Building Leverage in International Business: A Modern Approach on the Silk Road
“Juice,” is one of my favorites.
I have also heard executives refer to it as: “capacity,” “currency,” or “weight. Juice is the leverage a company must develop in order to achieve objectives in a foreign market. It is the C-Suite version of global street smarts.
Today, leverage is increasingly not about power arising from false pretenses or corruption. Times are changing and more constructive strategies are emerging. “When I was bringing ships through Panama or Suez, we always had a couple of cases of Wild Turkey or cigarettes ready for the officials boarding the vessel. Without it, you would sit forever. But that has mostly changed. These days everyone wins through efficiency,” said one retired captain from India. Successful market entry and sustained growth now result from assembling the strongest multi-national teams and investing in deeper relationships and shared upsides.
In contrast, old school leverage involved one-sided dominance with a limited shelf life that ultimately hurt everyone. When working on a hotel investment in the coastal town of Golfito, Costa Rica, I came across a massive loading platform where the jungle meets the sea. A taxi driver summed up 40 years of banana exports shipped from the dock by the United Fruit Company.
“Whenever we asked for more pay,” he explained, “the company threatened they would cut down every banana tree and move away.” Written historical accounts of the period are both complex and sobering. In 1975, the CEO of United Fruit, accused by the SEC of bribes to Central American officials, broke out the window of his 44th floor office at the Pan Am Building in Manhattan and jumped to his death. In 1985, in response to worker strike and other pressures, the company closed the Golfito banana plantation.
Rather than looking at past U.S. business practices as the baseline for measuring success among global management teams, there are other ways to judge good “juice.” Contemporary international business is properly built, and assessed, through a blend of political, economic, and legal leverage.
Anticipate complex questions. Be diplomatic.
One savvy New England governor, on a business trade mission to Taipei, carefully dodged inquiries from a television talk host regarding U.S. recognition of the Republic of China. The governor replied that while he understood the importance of the issue, his goal during the mission was to secure contracts for the commercial delegation, and, that as a state official, he should not comment regarding matters of federal law. An hour before going on set, the leader had prepared with eyes closed, visualizing the repartee. The governor, perhaps predictably, became a U.S. senator.
Political leverage starts with developing an advanced sense of self-awareness in the region. It extends through membership in foreign chambers of commerce; participation in non-governmental organization and community events; and attending opportunistically the dinners along “Embassy Rows” in strategically valuable countries. These activities, undertaken in good faith, will provide helpful sounding boards as well as potential solutions.
While it is not unusual for in-bound companies to hire legislative counsel and governmental affairs experts to understand electoral realities and to ensure market access, this can be delicate dealing and there are no guaranties. Diplomacy suggests that, like the visiting New England Governor in Taipei, foreign investors enjoying reasonable access to government do not benefit by openly taking political positions.
When, for example, U.S. officers debate their country’s history of race relations, or Colombian business leaders describe past eras of self-exile with their families as the consequence of having challenged narcotraffickers, or when Cambodian partners describe survival under Pol Pot, the outsider is wise to offer the uncomplicated yet powerful affirmation of: “I understand.”
As theologian Reinhold Niebuhr warned that the idealistic “children of light” should be aware of every group’s self-interest, and even absorb some of the realities leveraged by the ruthless “children of darkness,” companies’ global response plans should be similarly shaped by studying and fortifying against the impact of local corruption and misdealing.
Good business is good business the world over.
One celebrated CEO tests his team before allowing a draft proposal to be released: ”Aren’t we being a little bit cute here? Is this deal too rich for us? We’re not like that. How do we see this deal if we’re them? Do they still like us five years from now?” The managers are then made to defend their positions–and sometimes tame projected margins.
Professionals in each industry sector speak the same language. Business term sheets present economic variables which are understood by all parties. However, the complexities of project control and ego are the factors which usually slow transactions. Given that geographic distance between partners can breed distrust and business risk, the metrics of the cross-border deal should be properly balanced from the start and followed by vigilant oversight.
Economic leverage in current markets is also achieved through integrating lasting technology solutions. Sustained growth and balance are developed through the participation of investors and directors from multiple countries. In addition, considering China’s manufacturing capacity (even during times when the country struggles economically), much of the world has been left to compete on quality, R&D, and after-sales service. As a result, extended terms in distribution, licensing, and joint venture agreements are won through nothing less than performance and hard work.
Getting caught up in the euphoria of a new market creates risk. For example, bad business behavior detected in a foreign partner can never be explained culturally–as this tendency to make provincial excuses paves the road to management’s self-delusion and the erosion of economic leverage. Lasting economic leverage is often the product of imagination and novel strategy. The fruits of economic foresight, wisely executed, lie all around us.
African-owned and Mexican-owned race teams are now competing at NASCAR speedways in mainstream America as they purposefully extend business alliances with Fortune 500 leadership at the track. One Canadian manufacturer operating in a Dominican free trade zone is boosting employee goodwill and productivity through the education of children beyond the factory fence. In Spain, multi-national energy executives plan the growth of modern wind farms with the passion of Don Quixote.
The business codes of most jurisdictions are remarkably similar.
