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The dynamics of international business

negotiations
There can be no international business without the presence of at least two parties, each
coming from different countries, sitting face to face and negotiating a business deal.
Negotiations precede all international business transactions, whether they are the sale of a
product to a foreign buyer, the formation of a joint venture between two companies of
different nationalities to share distribution channels in a third country, an acquisition of a
company by a foreign company, or me licensing of a technology by a company tO a
foreign producer. It is inevitable that negotiations between two or more sides will take
place Whenever a certain outcome is impossible to obtain unilaterally without incurring
unacceptable political, legal, or economic consequences.

Negotiation is a process whereby two or more parties--be they individuals, groups, or


larger social units--interact in developing potential agreements to provide guidance and
regulation of their future behavior. Such negotiation can be conducted between nations,
as in the tripartite negotiations between the United States, Canada, and Mexico to forge
the North American Free Trade Agreement (NAFTA); between companies, as in the
alliance between British Air and USAir to share routes, airport gates, and reservations
systems; or between any two or more parties that need to cooperate or bargain to attain
certain common or conflicting ends.

In any negotiation, the process and outcomes are influenced by contextual factors. Too
often academics and the business press have focused on negotiating strategies Without
duly emphasizing context. Even when negotiation context is discussed, it is usually
presented as a "cultural" issue. Only recently have some researchers examined and
developed broad frameworks focusing on the context of international negotiation.

Using a similar approach, this article presents a comprehensive model of international


negotiation describing the different contexts and their relationship to the negotiation
process and outcomes. The proposed model should provide a practical framework for
negotiators, assisting them in better preparing themselves for complex negotiations and
recognizing the need for a broader perspective combined with the ability to comprehend
details.

Whenever two parties negotiate, the entire process occurs under two umbrella contexts,
environmental and immediate. The environmental context refers to forces in the
environment that are beyond the control of either party involved in the negotiations. The
immediate context includes such aspects as the relative power of the negotiators and the
nature of their interdependence factors over which the negotiators have influence and
some measure of control. The Figure shows the conceptual framework for international
business negotiations and the various dimensions of these contexts. The environmental
context, in the outer circle, consists of eight dimensions; the immediate context, in the
middle circle, consists of five. Both jointly have an impact on the process and outcome of
negotiations.

THE ENVIRONMENTAL CONTEXT OF INTERNATIONAL BUSINESS


NEGOTIATIONS

We shall first explore the nature of the environmental context, the outer-most circle in the
Figure. (1) The dimensions of the environmental context include legal and political
pluralism, currency fluctuations and foreign exchange, foreign government controls and
bureaucracy, instability and change, ideological and cultural differences, and the
influence of external stakeholders.

Legal Pluralism

The principle of national sovereignty gives every nation-state the right to make laws that
are supposedly in its national interests. An international business transaction must comply
with the laws of the countries involved. Certain laws prohibit certain types of
transactions. For example, the United States has legislation that lists the various types of
technologies, particularly those with potential military applications, that are prohibited
from being exported. When Cray Computer Company tried to sell a supercomputer to the
Indian government, the U.S. disallowed the sale on the grounds that it was illegal because
it hurt American national security interests.

In several countries, certain sectors of the economy, such as telecommunications and


automobile manufacturing, are often kept off-limits to wholly owned foreign investments.
For instance, a foreign company can enter the Indian and Chinese markets only by
forming joint ventures with indigenous companies. General Motors, Ford, Volkswagen,
and Mercedes have established manufacturing plants in India in joint ventures with
Indian companies; Volkswagen, Citroen, and Peugeot have joint ventures in China. The
joint venture requirement undoubtedly affected the negotiations between the two sides
over other important aspects, such as managerial and quality control, global marketing
rights, valuation of technology transferred, profit sharing, and royalty payments.

Negotiators should be forewarned about the legal traps that could transform a supposedly
good agreement into a nightmare if the legal implications of the transaction are not
carefully examined. It is imperative that negotiators be extremely careful in avoiding the
risk of doing something illegal under the laws of either the home country or the host
country.

