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The dynamics of international business negotiations
The Dynamics of International Business Negotiations Arvind V. Phatak and Mohammed M. Habib
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here 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 al1 international business transacW&W tions, 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 the licensing of 3 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 reguktion 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 lvithout duly emphasizing context. E\,en when negotiation context is discussed, it is usually presented as a “cultural”
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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, environmc~ltul and immediute. 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
W
e shall first explore the nature of the environmental context, the outermost circle in the Figure.’ The dimensions of the environmental context include legal and political pluralism, currency fluctuations and foreign exchange. foreign government controls and bureaucracy, instability and change,
Figure The Contexts of International
Negotiations WEDIATE CONTEXT
ENVIRONMENTAL
Relative Bargaining Power of Negotiators and Nature of Dependence Levels of Conflict
ideological and cultural differences, ence of external stakeholders.
and the influ-
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,
The Dynamics
of Intrrnational
Business
Negotiations
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 IJnion, and the II.5 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 :I 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 Wull Street. Journul 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 tluctua-
tions 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 vahleor 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 frotn 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 tnake 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 “countertrade” deal by which paytnent is made in goods, rather than cash. Foreign Government and Bureaucracy
Controls
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 8: Gamble had to plead with the Indian government for permission to tnarket P&G’s consumer products. Such pcrva-
sive 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.
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 have 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
Instability
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 The Dynamics
Differences
and Change
of International
Business
Negotiations
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 33
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 199Os, 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.
Cultural Differences International business negotiations involve interactions between managers from disparate cutures. Cultural norms and differences between the negotiators have a significant influence on how they behave throughout the process. For instance, the building of trust and relationships is extremely important for the Japanese, Chinese, Mexicans, and most Latin Americans. In these cultures, it is considered essential to become acquainted with each other and to build a certain ‘*comfort level” before sitting down at the negotiating table. “‘Japanese,” says Foster (1992). “view negotiation as a collaborative process of ‘mind-meeting,’ which can mandate several meetings before substantive issues are even discussed.” By contrast, Americans are known for their impatience to “get down to business” after a felv pleasantries. Cultural differences in the value placed on the use of time as a resource can influence negotiations. Americans are known to be meticulous about punctuality, getting things done when promised and not wasting time. They perceive time as a depleting resource that must be used efficiently. Mexicans and Chinese, on the other hand, see time as an endless continuum-a context rather than a constraint-in which we live. During negotiations, Americans are inclined to make small concessions early to establish a relationship and to keep the negotiation process moving forward smoothly. In contrast, Japanese have a tendency to hold back major concessions until very late in the negotiations. Differences also exist on how much and what type of information is shared with the other side. American negotiators are inclined to share large amounts of significant information about their company’s needs, limitations, and so on. The premise is that
the other side will reciprocate upon seeing how open they are. Japanese, on the other hand, see no such need to provide meaningful information to the other side and so offer only the smallest crumbs of information in exchange. To Americans, a contract signals the conclusion of negotiations; its terms establish the rights, responsibilities, and obligations of the parties involved. However, to the Japanese, a company is not forever bound to the terms of the contract. In fact, it can be renegotiated whenever there is a significant shift in the company’s circumstances. For instance, an unexpected change in governmental tax policy. or a change in the competitive environment, are considered legitimate reasons for contract renegotiation. To the Chinese, a signatory to an agreement is a partner with whom they can work, so to them the signing of a contract is just the beginning of negotiations. Most international business negotiations never fulfill their potential expectations because of cultural &z~pas on one side or the other during the negotiations. International business negotiators would be better off to be well versed in the cultural nuances and unspoken language of the negotiators at the other end of the table.
