Digital Diplomacy

Moisés Naím / Worldlink

The entrepreneurs and technological visionaries that unleashed the digital revolution were not contemptuous of government - they just ignored it. During the heady, early years of the Internet boom, the dominant view in Silicon Valley was not only that cyberspace did not need government, but that it could be largely immune from its interference. The common wisdom was that all it took to avoid any governmental regulation was to move the servers to another, less intrusive jurisdiction. For the dotcom pioneers, being a libertarian was not even an ideological choice; it was the instinct bred by working with the Internet.

While such instincts still form personal attitudes and business strategies in the dotcom world, its most experienced leaders are quickly discovering that they do need government. Much to their dismay, they now realise that they need many governments because the lack of law and order in cyberspace will make the global expansion of the Internet and the new businesses it has engendered slower and riskier. The worldwide balkanisation of technological standards, for example, can undermine profitability, and the emergence of different national tax codes for e-commerce can severely hamper global expansion. Much to the chagrin of the Internet industry, progress in the development of global standards, uniform tax codes, and other institutional innovations depends on the coordinated decisions of different nation states.

If at the beginning of the IT revolution the idea of dealing with even one government was seen as a nuisance to be avoided, having to depend on the workings of many governments is a nightmarish reality. While the rapid domestic expansion of Internet businesses certainly fuels the demand for some government action, the inherently international nature of such businesses drives the frenzied activity of dotcom lobbyists in Washington, Brussels and Geneva. Many Internet businesses are congenitally global: they were born as businesses with a global reach, global funding and global clients. And, as the experience of old economy multinationals shows, recruiting the home country's government in support of one's activities abroad is a habit that no global company can afford to kick. In this respect, the new economy companies are no different. But they did not know it.

THE GRAND TOUR, BUSINESS CLASS

A century ago, Standard Oil of New Jersey went overseas in search of crude. In the late 1990s, America Online went around the world in search of subscribers. In the first half of this century, the United Fruit Company needed to be in Central America because of that region's advantages in the cultivation of bananas. Nowadays, Yahoo! needs to be everywhere because the more unique visitors it attracts, the higher the price of its stock. While the rules and technologies of the new economy may have altered some of the modalities of international business, the key motives pushing companies abroad remain unchanged. Corporations still expand globally to increase their profits or to respond to the competitive moves of their rivals in a global chess game. Fuji Film cannot ignore where Kodak goes; Nokia's entry into a new foreign market prompts a hasty response from Motorola, and Procter and Gamble's international strategies are closely intertwined with those of Colgate Palmolive and Unilever.

In considering where and when to go abroad, companies are also driven by the unique imperatives of their particular businesses. In the past, when governments imposed high tariffs to discourage imports and stimulate domestic production, manufacturing companies were sometimes compelled to expand into a country even if its small market did not justify the decision. In the 1970s Venezuela had 15 car companies assembling trucks and cars for a national automotive market smaller than that of Dallas, Texas.

Recruiting the home country's government in support of one's activities abroad is a habit no global company can afford to kick

Today, import substitution policies are less common and the fundamentals of each industry are more dominant in driving its internationalisation patterns. Gas and mining firms look for promising geology; agriculture and tourism companies need benevolent weather; consumer product corporations search for countries with big markets and export firms like countries where labour costs are low. High-tech companies take into consideration a country's educational level. Many service industries, like advertising agencies, insurance companies or accounting firms, simply have to follow their domestic clients when they go abroad. Of course, the regulatory environment still matters: governments that offer a stable political environment and tax incentives or other subsidies will likely do a better job of attracting foreign firms.

Yet, even though all these factors continue to shape the internationalisation of business, a new calculus has also emerged, especially for the technology-based companies that form the backbone of the new economy.

Fundamentally, a company no longer needs to go abroad to be abroad. Online brokerage firms, for example, can conduct business globally without ever shipping anything overseas or even establishing a physical presence outside their home countries. Moreover, because many dotcoms were taken public early in their corporate life, their financial strategies and accounting practices had a global orientation almost since their beginning. The nature of the technology, the business models, and the financing common in the new economy means that even companies without a physical foreign presence must now contend with a wide variety of overseas challenges and threats to their operations. And so, just as the first multinationals needed government help in advancing and protecting their interests, their new economy successors depend on a new kind of corporate diplomacy.

