Chapter 12

International Business Negotiations and Diplomacy





!          Show the common and conflicting interests between countries and MNEs.

!          Illustrate negotiations between business and government in an international context.

!          Trace the changing roles of home-country governments in settling MNE’s disputes with host governments.

!          Clarify the role of companies’ public affairs and political behavior in international business.

!          Profile the major types of intellectual property.

!          Explain the positions of companies and governments in the uneven global enforcement of intellectual property rights.



Chapter Overview


Business-government relationships become much more complicated when negotiations are involved. Chapter 12 explores the dealings between MNEs and governments and examines the ways in which they strike agreements and how those agreements may change over time. It begins with a comparison of the relative strengths of each party and discusses the behavioral factors that will surely affect the progress of the negotiation process. It then discusses the involvement of home country governments in asset protection issues, including expropriations and intellectual property rights. The chapter concludes with an examination of the various ways firms and governments seek to improve their positions in dealing with each other.



Chapter Outline


OPENING CASE: Saudi Aramco [See Map 12.1]

This case explains how power ebbs and flows between nations and oil companies in response to changing economic, social and political situations. Saudi Arabia’s state-owned oil company, Saudi Aramco, is the largest in the world in terms of sales, production and reserves, and it ranks third in refining. Originally begun as a joint venture in the 1930s by Standard Oil of California and Texaco, who were subsequently joined by Exxon and Mobil in 1948, Aramco was unilaterally bought out by the Saudi government during the 1970s. The company then set about replacing its foreign management with Saudi management and generally decreased its dependence upon its former owners. In the late 1990s, however, economic events pushed crude oil prices to a record low, causing Saudi Aramco to cut spending on its upgrading and expansion projects, delay downstream expansion at overseas sites and lay off 8,000 workers. Subsequently, the Saudi Crown Prince reversed the policy prohibiting foreign ownership and invited the international oil companies back into Saudi Arabia. As the 21st century dawned, Saudi Aramco’s CEO commented, “The realities of the business world have changed, and we have to adjust.”


Teaching Tip: Review the PowerPoint slides for Chapter 12 and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, review the figures in the text. Also, note the reference to the CultureQuest video at the end of the chapter’s closing case. Finally, consider taking time to use the Foreign Investment Simulation Negotiation from R. Moxon Publishing; see Additional Exercise 12.3 for a description of the simulation and the web address.


I.                   INTRODUCTION

Negotiation is a process for executing mutually desirable transactions, or for resolving disagreements, through one or more meetings at which attempts are made to reach consensus through discussion and compromise. Diplomacy and negotiations between (home and host) governments and companies determine the terms of international business operations. Because all that is at stake, negotiations often become very complicated.



The terms of international business operations are influenced by the governments of both home and host countries. Tensions shift as the priorities of the vested parties shift and as the relative strengths of those parties change.

A.                Hierarchical View of Government Authority

In the hierarchical view of government authority, companies accept regulations as “givens.” In that case, firms can choose to comply with, to circumvent, or to avoid the regulations.

B.                 Bargaining View

Bargaining school theory states that the negotiated terms for a foreign investor’s operations depend on how much the investor and the host country need each other’s assets. The bargaining relationships between firms and governments will depend on whether the parties view agreements as zero-sum or positive-sum gains.

1.                  Country Bargaining Strength. Industrialized countries are particularly attractive to foreign investors because those countries offer large markets, lower business risk and political stability, while developing nations may offer potentially large markets, resource availability and/or competitive wage rates.

2.                  Company Bargaining Strength. A company’s bargaining strengths may include critical technology, marketing expertise, export capabilities, product diversity and the value of the FDI.

C.                Joint Company Activities

On the one hand, host governments may encourage joint company activities to strengthen national capabilities, to lessen their dependence on foreign companies, to spread risk and to deal more effectively with other governments. On the other hand, two or more firms may invest jointly abroad, not so much to strengthen their initial negotiating terms as to improve their positions in later negotiations, and to spread their risk. In the event of a conflict, a host government may be much more reluctant to deal simultaneously with more than one firm and home government.