External Stakeholders The various people and organizations that have an interest or stake in the outcome of the negotiations are the external stakeholders. Examples include competitors, customers, labor unions, organized business groups such as chambers of commerce and industry associations, and the company’s shareholders. Competitors are likely to apply pressure by lobbying against a proposed business arrangement, such as a joint venture, if the outcome of the negotiation is the introduction of a formidable new competitor in the market. Lobbying strategies may include the launch of a public relations campaign against the deal, illustrating real or contrived harmful effects of the joint venture or trying to have key permits and approvals denied by the government. Consumers that are affected by the outcome of the negotiations may become involved in ways that may help or hinder the negotiation process. For example, the United States has been negotiating for decades with Japan to provide greater access to the Japanese market for American goods and services. Japanese consumers are in favor of opening the market to foreign competition because it would result in their getting a cheaper and wider variety of goods. So they have been lobbying for it. However, the various industry groups in the electronics, automobile. and agricultural sectors remain opposed to opening the market to foreign competitors. and to date
have been quite successful at blocking any substantial market-opening measures. Labor unions are generally opposed to any business transaction that is likely to reduce employment opportunities for their members. For example, unions have organized several strikes against Caterpillar, the American manufacturer of earth-moving equipment. One of their principal grievances against the company is the loss of manufacturing jobs in the United States resulting from the transfer of manufacturing jobs overseas by Caterpillar’s management in search of low-cost production sites. Caterpillar has several manufacturing joint ventures abroad. The reaction of the labor unions in the U.S. must surely be having an impact on the negotiating process for any new foreign joint ventures. For international joint ventures being set up in the home country, labor unions are concerned about such issues as union recognition, hiring, selection process, job classification, and seniority. A classic example is the role of the United Auto Workers in the NUMMI joint venture negotiations between General Motors and Toyota that occurred in the early 1980s. The attitude of organized business groups, such as chambers of commerce, can influence the ambiance for international business negotiations. For example, with the opening of markets in China, India, and Russia, the U.S. Chamber of Commerce has organized several groups of top level executives from major American corporations to visit these countries in search of joint ventures. The chambers of commerce in each country can help clear many hurdles, such as unnecessary bureaucratic red tape. The hundreds of joint ventures established in China, India, and Russia could never have materialized had it not been for the active stance of the chambers of commerce of the countries involved. The progress of negotiations could be either stimulated or inhibited by the reaction of the shareholders. A company whose shareholders are opposed to a merger will either withdraw from the negotiations or try to change the attitude of other shareholders by making changes in their negotiating stance. Shareholders always maintain an “invisible” presence at the negotiating table, watching over the proceedings and signaling their approval or disapproval of the content of the negotiations.
THE IMMEDIATE CONTEXT OF INTERNATIONAL BUSINESS NEGOTIATIONS
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n the middle circle of the Figure is the immediate context of international business negotiations. The immediate context consists of factors over which the negotiators have some measure of control and which have an impact on
The Dynamics
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the negotiation process, including strategies and outcomes. It consists of five dimensions: the relative bargaining power of negotiators and the nature of dependence, the levels of conflict underlying potential negotiations, the relationship between negotiators prior to and during negotiations, the desired outcome of negotiations, and the immediate stakeholders.
Relative Bargaining Power of Negotiators and the Nature of Dependence There can be no negotiations unless both sides cooperate with each other to achieve their respective goals. Consequently, there is some measure of interdependence between them. For example, many large global pharmaceutical companies have consummated joint ventures with small start-up biotechnology firms to develop breakthrough cures for a variety of diseases. The small firms need financial resources that only large companies are in a position to provide. In return, large pharmaceutical companies want to place their bets on the development of several risky projects by hooking up with as many promising small companies as possible. Such interdependence motivates both sides to negotiate. In the context of negotiations, the nature of the dependence existing between the two sides determines the relative power of one side vis-gvis the other. The negotiating strategies adopted by a company thus depend on that company’s relative power in the negotiations. A company with greater power is more likely to adopt an aggressive “take it or leave it” stance, whereas a weaker firm will most likely adopt a far more submissive stance.
Levels of Conflict Underlying Potential Negotiations The level of conflict on key issues underlying a potential negotiation establishes whether the relationship between the negotiators will be supportive or hostile. The more the negotiators agree on key issues-in other words, the more “common ground” both sides share-the less conflict there will be, and thus the more supportive of each other their relationship will be. On the other hand, the more they disagree on the key issues, the greater will be the conflict between them, resulting in a more hostile relationship. The likelihood of a supportive relationship between negotiators is enhanced in a so-called 35
“win-win” situation-also known as a non-zero sum game, or integrative bargaining. The goals of the two sides are linked with each other in such a way that the extent to which one party attains its goals determines the extent to which the other does so. An example of a win-win situation is an agreement between a multinational company and a host country government that says the number of items the multinational can sell in the country market is equal to the number of items of the product exported by the host country. In this case, both parties win; exports help the host country earn foreign exchange, and sales in the host country allow the multinational company to increase its total revenue and market share. Conflict between the two sides is inevitable in so-called “win-lose” situations. In such a situation-also known as a zero-sum game, or distributive bargaining-the gains of one side come at the expense of the other. For example, two companies negotiating the percentage of the total equity of each in a joint venture are involved in win-lose negotiations, because any increase in the equity over 50 percent for either side would result in the other getting less than 50 percent of the equity. One can observe a competitive business relationship between the two sides in which the purpose of negotiation is to maximize individual gains.