Differences exist largely through implementation of the laws. Regulatory and procedural hurdles lead to bureaucratic “Simon Says” scenarios and additional costs which test the character of global executives. Patience becomes a virtue.
For example, Mexican law forbids foreigners from directly owning coastal real estate–and yet Mexican banks and fiduciaries are properly engaged as intermediaries to achieve this result indirectly. Singapore law requires that, in forming a Singapore subsidiary, detailed financial information about the foreign parent’s directors must be reported–but with resources, and time, come legally acceptable workarounds to avoid disclosure. Japanese law does not expressly prevent a foreign corporation from serving as an incorporator or holding the subsidiary’s first shares; however, in practice, a Japanese accountant is necessary to capitalize the initial subscription.
Local partners, attorneys, and officials are well aware of the hurdles and inefficiencies of their own systems. They watch the outsider’s reaction to the process. Through patience professional goodwill is built. Goodwill usually extends to credibility and leverage in the new market.
Legal leverage begins with interviewing and hiring the very best lawyers in the region. Foreign counsel must have the capacity to bring common sense, commitment to the cause, and uncomplicated access to government. When collaboration between the legal teams of multiple countries is undertaken, the exchange should feel no different than a transaction at home.
It is essential to cultivate a respectful relationship with lead counsel so that he or she will dare venture a personal opinion when it counts. This one-on-one trust is especially important when engaging law firms from conservative civil law traditions where lawyers ordinarily recite protocol instead of giving clear directives.
All of this comes with a warning. If the foreign law firm being interviewed declares it can curry favor with local officials to deliver results, look elsewhere. In most countries the rule of law and supporting bureaucracies are far too complex and diversely-staffed to be navigated through anything other than detail-oriented advocacy and clear legal channels. The risk of civil and criminal liability under the U.S. Foreign Corrupt Practices Act (“FCPA”) and other countries’ similar prohibitions are real. In 2015, the FBI added three teams to investigate FCPA violations. Solid cross-border commercial contracts, international tax planning, and the structuring of foreign subsidiaries are built on knowledge of the law and analytical excellence.
As importantly, an international arbitration clause included within even the most rudimentary of contracts, largely ensuring confidentiality and recourse by application of treaty, is itself a platform for strength.
Specifically, the 1958 Convention on the Recognition of Foreign Arbitral Awards (“New York Convention”) has been signed by most, but not all, major trading nations and provides for the enforceability of an arbitrator’s monetary award in the courts of ratifying countries. While judicial enforcement of the award is not guaranteed, a capable law firm will provide predictability and functional definitions based on local jurisprudence. The United States is not a signatory to any treaty providing for the enforcement of foreign court judgments. Accordingly, by counsel inserting model language designating an arbitrator instead of a judge in the dispute resolution provision, the New York Convention is available as leverage.
There are moments when notwithstanding planning and screening, problems arise: the plant manager is accused of assault against a co-worker; the foreign branch is selected for tax audit; or the company’s trademarks and brands are challenged by a competitor. At such times, the degree of professional currency as brought by advisors in the foreign jurisdiction can become determinative as to outcome. Work with those advisors to develop protocols and procedures that limit risk and reflect, in advance of any problems, a good faith effort to comply with local laws.
Leverage Along the Silk Road
Professional intimacy often transcends leverage.
Following our work together on a project, I invited foreign contacts in an Asian country’s New York consulate to spend the weekend at our country farm in Maine during August. The diplomats convoyed north in three black sedans. Our family shared lobsters and hand-cranked ice cream. Our guests shared homemade dumplings and fermented sorghum whiskey. After dinner, as darkness fell, I came upon one of the senior officials crying in the hayfield. He explained that the folk songs and poetry of his tradition celebrate the wonder of fireflies–but air pollution has killed them at home. As the gentleman watched his children laugh and chase fireflies through the tall grass, peeking through their cupped hands at the glowing bugs, he had been overcome by emotion.
While the process of creating leverage and hedging against risk in international business must be purposefully considered, much of its impact comes through being human, kind, and open to new experience. Without a genuine personal investment, the exercise can become transparent and ugly.
Of course, as global markets and people are not always predictable, in order to be effective in shaping cross-border deals one must be all of patient, wary, and accepting. Leverage becomes a state of mind. We learn to respect everyone, but trust few.
Years ago I received an old book from a Dominican corporate client who reserves part of each day to care for his rare birds–the lineage of which he traces to Egypt, India, Iran–and other points along the Silk Road. The author wrote of the history of collecting and raising poultry bartered for across continents (C.A. Finsterbusch, San Antonia by the Sea, Chile; 1929). For two decades, this book, of no immediate utility, sat somewhere incongruously on a shelf in my office alongside heavier legal treatises. As I explored the memoir, the writer documents his travels and international dealings, and there are some curious observations in the Preface:
I have picked my information from everywhere; have approached Royalty, scientists, diplomats and the humblest labourer, and am glad to say that everywhere I was treated alike, with very good and honest will. All over the world there are … many varieties [of birds] … of which we know nothing. They all together tell us the history of humanity.
Through negotiations with all types, we come to appreciate that the full power of leverage can be realized through balance. With this knowledge, we continue to search for commonality, financial gain, and intellectual challenge along the Silk Road.