1. International Business Diplomacy
This chapter begins by noting that “terms of operations are highly
influenced by attempts of international companies and governments to
improve their own positions relative to one another.” (p. 454) The
chapter then tries to cover the many possible cases that can arise in
relationships, particularly those pertaining to bargaining and negotiations,
between firms and governments. There are too many cases to cover all
of them. The following notes provide an overview of the general setting.
As noted at the outset of the course, the basic structure of bi-lateral
international interactions is as follows:
Country A Country B
Political Political
Politicians International Politicians
Institutions Relations Game Institutions
Domestic International Domestic
Pressure Pressure Pressure
Game Games Game
Business International Business
Institutions Institutions
Business Game
The international relations, international business, and pressure games
are almost always bargaining/negotiation games. (The text discusses the
nature of this kind of pressure on pp. 457-458.) The levels of influence
that each player can bring to bear depends upon “the relative strengths
of the parties involved. These strengths are affected by such factors as
competitive changes, the resources the parties have at their disposal,
validation by public opinion, and joint efforts of other parties.” (p. 454)
The text begins with Bargaining School Theory, which “holds that the
negotiated terms for a foreign investor’s operations depend on how much
the investor and host country need each other’s assets.” (p. 455) This
2. point can be generalized. I will use the Generic Negotiation Game as a
starting point. The formalities are presented in Steven J. Brams, 1992,
“A Generic Negotiation Game,” Journal of Theoretical Politics, 4:1, 53-66.
The general theory of negotiation is presented in Howard Raiffa, 1982,
The Art and Science of Negotiation, Cambridge, MA: Harvard University
Press.
The generic negotiation game is as follows:
NEGOTIATION
GAME Cooperate Defect
Cooperate <b+y,B+Y> <b,A>
Defect <a,B> <a-z,A-Z>
where payoffs are of the form <row,column>, and where a>b, y>0, and
z>0 for row player, and A>B, Y>0, and Z>0 for column player.
The following partial ordering of the payoffs follows from the
specifications of the parameters:
a > b, a > a-z, b+y > b for row player,
and
A > B, A > A-Z, B+Y > B for column player.
Since the negotiation game is specified only up to a partial order, it is
consistent with various particular games. These games constitute a rich
and useful array and are as follows:
PRISONER’S
DILEMMA Cooperate Defect
Cooperate <3,3> <1,4>
Defect <4,1> <2,2>
DEADLOCK Cooperate Defect
Cooperate <2,2> <1,4>
Defect <4,1> <3,3>
HARMONY Cooperate Defect
Cooperate <4,4> <2,3>
4. U(∆w)
U(g)
U(g-c)
g-f
∆w
g-c g
U(g-f)
The Negotiation Game provides a general framework for analyzing many
particular situations. For example, the basic trade agreement negotiation
game is an instance of Prisoner’s Dilemma (Krugman and Obstfeld 1991,
International Economics, New York: HarperCollins, 222-231), and the
hegemonic trade negotiation game is an instance of Bully (Dacey,
1994,“Inducing Fair Trade Out of Hegemonic Trade,” Synthese, 100:3).
Aggarwal and Allan (1994) present other interpretations of the
Negotiation Game. (Reference--Aggarwal, Vinod K. and Pierre Allan 1994
“Preferences, Constraints and Games: Analysing Polish Debt Negotiations
with International Banks,” 9-49 in Pierre Allan and Christian Schmidt
(eds.), Game Theory and International Relations, Hants, UK: Edward Elgar.)
5. The reason the text cannot cover all of the possibilities should now be
clear. There are many possible game structures, and within each,
infinitely many possible games. We will examine just a few.