Political Pluralism

The world consists of more than 100 countries, each with its own distinct political system
and foreign policy. International business people are often caught in the crossfire of
sometimes conflicting foreign policies of two or more countries. For example, an
American executive in a French subsidiary of a U.S. company must be aware of both
French and American foreign policies as they apply to engaging in a business relationship
with Cuba or North Korea. A business deal that may be in the political and economic
interests of France may run counter to those of the United States.

An example of such a situation is the construction of the Trans-Siberian pipeline in the


former Soviet Union in the 1980s. Several European subsidiaries of American companies
had negotiated contracts to supply such equipment as transformers, generators, and
construction services for the pipeline. When the Soviets invaded Afghanistan, however,
American foreign policy turned quite hostile toward the Soviet Union, and the U.S.
government demanded that American firms and their subsidiaries stop supplying the
equipment and services. But the European governments demanded that the subsidiaries of
American companies based in European countries be permitted to fulfill their contracts
with the Soviets, claiming that the pipeline supply contracts were in the national interests
of the host European countries. Only diplomacy at the highest level finally resolved the
problem.

The foreign policy of the host country also affects the conduct of international business
negotiations. For example, the Datuk Seri Mahathir Mohamad, Prime Minister of
Malaysia, is noted for his anti-European, anti-British political stance. Thus, English
companies engaged in negotiating a business transaction with Malaysian companies
would have to try extra hard to get the deal. This is especially true if non-European
companies from countries that are friendly with the Malaysian government are also in the
fray.

It is vital to understand the constraints imposed on the process of international business


negotiations by the foreign policies of countries that are directly or indirectly affected by
the outcome of such negotiations. parties involved should thoroughly study the potential
political fallout of an international business deal before it is negotiated and the agreement
is signed.

Currency Fluctuations and Foreign Exchange

When the Mexican currency crisis began in late 1994, the Wall Street Journal reported
that within a week the peso had lost almost 36 percent of its value against the dollar, and
43 percent since the beginning of the year. This highlights the significance of the impact
of currency value fluctuations on international business negotiations. International firms
that negotiated business deals or operations in Mexico should have taken the risk of the
peso devaluation into account during their negotiations with Mexican firms.

International business transactions take place in a world of multiple currencies, the values
(foreign exchange rates) of which fluctuate daily. A business deal that is not effectively
structured to compensate and protect against foreign exchange fluctuations is likely to be
a prelude to a disaster if the underlying currencies in which payments are to be received
precipitously decline in value--or a windfall if they appreciate in value--against the
recipient company's home currency or other stable currencies. It would be prudent for
negotiators of both companies to obtain realistic "most likely" forecasts of the exchange
rates for the relevant currencies from such reliable sources as international banks and
currency futures markets. They can thus build into the agreement contingency clauses
that would protect either side from wild swings in the exchange rates of their respective
currencies or engage in currency hedging contracts.

Foreign exchange controls by many governments also influence international business


negotiations. The ability of a company to pay for imported raw materials, or to repatriate
profits or dividends to a foreign parent, depends on the willingness of the host
government to make the necessary foreign exchange available for such transactions.
Negotiators for a foreign company must ensure that, in whatever agreement is negotiated,
provisions are made that would avoid or blunt the effect of these controls. For instance, in
the face of foreign exchange restrictions, an international company could negotiate a
"counter-trade" deal by which payment is made in goods, rather than cash.

Foreign Government Controls and Bureaucracy

The extent of governmental interference in business in many nations is extensive.


Government agencies may have the authority to control the total output of an industry. Or
they may have absolute control over the granting of permits to expand production
capacity. A company with the potential to increase market share is obligated to obtain the
necessary license to expand capacity, a license that is often denied by government
bureaucrats.

