Conflict Prevention Due Diligence: Negotiation & Consensus Building Strategies

for Foreign-Investment Projects

Prof. Luis Ore Business School

Universidad de Lima, Peru

lore@ulima.edu.pe

May 28th, 2016

Introduction

Foreign investors may face diverse challenges in host countries, from cross-cultural situations to blocking coalitions that may prevent the successful implementation of foreign investment projects. Stakeholder engagement and a consensus-building process approach can help…

Government, development, culture & environment

Governments around the world want to receive as much fresh capital as possible to improve their economies and living conditions of their citizens. Stakeholders deal with the challenge of balancing environmental protection and economic activity and development Companies tend to overlook or generalize cultural factors. Overlooking cultural factors when managing negotiations and relationships with local partners and local communities can risk the successful implementation of a project

Foreign investors and Blocking Coalitions

Foreign investors might face difficult situations such as the one encountered by Stone Container, an American-based foreign-investment company in Honduras, which reached an agreement with the Honduran government to develop an extensive forest-management program and harvest 320,000 hectares of pine forest for forty renewable years. After the agreement was publicly announced, local communities around the country, as well as environmental groups and activists, raised their voices and protested on the streets. Ultimately, the government cancelled the negotiations, and Stone Container‘s project was not implemented.

Foreign investors and Blocking Coalitions

Approach “Decide-Announce-Defend”.‖ Parties negotiate and make decisions about an investment privately, reach an agreement with the actors who grant authorizations, make a public announcement, and defend it when they encountered opposition. Even if a project can benefit a country economy and its population at large, the approach taken can cause the formation of a blocking coalition that prevent the successful implementation of a investment project.

The introduction of an Investment Project

The way an investment project is introduced to local communities and other stakeholders can have an impact in its future development. The announcement of an investment project might bring excitement to local communities because of potential new jobs and development, but can also result in a degree of uncertainty. Members of local communities may fear that their lifestyle will be threatened. This fear can lead to anger and potential social conflicts.

Local communities and cross-cultural challenges

When people feel threaten, they may fight for survival with an either-or mindset or win-lose mindset and conflict can escalate. Cultural dimensions can explain how local communities may respond when feeling threaten. Individualistic societies, tend to fit with universalist approach to the application of norms. Believe that rule of law is applicable to all as equals, and believe that people with fear or anger will go to the court system to protect their rights.

Local communities and cross-cultural challenges

Collectivistic societies, tend to fit with particularistic approach to the application of norms. Believe that rule of law is applicable to particular individual differently and that some people have more benefits than others based on predetermined conditions. They tend to distrust the courts and legal system, and when facing uncertainty, fear or anger they tend to apply power-based approach and participate in rallies and protests to attract political attention to protect their interests, needs, concerns and aspirations.

Foreign investment and government intervention

The government of Costa Rica while considering a Stone Container‘s project there. When the company found the proper location to construct a facility, environmentalist groups launched a media and legal campaign to prevent the construction due to their concerns for the potential damage to the environment. A new government came to power in Costa Rica, and facing this situation, named an inter-ministerial commission to analyze the investment and render a decision. The commission encouraged stakeholders to provide feedback and requested written submissions of recommendations. The commission made a decision, rendered a report, and approved the project, but requested relocation of the facility. A joint committee with government representatives and stakeholders continued negotiating.

Foreign Investors, Strategic Processes, and Trust: Situational and Cultural Considerations

Governments can design processes to take care of the needs and concerns of all stakeholders when considering a project. But there is no reason why a private foreign-investment company cannot design a process to better face multiparty negotiations in a host country. A foreign investor can decide to engage multiple stakeholders in a consensus-building process to make a decision whether or not to invest.

Foreign Investors, Strategic Processes, and Trust: Situational and Cultural Considerations

Latin Americans are very uncertainty-averse and do not easily accept change. (Hofstede, 2008). Resistance to a project can be due to situational factors, prior experiences can affect peoples perceptions (Government, left or right wing, democratic, dictatorship, etc) . Local communities may perceive that foreign investors only come to take the wealth of their land or damage it with their economic activities, leaving them worse off.

Distrust of local communities in foreign investors might be a common belief, a cultural tendency of uncertainty avoidance, or the result of situational factors. This can prevent the successful implementation of a project.

Foreign Investors, Strategic Processes, and Trust: Situational and Cultural Considerations

To inspire trust one must shape expectations… The foreign investors have a chance to shape the local communities‘ expectations and perceptions by engaging the communities in direct, honest, and open talks to address the distrust issue. Foreign investors should open dialogue to permit members of local communities voice their views of risk and find ways to satisfy their concerns.

A Strategic Approach for Foreign Investors: Implementable Investment Projects

• Manage Reputation Upfront: Build Trust and Manage Connections (connect with local trustworthy leader to share interests in implementing a project and interests of locals, sincere curiosity, influence circles, etc.)

• Stakeholders’ Involvement (stakeholder’s assesment, focus on interests)

• Joint assessment (Joint fact finding and contingent commitments)

• Joint Problem-Solving and Citizen Choice (cross cultural awareness,

better than no deal alternatives, take draft agreement to constituents)

• Foresee obstacles that project’s implementation may face and design dispute resolution mechanisms. (Think of predictable surprises)

Implementing Investment Projects

• We will always have the tension between establishing foreign investment projects in developing countries and impacting the environment of local communities.

• But foreign investors and local communities can work together to reach mutually satisfactory agreements that take into consideration interests, needs, and concerns important for each stakeholder.

• Even if there are huge cultural differences among the potential negotiating parties, there is always a chance to bridge this gap… We need to be sincerely curious to learn about and from each other.

Implementing Investment Projects

• Paying attention to cultural issues, respecting differences, learning about the local communities where the projects are to be established, honoring others‘ cultures, appreciating others‘ identities, acknowledging emotions, framing the foreign investment as a mutually beneficial opportunity, and engaging stakeholders in decision-making processes will build the trust required to have positive working relations among foreign investors and local communities.

• Countries will welcome more foreign investment and improve the conditions of their economies and the living conditions of their people.

Conflict Prevention Due Diligence: Negotiation & Consensus Building Strategies for

Foreign-Investment Projects

Prof. Luis Ore Business School

Universidad de Lima, Peru

lore@ulima.edu.pe

May 28th, 2016

…Thank You !