Introduction international business diplomacy

Case of Oil Diplomacy

Saudi Arabia has one quarter of the world’s known reserves and is the largest exporter and
second-largest producer (after the former Soviet Union) of petroleum. By the early 1990s one
company, Aramco, accounted for over 90 percent of the Saudi production and more than double
the output of the two next-largest oil firms in the world, Royal Dutch Shell and Exxon. Aramco’s
ownership, policies, and division of earnings from the outset have depended on interactions
among: (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 have
the operations of Aramco. To understand these changing relationships, we will review some
events that preceded Aramco’s first oil output in 1939.
U.S. policy toward U.S. oil firms historically has seemed contradictory because governmental
objectives 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 in
strategic areas worldwide. On the one hand, U.S. action dismembered the Standard Oil Trust in
order to stimulate domestic competition; on the other hand, the U.S. government allowed, even
encouraged, joint actions abroad by oil firms when those actions would help achieve the latter
two objectives.
At least as far back as 1920 the United States realized that in the long run its domestic oil
supplies would be insufficient. In the short term, though, worldwide oil supplies could not easily
be sold as rapidly as they could be produced. In this environment, U.S. oil firms were in a
position 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 result
that “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. The
U.S. firms were welcomed in the Middle East as competitors to Shell Oil Company, British
Petroleum (BP), and Compagnie Franchise des Petroles (CFP) from Britain and France. They
also were welcomed because they offered some sales in the United States that would otherwise
be impossible. During the 1920s and 1930s some of the U.S. oil companies also made secret
arrangements abroad that proved unpopular with the U.S. public. For example, Exxon (formerly
called Esso, or Standard Oil of New Jersey) agreed with BP and Shell to a system of world prices
based on the U.S price of oil . Exxon’s chief executive was forced to resign in 1942 after
exposure of his restrictive agreements with the I. G. Farben Company, a major participant in
Hitler’s 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, they
were acting independently of any government. Later they were accused of becoming captive to
Middle Eastern Arab policies.
The first two companies to participate in Saudi Arabian oil production were Socal (Standard Oil
of California) and Texaco, which formed a joint venture and negotiated large concessions. The
U.S. government had no representatives in Saudi Arabia at this time, and the two companies
conducted some quasi-official diplomacy that continued throughout World War II. They
organized construction of a pipeline to the Mediterranean in 1945 and received permission from
the U.S. government to use steel, which was in very scarce supply. In 1948 Exxon and Mobil
joined the original Socal and Texaco in what became known as Aramco. Mobil owned 10
percent, 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 world’s oil from multiple
sources that they were nearly invulnerable to the actions of any single country. By 1950 the
United States was entrenched in the cold war, and although it held military supremacy over the
former Soviet Union, the Truman Administration wished to maintain cordial relationships with
strategic 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 1951
whereby the oil companies would maintain their ownership but would pay 50 percent of
Aramco’s profits as taxes to Saudi Arabia. The companies then could deduct those taxes from
their U.S. tax obligations so that, in effect, the increase in revenue to Saudi Arabia was entirely
at the expense of the U.S. Treasury.
In 1952 Saudi Arabia learned from Iran’s experience what might happen if demands on Aramco
were 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 brink
of economic collapse. With CIA support, the Shah returned, and the Seven Sisters shared in 95
percent of the ownership of the new Iranian oil company.
Both Presidents Eisenhower and Kennedy proclaimed the importance to U.S. foreign policy of
the oil firms’ Middle East activities and intervened to prevent antitrust action against them in
their joint dealings abroad. In addition to preventing Soviet entry in the Middle East, the United
States was able to sidestep certain Arab-Israeli conflicts by being publicly pro-Israel and having
the Aramco partners perform most of the direct interactions with Saudi Arabia. Saudi Arabia was
unhappy 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 to
smaller independent U.S. companies that previously had depended on the Seven Sisters for
supplies. This marked the beginning of greater competition among distributors; it also meant that
countries 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 from
unilaterally 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 in
Caracas of five governments and the resultant formation of the Organization of Petroleum
Exporting Countries (OPEC). OPEC’s purposes were to prevent companies from unilaterally
lowering prices, to gain a greater share of revenues, and to move toward domestic rather than
foreign ownership of the assets. Still, in the early 1960s OPEC lacked the power to flex its
muscles.
In the 1960s three new trends weakened the Seven Sisters and strengthened Saudi Arabia’s
position in Aramco. First, there was continued emergence of other oil companies that made
concessions 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 Seven
Sisters’ diversification of supplies and thus were less able to move to other supply sources if a
country tried to change the terms of agreement unilaterally.
Second, because of rapidly expanding industrial economies, oil demand was growing faster than
supply; the earlier oil glut was quickly becoming an oil squeeze. Not even the Seven Sisters
could afford any longer to boycott major supplier countries as they had earlier boycotted Iran.
Third, there was a lessened threat of military intervention to protect oil investors. The failure of
the United States to support the abortive efforts of the British and French to prevent the Egyptian
