2. Literature Review
2.2. The Roles of Business Diplomacy
2.2.3. Environmental Scanning
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2.2.3. Environmental Scanning
“All economies are defined by formal and informal norms and regulations that structure market competition”. These are the words used by Baron and Diermeier in 2007 to define the so called
“rules of the game”. The third role of business diplomacy, the environmental scanning, deals specifically with those rules.
Definitions and background
Contrary to the first two categories of roles – stakeholder and issue management – the environmental scanning is not directly related to a specific field in the literature. Instead, it involves many research areas such as political science, political economy, corporate strategy, sociology, or geopolitics.
As expressed by Baron in the very first lines of its famous analysis entitled The Nonmarket Strategy System (1995), environmental scanning responds to the “challenge of understanding non-market forces”. Let me recall that, according to this author, “the Nonmarket environment consists of the […] arrangements that structure the firm's interactions outside of, and in conjunction with, markets”. For the purpose of this article, I would like to highlight the importance of the word “structure” used in this definition. Indeed, this notion allows understanding clearly the distinction I see between the issue management and the environmental scanning. In the previous section, I depicted the issues in close connection with specific events: in this sense, issues are mainly contextual. In contrast, environmental scanning concerns the structural part of the non-market context, the long-term parameters. In other words, using the game vocabulary : issue management deals with the factors in play during the course of the game, whereas environmental scanning deals with the configuration and the rules of the
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game.
Environmental scanning addresses two main questions. Firstly, to what extent does this (non-market) structure affect the company? And then, once having solved the first question, how to convert the information into knowledge and action to change the rules of the game? The following part of the literature review will intend to provide some background to clarify these two questions and better understand the statement by Saner et al. (2000): « business diplomacy provides a feedback loop from the external environment […] to the global company and back to the environment ».
Typology of structural elements in the non-market environment
Tackling the first question mentioned above is a good opportunity to grasp at the same time a typology of structural elements that belong to the scope of environmental scanning. Put simply, what do these rules (or configuration) of the game refer to concretely?
The first element in my typology is naturally the regulatory system. This notion is mainly discussed in the academic field of politic science, in terms of “regulatory politics”, that is to say from a public-policy point of view. However, in this paper I am more interested in the corporate strategist point of view and will rather rely on such approaches as Mahon and Waddock’s for example: they focus on the “interaction of public policy with corporate strategy” and assess the impact of “the ebb and flow of regulation, deregulation, and reregulation” on the business (Mahon and Waddock, 1992).
Please note, as Mitnick remarqued in 1993, that regulations can concern diverse perimeters.
There are “social regulations [which aim] controlling activities with direct effects on people”
and “economic regulations which seeks to control instrumental market activities” (like price,
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entry and trade practices), to which I can add environmental regulations even if the latter are not explicitly mentioned by Mitnick. Business diplomacy is involved in all these types of regulations.
Regarding the impacts of legislation on the company, Baron and Diermeier (2007) state that
“both competitive advantage and industry profitability are affected by this interaction”, due to entry barriers implications for instance. Most researchers associate regulations with additional costs for the company (see for example Anderson’s work entitled Cost of Government regulation study for the business Roundtable, 1979). Mitnick takes the opposing view and see the effects of regulations more positively: « there are opportunities associated with regulation, or the lack of it, and it is time for management to take advantage of them” (Mitnick, 1993).
Environmental regulations for instance can give impetus for innovation and create new opportunities (the green market), while economic regulations help stabilize the markets and make it more predictable. Also, some theories focus more precisely on the impact of a change in regulation: such is the case, for instance, of Banker, Das and Ou (1997), who study the impact of deregulations in the airline industry.
The second element in my typology, namely the institutional setting, comes from the political economy literature. Once again though, the initial point of view concerning the role of institutions toward the market economy is out of the scope of this article. Instead, we wonder how different governance systems affect the company. In other words: “what are the key components of the institutional arrangements that may explain variation in the business-government interface in different economies?” (Hillman and Keim, 1995)
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Hillman and Keim give a broad definition to the word institutions, as “devices for organizing the collective decision-making process [toward] public policies”. In a very interesting way for the perspective of this thesis, the two authors build on North’s work (1990) to distinguish two dimensions of institutional characteristics: the “formal constraints” and the “informal constraints” (North, 1990). This broad definition of institutions fits well with my approach, since both dimensions are within the scope of business diplomacy: thus I will work on the basis of this definition throughout this article.
