International Business
by
Daniels and Radebaugh
Chapter 12
International Business
Negotiations and
Diplomacy
© 2001 Prentice Hall
12-1
Objectives
To show the common and conflicting interests between countries and
MNEs
To illustrate negotiations between business and government in an
international context
To trace the changing roles of home-country governments in settling
MNEs’ disputes with host governments
To clarify the role of companies’ public affairs and political behavior in
international business
To explain the position of companies and governments in the uneven
global enforcement of intellectual property rights
© 2001 Prentice Hall
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Introduction
Operating terms of international companies
• Are influenced by governments of home and host countries
• Shift as priorities shift and as strengths of parties change
Negotiation of operating terms is where business-government
relationships become difficult
• Governments may refuse companies original or continued
operating permission
• Companies will not operate unless their terms of business are
favorable
© 2001 Prentice Hall
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Home- and Host-Country Influences on Companies’ Use of FDI
OPERATIONS
Business/government
negotiations
OBJECTIVES
STRATEGY
Governmental
enhancements
and restrictions
OPERATING
TERMS
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Governmental versus Company Strength in Negotiations
Hierarchical view of governmental authority
• Governments have regulations affecting international business
• Companies accept regulations as “givens”
– will comply, circumvent, or avoid regulations
Bargaining view
• MNEs and host countries have mutually useful assets
• Bargaining school theory—negotiated terms for a foreign
investor’s operations depend on how much the investor and host
country need each other’s assets
• Alternative sources for acquiring resources affect company and
country bargaining strengths
• Bargaining relationship depends on perception of it as zero-sum
game
© 2001 Prentice Hall
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Governmental versus Company Strength in Negotiations
(cont.)
Bargaining view (cont.)
• Country bargaining strength—based on size of markets and
political stability
– incentives appealing if they fit companies’ corporate
strategies and government has credibility to fulfill its promises
• Company bargaining strength—varies by industry
– type of bargain struck depends on the number of companies
offering similar resources
– company likely to gain a high percentage of ownership in
foreign operations when they control certain types of assets
» technology
» marketing expertise
» ability to export output
» local product diversity
© 2001 Prentice Hall
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Governmental versus Company Strength in Negotiations
(cont.)
Joint company activities—countries encourage domestic companies to
consolidate to counter dependence on foreign companies
• Companies from different countries invest jointly to improve later
negotiations
– government may be hesitant to deal simultaneously with
more than one home government
Home-country needs—achieve economic objectives
• Provides incentives or imposes restrictions to gain its due share
of rewards
• Home- or host-government’s influence on MNE tempered by
political interests and relations of the two governments
• When economic and political stakes are high, companies’ home
governments help them negotiate
© 2001 Prentice Hall
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Governmental versus Company Strength in Negotiations
(cont.)
Other external pressures on negotiation outcomes
• Decision makers in business and government must consider
opinions of other affected groups
– governments are particularly constrained
» local companies
» political opponents
– companies face pressure from a variety sources
» stockholders
» workers
» consumers
» governmental officials
» foreign groups
© 2001 Prentice Hall
12-8
Negotiations in International Business
Negotiations—means by which a company may initiate, conduct,
or terminate operations in a foreign country
• Used to establish terms for direct investment and other
operating arrangements
• Home- and host-country governments may negotiate loans,
investment guarantees, and overall economic and political
relationships
• Interrelated negotiations
Government-Company
© 2001 Prentice Hall
12-9
Negotiations in International Business (cont.)
Bargaining process
• Acceptance zones
– begins with an array of proposals
» some proposals are used as a basis of compromise or
as tokens
– agreement occurs only if there are overlapping acceptance
zones
• Range of provisions
– domestic and foreign negotiations vary in degree
– governments vary negotiating agendas toward foreign
investors
– most governments offer investment incentives to attract
MNEs
– companies agree to many performance requirements
intended to help countries achieve economic and
noneconomic objectives
© 2001 Prentice Hall
12-10
Acceptance Zones in Negotiating
a) No overlap in acceptance zones
0
100
Company’s acceptable ownership 51% to 100%
49 51
100
75
51 49
Government’s acceptable ownership 51% to 75%
0
b) Overlap in acceptance zones
0
100
Company’s acceptable ownership 25% to 100%
100
49
25
75
51
Government’s acceptable ownership 51% to 100%
© 2001 Prentice Hall
0
12-11
Negotiations in International Business (cont.)
Renegotiations—terms for continued operations may be rebargained
• Company has greatest bargaining strength before it makes
investment in a foreign country
• Theory of the obsolescing bargain—erosion of MNE’s bargaining
strength
– after capital and technology transferred abroad, and foreign
nationals have been trained to direct operations, parent
company needed less
– company that is responsive to local economy can maintain or
improve its bargaining position by offering additional
resources needed by host country
– host country becomes less attractive as a place for
investment if it pushes too hard on foreign companies
© 2001 Prentice Hall
12-12
Behavioral Characteristics Affecting Negotiations
Cultural factors—cultural differences may lead to misunderstandings and
mistrust
• Areas of possible misunderstanding include:
– individualistic versus collectivist societies
– low-context versus high-context cultures
– pragmatist versus idealistic cultures
– high- versus low-trust societies
– monochronic versus polychronic cultures
– differences in the importance of punctuality
Language factors—difficult for negotiators to find words to express their
exact meaning in another language
• Use of interpreters prolongs negotiations
– cultural factors determine whether interpreters are
acceptable
© 2001 Prentice Hall
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Behavioral Characteristics Affecting Negotiations (cont.)
