Business diplomacy: the compass rose of foreign markets

With transnational corporations (TNCs) around the world today numbering over 60,000 and more than 800,000 affiliates working abroad, it is easy to understand how modern day international business could have transformed into a major global player serving at the axis of politics, social and environmental responsibility. Additionally, with accountability to a large variety of both public and private stakeholders, all exerting significant power and influence, today’s global corporate structure is reinventing modern international relations, and in some cases, dominating it. (Muldoon 2005) This transformative nature of globalization today can also serve as a source of friction among this growing chorus of players and is bringing irreversible change to these relationships and how they impact and influence business around the world. (Muldoon 2005) From the largest to the smallest international corporation seeking to expand into new international markets, the challenges that come with corporate ambition can mean the difference between success and failure and they find a home at the intersection of international relations, diplomacy and economics. To successfully navigate these challenges, especially in emerging economies, a company must now factor in more than just the “bottom line” and address complex issues that include human rights differences, environmental regulations, labor rights and values of each country. (Henisz, 2014) Combined with modern-day mobility achieved through technology and the Internet, corporations today have a great capacity to reach targeted audiences and establish a presence, but it is this same technology that also allows for immediate response to any corporate action. This constant, 24-hour news cycle, where everyone is made to be a real-time reporter through social media, has created a situation that demonstrably necessitates the ability to not only 3 respond immediately, but also to have real-time understanding of the challenges faced by a corporation as it looks toward global expansion. International Business Diplomacy, or simply Business Diplomacy as it will be referred to in this paper, combines all of these nuanced factors into a relatively new discipline that offers companies looking to expand into new markets, guidelines and directives so that they can more strategically map corporate direction, limit risk and achieve their objectives. This paper will examine the history of diplomacy and how the concept of statecraft became intertwined with the increasing globalization of business. Following a scholarly examination of how modern Business Diplomacy came into being, and the unique challenges that come with its application, particularly the liabilities needed to be overcome, this paper will apply the concept to the Brazilian aerospace manufacturer Embraer, tracking its strategic emergence from a small, regionally focused aircraft producer to global leader in the regional and executive jet market platforms. It will then examine Embraer’s entrance into the Chinese market, where the company suffered from several missteps and eventually had to refocus its business model from commercial to executive jets. Finally, as globalization continues to “emancipate international business from its institutional and social constraints,” (Muldoon 2005) this paper will address how the relatively new and emerging discipline of Business Diplomacy is continuing to mature and grow in stature and influence through the proposition of a new challenge or “liability” that corporations must also overcome as they expand into new markets. Through the analysis of Embraer in China, this paper will introduce the Liability of Governance to the lexicon of Business Diplomacy and propose specific steps that a company can undertake to avoid it.

Are returns on Foreign Direct Investment (FDI), FDI determinants?

Foreign Direct Investments (FDI) acquired an important role in the development process of the global economy. FDI inward stock was equivalent to an average of 32% of GDP for OECD countries in 2013. However, FDI affects a country’s Balance of Payments (BoP) in two ways: FDI flows are recorded in the BoP financial account while returns on FDI affect the BoP current account. Therefore, part of the positive contribution of inward FDI to a country on its financial account could be potentially offset by a negative contribution of FDI returns on the current account. The intent of this work is to complement the research on FDI determinants by introducing FDI returns as a variable in a gravity model where bilateral FDI outflows are the dependent variable. Moreover, using outward FDI flows as the dependent variable, the work allows looking at the behavior of Multinational Corporations (MNC) investing abroad. The results show that MNCs repatriate returns generating from the investments they make abroad. This is particularly true when high-income countries are involved: MNCs from high-income countries repatriate returns to their home countries from FDI made anywhere, while MNCs from middle-income countries repatriate returns from FDI in high-income countries. Repatriated returns are a relevant variable determining the value of FDI that a country makes in another country. The information on FDI returns is starting to become available to the public. This allows MNCs to sharpen their investment location decision models and national IPAs to better assess the two-fold BoP effects of promoting FDI.