The “formal constraints” of institutions correspond to their organizational structure to systematize the division of power (presidential vs. parliamentary system, ministries vs. cabinets, etc.). Hillman and Keim question how those differences should impact the way companies deal with institutions. For example, “in established parliamentary systems, business efforts to influence pertinent government policy will be more focused on executive branch ministries than on parliaments.” (Hillman and Keim, 1995) Around ten years later, Hillman goes further and refers to some “variables” to assess institutional differences, such as “majority party, member electoral security […] committee membership” (Hillman et al., 2004).
The “informal constraints” embrace “culture, values and norms” (North, 1990) that characterize a society, i.e. the conventions and way of behave within an institution. “The underlying norms of our society create an institutionalized environment within which policy decisions must be made”. (Hillman and Keim, 1995) This impact of culture is also the object of the work by Cobb and Ross entitled Cultural Strategies of Agenda Denial: Avoidance, Attack, and Redefinition (1997). The three authors defend that the political and institutional agenda depends highly on “cultural strategies”.
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Finally, the conclusion of Hillman and Keim will be useful in future developments: “we contend that differences in business-government relations across countries can be better understood by examining the institutions through which business and government interact.”
This argument is a step to cross the players of the game with the rules of the game, in line with the integrated model I will attend to build.
The last element in my typology is of geopolitical and geo-economic nature. Growth of the Chinese economy and power, raw material race, European integration, resurgence of piracy, nuclear proliferation, fights against terrorism: the beginning of the 21st century has been marked by many geopolitical and geo-economic parameters whose impacts have been spreading on the business environment.
Consistently with the distinction I already explained between the issue management and the environmental scanning (contextual vs. structural), I consider geopolitical and geo-economic elements not only as single events (like a war or an embargo) but rather as structural configurations (like economic unions or balance of military power) and long term dynamics (shifts in the world economic and political centers). This approach can be based on the work by Lacoste, one of the most well-known geographer and geopolitician in France, who discerns three dimensions to analyze a geopolitical situation over time: the so called “dispositif”,
“processus” and “événements” (written in French (1993), no official English version available) that I propose to translate respectively as configurations, dynamics and events. (Lacoste, 1993)
Since I refer to both geopolitical and geo-economic elements, their relation and distinction should be briefly brushed. As stressed by Rozov in 2012, some searchers consider geo-economics as part of geopolitics, while some other consider geopolitics as part of
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geo-economics. What is certain is that these two realities are intrinsically linked. However, Rozov provides an interesting distinction, highlighting different “objective logics”, which will also serve to better define what I mean with these two words in the rest of the thesis:
“Everything related to control over economic resources within the framework of the existing structures of territorial rule is geoeconomics. Everything related to the struggle for this territorial control itself is geopolitics.”(Rozov, 2012)
I will not take any position regarding this debate since it is out of the scope of this article; what is definitely within the scope of the article though is to claim that business diplomacy must scan both geopolitics (change in military and political control over territories for ex) and geo-economic (development of markets, accumulation and concentration of capital for ex) parameters, since both dynamics have a complementary impact on the business environment.
International Relations and International Business fields often involve, albeit implicitly, some geopolitical dimensions when analyzing the international business environment. (Mezias, 2002) Two relatively recent works have been much more explicit about the impacts of geopolitics and geo-economy on the environment and thus on the corporate international strategies. The first claims that “geopolitical variables […] play an important role in conditioning the international business environment”, such as “geographic distance”, “location”, “consequences of colonial, Cold War and post Cold War”, “regionalization”, “distribution of the global population”
(As-Saber et al., 2001). The second writes that “the International Business Environment […] is shaped and influenced by the geopolitical context, over a longer timeframe, though, on certain occasions, sudden geopolitical events could also immediately impact the competitive business environment”. (Sethi, 2007)
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Even more recently, in 2013, Teixeira and Dias focused on a more specific question: the impacts of geopolitical factors on the firm’s Foreign Direct Investment location decisions. This is proof that this field is subject of increasing interest.
Figure 4: A Typology of Structural Elements in the Non-Market Environment
Environmental-scanning – roles and challenges
I can proceed now to the next question raised earlier in this section: how to transform the scanned information into knowledge and action to play efficiently the current game first, and then to change the game.
The first step consists in decrypting information about the different structural elements identified in the typology, in order to better understand the rules of the game and anticipate their evolutions. This role of environment scanning derives from the first “I” of Baron’s “four Is”
model.
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“Information play an important role” (Baron, 1995), and this role is becoming even more challenging when we have in mind that the scope of the thesis especially involves multinational companies. Indeed, the “rules of game vary significantly across countries” (Baron and Diermeier, 2007) which makes business diplomacy tasks harder. Saner et al. (2000) give strong emphasizes to the great variety of roles, knowledge and know-how required to cope with these challenges. In order to have a clearer overview, I propose to reorganize these knowledge and roles (required for scanning the environment) and articulate them within the frame of my typology.