Relationship Between Negotiators Before and During Negotiations The nature of the relationship between the two sides before the very first negotiating session would have a significant impact on their relations during the negotiations. If the two sides have had a harmonious relationship-perhaps a long and positive business relationship, or having engaged in mutually beneficial win-win types of negotiations-then the negotiating strategies adopted by each side would tend to be supportive of another win-win outcome. Prior relationships build expectations concerning the future of the current relationship that influence negotiation behavior. The entire process actually consists of a series of negotiating sessions. So the experiencepositive or negative-of each session serves as a backdrop for the next one, continuing to the culmination of the entire process. Consequently, each “positive” negotiation session serves to facilitate a favorable outcome at the next session; a
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“negative” session to the atmosphere
has the potential of the next.
to do damage
Desired Outcome of Negotiations The outcome of negotiations can be both tangible and intangible. Tangible outcomes include agreement on such matters as profit sharing, technology transfer, royalty rates, laws for the protection of intellectual property, equity ownership, and other assets having real substance that can be appraised for value. Intangible outcomes include the goodwill generated between the two sides in the negotiations, the desire to make concessions to enlarge the stockpile of goodwill among the parties, and the overall desire to attain win-win outcomes through collaboration and compromise. The strategies and outcomes of negotiations will be conditioned by the short-term vs. longterm relationship emphasized by the two sides. For instance, it would be reasonable to expect both sides to compromise on tangible outcomes in favor of intangible ones if indeed the longerterm relationship is the preeminent objective of both sides. On the other hand, if a short-term relationship is all that is desired, the negotiators are likely to aim for tangible results that do not require goodwill between the two sides for their fulfillment. The U.S.-Japan trade negotiations are an example of negotiations in which the longerterm relationship between the two sides is even more important than the immediate tangible results of opening up the Japanese market and, especially, to reduce America’s yearly trade deficit of approximately $60 billion with Japan. It must be emphasized that most tangible outcomes in international business negotiations require goodwill and long-term relationships for them to become a reality. For example, the transfer of technology by an international company to a foreign enterprise is a tangible outcome. However, this transaction generally becomes effective generally after months or years of making goodwill and harmonious relations between the two sides a vital commodity.
impact of Immediate Stakeholders The immediate stakeholders in a business negotiation process are: (1) the negotiators on each side and their characteristics; and (2) the companies’ managers, employees, and boards of directors. The characteristics of the negotiators include such aspects as their cumulative experience in past international business negotiations and their cultural background. People who have negotiated numerous international business deals in the past will have a body of knowledge in their repertoire that could be quite an asset in impending busiBusiness
Horizons
/ May-June
1996
ness negotiations. For instance, a negotiator who has negotiated with the Chinese in the past will be far more adept at reading their “unspoken language” than someone who is a novice. Choosing which approaches and strategies work and which do not, in the context of a given negotiation, is an art that is acquired through the long practice of negotiations. The negotiator’s cultural background has perhaps the most profound impact on the negotiation process. After all, there can be no international negotiations without the interaction between at least two people of different cultural backgrounds. And culture, which is the amalgam of a set of values, beliefs, and norms that have been internalized by people in a society, has a definite role to play in how and why people behave the way they do, even in the context of international business negotiations. The personal stakes of the managers, the employees, and the boards of directors in the outcome of the negotiations have a bearing on the strategies chosen and on any offers and counteroffers made during the process. All three groups may have one or more of the following stakes in the outcomes of the negotiations: financial, career advancement, ego and prestige, personal power, wages and employment, or economic security. Managers are likely to think twice before negotiating an agreement that would erode any of their personal stakes, or those of the employees or the board of directors. For example, as mentioned above, Caterpillar has suffered numerous breakdowns in labor-management negotiations and several strikes at its Peoria, Illinois plant because the company has been negotiating with foreign firms to transfer several cost-sensitive operations to low-wage locations. Caterpillar’s labor union is unhappy because of potential job losses at the Peoria plant caused by the exports of jobs. But Caterpillar’s management was forced to follow this strategy because it had to make significant productivity and labor efficiency improvements to remain competitive against such global competitors as Komatsu.