Foreign investiment and convergence

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Foreign direct investment spillovers in Portugal: additional lessons from a country study

This paper investigates the impact of FDI on the productivity of Portuguese manufacturing sectors. Model specification is improved by considering the choice of the most appropriate interval of the technological gap for spillovers diffusion. We also allow for sectoral variation in the coefficients of the spillover effect; idiosyncratic sectoral factors are identified by means of a fixed effects model. Inter-sectoral positive spillover effects are examined. Significant spillovers require a proper technological differential between foreign and domestic producers and favourable sectoral characteristics. They may occur in modern industries in which the foreign firms have a clear, but not too sharp, edge on the domestic ones. Agglomeration effects are also one pertinent specific influence.

Capital structure choice of foreign subsidiaries: evidence from multinationals in Brazil

Is the capital structure choice of a foreign subsidiary different from the choice of a comparable company controlled by nationals? If so, what are the differences? In this paper we shed some light on these questions by looking at a sample of foreign subsidiaries in Brazil over the period 1985 to 1994. We find that the foreign subsidiaries in our sample are more levered than their Brazilian counterparts. This difference, however, has declined over time. The evidence is consistent with the hypothesis that foreign subsidiaries increase leverage as a hedge against an expropriation of assets in a nationalization process.

Economic growth with foreign saving?

Highly indebted countries, particularly the Latin American ones, presented dismal economic outcomes in the 1990s, which are the consequence of the ‘growth cum foreign savings strategy’, or the Second Washington Consensus. Coupled with liberalization of international financial flows, such strategy, which did not make part of the first consensus, led the countries, in the wave of a new world wide capital flow cycle, to high current account deficits and increase in foreign debt, ignoring the solvency constraint and the debt threshold. In practical terms it involved overvalued currencies (low exchange rates) and high interest rates; in policy terms, the attempt to control de budget deficit while the current account deficit was ignored. The paradoxical consequence was the adoption by highly indebted countries of ‘exchange rate populism’, a less obvious but more dangerous form of economic populism.

Why foreign savings fail to cause growth

Este artigo é uma formalização da crítica à estratégia do crescimento com poupança externa que um de seus autores vem sendo fazendo nos últimos anos. Apesar dos países de renda média serem pobres de capital, os déficits em conta corrente (poupança externa), financiado seja por empréstimos ou por investimentos externos diretos, não irá aumentar a taxa de acumulação de capital ou terá pouco impacto sobre ela, uma vez que os déficits de conta corrente estarão associados taxas de câmbio apreciadas, ordenados e salários aumentados artificialmente e altos níveis de consumo. Consequentemente, a taxa de substituição da poupança externa pela interna será relativamente alta, e o país será obrigado não a investir e crescer, mas a consumir. Apenas quando há grandes oportunidades de investimento, estimuladas por uma ampla diferença entre a taxa de lucro esperada e a taxa de juros de longo prazo, a propensão marginal ao consumo diminuirá suficientemente, a ponto de o lucro adicional originário do fluxo de capital estrangeiro ser usado para investimento, ao invés de para consumo. Neste caso especial, a taxa de substituição de poupança externa pela interna tenderá a ser menor e a poupança interna contribuirá positivamente para o crescimento

Foreign activity effects on the capital structure of brazilian companies during 2004-2008

As empresas brasileiras com atividades internacionais (MNC) possuem uma estrutura de capital diferente das empresas domésticas (DC)? Se sim, é válida a hipótese upstream-downstream, com empresas internacionalizadas utilizando mais dívida do que as empresas domésticas? Encontramos que as MNCs brasileiras utilizam mais dívida devido à atividade internacional, com 9,6% mais alavancagem, dos quais 5,8% são oriundos de fontes de longo prazo. Nós ainda lançamos uma luz sobre uma explicação alternativa para o maior uso de dívida pelas empresas internacionalizadas. Esta dissertação testa se existe um vínculo entre a atividade internacional e o financiamento com dívida estrangeira. O acesso a dívida estrangeira ajuda a explicar porque MNCs utilizam mais dívida do que DCs? Nossos resultados revelam que a atividade internacional está positivamente relacionada ao uso de dívida estrangeira, sendo que MNCs médias carregam 12,7% mais dívida estrangeira em sua estrutura de capital. Nossa amostra consiste em 131 companhias no período 2004-2008, resultando em 538 observações.