Regarding the regulations, “Global companies are expected to abide by multiple sets of national laws and multilateral agreements” (Saner and Yiu, 2005) In order to decrypt and comply with these legislations, business diplomacy has to cover “national, international, and host country laws and regulations” (Saner et al., 2000). Furthermore, when it comes to institutions, business diplomacy should take into account “the logic, ideological precepts, and related intellectual underpinnings of governance systems that differ from the dominant form of Western capitalism.” (Saner and Yiu, 2005) More precisely, insisting on the informal constraint of institutions, business diplomacy can help “comply with protocol, procedures and etiquette based on international practice and norm appropriate to local culture” (Saner et al., 2000). As for the geopolitical configurations, business diplomacy implies “collect[ing] and analyz[ing]
pertinent information emanating from host countries […], Political analysis of key countries and regional groupings [and] utilizing trade rules” (Saner et al., 2000).
The second step is crucial and concretizes the move from acknowledgement to influence. I note immediately a dominant assumption which enables the transition from the first to this second step and without which business diplomacy could not exist. Traditionally, theories and
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practice have “take[n] the rules of the game – the regulatory system, for example – as given, whereas non-market strategy perspective views these rules as endogenous” (Baron, 1995).
Under this philosophy, what I call changing the rules of the game is thus possible.
Business diplomacy activities associated with this role are usually called “Corporate Political Activities” in the literature and defined as follows: “corporate attempt to shape government policies in ways favorable to the firm” (Baysinger, 1984). Very helpful to this study is the direct link noticed by Baron and Diermeier (2007) between those corporate political activities and the non-market context: they argue explicitly that changing the rules of the game “to an organization’s advantage constitute[s] the domain of nonmarket strategy”, that is to say here the business diplomacy’s domain.
I specify that corporate political activities are not equivalent with the management of political issues discussed in the issue-management section. This is once again due to the distinction (contextual vs. structural elements) used several times already. Here, Hillman and Hitt (1999) provides us with a clear differentiation: the management of political issues relies mainly on a
“transactional approach […] more ad-hoc and issue specific”, whereas corporate political activities rely on a “relational approach” more long-term and relationships-oriented.
Companies can mostly influence the rules of the game in terms of their regulatory component:
so that is mainly what I will be discussing later. I can still say a few words about the other elements of the typology. Regarding the institutions, it is rare that companies have enough leverage effects to change their structure, or maybe in the very long term. However, when it comes to the informal part of the institutions, companies can attempt “influencing standards”
(Saner et al., 2000) or directly the persons in charge by doing some “campaign financing”
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(Sethi, 1982). Concerning geopolitics and especially geo-economics, the MNCs’ capacity of influence is bigger, since they have become major players in the globalized world. For this reason, the so called “mega corporations” can go beyond the first step of anticipation and “even intercede with strategic think tanks and government bodies to influence and fashion the future [geopolitical] scenarios in a manner that helps their quest for global leadership” (Sethi, 2007).
Let me now dwell a little bit more on the corporate political activities toward the regulations.
Concretely, three kinds of political activities are involved here: “« Lobbying », « Coalition building » and « Indirect lobbying » (Sethi, 1982). The fourth kind of political activities (“campain financing”) was mentioned earlier about the institutions. The interest of Sethi’s paper does not end there. It also points out different ways of approaching the implementation of corporate political activities, which will prove to be important in the coming discussions. The first approach, called “defensive mode” (or also “bridging” in the words of Blumentritt, 2003) is characterized by reactive behaviors and one-off confrontational actions. It usually applies to huge companies with a dominant position in the market, and leads to several risks, among which the most important are certainly the lack of consistency and the “lack of planning” (Sethi, 1982). The second approach, called “accommodative mode”, corresponds to an attempt of companies to address changes in the environment structure with more flexibility and adaptability. This entails “compromises”, “coalitions or industry wide goals”, although they are usually short-term and consequently seen as “opportunist”. (Sethi, 1982) The last stage preferred by Sethi is called “positive activism” (corresponding to the “buffering” in the words of Blumentritt, 2003). This approach is longer-term oriented and involves much more pro-activity: as a result, this should allow companies “leading political changes rather than responding to it”. (Sethi, 1982)
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Last but not least challenge that goes hand in hand with business diplomacy’s influence: it is of paramount importance that business diplomacy considers and reconciles individual and collective interests. Otherwise, the activities of influence are very unlikely to succeed. This is the meaning of a quotation (collected by Baron, 1995) from Robert Galvin, former head of Motorola, emphasizing the significance of “writing the rules of the game honorably and fairly in a manner that gives everyone a chance with predictable rules”.