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egotiation-a process in which one party tries to change the attitudes, beliefs, or behavior of another party-is essential in conducting international business. This comprehensive model views negotiations as occurring within two umbrella contexts: an environmental context of forces beyond the control of either party to the negotiations, and an immediate context consisting of controllable attributes and relationships that characterizes the negotiations process. The proposed model should be applied from the outside in. Negotiators should start with the environmental context and study its impact on The Dynamics
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the immediate context and on the negotiations process and outcome. Then the direct impact of the immediate context on negotiations should be studied. The model should be treated dynamically. Any changes in the environmental and immediate contexts will bring subsequent changes in the negotiation process and outcome. As the negotiation moves from one stage to the next, negotiators must reevaluate their initial needs, motivations, positions, and strategies under changing contextual circumstances. It is also important to reevaluate the other party’s situation. Negotiators should remain on the lookout for new and emerging needs of the other party and try to communicate openly with them for generating feasible solutions. International business negotiations are seldom restricted to a single issue, nor are both sides necessarily negotiating for the same outcomes. The model provided here should assist managers in identifying the potential sources of change, the issues brought forth by them, and the ramifications for outcomes. It is imperative that negotiators obtain as much data as possible on the contexts of negotiation. Data at all three levels-national, industry, and company-should be targeted. Many sources are available. Most countries have trade officials in their embassies and consulates who may offer advice. The United States has trade officials based in the Commerce Department who are responsible for keeping tabs on the changing economic and political climates of other countries. International banks and organizations such as the International Monetary Fund (IMF) and the World Bank publish country reports containing volumes of data that are relevant to the current negotiations. Because of these dynamic contexts, negotiators will have to be flexible. They must stay calm in the face of surprises and discontinuities. They should be prepared to accept new conditions and incorporate new agendas as long as they are credible and productive. Flexibility is important because it can generate creative solutions rather than traditional compromises. It certainly helps if the negotiators have a good knowledge of the potential obstacles in the host country. One should remain especially aware of the host country negotiator’s pace of negotiation, the formality of the presentation, possible government official
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involvement, and so on. Interviews of individuals who have negotiating experience with the host country could be of help in this respect. Above all, negotiators will have to practice patience in international negotiations. It usually takes a long time to reach an agreement between the parties because of all the complexities involved. Patience is vital l~ecause it sends a signal of the negotiator’s commitment to the project, helping to build trust and a long-term relationship with the other party. It is also important I~~ause it ensures th:lt possible contingencies resulting from changing contexts are planned and taken into account. Only ;I well-prepared, highly adaptive strategy will ultimately guarantee success in international negotiations. 0
Sociul
(New
1. Some concepts for this section have been her-
roved from Salacuse (1988).
John J. Curran, “Chim‘s
House,
II. Kicks and V. Mahajan. “Ulunders in International Marketing: Fact or Fiction?” Loq Range Plurming, (198Q 78-83. Jes\wld W. Sdacuse, “Making Deals A Heginner’s Guide to International tions,” !~e~otiatiofr.k,?Irllul. Janwry
17
in Strange Places: Business Negotia1988. pp. i-13.
Jack Sawyer and Harold Guetzkow, “Bargaining and Negotiation in International Relations,” in Herbert C. Kelman. cd.. I~hw~utiomd Bebal~ior: A Sociul-Z?~)chologid Atra!y.si.s (Sew York: Holt, Rinehart and Winston. 1965).
Adr~17c1’~ it7
h~tcwmtioml
(Greennich,
CT: JAI Press.
Panldigm of lnterrw in R.D. Farmer, ed..
Cwnpurutic~e
1988):
.Munuge?ne?7t
203-219.
lnve~tment
Doom.”
f?,r-/zrfzc~.
Stephen E. Weiss. “Analysis International Business: The zatior/ Scicrrce. 4. 2 ( 1993):
of Complex Negotiations in KRC Perspective.” Orgorni269-300.
p. 117.
John 1,. Graham and Koy A. Herherger, Jr.. “Negotiators Ahroad-l>on’t Shoot From The Hip.” Hc~nwrd Hzei17a-.sRer’i~zo. July-August 1983. pp. 160-168. il. Herl>ig of Cross-Cultural
and Hugh E. Kranlcr. “Do‘s and IIon‘ts Negotiations,” Imhtstriu~ ;2lurketir7g :2l~i?7c7~c’rTie~zt.21 (1992): 287-298.
lJauI
“hlexico’s Percent,”
Escabtio~a.
Kandom
Stephen E. Weiss. “Creating the Ghl-Toyota Joint Venture: A Case in Complex Negotiations,” Colrrmhiu J~71r~7d oj‘ Wrld B7ksir7ess. Sumner 19X7, pp. 23-37.
References
7, 1994.
Co@ict:
York:
1986), pp. 33-34.
R. Tung, “Toward :I Conceptual tionnl I
Notes
March
D.G. Pruitt and J.Z. Rubin, S’tulet~7nte. ur7d Settiement
Woes Accelerate As Peso Falls Further aZtll Strect~Jorrrrwl.December 8. 199t.
2.26 p. AS.
Arvind V. Phatak is the Laura H. Carnell Professor of Management and International Business, and Mohammed M. Habib is an assistant professor of management, both at Temple University in Philadelphia, Pennsylvania.
