How To Create a Better Deal in International Bargaining Situations

On April 19, 2013, after what was undoubtedly an intensive series of international bargaining and negotiation sessions, Toyota announced that it would begin manufacturing its Lexus luxury car in the United States for the first time. The Japanese automaker planned to invest $360 million in a new production line for its Georgetown, Kentucky, plant, which was expected to create about 750 jobs and churn out 50,000 Lexus ES sedans annually. The automaker would spend another $170 million on upgrades to the Georgetown plant, its largest outside Japan, the New York Times reported.

In response to the news, Kentucky governor Steven L. Beshear said he felt as if the state had “just won the Kentucky Derby.” Toyota’s decision was another sign that American auto manufacturing was on the road to recovery in the aftermath of the 2008 recession.

For Toyota, the decision fulfilled at least two primary strategic goals. First, the new production line would meet growing demand for the Lexus within the United States. In addition, shifting more production overseas would better insulate Toyota from a strong yen, which had increased production costs in Japan and eroded the value of the company’s earnings overseas. Along these lines, Toyota was also planning to invest $2 billion to expand and upgrade factories in Indiana, West Virginia, and Canada.

Toyota’s Lexus announcement was likely the culmination of several negotiations, as various states reportedly competed for the prize. Ultimately, Toyota appears to have been convinced to expand in Georgetown by $146.5 million in state tax benefits from the Kentucky Economic Development Finance Authority.

Whenever they are investing capital internationally, businesses and individuals typically must engage in intensive contract negotiations with numerous foreign parties. In his book, The Three Laws of International Investment: National, Contractual, and International Frameworks for Foreign Capital (Oxford University Press, 2013), Tufts University professor Jeswald W. Salacuse explains that such international bargaining can be especially complex, consisting of direct foreign investments such as Toyota’s, acquisitions, loans, privatizations, and joint ventures and other partnerships.

Four challenges common in international bargaining scenarios

Cross-border deals can present several challenges. Here’s advice from Salacuse on managing four of the most common challenges.

Challenge #1: An unfamiliar locale.
When negotiators do business abroad, they typically plunge into an unfamiliar environment, complete with different laws and business practices and often a foreign language. Add on the travel costs, time differences, and distance from home, and the prospect of negotiating an international investment can seem daunting.

But consider that traveling to negotiate investments with foreign partners has its advantages. When you make the effort to visit your counterpart’s turf, you signal your serious intention to do a deal. Even more important, you gain a unique opportunity to learn about the other parties and the local context, writes Salacuse in The Three Laws of International Investment. The knowledge you acquire from listening and observing will prove invaluable in helping you assess the other side’s expectations and constraints. It will also help you build the strong relationships that are necessary for the deal to thrive long after the contract has been signed.

Salacuse does offer one warning when it comes to negotiating international investments abroad: To avoid delays and stalling tactics from your foreign counterparts, make your travel plans clear and understate the amount of time you have available to do business.

Challenge #2: Cultural differences.
Cultural differences between negotiators from different countries can obstruct negotiations in several ways, according to Salacuse.

First, they can create misunderstandings that lead your negotiations offtrack. A Western executive who responds to a counterpart’s proposal by saying, “That’s difficult,” for instance, probably means that the door is still open to further discussion. By contrast, in some Asian cultures, where negotiators may be reluctant to deliver bad news directly, the same words may signal that a proposal is unacceptable and will no longer be considered. Western negotiators may miss this cue and believe that the proposal is still on the table.

Cultural differences can also affect the form and substance of your desired deal, including the language you use. In Muslim cultures where Islamic law prohibits the taking of interest on loans, for instance, a negotiator from another culture might need to refer to finance charges as “administrative fees” to gain his counterpart’s acceptance.

Books and articles can lead you through the intricacies of negotiating with members of different cultures and working through interpreters. But keep in mind that relying too much on information about cultural norms can lead us to stereotype those we encounter. To avoid this trap, when possible, take time to build rapport with your fellow negotiators and get to know them as individuals.

Challenge #3: Negotiations with foreign governments.
Even if your international investment primarily involves negotiations with a private party, you may still need to do business with officials from the host country’s government. Governments sometimes intervene to delay or halt private negotiations because of public concerns, and they often act as regulators who must sign off on whatever deal you reach.

When planning for a potential international bargaining situation, businesspeople and lawyers should ask themselves the following key questions, says Salacuse:

• To what extent does a government have an actual or potential interest in the deal?
• How and to what extent will the government be involved in the talks?
• How might the government intervene in a negotiation to protect its interests?

It’s not unusual for government officials to say that they have no authority to negotiate—that they can carry out only the laws and regulations they have sworn to uphold. Bureaucrats may feel uncomfortable with the term “negotiation,” believing it suggests the possibility of favoritism and corruption. But, in fact, they may have considerable leeway to interpret existing rules.

You can encourage government officials to negotiate with you by (1) finding a justification for your transaction in the law or in regulations or standards that will convince the public, civic groups, and the government’s opponents; (2) engaging in a negotiation process that the government can publicly support, namely one that is more open and transparent than your business deals back at home might be; and (3) avoiding the word “negotiation” in favor of terms such as “discussions,” “conversations,” and “requests.”

Challenge #4: A long time horizon.
In our era of globalization, one-off foreign trade transactions have increasingly been replaced by joint ventures, strategic alliances, global franchising arrangements, and the like, according to Salacuse. As a result, international investors often become long-term partners with a foreign entity, even if not by name. Toyota, for example, clearly hopes that its Kentucky plant will grow and thrive for decades to come.

Unfortunately, businesses are often overly optimistic about the likelihood of their new international partnership’s long-term success. According to one study, the average international alliance collapses after just 3.4 years. Common problems include mistrust and lack of information sharing between partners, disagreement on the scope of activities, and different management styles.

In addition, in a rapidly changing international environment, you may find that you have to cope with civil strife, political upheavals, monetary fluctuations, and technological change. The Argentine financial crisis of 2001–2002, for example, upended scores of major foreign investments in the country, resulting in extensive litigation. It’s unrealistic to assume that you can head off all these problems through provisions in your initial contract. Moreover, many cultures give much less weight to contracts than North Americans do, making contract terms less important over the long term than you might like them to be.

By contrast, it generally will be helpful to consider the following “non-legal and non-contractual” questions from Salacuse:

• How well do the parties know each other?
• What mechanisms might foster communication between the parties after the contract is signed?
• Is the deal balanced and beneficial to both parties?
• Do the parties understand and respect each other’s interests, values, and cultures?

When you acknowledge the inevitability of change from the outset, you equip yourself to manage it. That might mean stipulating in your contract that you will renegotiate specific issues at defined times. When conditions change, negotiation will be your best tool for managing the evolving deal. And if the deal breaks down, “negotiations may be the only means to mend it,” writes Salacuse.