Foreign direct investment spillovers: what can we learn from portuguese data?

This paper investigates the impact of foreign direct investment on the productivity performance of domestic firms in Portugal. The data comprise nine manufacturing sectors for the period 1992-95. Relatively to previous studies, model specification is improved by taking into consideration several aspects: the influence of the “technological gap” on spill-overs diffusion and the choice of its most appropriate interval; sectoral variation in the coefficients of the spill-overs effect; identification of constant, idiosyncratic sectoral factors by means of a fixed effects model; and the search for inter-sectoral positive spillover effects. The relationship between domestic firms productivity and the foreign presence does take place in a positive way, only if a proper technology differential between the foreign and domestic producers exists and the sectoral characteristics are favourable. In broad terms, spillovers diffusion is associated to modern industries in which the foreign owned establishments have a clear, but not too sharp, edge on the domestic ones. Besides, other specific sectoral influences can be pertinent; agglomerative location factors being one example.

Foreign funding to an emerging market: the Monetary Premium Theory and the Brazilian Case, 1991 - 1998

We develop a framework to explain the private capital flows between the rest of the world and an emerging economy. The model, based on the monetary premium theory, relates an endogenous supply of foreign capitals to an endogenous differential of interest rates; its estimation uses the econometric techniques initiated by Heckman. Four questions regarding the capital flows phenomenon are explored, including the statistical process that governs the events of default and the impact of the probability of default on the interest rate differential. Using the methodology, we analyse the dynamics of foreign capital movements in Brazil during the 1991- 1998 period.

Foreign direct investment spillovers: additional lessons from a country study

We investigate the impact of foreign direct investment on the productivity of domestic firms, using sectoral data for Portugal. An improved analysis takes into account the most appropriate interval for the technological gap between foreign and domestic firms. Sectoral variation of spillovers, idiosyncratic sectoral factors and the search for inter-sectoral effects provide new insights on the subject. Significant spillovers require a proper technology differential between the foreign and domestic producers and favourable sectoral characteristics. Broadly, they occur in modern industries in which foreign firms have a clear, but not too sharp, edge on the domestic ones. Agglomeration effects are also identified as pertinent specific influences.

Essays on the general equilibrium effects of barriers to trade on economic growth, foreign trade and the location of economic activity in Brazil

This work presents a fully operational interstate CGE model implemented for the Brazilian economy that tries to quantify both the role of barriers to trade on economic growth and foreign trade performance and how the distribution of the economic activity may change as the country opens up to foreign trade. Among the distinctive features embedded in the model, modeling of external scale economies, port efficiency and land-maritime transport costs provides an innovative way of dealing explicitly with theoretical issues related to integrated regional systems. In order to illustrate the role played by the quality of infrastructure and geography on the country‟s foreign and interregional trade performance, a set of simulations is presented where barriers to trade are significantly reduced. The relative importance of trade policy, port efficiency and land-maritime transport costs for the country trade relations and regional growth is then detailed and quantified, considering both short run as well as long run scenarios. A final set of simulations shed some light on the effects of liberal trade policies on regional inequality, where the manufacturing sector in the state of São Paulo, taken as the core of industrial activity in the country, is subjected to different levels of external economies of scale. Short-run core-periphery effects are then traced out suggesting the prevalence of agglomeration forces over diversion forces could rather exacerbate regional inequality as import barriers are removed up to a certain level. Further removals can reverse this balance in favor of diversion forces, implying de-concentration of economic activity. In the long run, factor mobility allows a better characterization of the balance between agglomeration and diversion forces among regions. Regional dispersion effects are then clearly traced-out, suggesting horizontal liberal trade policies to benefit both the poorest regions in the country as well as the state of São Paulo. This long run dispersion pattern, on one hand seems to unravel the fragility of simple theoretical results from recent New Economic Geography models, once they get confronted with more complex spatially heterogeneous (real) systems. On the other hand, it seems to capture the literature‟s main insight: the possible role of horizontal liberal trade policies as diversion forces leading to a more homogeneous pattern of interregional economic growth.