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here 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 al1 international business transacW&W tions, 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 the licensing of 3 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 reguktion 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 lvithout duly emphasizing context. E\,en when negotiation context is discussed, it is usually presented as a “cultural”
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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, environmc~ltul and immediute. 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
W
e shall first explore the nature of the environmental context, the outermost circle in the Figure.’ The dimensions of the environmental context include legal and political pluralism, currency fluctuations and foreign exchange. foreign government controls and bureaucracy, instability and change,
Figure The Contexts of International
Negotiations WEDIATE CONTEXT
ENVIRONMENTAL
Relative Bargaining Power of Negotiators and Nature of Dependence Levels of Conflict
ideological and cultural differences, ence of external stakeholders.
and the influ-
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,
The Dynamics
of Intrrnational
Business
Negotiations
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 IJnion, and the II.5 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 :I 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 Wull Street. Journul 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 tluctua-
tions 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 vahleor 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 frotn 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 tnake 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 “countertrade” deal by which paytnent is made in goods, rather than cash. Foreign Government and Bureaucracy
Controls
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 8: Gamble had to plead with the Indian government for permission to tnarket P&G’s consumer products. Such pcrva-
sive 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.
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 have 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
Instability
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 The Dynamics
Differences
and Change
of International
Business
Negotiations
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 33
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 199Os, 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.
Cultural Differences International business negotiations involve interactions between managers from disparate cutures. Cultural norms and differences between the negotiators have a significant influence on how they behave throughout the process. For instance, the building of trust and relationships is extremely important for the Japanese, Chinese, Mexicans, and most Latin Americans. In these cultures, it is considered essential to become acquainted with each other and to build a certain ‘*comfort level” before sitting down at the negotiating table. “‘Japanese,” says Foster (1992). “view negotiation as a collaborative process of ‘mind-meeting,’ which can mandate several meetings before substantive issues are even discussed.” By contrast, Americans are known for their impatience to “get down to business” after a felv pleasantries. Cultural differences in the value placed on the use of time as a resource can influence negotiations. Americans are known to be meticulous about punctuality, getting things done when promised and not wasting time. They perceive time as a depleting resource that must be used efficiently. Mexicans and Chinese, on the other hand, see time as an endless continuum-a context rather than a constraint-in which we live. During negotiations, Americans are inclined to make small concessions early to establish a relationship and to keep the negotiation process moving forward smoothly. In contrast, Japanese have a tendency to hold back major concessions until very late in the negotiations. Differences also exist on how much and what type of information is shared with the other side. American negotiators are inclined to share large amounts of significant information about their company’s needs, limitations, and so on. The premise is that
the other side will reciprocate upon seeing how open they are. Japanese, on the other hand, see no such need to provide meaningful information to the other side and so offer only the smallest crumbs of information in exchange. To Americans, a contract signals the conclusion of negotiations; its terms establish the rights, responsibilities, and obligations of the parties involved. However, to the Japanese, a company is not forever bound to the terms of the contract. In fact, it can be renegotiated whenever there is a significant shift in the company’s circumstances. For instance, an unexpected change in governmental tax policy. or a change in the competitive environment, are considered legitimate reasons for contract renegotiation. To the Chinese, a signatory to an agreement is a partner with whom they can work, so to them the signing of a contract is just the beginning of negotiations. Most international business negotiations never fulfill their potential expectations because of cultural &z~pas on one side or the other during the negotiations. International business negotiators would be better off to be well versed in the cultural nuances and unspoken language of the negotiators at the other end of the table.