The General Trade Negotiation Game
This game is played between nations and is carefully and fruitfully studied
in International Economics. (Again, see Krugman and Obstfeld.) The
game-theoretic name of this game is Prisoner’s Dilemma. The payoff
table is as follows:
PRISONER’S
DILEMMA Cooperate Defect
Cooperate <3,3> <1,4>
Defect <4,1> <2,2>
Note that each side has a dominant strategy--defection. In this setting,
defection amounts to demanding favorable conditions of trade, while
cooperation amounts to demanding fair conditions of trade. Thus, each
player wants favorable conditions, and the game ends at the <2,2>
payoff. Note, however, each player is better off if they cooperate. Then
the game ends at the <3,3> payoff. Such bilateral cooperation typically
emerges under repeated play of the game. (Robert Axelrod, 1984, The
Evolution of Cooperation, New York: Basic Books and Robert Axelrod)
However, it is not always so simple. (R. Dacey and N. Pendegraft, 1988,
“The Optimality of Tit-for-Tat,” International Interactions 15:1, 45-64)
The key point here is the natural and unavoidable conflict. Note that if
everything were just fine, then the game would be different, as follows:
HARMONY Cooperate Defect
Cooperate <4,4> <2,3>
Defect <3,2> <1,1>
This game is the antithesis of Prisoner’s Dilemma. Each player has
cooperate as a dominant act, and everything works out very nicely.
Harmony, however, is NOT a model of the international trade negotiation
process.
6. As noted, the hegemonic trade negotiation game is Bully, as follows:
BULLY Cooperate Defect
Cooperate <3,3> <2,4>
Defect <4,1> <1,2>
The book comments on this game as follows: “If either a company or a
country has assets that the other strongly desires and if there are few (or
no) alternatives for acquiring them, negotiated concession may be very
one-sided.” (p. 455) Note that the column player has defect as a
dominant strategy. The row player, seeing this, need only consider the
<2,4> and <1,2> payoffs. Between these, clearly the former is preferred
to the latter. Therefore, the row player chooses to cooperate. The
outcome of the game is <2,4>, with the conciliatory row player getting
its second worst outcome and the hegemonic column player getting its
best outcome. This situation is rarely stable, and often leads to serious
conflict. The role of OPEC during the 1970s and early 1980s fits this
model, as did the role of the British in North America during the late
1700s. Monopolists and monopsonists often fit this model, at least in
the short run.
The text’s discussion of company and country bargaining strength (pp.
455-456) is important. The relative strength levels of the relevant
parties is what determines which game is being played.
The text’s discussion of behavioral characteristics also is important (pp.
461f). This discussion relates more to the general account provided by
Raiffa than to the game-theoretic one given above. The key point is this-
-different cultures have different negotiating styles. Westerns (i.e., North
Americans and Europeans) tend to be impersonal, impatient, and direct.
Asians tend to be personal, patient, and indirect. Latin Americans tend to
be personal, impatient, and indirect. The impatience and directness of
Westerners often costs then dearly in negotiations with Asians and Latin
Americans, respectively. (Table 13.1 presents all this in more detail.)
These generalizations can cause great difficulty. Often it is in a person’s
own best interest to be misperceived by the other party to a negotiation.
Since anyone can learn to behave contrary to his or her culture, it is silly
to apply the foregoing stereotypes to your adversaries. (The text hints
at this on page 462.)
7. THE ROLE OF LANGUAGE
The text raises this very important issue on page 463. Negotiation
involves manipulation, which involves ambiguity. Most important,
strategic ambiguity requires precision. If the other person does not
understand exactly what you intended to have understood, then any
attempt at manipulation loses precision. The text focuses on the use of
slang, which is often misunderstood, even among one’s fellow citizens.
The problem goes deeper. The use of metaphors, similes, etc. will miss
the mark if they cannot be understood. It is not enough to have a
translator. A negotiator is best off if he or she is the translator. (It
should now be clear why so many countries find the investment in foreign
language education so important.)