D.                Home-Country Needs

Home-country governments are rarely neutral with respect to FDI. They, too, have objectives such as economic growth and full employment. The political relationship of two governments may also influence their participation in and the outcome of business negotiations.

E.                 Other External Pressures on Negotiation Outcomes

Other interested stakeholders who may bring pressure to bear upon the outcome of a negotiation could include local firms, political opponents, local pressure groups (such as labor unions and environmental protection organizations), stockholders, employees, customers, suppliers, etc.



Negotiations are the means by which a firm may initiate, conduct, or terminate operations in a foreign country. The process itself often leads to multi-tiered bargaining before a successful agreement is reached.

A.                Bargaining Process

Comprehensive bargaining among governments and companies may begin long before the terms of agreement begin to evolve. Besides the given economic conditions, behavioral factors will affect both the bargaining process and the actual terms of agreement. Often the parties renegotiate these terms as their relationship evolves.

1.                  Acceptance Zones. In the bargaining process, agreement occurs only when overlapping acceptance zones can be identified. If such zones do not overlap, positive negotiations simply are not possible. [See Figure 12.3]

2.                  Range of Provisions. Most countries offer investment incentives in order to attract FDI. Direct incentives could include tax holidays, employees training, research and development grants, accelerated depreciation, low-interest loans, subsidized energy and transportation, exemption of import duties, etc. Countries may also provide indirect incentives, such as trained labor forces and labor laws that prevent work disruptions. For their part, companies generally agree to performance requirements that are ultimately designed to help countries attain economic and non-economic objectives, such as a positive balance of payments or local control over important decisions.

B.                 Renegotiations

The theory of the obsolescing bargain states that an MNE’s bargaining position will gradually erode once it transfers fixed assets to a host country. Although an MNE’s position is usually stronger before entering a country, it may improve its bargaining position over time by offering (or withholding) additional resources the host country desires.

C.                Behavioral Characteristics Affecting Negotiations

In international negotiations, misunderstandings may occur because of differences in culture, nationalities, language and professions.         

1.                  Cultural Factors. [Refer to Chapter 2] Cultural differences may be evident during negotiations because of the different levels of power vested in the negotiators, low-context vs. high-context communication styles, pragmatic vs. holistic views, monochronic vs. polychronic approaches to problem-solving, differing attitudes with respect to time and punctuality, etc. Further, the importance of these factors may be different at the time of renegotiations because the parties are by then better acquainted.

2.                  Language Factors. Often it is difficult to find words in a second language (much less a third) that correctly express the intended meaning of an original statement. Further, cultural factors determine the acceptability of the use of interpreters.

3.                  Culturally Responsive Strategies. There is no guarantee negotiators on either side will necessarily behave according to the norms of their home culture. Thus, managers should determine at the outset whether to adjust to their counterparts, help their counterparts adjust to them, or follow some sort of hybrid adjustment pattern.

4.                  Professional Conflict. Government and business negotiators may begin with mutual mistrust due to historical attitudes or differences in their professional status; often they do not fully understand each other’s objectives. Such conflicts have been particularly evident, as developing economies have attempted to sell state-owned enterprises to foreign investors.

5.                  Termination of Negotiations. When termination is necessary, negotiators should find means to allow all parties to minimize stress, save face, avoid publicity and perhaps reinstitute future contacts.

6.                  Preparation for Negotiations. By practicing their own roles and those of their counterparts, and by thoroughly researching all aspects of a negotiation, participants should be better able to anticipate responses and plan their own actions.



Companies may fear foreign countries will appropriate their assets without giving them adequate compensation. Thus, firms often press their home-country governments to deal directly with other governments to help protect both their tangible and intangible assets.

A.                The Historical Background of Home-Country Protection

The international standard of fair dealing states that foreign investors should receive prompt, adequate and effective compensation in cases of expropriation. Historically, home countries were known to use military force and coercion to ensure such treatment, but the current view is that they should not intervene militarily to protect foreign investments. This position has been reinforced by a series of UN resolutions and also the fact that host country priorities have shifted toward attracting FDI. Nonetheless, dependencia theory holds that developing countries have practically no power when dealing with MNEs as host countries; while largely out of vogue today, certain developing countries still hold this view and use it to delay or prevent MNE investments.