External Stakeholders The various people and organizations that have an interest or stake in the outcome of the negotiations are the external stakeholders. Examples include competitors, customers, labor unions, organized business groups such as chambers of commerce and industry associations, and the company’s shareholders. Competitors are likely to apply pressure by lobbying against a proposed business arrangement, such as a joint venture, if the outcome of the negotiation is the introduction of a formidable new competitor in the market. Lobbying strategies may include the launch of a public relations campaign against the deal, illustrating real or contrived harmful effects of the joint venture or trying to have key permits and approvals denied by the government. Consumers that are affected by the outcome of the negotiations may become involved in ways that may help or hinder the negotiation process. For example, the United States has been negotiating for decades with Japan to provide greater access to the Japanese market for American goods and services. Japanese consumers are in favor of opening the market to foreign competition because it would result in their getting a cheaper and wider variety of goods. So they have been lobbying for it. However, the various industry groups in the electronics, automobile. and agricultural sectors remain opposed to opening the market to foreign competitors. and to date
have been quite successful at blocking any substantial market-opening measures. Labor unions are generally opposed to any business transaction that is likely to reduce employment opportunities for their members. For example, unions have organized several strikes against Caterpillar, the American manufacturer of earth-moving equipment. One of their principal grievances against the company is the loss of manufacturing jobs in the United States resulting from the transfer of manufacturing jobs overseas by Caterpillar’s management in search of low-cost production sites. Caterpillar has several manufacturing joint ventures abroad. The reaction of the labor unions in the U.S. must surely be having an impact on the negotiating process for any new foreign joint ventures. For international joint ventures being set up in the home country, labor unions are concerned about such issues as union recognition, hiring, selection process, job classification, and seniority. A classic example is the role of the United Auto Workers in the NUMMI joint venture negotiations between General Motors and Toyota that occurred in the early 1980s. The attitude of organized business groups, such as chambers of commerce, can influence the ambiance for international business negotiations. For example, with the opening of markets in China, India, and Russia, the U.S. Chamber of Commerce has organized several groups of top level executives from major American corporations to visit these countries in search of joint ventures. The chambers of commerce in each country can help clear many hurdles, such as unnecessary bureaucratic red tape. The hundreds of joint ventures established in China, India, and Russia could never have materialized had it not been for the active stance of the chambers of commerce of the countries involved. The progress of negotiations could be either stimulated or inhibited by the reaction of the shareholders. A company whose shareholders are opposed to a merger will either withdraw from the negotiations or try to change the attitude of other shareholders by making changes in their negotiating stance. Shareholders always maintain an “invisible” presence at the negotiating table, watching over the proceedings and signaling their approval or disapproval of the content of the negotiations.
THE IMMEDIATE CONTEXT OF INTERNATIONAL BUSINESS NEGOTIATIONS
I
n the middle circle of the Figure is the immediate context of international business negotiations. The immediate context consists of factors over which the negotiators have some measure of control and which have an impact on
The Dynamics
of International
Business
Negotiations
the negotiation process, including strategies and outcomes. It consists of five dimensions: the relative bargaining power of negotiators and the nature of dependence, the levels of conflict underlying potential negotiations, the relationship between negotiators prior to and during negotiations, the desired outcome of negotiations, and the immediate stakeholders.
Relative Bargaining Power of Negotiators and the Nature of Dependence There can be no negotiations unless both sides cooperate with each other to achieve their respective goals. Consequently, there is some measure of interdependence between them. For example, many large global pharmaceutical companies have consummated joint ventures with small start-up biotechnology firms to develop breakthrough cures for a variety of diseases. The small firms need financial resources that only large companies are in a position to provide. In return, large pharmaceutical companies want to place their bets on the development of several risky projects by hooking up with as many promising small companies as possible. Such interdependence motivates both sides to negotiate. In the context of negotiations, the nature of the dependence existing between the two sides determines the relative power of one side vis-gvis the other. The negotiating strategies adopted by a company thus depend on that company’s relative power in the negotiations. A company with greater power is more likely to adopt an aggressive “take it or leave it” stance, whereas a weaker firm will most likely adopt a far more submissive stance.
Levels of Conflict Underlying Potential Negotiations The level of conflict on key issues underlying a potential negotiation establishes whether the relationship between the negotiators will be supportive or hostile. The more the negotiators agree on key issues-in other words, the more “common ground” both sides share-the less conflict there will be, and thus the more supportive of each other their relationship will be. On the other hand, the more they disagree on the key issues, the greater will be the conflict between them, resulting in a more hostile relationship. The likelihood of a supportive relationship between negotiators is enhanced in a so-called 35
“win-win” situation-also known as a non-zero sum game, or integrative bargaining. The goals of the two sides are linked with each other in such a way that the extent to which one party attains its goals determines the extent to which the other does so. An example of a win-win situation is an agreement between a multinational company and a host country government that says the number of items the multinational can sell in the country market is equal to the number of items of the product exported by the host country. In this case, both parties win; exports help the host country earn foreign exchange, and sales in the host country allow the multinational company to increase its total revenue and market share. Conflict between the two sides is inevitable in so-called “win-lose” situations. In such a situation-also known as a zero-sum game, or distributive bargaining-the gains of one side come at the expense of the other. For example, two companies negotiating the percentage of the total equity of each in a joint venture are involved in win-lose negotiations, because any increase in the equity over 50 percent for either side would result in the other getting less than 50 percent of the equity. One can observe a competitive business relationship between the two sides in which the purpose of negotiation is to maximize individual gains.
