paris, the Swedish Chamber of Commerce, andspecialized commodity associations in London frequently are asked to assist the parties. Sincethe trade transactions are generally among private groups, the disputes do not create the type ofwidespread 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 overactivities within their own borders. Among the notable uses of external organizations have beenthe World Banks agreement to arbitrate the compensation and to act as transfer agent forpayments involving the Suez Canal nationalization. Another involved a World Bank nonbindingarbitral award that was accepted by both French bondholders and the City of Tokyo. TheInternational Center for Settlement of Investment Disputes operates under the auspices of theWorld 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 1974Jamaica refused to use the center after seizing foreign bauxite holdings, although the investorsand the Jamaican government had agreed in earlier years to use the center in case of disputes. Asyet there is no effective means of imposing international law on nations; however, as a result of

the centers failure to offer potential investors sufficient confidence about LDCs, the World Bankestablished the Multilateral Investment Guarantee Agency in 1988. This agency offers insuranceagainst 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 hadlarge amounts of investments in the others territory. In fact, when the two governments frozeeach others assets, Iran had substantially more invested in the United States than the UnitedStates had in Iran. The two countries agreed to appoint three arbitrators each to an international


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resolving these problems.A number of other bodies have been established by the UN, some dealing with issues relating toMNEs. Two such groups are the United Nations Conference on Trade and Development(UNCTAD) and the International Sea-Bed Authority. UNCTAD, has been especially active indealing 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 thatbegan in 1973, is aimed at determining coastal water rights and setting policy on the exploitationof 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 LaborOrganization, the International Monetary Fund, and the World Intellectual PropertyOrganization.

CONSORTIUM APPROACHES

As mentioned earlier, a company may at times be able to play one country against another, or agovernment may be able to do the same with international firms. When in a relatively weakposition, companies or countries may be able to join together in a consortium to present a unitedfront 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 havebanded together on one side and countries have joined forces on the other side. The unity hasstrengthened both sides and at different points has helped to give advantages to one over theother.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 themfrom 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 thansuccessful; nevertheless it contrasts to the approach of the European Community, which has nothad a common policy. When France wished to restrict the growth of MNE penetration within itsmarket by withholding ownership permission, that country was helpless. MNEs could serve theFrench 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 Israeligoods and by refusing to do business with firms that sell strategic tools and certain resources toIsrael. 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 tobuy from some firms selling to Israel when they desperately needed the goods themselves. Theprevention of trade between Israel and Arab states is not an unusual type of practice, nor does ithave much impact on MNEs. What is different about this arrangement is that it often forcesMNEs headquartered in other countries to make a choice of selling either in the Arabcountriesor in Israel, but not in both. (China at times has also retaliated by disallowing certainbusiness with a given country whose firms did sensitive business with Taiwan.) By bandingtogether, the Arab countries represent a very formidable market. Although it is impossible to


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Summary

Although host countries and international firms may hold resources that, ifcombined, should achieve objectives for both, conflict may cause one or both parties to withholdresources, thus preventing the full functioning of international business activities. Both the managers of international firms and the host-country governmental officials mustrespond to interest groups that may see different advantages or no advantage at all to thebusiness-government relationship. Therefore, the final outcome of the relationship may not bethe one expected from a purely economic viewpoint. Negotiations increasingly are used to determine the terms under which a company may operatein a foreign country. This negotiating process is similar to the domestic processes of companyacquisition and collective bargaining. The major differences in the international sphere are the

much larger number of provisions, the general lack of a fixed time duration for an agreement,and the need to agree on company property values in cases of nationalization. The terms under which an international firm may be permitted to operate in a given countrywill be determined to a great extent by the relative degree to which the company needs thecountry and vice versa. As the relative needs evolve over time, new terms of operation willreflect the shift in bargaining strength. Generally, a companys best bargaining position is before it begins operation. Once resourcesare committed to the foreign operation, the firm may not move elsewhere easily. Since negotiations are conducted largely between parties whose cultures, educationalbackgrounds, and expectations differ, it is very difficult for negotiators to understand sentimentsand present convincing arguments. Negotiation simulation offers a means of anticipating

responses and planning an approach to the actual bargaining. Historically, developed countries ensured through military intervention and coercion that theterms agreed upon between their investors and recipient countries would be carried out. TheEast-West political schism and a series of international resolutions have caused the near demiseof these methods for settling disputes. The promise of giving or withholding aid has been usedmore recently by developed countries as a device for influencing host governments. A number of bilateral treaties have been established whereby host countries agree tocompensate investors for losses from expropriation, civil war, and currency devaluation orcontrol. These agreements are not often clear about the mechanism or place of settlement for thelosses. Although international organizations or groups in third countries are frequently used toarbitrate trade disputes among individuals from more than one country, this method has beenused very rarely to settle investment disputes, because governments are reluctant to relinquishsovereignty over matters occurring within their borders. To prevent companies from playing one country against another or vice versa, groups ofgovernments or companies occasionally have banded together to present a unified front in orderto improve the terms received. External relations may be used by both companies and countries to develop a good image,overcome a bad one, and create useful proponents for their positions. If successful, this strategy


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may result in better terms of operation for either side. International agreements have been made to protect important intangible assets such as patents,trademarks, and copyrights. Since millions of dollars are often spent in the development of theseassets, worldwide protection is a necessity. One of the big problems for firms with intangible assets in recent years has been the pirating of

the assets in countries that have not signed international agreements or do not actively enforcetheir laws on the asset protection.

Running and International Business Requires Effective

International Business DiplomacyGeza Feketekuty

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 todays 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.

Skillful business diplomacy

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
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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.

Documents

IB Diplomacy