B.                 The Use of Bilateral Agreements

To improve foreign-investment climates for their MNEs, many industrialized countries have concluded bilateral treaties with other countries. Generally, such treaties provide for insurance to cover losses from expropriation, political violence, government contract cancellation and currency controls.

C.                Multilateral Agreements and Settlements: FDI and Trade

When MNEs cannot reach agreement with organizations in a host country, they may agree to a third-party settlement to be handled by a neutral organization or group of countries. Government-to-government trade disputes are now largely the domain of the WTO, which is considering expanding its mandate from matters of trade to aspects of investment issues and dispute settlement.

D.                Multinational Agreements: Intellectual Property Rights (IPRs)

Intellectual property involves the creative ideas, innovative expertise and intangible insights that give an individual, company, or country a competitive advantage. Intellectual property rights (IPRs) represent the ownership rights to intangible assets, such as patents, trademarks, copyrights and know-how. IPRs cover both industrial and artistic property. The Uruguay Round of the GATT provides for IPR reciprocity, i.e., a country must grant to foreigners the same property rights available to its own citizens. That said, countries differ substantially in the laws they pass and enforce to protect IPRs. Generally, developing countries offer weaker legal protection than do industrial countries, and even when two countries institute similar levels of legal protection, their enforcement policies may be quite different.

1.                  Patents. A patent represents the right granted by a sovereign power or state for the protection of an invention or discovery against infringement. The Patent Cooperation Treaty (PTC), the European Patent Convention (EPC) and the EEC Patent Convention allow firms to first make a uniform patent search and application, and then to apply for patents in all signatory countries. The International Bureau for the Protection of Industrial Property Rights (BIRPI) grants reciprocity to foreigners whose countries are Convention members.

2.                  Trademarks. A trademark is a name/logo that distinguishes an organization and/or its products. Cross-national cooperation for trademark protection is found in the Trademark Registration Treaty (commonly known as the Vienna Convention), which states that a firm must use a trademark within three years of registering it internationally.

3.                  Copyrights. A copyright represents the right to produce, publish and sell literary, musical, or artistic works.

4.         Piracy. Piracy represents the unauthorized use of property rights that are protected by patents, trademarks, or copyrights. It is estimated that international trade in counterfeit products runs as high as $500 billion a year, i.e., about 9 percent of the total value of world trade.



Just as MNEs are concerned about governments’ actions, governments are concerned about the actions of MNEs. The UN Center on Transnational Corporations, the OECD and a variety of non-governmental organizations (NGOs) and industry associations have instituted codes to deal with specific MNE practices. Generally, such codes are voluntary, but they symbolize a collective attitude toward specific business practices that helps governments regulate the local activities of MNEs.



Many firms strongly believe that by being good corporate citizens abroad they can reduce local animosity and remove concerns that might affect their competitive abilities. They may publicize the ways their activities help satisfy social objectives and strive to increase the number of local proponents by sharing ownership, avoiding direct confrontations, installing local management and shifting part of the R&D function to host countries. Nonetheless, it is almost impossible to please all stakeholders.



Pharmaceuticals and Intellectual Property Rights [See reference to the CultureQuest video following the closing chapter case.]

The illegal copying of pharmaceutical products has been rampant for decades. Local manufacturers routinely copy and market medicines that MNEs have invented. Although MNEs lose million of dollars in revenues, many argue that copying is justified “in some circumstances” because it is the only way to give poor people access to vital medicines—especially in low-income countries. A growing number of activists, charities and governments are challenging pharmaceutical firms over the high cost of drugs and are pressuring the WTO to relax the conditions of the TRIPS accord that protect the IPRs of pharmaceutical firms. Should consumers in industrialized countries pay higher prices for medicines in order to finance lower-priced medicines in poorer countries? If so, how can MNEs and industrialized countries deal with the threat of parallel imports?