Relationship Between Negotiators Before and During Negotiations The nature of the relationship between the two sides before the very first negotiating session would have a significant impact on their relations during the negotiations. If the two sides have had a harmonious relationship-perhaps a long and positive business relationship, or having engaged in mutually beneficial win-win types of negotiations-then the negotiating strategies adopted by each side would tend to be supportive of another win-win outcome. Prior relationships build expectations concerning the future of the current relationship that influence negotiation behavior. The entire process actually consists of a series of negotiating sessions. So the experiencepositive or negative-of each session serves as a backdrop for the next one, continuing to the culmination of the entire process. Consequently, each “positive” negotiation session serves to facilitate a favorable outcome at the next session; a
36
“negative” session to the atmosphere
has the potential of the next.
to do damage
Desired Outcome of Negotiations The outcome of negotiations can be both tangible and intangible. Tangible outcomes include agreement on such matters as profit sharing, technology transfer, royalty rates, laws for the protection of intellectual property, equity ownership, and other assets having real substance that can be appraised for value. Intangible outcomes include the goodwill generated between the two sides in the negotiations, the desire to make concessions to enlarge the stockpile of goodwill among the parties, and the overall desire to attain win-win outcomes through collaboration and compromise. The strategies and outcomes of negotiations will be conditioned by the short-term vs. longterm relationship emphasized by the two sides. For instance, it would be reasonable to expect both sides to compromise on tangible outcomes in favor of intangible ones if indeed the longerterm relationship is the preeminent objective of both sides. On the other hand, if a short-term relationship is all that is desired, the negotiators are likely to aim for tangible results that do not require goodwill between the two sides for their fulfillment. The U.S.-Japan trade negotiations are an example of negotiations in which the longerterm relationship between the two sides is even more important than the immediate tangible results of opening up the Japanese market and, especially, to reduce America’s yearly trade deficit of approximately $60 billion with Japan. It must be emphasized that most tangible outcomes in international business negotiations require goodwill and long-term relationships for them to become a reality. For example, the transfer of technology by an international company to a foreign enterprise is a tangible outcome. However, this transaction generally becomes effective generally after months or years of making goodwill and harmonious relations between the two sides a vital commodity.
impact of Immediate Stakeholders The immediate stakeholders in a business negotiation process are: (1) the negotiators on each side and their characteristics; and (2) the companies’ managers, employees, and boards of directors. The characteristics of the negotiators include such aspects as their cumulative experience in past international business negotiations and their cultural background. People who have negotiated numerous international business deals in the past will have a body of knowledge in their repertoire that could be quite an asset in impending busiBusiness
Horizons
/ May-June
1996
ness negotiations. For instance, a negotiator who has negotiated with the Chinese in the past will be far more adept at reading their “unspoken language” than someone who is a novice. Choosing which approaches and strategies work and which do not, in the context of a given negotiation, is an art that is acquired through the long practice of negotiations. The negotiator’s cultural background has perhaps the most profound impact on the negotiation process. After all, there can be no international negotiations without the interaction between at least two people of different cultural backgrounds. And culture, which is the amalgam of a set of values, beliefs, and norms that have been internalized by people in a society, has a definite role to play in how and why people behave the way they do, even in the context of international business negotiations. The personal stakes of the managers, the employees, and the boards of directors in the outcome of the negotiations have a bearing on the strategies chosen and on any offers and counteroffers made during the process. All three groups may have one or more of the following stakes in the outcomes of the negotiations: financial, career advancement, ego and prestige, personal power, wages and employment, or economic security. Managers are likely to think twice before negotiating an agreement that would erode any of their personal stakes, or those of the employees or the board of directors. For example, as mentioned above, Caterpillar has suffered numerous breakdowns in labor-management negotiations and several strikes at its Peoria, Illinois plant because the company has been negotiating with foreign firms to transfer several cost-sensitive operations to low-wage locations. Caterpillar’s labor union is unhappy because of potential job losses at the Peoria plant caused by the exports of jobs. But Caterpillar’s management was forced to follow this strategy because it had to make significant productivity and labor efficiency improvements to remain competitive against such global competitors as Komatsu.
