International Negotiations

 

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The Hidden aspects of International Negotiations

By Arun Kottolli

Introduction

There has been a significant increase in international negotiations in the last two decades. In an increasingly Globalized world, more and more businesses are conducting business across borders. Negotiations preceded all international business transactions; sale of a product, formation of a joint venture, merger or acquisitions of companies abroad, or the licensing of the technology to or from a foreign firm. Negotiations are inevitable when a required outcome is impossible to obtain unilaterally without incurring unacceptable political, legal, or economic consequences. As a result, International negotiations are of significant importance to get an acceptable multinational business agreement.

The impact of international trade on U.S. economy has been well understood. The international trade affects all parts of the economy, with two-way trade in goods and services amounting to more than $81.6 trillion or nearly 25 percent of the U.S. GDP (Binnendijk, 1997). As a result, behavioral guidelines for effective cross-cultural negotiations have gained new importance. This paper explores the basic understanding cultural implications on cross-cultural negotiations. It has been observed that people tend to form a simplistic stereotypes for other cultures (Adler, 2000). While these stereotypes has its benefits when used carefully, there are several hidden challenges in cross-cultural challenges. This paper will examine some of the hidden dangers to cross-cultural negotiations arising from differences in governance and decision making across cultures and explore means to overcome such barriers

Cultural Stereotypes

To succeed in these international negotiations, one needs to know how to communicate with and influence members of other cultures. In the last two decades, enormous research has been conducted on international negotiation styles. Several documents on negotiating with Chinese(Adler, 1992), Brazilians(Graham, 1986), Russians (Beliaev, 1985), Middle-eastern Arabs (Al-Ghamdi, 1999) , Japanese (Blaker, 1977), Mexicans (Weiss, 1994) etc. have been published. In addition, Hofstede's studies (Hofstede, 1980) and classification of cultures based on: Uncertainty avoidance, Individualism - Collectivism, Masculine - Feminine, Power distance and Confucian dynamism. All these research and documents have created a stereotyping of negotiation styles of various cultures.

Stereotyping a county or a culture can be useful or harmful depending on how it is used. For example, table-1 shows some of the typical stereotypes developed from various studies (Glenn, 1997).

 

Table -1 : Some of the typical stereotypes.

 

US & Canada

Arabs

Russians

Primary Negotiating style & process

Conflict: Arguments countered with..

Making Concessions

 

 

Response to counterparts concessions


Relationship

 

Authority


Initial Position

 

Deadline

Factual appeals made to logic

 

Objective facts

 


Small Concessions made early to establish a relationships

 

Usually reciprocate counterpartís concession

Short term

 

Broad


Moderate




Very important

 

Effective appeals made to emotions

 

Subjective Feelings

 

Concessions made throughout the bargaining process

 


Almost always reciprocate

 

Long Term

 

Broad


Extreme




Casual

Axiomatic appeals made to ideals


Asserted Ideals

 


Few if any concessions are made. Concessions are seen as sign of weakness


Almost never reciprocate

 

No continuing relationships


Limited


Extreme




Ignored

Source: International Journal of Inter cultural relations, 1997

 

However most people forget that stereotypes can be helpful or harmful depending how its used. Effective stereotyping allows people to a fast method to understand a new culture and act appropriately. To be useful, knowledge from a known stereotype should be used as a first best guess, when it is accurate and when it is descriptive rather than evaluative. However, most stereotypes carried in people's minds are inaccurate perceptions which are selectively learned and held rigidly (Ratiu, 1983).

 

Hidden Challenges

Cultural difference can disrupt international negotiations. But in the recent past, firms and organizations have invested in cross-cultural training for their executives and negotiators. Negotiators have learnt the do's and don't of a foreign culture and have become quite skillful at handling cultural etiquette. Obedience to these rules is not enough in International negotiations. The hidden challenges, such as knowing the important players, the negotiation process and negotiation approach to build consensus and shaping expectations, play a key role in having a successful negotiations.

Know the Players

The real purpose of the negotiation is to influence the organization, not just the negotiators. In international negotiations, an unfamiliar territory, it is difficult to know exactly who is involved and what roles they play. In all negotiations, there will be two sets of decision makers, formal decision makers and informal decision makers. Not all formal decision makers will be at the negotiating table and even experts sometimes fail to identify them as seen in the following examples.

 

Formal decision makers

Consider a merger negotiation in United States, The key players will include the two firms, SEC, Department of Justice, the federal trade commission, European Union Trade commission and others. Similarly, while negotiating abroad there will be other important players. These other players may not be obvious to you. So one needs to take extra time to know who the players are.

For example, Consider GE's merger negotiation with Honeywell in 2002. GE suffered a humiliating defeat in part because GE's management underestimated the nature and seriousness of European Union's concerns about competitiveness and their potential to block the merger (Sebenius, 2002).

Knowing the key players also means to understand each player's role - who takes which decision. Not knowing the role of all the players can be a costly mistake - As discovered by Pirelli. Italian tyre maker Pirelli had gained control of the majority shares in Germany's Continental Gummiwerke. It even had approval from Deutsche bank and Gerald Schroder.

