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MODERN ECONOMIC DIPLOMACY

 

The term “economic diplomacy” refers to the diplomatic service activities focused on increasing export, attracting foreign investments and participating in the work of international economic organisations, i.e., the activities generally focused on the affirmation of economic interests of a country on the international level.
The pursuit of the economic component of the Croatian foreign policy falls within the scope of the Croatian Ministry of Foreign Affairs and European Integration, the institutional framework for economic diplomacy, while its tasks and goals are explicitly included in Croatian foreign policy fundamental guidelines.
How aware are we really of the true role of economic diplomacy in international relationships, its range, work methods, multifunctional aspects and, in the end, the effects achieved by appropriate mobilization of its protagonists? The answer depends chiefly on our perception of modern diplomacy in general, but also on the direction of economic and social development a country wishes to pursue in the context of globalization. A clear standpoint on these issues dictates the appropriate positioning of economic diplomacy and its activities in the structure of public administration as well.

Economic diplomacy – cause or effect?

Economic or commercial activities have always been one of the components of the diplomatic service, while their role, methods and goals were determined by the actual moment in history. Until a few decades ago, especially in the period after the Second World War, economic or commercial activities were regarded as marginal diplomatic activities. The activities of the so called political diplomacy, as well as professional diplomats, who worked in the field of strictly political interstate relationships, had a much higher status and professional reputation in comparison with the commercial attaché. However, if we look back to the origins of diplomacy, we will discover that commerce was the fundamental stimulus for crossing the then national borders and developing interaction among nations. Historical sources confirm the existence of intensive commerce regulated by trade agreements among the civilizations of ancient Egypt and West Asia as early as in the 14th century BC. Trade between the Old World and the New World flourished due to the European colonisation of Asia and the discovery of rich South-American coasts. The Dubrovnik diplomacy, protecting its territorial, but also commercial, interests, used carefully designed diplomatic mechanisms.
In other words, commerce was the cause for establishing the first interstate relationships and agreements. Therefore, we can say: the flag followed commerce.

In the last decades, improving commercial and economic relationships is once again in the very centre of diplomatic activities. The basic causes behind this return of diplomacy to its historical sources can be found in the following facts:

  • In the majority of developed countries, the share of foreign trade and investment in the GDP, especially after the Second World War, is constantly growing in comparison with domestic production;
  • The implementation of economic reforms in the processes of market-oriented economies of the developing countries, as well as development strategies based on strengthening export, contributed to a faster integration of a large number of countries into the global economic trends;
  • Globalization of commerce and business – relocation of production and services, created the need to activate multilateral regulatory and coordinative mechanisms.
  • Expansion of regional trade agreements with the aim of eliminating barriers to international commerce and investment processes – EU, CEFTA, Mercosur, NAFTA, FTAA and others –modified their original role and scope significantly.

In today’s globalized world, characterized by economic interdependency of different countries, economy has become the decisive element in international relationships. It is the “measurable” component in determining the level of relationships among countries, and it dictates direction, content and intensity of political relationships among countries. Therefore, economy has gained the central role in diplomatic activities, the borders between traditional political and economic diplomatic activities are becoming ever thinner and their synergic operation more pronounced, while the term “economic diplomacy” expands beyond the conventional limits of its scope and field of activity.

Today, modern diplomacy is becoming an integrated discipline which requires understanding the dynamics of international relationships in the political and economic areas as well as mutual interaction and interdependence of both. Functional limits of integrated diplomacy are polyvalent, whereas each specific diplomatic activity on the political or economic levels affects the other. This approach emerges in bilateral as well as in multilateral relationships.

The field of economic diplomacy activities

Activities of modern economic diplomacy focus on achieving specific economic goals of a country on the international level, whereas the fields of activities are interdependent and their borders very fluid and rather difficult to define, especially with the concept of integrated diplomacy. Economic diplomacy activities can be divided into the following basic areas of work:

  1. Promoting export
  2. Promoting investment
  3. Transfer of technologies
  4. Management of technical support /development collaboration – which is significant from the standpoint of the countries receiving support as well as from the standpoint of the countries and international organizations providing it
  5. Promotion of the country – which is the basis for all the above mentioned areas, and includes the creation of a positive image of the country, branding, tourism promotion, etc.