A company may also need a license to implement a strategy designed to expand its
product line. As a case in point, in the mid-1980s the Indian subsidiary of Procter &
Gamble had to plead with the Indian government for permission to market P&G's
consumer products. Such pervasive intrusion into the "private" affairs of companies is
quite routine in most developing countries, such as China, Indonesia, Egypt, and India.
Efforts at liberalization and privatization in these countries has reduced this interference
somewhat. However, the level of such interference is still far more than one normally
encounters in the more economically advanced countries.

Government agencies control entire industries in many countries. Until recently, the
entire telecommunications field was in the sole domain of government-owned enterprises
in Brazil, Argentina, Chile, and India. Now, joint ventures are allowed in these sectors
with government and private enterprises. In many countries, private enterprise is
forbidden in such sectors as oil and gas, shipping, and airlines. In some industries,
government firms compete with private enterprise, as is the case in India.

Negotiations in the sorts of business environment described above almost always include
the government as one of the parties with whom a foreign firm is negotiating, directly or
indirectly. The government agency may not be physically present at the negotiating table,
but its silent presence is felt throughout the process because every issue negotiated has to
be considered in light of the pertinent governmental regulations.

Instability and Change


Heraclitus said, "There is nothing permanent except change." Change is omnipresent.
During the decade of the 1980s and the early 1990s, we have witnessed such unexpected
events as the fall of the Soviet Union, the unification of Germany, the Gulf War,
significant peace prospects in the Middle East, and the economic liberalization and
opening of markets to trade and foreign investments in China, India, and Russia. Each of
these events has brought forth opportunities for international firms. However, such
opportunities are also associated with risks in other areas. As Curran (1994) stated:

A more immediate worry for investors is that if inflation is not checked, China's
currency, the yuan, could be devalued. Investors only have to think back a few years to a
period when China's government was devaluing the currency every few months. Growth
is nice, but so is capital preservation.

Political risks seem to be rising too. Can the market keep liberalizing without creating a
strong desire among citizens for more freedom in other areas of life, leading to another
bloody confrontation with the old line communist leaders? And what happens to China's
power structure after Deng Xiaoping dies? Such concerns do not negate the long-term
case for China, but they do make it less of a sure bet. Investors need patience, smarts, and
a strong stomach for volatility.

To cope with volatility and risks, negotiators should be prepared with advice from experts
on the probability of economic and political risks in the target country. Armed with valid
and reliable information on the most likely economic and political scenarios, international
managers would be on a firmer footing to effectively negotiate the very best deal possible
with their company counterparts in the host country.

International negotiators must Nave expertise in the target country as well as in the global
business environment. Knowledge of global opportunities and risks for the company's
product is most useful because it serves as a benchmark against which to evaluate the
costs and benefits of doing business in a particular country. For example, a British
company that is negotiating a joint venture with a Chinese enterprise to produce cars for
the Chinese market would be in a much better bargaining position knowing that an
equally good opportunity exists in India.

Ideological Differences

Ideology may be defined as the body of ideas on which a particular political, economic,
or social system is based. International managers may be shocked to find that the
ideologies--indeed, the very basis of life they have always taken for granted may not exist
in other countries. For example, political freedom is limited in Egypt, which allows only
one political party to exist. It is almost totally absent in China. Equality does not exist
among Saudi Arabians, especially between men and women. The right to own private
property does not exist in communist countries like Cuba, North Korea, and China. And
in segments of the economy where private enterprise does exist, that right is delegated to
the individual by the state. These concepts all run quite contrary to the ideology of the
United States, where individuals have the birthright to own property, exercise political
freedom, and be treated equally.

Countries such as India, Nigeria, Malaysia, Egypt, and Indonesia, which were once
Western colonies, have a history of antipathy toward foreign investment. It is mistakenly
perceived as another form of foreign domination. Although these attitudes have changed
dramatically since the beginning of the 1990s, left-wing political parties and labor unions
continue to blame global companies for the countries' domestic problems. The conflict in
political ideologies makes it necessary for negotiators to find a middle ground and frame
the language and content of the negotiated contract in a pattern that is acceptable to both
sides.