Culturally responsive strategies—negotiators from different cultural
backgrounds do not necessarily behave according to their culture’s
norms
• Counterpart may be an exception to the norm
• Counterpart may know the other’s culture and be adaptive to it
• Five strategic responses possible for negotiating with a foreign
counterpart
Professional conflict—differences in professional status between
business and governmental negotiators may create conflict
• Time required for each to understand and appreciate other’s point
of view
• Possible that neither will attempt to develop a relationship
designed for long-term objectives
© 2001 Prentice Hall
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Culturally Responsive Strategies and Their Feasibility
Counterpart’s familiarity with
negotiator’s culture
High
1. Induce
counterpart
to follow one’s
own script
5. Improvise
an approach
(effect
symphony)
4. Adapt to the
counterpart’s
script (coordinate
adjustment of
both parties)
Medium
3. Employ agent
or advisor
(involve
mediator)
Low
Low
2. Follow
counterpart’s
script
Medium
High
Negotiator’s familiarity with
counterpart’s culture
© 2001 Prentice Hall
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Behavioral Characteristics Affecting Negotiations (cont.)
Termination of negotiations—settlement deemed impossible
• Method of cessation of negotiations is important
– may affect future negotiations
– tendency to blame other for failure of talks
– both parties should be allowed to save face
Preparation for negotiations—role-playing
• Negotiators better able to anticipate responses and plan their own
actions
• Hard to simulate stress-related characteristics of negotiations
• Location of negotiations may give one side an advantage in
bargaining
© 2001 Prentice Hall
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Home-Country Involvement in Asset Protection
Companies concerned that foreign countries will appropriate their assets
• Urge home-country governments to intercede on their behalf to
protect these assets
• International standard of fair dealing—host governments should
give foreign investors prompt, adequate, and effective
compensation
• Shift in host-countries’ priorities toward attracting FDI rather than
expropriating it
– less concern among home countries about the need for
intervention to protect investors
Dependencia theory—emerging economies have practically no power as
host countries when dealing with MNEs
• Home countries need not rely on military threats
– use trade pressures, aid, and influence with international
lending agencies
© 2001 Prentice Hall
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Home-Country Involvement in Asset Protection (cont.)
Use of bilateral agreements—improve foreign investment climates
• Provide home-country insurance to investors
– agree to settle investors’ losses on a government-togovernment basis
• Other types of bilateral agreements include treaties of friendship,
commerce, and navigation as well as prevention of double
taxation
• Multilateral agreements and settlements: FDI and trade—disputes
handled by a neutral country or group of uninvolved countries
• Government-to-government trade disputes largely handled by
World Trade Organization (WTO)
• International Center for Settlement of Investment Disputes—
arbitration center
• NAFTA tribunal handles regional disputes
© 2001 Prentice Hall
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Home-Country Involvement in Asset Protection (cont.)
Multinational agreements: Intellectual property rights (IPRs)—cover both
industrial property and artistic property
• Countries differ in their protection of IPRs
– emerging countries offer less protection
– even with similar levels of protection, countries differ in their
approaches
• Patents—Paris Convention
– current cross-national protection of patents achieved through:
» Patent Cooperation Treaty (PCT)
» European Patent Convention (EPC)
» European Economic Community Patent Convention
– patent-infringement battles are costly, complex, and hard to
prove
© 2001 Prentice Hall
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Home-Country Involvement in Asset Protection (cont.)
Multinational agreements: IPRs (cont.)
• Trademarks—protects brand names
– some brand names have entered public domain
– Trademark Registration Treaty—offers cross-national
protection of trademarks
• Copyrights—protect published and recorded materials
– Universal Copyright Convention and Berne Convention—
major cross-national agreements
• Piracy—production without consent of the firm holding the patent,
trademark, or copyright
– manufacturers’ associations created to deal with piracy
– WTO—taken over administration of international property
rights
– companies taking steps to limit piracy
© 2001 Prentice Hall
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Collective Actions to Deal with International Companies
Actions of MNEs a cause for concerns for governments
• League of Nations—first attempt to regulate international
companies on multilateral basis
• U.N. Center on Transnational Corporations
– collects information on MNE activities
– a forum for publicizing common complaints
• Organization for Economic Cooperation and Development—
approved a code of conduct
• Nongovernmental organizations and industry associations have
instituted codes dealing with specific practices
• U.S. issued voluntary code for foreign operations of American
companies
© 2001 Prentice Hall
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Corporate Citizenship and Public Relations
Companies publicize good-citizenship activities
• Business conduct that satisfies social objectives
• Nonbusiness functions that help society
MNEs under conflicting pressures from different groups
• MNE responses often perceived as defensive
Companies work to increase the number of supporters
• Use advocacy-publicity to win support for international activities
Companies mitigate criticism by:
• Permitting local managers to determine policies
• Consulting with stakeholders about employment
• Foster participation that develops local proponents
• Take on additional social functions
MNE may have to be uncompromising with government
© 2001 Prentice Hall
12-22