Corporate diplomacy can be described as an approach to managing the different and unique nonmarket forces with which a multinational corporation (MNC) deals. Corporate diplomacy is becoming highly relevant for organizations as they address sociopolitical risk along with the growing dependence on stakeholders in a host country. Today’s global business environment comprises a complex web of linkages across a spectrum of governments and communities. MNCs require a wider set of models of practice to engage with governments and communities in host countries. There is a need to understand how organizations manage social and political risks. The business environment can be fragmented, volatile, and even hostile at times, and hence, organizations have to make strategic choices to succeed in the nonmarket business environment. In international markets, the nonmarket business environment helps determine an organization’s success.
This entry describes corporate diplomacy as a way to manage the nonmarket business environment and hence build corporate reputation. It details the example of corporate diplomacy used by ArcelorMittal when it encountered an unstable and even hostile business environment in France. Dealing with such an environment requires organizations to make strategic choices to survive and succeed and to build corporate reputation.
Corporate diplomacy is broadly understood as a privileged authority an organization attains in a host country that gives it the control to achieve its organizational objectives. Corporate diplomacy, thus, is essential for any organization that wants to create, build, or extend its position and privileges in its nonmarket business environment. Christian A. Herter Jr., the former general manager of the government relations department at Socony Mobil Oil Company, originally suggested the concept of corporate diplomacy in 1966. Herter emphasized the need for corporate diplomacy, especially after World War II, due to global competition and mistrust of Western nations. However, the expectations of stakeholders are changing as organizations are increasingly evaluated on whether they are morally legitimate and not just financially successful. An enhanced and favorable corporate reputation is just as important to an organization as its financial performance.
Corporate diplomacy involves an MNC’s attempt to manage the business environment in a way that ensures that business is done smoothly with an unquestioned license to operate and an interaction that leads to mutual adaptation between corporations and society. Corporate diplomacy, therefore, focuses on the strategic choices that MNCs make in their host environments to maintain and strengthen their corporate reputation and function easily. Corporate diplomacy as a strategic function relates to creating and seizing business opportunities, safeguarding the image and reputation of the firm, influencing the making of rules, and preventing conflicts in an organization’s nonmarket business environment.
Nonmarket Business Environment
The nonmarket environment is defined as the social, political, and cultural sphere that surrounds the economic market of an organization and might affect the organization’s ability to reach its business objectives. The international business literature has widely recognized political risk as an aspect of the nonmarket business environment. Government has been recognized and emphasized as a variable in international business studies because MNCs operate under a variety of evolving political regimes that may have an impact on smooth organizational operations. The political environment is uncertain, and the complexity increases with the social environment and multiple stakeholders. The term nonmarket environment is meant to denote the wide range of political, social, and legal arrangements that firms might have to engage outside their market environment. Understanding and managing this dynamic nonmarket environment is key to shaping it.
MNCs acknowledge the importance of social and political forces along with the economic forces in an environment, and these social and political forces are seen as an investment to build corporate reputation. Nonmarket stakeholders, including governments, regulators, community, environmental interest groups, and industry associations, can impose coercive and normative pressures for organizations to deal with. Coercive forces can be in the form of regulations and the regulatory enforcement an organization could face, whereas normative pressures are the set of values, norms, and rules for organizations. The field of international public relations has also addressed the impact of sociopolitical risks on the practice and function of public relations. The contextual variables critical for success in international public relations help define the nonmarket business environment.
Thus, the challenge for MNCs is to recognize, respect, and respond to the dynamic political and social factors that are unique to every host location. Adapting to these unique factors helps an organization operate successfully in a host country with support from multiple stakeholders. This forms the basis of corporate diplomacy.
Novartis AG, one of the world’s largest pharmaceutical companies, has been fighting a public battle with the Government of India over Glivec, a cancer drug. Novartis has been successful in obtaining patents for the drug in more than 40 countries but has been denied a patent by the Government of India. The pharmaceutical company has featured content and videos on its website focusing on the benefits of the drug for patients, hence targeting the nonmarket audience. The nonmarket strategy of Novartis complements the market strategy of competing in the Indian market.
Corporate Diplomacy in Action: The Case of ArcelorMittal
In July 2006, the merger of Mittal and Arcelor created a global company that combined the world’s two largest steelmakers. When he took over Arcelor, Lakshmi Mittal promised that he would not carry out massive job cuts. But a lot changed since 2006, especially after the European financial crisis of 2008. PSA Peugeot Citroën, France’s biggest carmaker, had 8,000 job cuts and had to shut down its plant. Sanofi, France’s biggest pharmaceutical company, also announced 900 job cuts. The demand for steel dropped, and ArcelorMittal plunged into a quarterly net loss and was forced to shut sites in Gandrange in France and Liege in Belgium and then in Florange in northeastern France.
The steel group’s decision to close its plants in Belgium, Luxembourg, and France triggered violent protests as well as initiatives by the European Union to save the steel industry. European Union industry commissioner Antonio Tajani reportedly said, “There is no Europe without steel.” The shutting down of sites by ArcelorMittal was seen as unacceptable. Mittal was even criticized by France’s industry minister, who accused Mittal of lying and said that the Florange closure breaks the promise of creating jobs for the common people made by chief executive Lakshmi Mittal during Mittal Steel’s takeover of Arcelor in 2006.
The anger of the workers and labor unions was further fueled by a video game called “Kill Mittal,” launched as a way to vent anger against the Indian steel company. The video game took inspiration from Mittal’s real-life decision to shut steel blast furnaces in France’s northeastern town of Florange.
The decision to nationalize ArcelorMittal was seen negatively by MNCs as a way to bully an industrial group the French do not quite consider their own and to exploit public sentiment to show that the government is fighting hard to save jobs. The handling of the issue by the French government caused outrage in India, where social media networks were flooded with messages saying Mittal would have been treated differently had he been white.
Finally, Mittal met with the French prime minister, who ruled out nationalizing the steel plant. ArcelorMittal agreed to mothball the furnaces, rather than closing them, and to explore the possibility of using the equipment as part of another project. ArcelorMittal further invested $233.6 million in the Florange steel complex, which includes a factory that refined and finished steel, mostly for the auto industry, as well as a food- and drink-packaging unit. In addition, ArcelorMittal pledged that all job reductions would be achieved through voluntary employee resignations. ArcelorMittal, in a special website created to address the developments in Florange, promised to provide any necessary training in order for those leaving to find alternative employment.
The crisis faced by ArcelorMittal raises a question about the real challenge faced by the organization: Was it the Indian origin of the company, the French government, the labor unions, the workers, the economic crisis, the failure of the organization to keep its promises, or all of these factors adding up at the wrong time? Certainly, one of the key lessons learned from the ArcelorMittal case is that MNCs have to grapple with nonmarket pressures that can surprise even the most experienced. The only solution for ArcelorMittal was to find a middle ground with all the parties involved.
This entry analyzed the nonmarket business environment an MNC is entwined in and corporate diplomacy as a theoretical and practical approach that gets to the heart of understanding a diffuse nonmarket business environment. The examples of ArcelorMittal and Novartis present the challenges MNCs are facing from their nonmarket business environments and the strategies they are adopting to overcome those challenges. The formal and informal rules and regulations vary significantly across countries. These rules are further shaped and interpreted by an organization’s nonmarket business environment. The nonmarket environment includes social, political, regulatory, and legal considerations that cannot be controlled or managed through an organization’s market-based interactions. Understanding the nonmarket business environment is just one part of the puzzle, while the other part comprises influencing the nonmarket business environment through corporate diplomacy to build corporate reputation.
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