takeover of the Suez Canal demonstrated that the major Western powers were unlikely to unify
their efforts. Although it had invaded Lebanon successfully in 1958, the United States was less
prone 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 States
also was increasing its military involvement in an unpopular war in Vietnam, so it was less able
to lend military support to its oil firms in the Middle East.
In 1970 Muammar el-Qaddafi of Libya demanded increased prices from Occidental. Since
Occidental was almost completely dependent on Libya for crude, the company relented. Qaddafi
then confronted the major firms that no longer had sufficient alternative supplies and gained
concessions from them as well. Libya’s success was noted in other countries, which used OPEC
to further strengthen their negotiating positions by dealing collectively with the oil firms. The
Teheran Agreement of 1971 immediately increased prices. The embargo by Arab OPEC
members in 1973 demonstrated that they had sufficient power to impose further economic
demands and to
cause Western powers to modify their political positions, particularly in relation to Israel. OPEC
now had eleven members and controlled about 93 percent of the world’s oil exports.
As the largest OPEC producer, Saudi Arabia has been able to utilize its new-found strengths in
several ways. Between 1972 and 1980 the government of Saudi Arabia bought a 100 percent
ownership in Aramco operations. As smaller firms gained a larger share of the world oil sales
and as national governments in Sweden, the former West Germany, Japan, and France began
buying directly from oil-producing countries, Saudi Arabia has increased the number of
customers for its crude from the original four Aramco partners.
How has Aramco’s government-owned status affected Exxon, Texaco, Socal, and Mobil’s
operations in Saudi Arabia? The companies have been able to exploit their many assets
successfully in order to maintain a profitable presence vis-a-vis Saudi Arabia. They have realized
that Saudi Arabia’s increased oil revenues enable the Saudis to be a lucrative customer; they also
know that Saudi Arabia is closely allied to the West, particularly the United States, on whom it
depends for technical and defense assistance.
The four oil companies continue to help manage the Saudi oil industry because they can make
contributions that the Saudis cannot acquire easily from other sources. As the major employer
before government purchase into Aramco, the American partners had demonstrated an ability to
attract qualified personnel from abroad, to train Saudis, and to run an efficient operation. As
Aramco has expanded and moved into new activities, the oil firms have been able to continue
these efforts through lucrative contract arrangements. For example, in 1990 Mobil was a joint
venture partner in a refinery and a petrochemical complex with the Saudi government, each
worth over $1 billion. By 1991 about 12,000 (one quarter) of Aramco’s employees were non-
Saudi workers, but foreigners had been replaced in nearly all top managerial positions. There
was a near consensus that foreigners would be needed in increasingly technical positions, such as
in finding and extracting oil, but engineering firms, such as Bechtel and Fluor, were competing
with the oil firms for major contracts.
The oil firms’ contributions to Aramco’s success thus include some continued day-to-day
management, the contracting of foreign workers, the infusion of technology, the training of Saudi
personnel, and the marketing of crude oil exports when sales are not made directly to a foreign
government. The marketing contribution took on more importance in the late 1980s, when there
was a glut brought about by new supplies (e.g., from Mexico) and decreased demand. To ensure
future sales, in 1988 Aramco entered a joint venture by buying a 50 percent interest in Texaco’s
refining assets and marketing system in 23 U.S. states. However, in 1990 Saudi Arabia’s future
ability to supply petroleum was brought into question when Iraq occupied Kuwait and amassed
its 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 United
Nations’ 1991 liberation of Kuwait.
The oil firms also have been important in molding U.S. foreign policy through lobbying and
advertising campaigns that proclaim, “We would like to suggest that there is only one realistic
possibility: 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 Saudi
Arabia, the oil companies have been able to sell their Aramco interest at prices reported to be
above the net book value of assets. They have successfully secured a continued source of crude
oil, although sometimes at a contract price above the world spot price, and have profited from
management and technical contracts.
In the aftermath of Kuwait’s 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 government’s power in
relationship to consumers. But there was no shortage of world oil during the war with Iraq. At
the same time, the growing dependence of Saudi Arabia on U.S. military assistance might lead to
more government-to-government negotiations, thus bypassing the Seven Sisters.
The Aramco case illustrates that the terms under which companies operate abroad are greatly
influenced by both home- and host-country policies and that the terms change over time as
governmental priorities shift and the relative strengths of the parties evolve. The relative
strengths were shown to be affected by such factors as competitive changes, the resources that
parties 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 is
substantial 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 follow
conflicting courses. In fact, a discord, if carried to the extreme, may result in a cessation of the
particular 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 extreme
are practices that, although not deemed ideal by either party, nevertheless are sufficiently
satisfactory to permit an evolving relationship. This chapter examines the means by which
international businesses and governments attempt to improve their own positions vis-a-vis one
another.
Case
Aircraft Business: A case of heavy diplomacy

US diplomats have on several occasions intervened to convince foreign governments to buy

aircraft from Boeing rather than its European rival Airbus, newly released diplomatic cables
show.