New Roles for Diplomacy in the New Century

With the end of the Cold War came new alignments of countries based on economic factors to replace many of the political-military rivals of the past. However, government-to-government cooperation in dealing with MNEs is apt to develop slowly on a global scale. There are simply too many competing interests among countries that tend to divide them on issues of economic development, product-specific agendas, and regional viewpoints. One such major issue is that of the protection of intellectual property.




Teaching Tip: Visit for additional information and links relating to the topics presented in Chapter 12. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter 12.



CLOSING CASE: Global Software Piracy [See Table 12.1, Map 12.2]


1.                  What has been the relationship among the various organizations combating software piracy?

Companies, industry associations and governments have tried to negotiate practical solutions to this problem. Until recently, the problem was generally approached by first relying on software companies to develop technical and business measures to thwart counterfeiters. Governments would then support their efforts by passing laws to specify punishments for lawbreakers. Companies, governments and associations, singly and jointly, have also successfully lobbied transnational institutions to help police piracy. Collectively, the results of their actions testify to the usefulness of market-based solutions to software piracy. Practical solutions developed by the software companies pre-empted the need for governments to formulate and enforce antipiracy standards and technologies.


2.                  In your opinion, should software companies, industry associations, home governments, or transnational institutions take the lead in negotiating with the governments of countries with high piracy rates? Why?

Given the events of the 1990s, it is tempting to argue transnational institutions should take the lead in negotiating with governments. With member nations numbering 170, the World Intellectual Property Organization (WIPO) casts a formidable presence, as does the World Trade Organization. Once a country ratifies anti-piracy treaties, its government can no longer close its eyes to piracy. However, given the recent up-tick in software piracy, neither companies, associations, governments, nor institutions dare let their guard down. It is a problem about which they must be ever vigilant and continually to work together to minimize.


3.                  Can the software industry expect to move forward without resorting to government-devised standards in the area of antipiracy technologies?

Although practical solutions developed by the software companies have been reasonably effective to date, the problem is very worrisome. In spite of an ever-expanding set of laws, policies and treaties, the tenacity and pervasiveness of software pirates raises several questions for the industry. A major loophole associated with government-devised standards is that the variety of legal traditions in the world makes universal standards next to impossible to legislate and enforce. Even if that hurdle were to be overcome, given the rapid pace of software development, globally-devised standards may be outdated before they’re ever implemented.


4.                  What kind of solutions can the software industry plan to apply to the piracy problem if the problem steadily worsens?

If the piracy problem steadily worsens, the software industry is likely to become even more proactive in its attempts to confront it. For example, more companies may choose to use search engines to prowl the Internet in search of sites that distribute or sell pirated software. They are likely to continue to stage software stings and then provide information to prosecutors for use in criminal cases. The industry will also take legal action against thousands of law-breaking web sites. In addition, software firms will surely continue to work closely with governments, simply because the protection of software is in every country’s national interest.



Additional Exercises: Negotiations and Diplomacy


Exercise 12.1. Although most companies would prefer to see intellectual property rights consistently protected on a global basis, many governments would prefer to retain the authority to decide such issues locally. Ask students to debate the trade-offs between globalization and national or regional sovereignty in the context of intellectual property. Would their positions change if the focus moved from the software to the pharmaceutical to the aluminum and to the commercial aircraft manufacturing industries, for example?


Exercise 12.2. It is generally thought that a firm’s bargaining power is greatest before an investment agreement is signed. At some time in the future, however, a firm may consider moving a production facility from one foreign country to another, rather than upgrade or replace an existing facility. What are the bargaining strengths of an MNE and a host government at that point? Ask students to discuss the ebb and flow of power shifts that occur over time between governments and firms as economic opportunities and conditions change.


Exercise 12.3. Richard Moxon’s Foreign Investment Negotiations Simulation Negotiation (FINS) simulates a negotiating situation among multinational corporations, the governments of five large emerging market countries and firms based in those countries. The negotiations concern the development of a high technology manufacturing industry by those nations via foreign investments, joint ventures, licensing agreements, or other arrangements. Further information and the FINS Participant Manual can be found at: