GG2022 - Diplomatic Business: Engaging Corporations in Global Policy
When Chinese Premier Wen Jiabao landed in New Delhi in December 2010, he was joined by 400 Chinese businessmen. The delegation represented the changing face of international diplomacy. Long gone are the days when acts of diplomacy equated with well-dressed military men meeting at a hotel in Europe. The new diplomacy often requires the collaboration of a multi-layered morass of diplomats, entrepreneurs and labor unions, media moguls, military and militia leaders. As fears of the next stock market crash displace fears of the next terrorist bomb blast, private sector leaders are the growing face of global governance. Going forward, global diplomacy should engage corporations with a seat at the table.
Global companies now extend beyond the bounds of traditional state representation
Rising companies can no longer be categorized by country; their influence extends beyond the individual states that house their headquarters. VimpelCom, which was founded in Russia, is now a major global telecommunications player with almost 200 million subscribers managed out of Amsterdam headquarters. The merged steel major ArcelorMittal combined Mittal Steel and the European-headquartered company Arcelor. While ArcelorMittal is officially headquartered in Luxembourg, it has significant operations in more than 20 countries. Meanwhile, Naspers, which began as a newspaper in South Africa in 1915, is now a global media giant with holdings of 29% in Mail.ru in Russia and 34% in Chinese internet giant Tencent.
Like major states, multinational companies have global influence. These companies have global operations and management teams, and the impact of their actions capture the attention of government officials from multiple countries. For instance, when Mittal Steel's takeover efforts of Arcelor were opposed by the French government, Indian Commerce Minister Kamal Nath warned of a trade war between India and France. Similarly, efforts by Chinese state-owned oil company CNOOC to take over Unocal in 2005 were significantly delayed by US congressional opposition, and CNOOC ultimately dropped its bid due the "political environment." Similar challenges were raised a year later to DP World's efforts to take over operation several US ports from a British firm.
Major multinational companies are rising from emerging markets – and driving global growth
The rising force of global growth is in emerging markets, increasing the frequency and significance of interactions between firms and states across both emerging and mature markets. In January, the Boston Consulting Group highlighted 100 fast-globalizing firms from emerging markets – "global challengers" – that are driving global growth. The 100 emerging market firms highlighted by BCG accounted for $1.7 trillion in global purchasing of goods and services in 2011, with revenue growing at 16% per year from 2008-2011. This growth is translating into jobs: from 2006 to 2011, BCG's global challengers added 1.4 million jobs – while employment in the S&P 500 showed no growth. Tata is now the largest manufacturing employer in the UK, and Chinese company Lenovo (who acquired IBM's ThinkPad personal computer business in 2005) is opening a computer plant in North Carolina. For policymakers looking for the next wave of global growth, these are the firms that will lead it.
Facilitating foreign investment and partnerships is important for global development. Combining capital and capabilities across borders can create real gains for consumers. For example, Germany's Merck and India's Dr. Reddy's Laboratories combined forces to develop affordable forms of cancer therapies. A joint venture between CNOOC and Chesapeake Energy will help create 4,000 jobs in Colorado and Wyoming. The growth of rising challengers can help support jobs and new product development in mature markets – if the partnerships can be reached.
As multinationals become more diverse, corporate diplomacy will become key for growth
As emerging market firms globalize, states and corporations from different continents will more often find themselves around the negotiating table. Just as when political leaders meet, there is no guarantee that these corporate leaders will share similar cultures or values. Still, corporate leaders still find the gap unexpectedly large in some cases. Arcelor's management initially rejected Mittal Steel's advances noting that the two firms did not "share the same strategic vision, business model and values." DP World leaders "expressed bewilderment" over the degree of US opposition.
Success in these interactions is important for global growth, especially given the unattractive alternative: long, acrimonious negotiations that leave state economies threatened and corporations wary. The CNOOC-Unocal episode of 2005 and the DP World episode of 2006 both indicate the lost time and money that can occur – on both sides – when negotiations end poorly.
Progress will happen through principles, not procedures
Productive engagement between business and government is not likely to require new inter-governmental forums or courts of law. Rather, the focus should be on improved clarity around shared norms and understanding, rather than new legal code. The most significant interactions that businesses have with government are often during periods of change for a business – entering a new market, buying or selling a company, launching a new product or operation. During these difficult and challenging times, few businesses would suggest that more government processes are needed in their work; interfacing with the existing processes already proves to be a significant challenge for many businesses, particularly those operating overseas. The more helpful route is improvements to existing processes around recognized principles.
Many of the most productive steps in outlining frameworks for engagement between business and government have happened through frameworks, not new procedures. Real progress was achieved on human rights with broad recognition of the "Protect, Respect, and Remedy" framework of the United Nations Guiding Principles on Business and Human Rights. To enable growth – which is key for development, jobs and poverty alleviation – additional norms would be helpful for how governments and businesses engage, particularly around cross-border business transactions.
Improved transparency and engagement is the starting point
States need to be prepared to engage corporations – both local and foreign – in an open and transparent fashion. US and European companies often complain that the Chinese or other emerging market governments can be difficult to decipher and engage. Still, the Committee on Foreign Investments in the United States has also come under criticism for lacking transparency to foreign companies seeking to invest in the United States. Similarly, Canadian law requires that foreign investments provide a "net benefit" as determined by Industry Canada policymakers. The uncertainty about how to assess "net benefit" has complicated several recent foreign investments. Review processes have an important role to play, but providing structures for more regularly and clearly engaging corporations in a transparent fashion throughout will help encourage investment. Any corporation – including a foreign one – deserves a clear and consistent explanation for why its legitimate business interests are being curtailed by a government. There may be good reasons – and states should engage to share them.
Corporations need to work more aggressively to recognize and engage external stakeholders in a similarly transparent fashion. While CNOOC's unsolicited bid for Unocal in 2005 may have surprised US policymakers, CNOOC's more recent effort to acquire Canadian firm Nexen more thoroughly engaged external stakeholders. CNOOC hired lobbyists, consultants, public relations specialists to help manage relations between the firm and key policymakers in US and Canada. Concluding successful cross-border mergers, acquisitions, and partnerships will require connecting corporations with policymakers early and often.
One barrier to more frequent and transparent engagement is corporate concerns about confidentiality of business details and political concerns about appearing to fraternize too much with corporate interests, particularly in the US and Europe. As governments and businesses improve their ability to engage each other, bringing in NGOs as part of some meetings has the potential to improve transparency while protecting policymakers from accusations of undue influence for business.
As we look forward, corporations also need to do more to be transparent global citizens. There are some encouraging signs of progress. Based on a joint study between BCG and the World Economic Forum, Chinese globalizing firms have published only 36 reports on global corporate citizenship in 2006, but that number grew to over 800 reports in 2011. Going beyond reports, the Chinese government is also helping its firms to take a more serious approach to operating overseas. For instance, China's Ministry of Finance co-hosted a best practices workshop in November for small and medium enterprises doing between China and Africa.
Private corporations are as important as state governments for prominent global policy areas – including GG2022's focus areas of development, cyber-security, and energy. Bringing corporations to the table in a clear and transparent fashion has the opportunity to increase global growth. States and corporations must both shift their stances toward diplomatic engagement to enable productive partnerships for development and growth.
Whitney Haring-Smith is a fellow of the GG2022 program and a project leader for the Boston Consulting Group in Hong Kong. He is also an author of the BCG Global Challengers 2013: Allies and Adversaries report. This column is part of a series from the GG2022 fellows. For more information on the GG2022 please see here.