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.

NEGOTIATIONS IN INTERNATIONAL BUSINESS

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

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.

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 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.

The Use of Bilateral Agreements

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.

OTHER MULTILATERAL INSTITUTIONS

So far, we have discussed only a few examples of regional cooperation to provide an idea of
types of cooperation and their successes and failures. It is obvious that when countries join
together, they can accomplish a great deal. However, it is also obvious that nationalism and
national interests play a great role in the success or failure of any form of political or economic
cooperation.
In fact, nationalism usually gets in the way of successful cooperation. The best sources of
information for regional groups are the Yearbook of International Organizations and the Europa
World Year Book. The following are examples of three organizations that are involved in forms
of cooperation that encompass more than just economic objectives.

The United Nations

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.

EXTERNAL RELATIONS APPROACHES

The Need by Countries

Countries that wish to attract more foreign investment sometimes have found either that they are
inadequately known to investors or that investors have false impressions of the business
possibilities within their borders. Some potential investments thus are overlooked rather than
rejected. An investment in a small country such as Mauritius may not be undertaken simply
because the investment decision makers do not turn their thoughts to that country.
Other countries may be victims of publicity attendant on conditions in neighboring countries. For
example, there is a tendency to stereotype African or Latin American nations. Investment flows
to Costa Rica thus may suffer because of a war between El Salvador and Honduras, anti-U.S.
sentiment in Nicaragua, nationalization programs in Peru, or political unrest in Guatemala.
To overcome either bad publicity or no publicity at all, many countries have established public-
relations programs abroad. Their activities are extremely varied: Some include participation in
world fairs and exhibits so that the country becomes better known. Some advertise to provide
data on the economy. Some organize conferences abroad to explain their attractiveness; for
example, Vietnam, Laos, and Cambodia held a conference to explain their changed attitude
toward foreign investors. It is common to see full-page advertisements in the Wall Street Journal
on such subjects as “Reasons to Invest in the Dominican Republic.” In order to become better
known, Morocco waged a campaign using advertisements with the slogan “Invest in Morocco. It
may never have crossed your mind.” Countries also have used advertising media to overcome the
problems of adverse publicity.
Summary
■ Although host countries and international firms may hold resources that, if
combined, should achieve objectives for both, conflict may cause one or both parties to withhold
resources, thus preventing the full functioning of international business activities.
■ Both the managers of international firms and the host-country governmental officials must
respond to interest groups that may see different advantages or no advantage at all to the
business-government relationship. Therefore, the final outcome of the relationship may not be
the one expected from a purely economic viewpoint.
■ Negotiations increasingly are used to determine the terms under which a company may operate
in a foreign country. This negotiating process is similar to the domestic processes of company
acquisition 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 country
will be determined to a great extent by the relative degree to which the company needs the
country and vice versa. As the relative needs evolve over time, new terms of operation will
reflect the shift in bargaining strength.
■ Generally, a company’s best bargaining position is before it begins operation. Once resources
are committed to the foreign operation, the firm may not move elsewhere easily.
■ Since negotiations are conducted largely between parties whose cultures, educational
backgrounds, and expectations differ, it is very difficult for negotiators to understand sentiments
and 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 the
terms agreed upon between their investors and recipient countries would be carried out. The
East-West political schism and a series of international resolutions have caused the near demise
of these methods for settling disputes. The promise of giving or withholding aid has been used
more recently by developed countries as a device for influencing host governments.
■ A number of bilateral treaties have been established whereby host countries agree to
compensate investors for losses from expropriation, civil war, and currency devaluation or
control. These agreements are not often clear about the mechanism or place of settlement for the
losses.
■ Although international organizations or groups in third countries are frequently used to
arbitrate trade disputes among individuals from more than one country, this method has been
used very rarely to settle investment disputes, because governments are reluctant to relinquish
sovereignty over matters occurring within their borders.
■ To prevent companies from playing one country against another or vice versa, groups of
governments or companies occasionally have banded together to present a unified front in order
to 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
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 these
assets, 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 enforce
their laws on the asset protection.

Running and International Business Requires Effective

International Business Diplomacy
Geza 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 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.

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
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.