In late 2000, a French court ordered US company Yahoo! to limit the content on its website, saying that parts of it violated French laws. The magistrate argued that Yahoo! could filter its content in France and gave the company three months to comply after which it would face a fine of Ffr100,000 ($13, 300) per day. If this example is followed by judges and regulators elsewhere, Internet companies will be forced to scan each country's rules and regulations and design the content of their web sites, their e-commerce practices, their privacy rules and their encryption technology to comply with each country's codes. This is the point when calling one's government for help and when lobbying for homogeneous global rules, agreed upon by all significant countries, become good ideas and when libertarian ideals are checked at the door. The example of Yahoo!'s travails in France clearly illustrates one of the ironies facing today's nimble, flexible, high-tech companies: their global success may depend in no small measure on the slow, lumbering process of multilateral negotiations.

RISKS OF THE BRAVE NEW WORLD

To complicate matters further, Internet companies are not only threatened by the legal actions of foreign governments. They are also threatened by myriad individuals and informal networks bent on stealing or "sharing" intellectual property without paying for it.

Consider the way that companies must protect their most valuable assets. In the old days, multinationals had to bear the risk of seizure of their oil fields, mines, factories, or even their cash by foreign governments in outbursts of nationalism. Today, the main risk for many companies is not that populist politicians will expropriate their assets but that technologically adroit hackers and counterfeiters spread around the world will appropriate their trade secrets. A stern protest from the trade representative or ambassador isn't much use against this kind of threat. Witness the continuing saga of US and Chinese efforts to negotiate and enforce contentious intellectual property agreements that have done little to beat back copyright pirates, trademark tramplers, and patent predators.

The US has not been able to impose its preferences because no government, no matter how powerful, can unilaterally impose its will on these issues

Companies also face a vastly different international antitrust landscape. In the past, threats to the likes of Standard Oil or Ma Bell only came from trustbusters in the US Justice Department. Today, as America Online, Time Warner, and Microsoft can attest, challenges also emerge from the European Union in Brussels, the World Trade Organisation in Geneva, and a host of specific national jurisdictions. Today's global companies have as much to fear from the cooperation of regulators in different countries as from the collusive practices of rival firms. After America Online and Time Warner announced their merger plans last January, the Washington Post reported that "a virtual hot line" had been established between the US Federal Trade Commission and the European Union's commissioner for competition affairs.

Finally, new economy companies must look beyond Washington to ensure uniform international technological standards. The more that standards for broadband, cellular phones, computers, and other IT devices vary across borders, the harder it is for these companies to sell their products. That explains the army of lobbyists that American companies have unleashed against the World Trade Organisation, the European Union, the International Telecommunications Union and even the OECD in an attempt to shape the developing global rules. Other important emerging standards include those governing consumer privacy, cross-border e-commerce, encryption, government procurement, and the global mobility of technical personnel.

These are areas where hegemony - a concept that finds its fullest expression in military superiority - does not assure commercial success. For all its power and influence, the US has not been able to impose its preferences in these areas, not just because of its spotty record of involvement and support for multilateral organisations, but mostly because no government, no matter how powerful, can attempt to impose unilaterally, much less enforce, its will on these issues. Instead, challenges such as protecting intellectual property and establishing technological standards can only be met through what perhaps is the slowest, most inefficient way of solving human problems: multilateralism. That presents new economy companies with an uncomfortable paradox: few of the traits they prize are found in institutions where governments converge to organise their doings. Technology firms favour speed, decentralisation, individualism, transparency, and a disregard for borders and sovereignty. In contrast, multilateralism normally involves slow decision-making, centralisation, free riders, unclear goals, and hypersensitivity about any real or symbolic erosion of national sovereignty.

The clash between the spirit of the new economy and the culture of multilateral decision-making will play a major role in shaping the way the digital revolution spreads around the world. Innovations in how countries organise to define and enforce collectively the rules that govern the new economy will be as critical in determining its future evolution as the technological innovations that drive it.