Promoting export
Promoting export, together with promoting investment of course, is the essential field of economic diplomacy activity. Diplomacy has the role to mobilize interests on the spot, create desired ambient for the meetings of exporters and their potential partners and define and articulate the circumstances encouraging export. However, it is necessary to underline the importance of an elaborate export strategy, as a defined export portfolio of the mother country which has the need for support on the spot.

Promoting investment
Promotin investment is especially emphasized in diplomatic missions’ activities. All the countries of the world, underdeveloped, developing or developed, compete in the global race to attract direct foreign investments. In a large number of countries, the activity of promoting investments in foreign countries is within the competence of national agencies for investment promotion. However, the role of diplomatic missions is irreplaceable and very important. They have extensive knowledge of the recipient country, a developed network of political and other contacts and many years of continuous presence in the field. Extensiveness and intensiveness – these are the two chief guidelines for activities in foreign investment promotion. The first refers to recognizing a potential investor, and presupposes field probing activities. Intensity in action presupposes contacts, established and maintained, with potential investors, clarifying possible doubts, providing basic explanations and alike. Both guidelines, though, have preconditions – first, identifying potential investors presupposes the existence of an detailed “list” of investment priorities and projects of the home country, and second, intensive lobbying focused on the identified potential investor requires available reliable information about his profile, level and seriousness of the interest expressed and objective capacity for realizing the investment.

Promoting the country
Almost no aspect of international relationships – bilateral, regional or global – exists without being linked to the image of a country. The way in which a country is perceived in the world significantly influences its interstate relationships on all levels. The creation of a suitable perception of the country is the very essence of the tasks of diplomatic missions, foreign affairs ministries and professional diplomats in general – although their actual chances to radically or temporarily influence a change in the existing perception of their country abroad are often limited. However, proactive diplomacy requires that a serious and lasting attention is given to the creation of the desired image of their country. Brian Hocking1, renowned modern diplomacy theoretician, analysed the influence of the image of a country on the decisions taken by foreign businessmen about starting business activities in that country – 72% said that the image of a country was of the crucial weight in realizing investments or other forms of economic collaboration in that country. The World Bank, in its edition «Marketing a Country: promotion as a tool for attracting foreign investments»2, assigns the key role in attracting foreign investments to the fitting promotion and positive perception of the country. On the other hand, it is indisputable that a substantial economic exchange can exist in different circumstances, including among the countries that have no diplomatic relationships or where these are burdened with serious political issues, even animosity. However, bilateral relationships based on positive perceptions of national identity are certainly a basis for a more dynamic and easier development of economic relationships. Initiative, innovation and inventiveness are established qualities of a successful organization of promotional activities which are at the disposal of diplomatic missions. Here, all synergic effects of the diplomatic missions’ scope of activities should not be forgotten. These are reflected in the application of integrated diplomacy system. Notably, the coordination of political and economic activities, cultural promotion, consular work, relations with the media, relationships with the emigration and other areas of work of diplomatic representation offices, in the function of comprehensive promotion of a country and creation of a positive image of the country in the recipient country, are bases of integrated diplomacy.

The basic work methods of economic diplomacy

Analysis
A diplomatic mission is crucial in “providing” its ministry with data about the market and information gathered through a number or sources it has access to in the recipient country. This includes the information on the basic principles and the structure of the economy of the recipient country, its import-export portfolio, the profile of direct investments into the country, its technological and industrial capacities, economic trends and alike. Identification of products and sectors with the potential for economic collaboration constitutes a special area of analysis.

Creating guidelines for market presence
One of the chief functions of economic activities of diplomatic missions is to provide help and to encourage domestic companies to overcome obstacles arising from the ignorance or an inadequate knowledge of foreign markets. The background of this function of diplomatic missions is the orientation towards the interests and the needs of their citizens, which is also one of the fundamental principles of public administration. The selection, data processing and production of such materials requires the diplomatic mission to have a deep understanding of the economic profile of the country (from the competence of economic institutions, the tax and customs system, basic import and export settings, financial market performance, dispute settlement modalities, identification of major market players, workforce market, business customs and alike) which is one of the chief functions of economic diplomacy and the affirmation of its credibility. It is also desirable for the missions to focus on specific interests, such as creating market reports for specific products, economic sectors, competition activities and alike. Industrial countries often employ local experts for market analysis, which is reasonable because these tasks require specific expertise that cannot be expected from a professional diplomat.