In a U.S. transaction, having majority shares is enough to acquire a company. But not in Germany. According to Germany's corporate governance rules, management board, shareholders, a supervisory board and labor have to agree for the merger or acquisition or any major decision. In addition, the labor union elects members to the supervisory board, which in turn elects the management board. The management board has powers to prevent any single shareholder from taking control over the company irrespective of the percentage of shares owned by that shareholder.

Pirelli failed to get a buy-in from labor and management board, thus it could not complete the acquisition even though it controlled majority of the shares.

These examples show the need to understand the deeply entrenched business structures while dealing with organizations abroad. Cultural and legal assumptions can sometimes make it difficult to recognize the other key decision makers.

 

Informal Decision Makers

These are really the "hidden" decision makers in any negotiations, particularly in International negotiations. The informal decision makers may not have the legal right to affect the current negotiations but they wield enormous influence over the business. For example, keiretsu network in Japan, Guanxi (personal connections) in China, Mafia in Russia, etc. In addition, competitors from home country and in foreign country can influence the outcome of a negotiation.

In many countries, the informal decision makers may have a greater influence than the actual parties making the deal. Outsiders need to understand who these players are and how to influence them.

For example, In 1994, Both Ford and GM were bidding to build an automobile factory in China. Ford appointed Jim Paulson as president of Ford in China. Paulson, an excellent engineer and had worked in several foreign countries. GM on other hand had appointed Shirley Young, a Shangai born executive, daughter of former Chinese ambassador to U.S. Even though Ford was ahead in the bidding phase, Young was able to secure the contract to GM in 1997. GM had won this negotiation primarily through good Guanxi brought in by Shirley Young. While Ford got bogged down in intellectual property right regulations in China (Graham, 2003).

In international negotiations, there will be a great gap between the laws on the books and the actual situation on the field. Frequently negotiators often underestimate the power of informal influences because they have the legal ability to enforce the contract.

Successful international negotiations begin with identifying the key players who have formal and informal influence over the decision process. Develop a strategy to address their interests to reach a mutually agreeable negotiated settlement.

 

Approach to Negotiations

Knowing the key players is just half the battle. As mentioned earlier, negotiations often is the means to influence the entire organization. Knowing whom to influence gives rise to the question of how to influence them?

Approach to negotiations means primarily controlling the process of influencing the key players. In international negotiations, one needs to understand the methods and means of influencing people and organizations. Cultural, legal and organizational differences makes it imperative to adapt different negotiation strategies and tactics.

Top Down Approach

In a typical American (or Anglo-Saxon) negotiation, negotiators would like to deal with the "real boss", an authority figure who makes the final decision. Americans pride themselves on having the full authority to negotiate. As a result most negotiators find a way to interact directly with the "boss" and avoid making deals with relatively powerless agents. While this technique has been proven at home and sometimes abroad, top down approach has serious limitations in international negotiations. And in many cases, it may work to your disadvantage.

For example, A French firm wished to acquire an Indian subsidiary of a Swiss multinational. The two CEOs agreed on the deal and expected the agreement would be accepted by the management in India. The French company even tried to crammed it down on the Indian subsidiary by offering incentives to those who accepted it, and by punishing those who opposed it. This strategy backfired when the subordinates rebelled and the value of the deal soon eroded (Ghoshal, 2001)

In another example, Armand Hammer entered into a joint venture with China National Coal Development Corporation (CNCDC). The deal was negotiated between Hammer and China's supreme leader Deng Xiaoping, who met in person and expressed serious commitment to making the venture a success. Hammer saw this deal as a crowning achievement of his career: the largest foreign investment in Chinese history. The two leaders ordered their subordinates to reach an agreement. Yet the deal failed due to bureaucratic conflicts, escalating demands and misinterpretations. Finally after a decade of negotiations, Armand Hammer pulled out of the deal due to sheer frustration.(MacLeod, 1997)

The example of Armand Hammer with CNCDC illustrates the risk with dealing only with omnipotent bosses. The source of real power can be misleading. Organizations have to learn that there are limits of presidential powers which can prevent the deal from transpiring as expected. Even when dealing with authoritarian powers, deals with the top may not translate into action on the ground.

Building Consensus

"Before the Japanese have reached a consensus, they can't negotiate; After consensus is attained on the other side, there is nothing to negotiate"

-- John Graham & Yoshihiro Sano

Building consensus in another approach to decision making during a negotiations. The consensus approach is quite common in Japan, China, and India. Consensus building requires agreement among the members of the other side's negotiating team; and at times it requires influences from a higher authority. The need to build consensus among the players on the other side will affect your negotiating strategy in many ways.