N
egotiation-a process in which one party tries to change the attitudes, beliefs, or behavior of another party-is essential in conducting international business. This comprehensive model views negotiations as occurring within two umbrella contexts: an environmental context of forces beyond the control of either party to the negotiations, and an immediate context consisting of controllable attributes and relationships that characterizes the negotiations process. The proposed model should be applied from the outside in. Negotiators should start with the environmental context and study its impact on The Dynamics
of International
Business
Negotiations
the immediate context and on the negotiations process and outcome. Then the direct impact of the immediate context on negotiations should be studied. The model should be treated dynamically. Any changes in the environmental and immediate contexts will bring subsequent changes in the negotiation process and outcome. As the negotiation moves from one stage to the next, negotiators must reevaluate their initial needs, motivations, positions, and strategies under changing contextual circumstances. It is also important to reevaluate the other party’s situation. Negotiators should remain on the lookout for new and emerging needs of the other party and try to communicate openly with them for generating feasible solutions. International business negotiations are seldom restricted to a single issue, nor are both sides necessarily negotiating for the same outcomes. The model provided here should assist managers in identifying the potential sources of change, the issues brought forth by them, and the ramifications for outcomes. It is imperative that negotiators obtain as much data as possible on the contexts of negotiation. Data at all three levels-national, industry, and company-should be targeted. Many sources are available. Most countries have trade officials in their embassies and consulates who may offer advice. The United States has trade officials based in the Commerce Department who are responsible for keeping tabs on the changing economic and political climates of other countries. International banks and organizations such as the International Monetary Fund (IMF) and the World Bank publish country reports containing volumes of data that are relevant to the current negotiations. Because of these dynamic contexts, negotiators will have to be flexible. They must stay calm in the face of surprises and discontinuities. They should be prepared to accept new conditions and incorporate new agendas as long as they are credible and productive. Flexibility is important because it can generate creative solutions rather than traditional compromises. It certainly helps if the negotiators have a good knowledge of the potential obstacles in the host country. One should remain especially aware of the host country negotiator’s pace of negotiation, the formality of the presentation, possible government official
37
involvement, and so on. Interviews of individuals who have negotiating experience with the host country could be of help in this respect. Above all, negotiators will have to practice patience in international negotiations. It usually takes a long time to reach an agreement between the parties because of all the complexities involved. Patience is vital l~ecause it sends a signal of the negotiator’s commitment to the project, helping to build trust and a long-term relationship with the other party. It is also important I~~ause it ensures th:lt possible contingencies resulting from changing contexts are planned and taken into account. Only ;I well-prepared, highly adaptive strategy will ultimately guarantee success in international negotiations. 0
Sociul
(New
1. Some concepts for this section have been her-
roved from Salacuse (1988).
John J. Curran, “Chim‘s
House,
II. Kicks and V. Mahajan. “Ulunders in International Marketing: Fact or Fiction?” Loq Range Plurming, (198Q 78-83. Jes\wld W. Sdacuse, “Making Deals A Heginner’s Guide to International tions,” !~e~otiatiofr.k,?Irllul. Janwry
17
in Strange Places: Business Negotia1988. pp. i-13.
Jack Sawyer and Harold Guetzkow, “Bargaining and Negotiation in International Relations,” in Herbert C. Kelman. cd.. I~hw~utiomd Bebal~ior: A Sociul-Z?~)chologid Atra!y.si.s (Sew York: Holt, Rinehart and Winston. 1965).
Adr~17c1’~ it7
h~tcwmtioml
(Greennich,
CT: JAI Press.
Panldigm of lnterrw in R.D. Farmer, ed..
Cwnpurutic~e
1988):
.Munuge?ne?7t
203-219.
lnve~tment
Doom.”
f?,r-/zrfzc~.
Stephen E. Weiss. “Analysis International Business: The zatior/ Scicrrce. 4. 2 ( 1993):
of Complex Negotiations in KRC Perspective.” Orgorni269-300.
p. 117.
John 1,. Graham and Koy A. Herherger, Jr.. “Negotiators Ahroad-l>on’t Shoot From The Hip.” Hc~nwrd Hzei17a-.sRer’i~zo. July-August 1983. pp. 160-168. il. Herl>ig of Cross-Cultural
and Hugh E. Kranlcr. “Do‘s and IIon‘ts Negotiations,” Imhtstriu~ ;2lurketir7g :2l~i?7c7~c’rTie~zt.21 (1992): 287-298.
lJauI
“hlexico’s Percent,”
Escabtio~a.
Kandom
Stephen E. Weiss. “Creating the Ghl-Toyota Joint Venture: A Case in Complex Negotiations,” Colrrmhiu J~71r~7d oj‘ Wrld B7ksir7ess. Sumner 19X7, pp. 23-37.
References
7, 1994.
Co@ict:
York:
1986), pp. 33-34.
R. Tung, “Toward :I Conceptual tionnl I
Notes
March
D.G. Pruitt and J.Z. Rubin, S’tulet~7nte. ur7d Settiement
Woes Accelerate As Peso Falls Further aZtll Strect~Jorrrrwl.December 8. 199t.
2.26 p. AS.
Arvind V. Phatak is the Laura H. Carnell Professor of Management and International Business, and Mohammed M. Habib is an assistant professor of management, both at Temple University in Philadelphia, Pennsylvania.