The text makes a very interesting point--“Because of conflicting
pressures from different groups, an MNE can almost always be accused of
bad behavior by someone.” (p. 472) The key point here is that an MNE is
playing in at least two games simultaneously. Recall the box diagram
given at the outset of these notes. The simplest variation is the two-
level game involving a business game with a firm in another country and a
pressure game with the domestic government. This game is very
common. The diagram is as follows:
Country A Country B
Domestic
Politicians
Government
Domestic
Pressure
Game
International Business
MNE Institutions
Business Game
8. The slightly more sophisticated version of the bi-lateral setting is as
follows:
Country A Country B
Domestic Political
Politicians Politicians
Government Institutions
Domestic International
Pressure Pressure
Game Games
International Business
MNE
Business Game Institutions
In the former, the MNE is receiving pressure form both foreign
competitors and the domestic government, whereas in the latter the MNE
is also getting pressure from the foreign government. Two points are
important. First, the MNE may well be in a multi-lateral setting where
there are many governments and many firms. Second, there are other
pressure groups not represented here, including groups involved in
environmental issues, social issue, etc.
The text makes a recommendation. “A good rule for serving a given
group is to try to maximize benefits without excessively disrupting the
local situation.” And further, “Companies should work to increase the
number of local supporters and dampen potential criticism.” (p. 472)
Both statements seem to meet with common sense. The point is this--
the common sense offered by the text does not hold in all, or even many,
cases.
Protection of Intellectual Property Rights
Again, the text has changed direction. This is a big issue. Not everyone
treats intellectual property the way we presume we do. The mechanisms
of protection are patents and copyrights. Both were devised for a much
9. earlier and technologically simpler age. Neither work well now. Should
someone be allowed to patent an algorithm? A DNA sequence? A virus?
Clearly, copyrighting software will not protect the software. (Copyright
protects only the statement, not the content.) Until recently, one could
not patent a piece of software, since it is not a physical object or a
process. There is now a case in the legal system pertaining to software
patents. Obviously, trademarks do not protect the software.
(Trademarks protect only the logo.)
Piracy is a basic issue. First, the model of piracy is quite simple, as
follows:
The piracy decision considered here consists of the choice between
purchasing and stealing software. I will presume that pirated software is
costless. If the dishonesty is caught, then there is a fine to be paid, and
if the dishonesty is not caught, then no fine is paid. Let g denote the
gain from the use of the software, c the acquisition cost of the software,
and f the fine. For example, if the task is developing a design, then g is
the gain in income from selling the finished design, c is the cost of the
software, and f is the penalty for piracy. The payoff table is as follows:
buy steal probability
piracy
is g-c g-f p
punished
piracy
is not g-c g 1-p
punished
To avoid trivialities, I presume that f > g > c > 0. If f < c, then piracy is
the dominant act and every (solely) rational individual would be engaged
in piracy. If c > g, then no rational member of the community would use
software. Finally, g > f violates the legal principle that the punishment
must fit the crime. These assumptions are consistent with the
advertising of the Business Software Alliance--“Selling or copying pirated
software without authorization is against the law, with severe criminal and
civil penalties including imprisonment of up to five years, fines of up to
$250,000, or both.” (See any recent issue of a PC magazine.) The fine,
f, represents the individual’s assessment of the penalty that would be
10. imposed if the piracy were detected and punished. Clearly, the Business
Software Alliance statement suggests f is greater than the value of g for
almost all individuals.
The behavior of a solely rational individual is determined by the
values of the expected utilities of his or her acts--buy is preferred to steal
if and only if Eu(buy) > Eu(steal), where Eu(buy) = pu(g-f)+(1-p)u(g), and
Eu(steal) = u(g-c). Substituting and rearranging terms yields the result
that a solely rational individual prefers buying to stealing if and only if
u(g ) − u(g − c)
p >
u(g ) − u(g − f )
.
That is, a solely rational individual prefers buying to stealing if and only if
the probability of detection is "high enough" relative to the payoffs g, g-c
and g-f, and to the individual's preference structure and attitude toward
risk, as represented by the utility function U. Graphically, we have the
following:
11. Piracy is quite common. It is the norm in various places, e.g., China and
Russia. Since neither patents nor copyrights protect intellectual property,
piracy can be expected to increase.