For example, When a consortium of U.S. companies submitted a proposal to assist in building a dam in the Three Gorges Area of Yangtze river, the project was debated by the Chinese for more than 70 years! The Chinese needed time to build a consensus before embarking on the project. The American consortium was negotiating with Yangtze Valley Planning Office (YVPO). In China, bureaucratic offices like YVPO are explicitly ranked and no one unit has authority over the other of the same rank; disputes are to be settled by the higher authority. The only practical solution is consensus. (Graham, 2003)

Negotiators have to adjust their strategy to deal with the task of consensus building. Since consensus often focus on relationships rather than the deal itself. People involved in negotiations must take substantial amounts of time to learn about each other and foster a deep relationship before talking about the deal. In consensus approach, the relationship building is more important than the deal itself. "The path is more important than the ends". This means that you should be prepared to provide information readily and must be asking questions continuously to the extent that everyone gets to know everyone before the negotiations can start.

It is during this process, the needs and demands of each party has to be included into consensus building. Your objective in consensus building is to get your points of view, your interests and plans incorporated into their consensus process. What happens in the negotiating table is a mere formality of approving the consensus arrived earlier. The negotiating table is not the place to influence others to change their minds. Making new demands or persuasive appeals are ineffective and are inappropriate.

Shaping Expectations

The outcome of a successful negotiation must always match with our expectations. Therefore it is necessary to shape our own organization's expectations from the deal - How long the deal will take? What concessions we have to make? How much we can expect from the deal?

In other words the answer to the question "What do I want?" needs to be clarified when new information is revealed during the negotiations. Failure to do so may put you in a negotiating vice, between your organization demanding you to deliver on their high expectations and the reality on the ground.

Similarly, the other party to the negotiation will influence their expectations from the agreement. The expectations in an International negotiation revolve around four key areas: (Osman-Gani, 2002)

Underlying opinion of the process: Both sides need to see it as a win-win process, unilateral assumptions about the other side's view is dangerous and misleading.

Building an agreement: Both sides need to agree on how to approach the final agreement. Asian countries seek a broad and wide ranging agreement first with details to be agreed later, while Americans and Europeans want to deal with small specific
agreements first.

Level of detail: An extension of the above, firms from countries where legal rules are poorly implemented are content with a broad agreement based on general principles rather than a detailed contract.

Implementation of Agreement: U.S. firms generally expect other to follow the letter of the contract and resorting to legal methods if there were any violations. In many other countries, a contract is a mere starting point of a relationship which will entail several rounds of renegotiation. Both the sides need to understand the expectations of the other side regarding the method of implementation of the contract.

Conclusion

International negotiations are much more complicated than the perceived cultural differences.

It is definitely worth noting the cultural differences and learning the do's and don'ts of other cultures. While culture tells a lot about the person with whom you are negotiating with, it tells little about the other hidden players in negotiations, their approach to negotiations and their expectations from the agreement. Due diligence is required to map all the key players, identify factors which influence their decisions and approach the negotiations so as the influence the final outcome.

References

  1. Ratiu, Indre. "Thinking Internationally: A comparison of How International Executives Learn," International studies of Management and Organization, vol 13, pp. 139-150,1983
  2. Sebenius, James K "The hidden challenges of cross-border negotiations" Harvard Business Review, March 2002
  3. Graham, John L and Lam, Mark N. "The Chinese Negotiation" Harvard Business Review, October 2003
  4. Ghoshal, Sumantra, Piramal, Gita and Budhiraja, Sudeep "World Class in India" Peguin Books India Ltd, 2001
  5. MacLeod Roderick, "China Inc: How to do Business with Chinese" Harper & Row, 1997
  6. AAhad M. Osman-Gani & Joo-Senf Tan. "Influence of Culture on Negotiation Styles of Asian Managers" Thunderbird International Business Review, December 2002
  7. Binnendikj, H., National Negotiating Styles. Center for the Study of Foreign Affairs, Foreign Service Institute, U.S. Department of State, Washington, D.C., 1997
  8. Adler, Nancy J "International Dimensions of Organization Behavior" South - Western, 2000
  9. Adler, Nancy J and Graham, John L, "Strategy Implementation: A comparison of face-to-face negotiations in the People's Republic of China," Strategic Management Journal Vol 13, no 7 1992 pp. 449-466
  10. Graham, John L, "The Influence of Culture on the Process of Business Negotiations," "Journal of International Business Studies, Vol 16, no. 1 1985 pp. 81-96
  11. Beliaev, E "Understanding Cultural Environment: U.S.A- U.S.S.R. Trade Negotiation," California Management Review, Vol 27 no. 2 1985, pp.100-112
  12. Al-Ghamdi, Salem M. "Success and Failure in Saudi-American Negotiations: American Views," International Negotiation, Vol. 4 no.1 1999, pp.23-36
  13. Fisher, R and Ury, W Getting to Yes Boston: Houghton Miffin, and New York: Penguin, 1981
  14. Fisher, Glenn. International Negotiations: A Cross Cultural Perspective Chicago: Inter cultural Press 1980
  15. Blaker, M Japanese International Negotiating Style New York: Columbia University Press 1977
  16. Weiss, Stephen E. "Negotiating with Romans - Part-1," MIT Solan Management Review Winter 1994
  17. Hofstede, Geert, "Motivation, Leadership, and Organization: Do American Theories Apply Abroad?" Organizational Dynamics Summer 1980

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