Team work
It is a work-organization method for diplomatic representation offices which goes beyond the formal duties of diplomatic personnel. The need and the appropriate time to introduce the so called “task force” mission in the diplomatic representation office as a whole should be identified. It requires the participation of the entire diplomatic mission team to pursue the major economic tasks. Individuals who do not have formal relationship with the diplomatic mission can also be included into the task force, for example, citizens in important positions in the recipient country, prominent economists or individuals from the political and public life in the recipient country. The head of such team work is always the head of the mission who, primarily through his or her approach to work and openness to innovative diplomatic mechanisms, harmonizes the direction and the working method of the diplomatic mission with the current situation as well as the needs and instructions from the domicile country.

The activities of economic diplomacy, even far more than other aspects of diplomatic activities, provide a wide range of opportunities to apply innovative operation models. These activities require a proactive approach to work, and “tools”, as well as the utilization of connections and development of interdependence between the aspects which may not exhibit clear correlative elements at the first glance, but which have powerful effects on the affirmation of national economic interests eventually.

Organization of economic diplomacy systems – institutional models

Today, foreign affairs ministries in the world use several models for the organization of work related to the economy.

The unified model
It entails the unification of the scope of activities of foreign service and the scope of activities of foreign trade under the aegis of the ministry of foreign affairs. The ministry of foreign affairs is the major protagonist and creator in the pursuit of the economic interests of a country on the international level. The ministry implements activities on the basis of defined strategies and priorities in collaboration with all relevant organizations and professional, interest and business groups in the country. Ministries of foreign affairs have the role of coordinators in the process. Ministries are directly in charge of achieving the defined goals on the international level, through a network of diplomatic missions.

Partial unification
Ministry of foreign affairs operates through institutionalized cooperation with the institutions competent for economic strategy development, promotion of export or attracting investments – such as economic development committees or agencies for the promotion of export and import, and has a coordinative function in the process. Activity priorities are defined by conclusions of institutionalized coordination organization. This model is made operational in the field by separate economic departments working within diplomatic missions or independently of these. They are staffed by professional diplomats or persons appointed by the said organizations.

Transfer to a third agency or institution
The competence of the ministry of foreign affairs remains on the level of passive monitoring of the situation and providing logistics and political support by diplomatic missions in the field when the need arises. Agencies for the promotion of export and investment working abroad through their branch offices are in charge of operational tasks. Their primary care is full-time promotion of export and investment and a more aggressive marketing.

Competition
This model causes relatively chaotic situations in numerous countries where respective ministries of foreign affairs and departmental institutions – department ministries, export agencies, professional associations and alike – have overlapping areas of competence in the export, attracting investment, organizing negotiating platforms or representing and leading negotiations in international organizations. Such a system often creates misunderstandings regarding the definition of competencies in specific cases, and  fragmentation of activities on the international level, which often causes divergent views, statements and activities. Also, it is a model which, eventually, does not enable the existing diplomatic structure to fully contribute to the affirmation of the economic goals of a country.

The model used in specific countries is a reflection of the governing structure’s perception of modern diplomacy and, consequently, of the positioning of economic diplomacy and its implementation within the structure of public administration.

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It is necessary to emphasize one of the basic principles of economic diplomacy.

Speaking of export promotion, mechanisms of economic diplomacy are included in supporting a domestic company when it crosses or plans to “cross the border”, i.e. to commence trading in another country. Such a company should be ready to export; assumingly, it has a product distribution strategy for the specific market, worked-out marketing activities, the necessary export capacity etc. The role of economic diplomacy is specific. It cannot, and must not, be a substitute for direct organization of export activities of a company on a foreign market or business talks between trade partners, nor is this its role. One must remember that a diplomat does not sell – if they were in the trading business, they would be merchants, not diplomats.

This economic diplomacy principle leads to the conclusion that, in order to achieve full effect of export promotion, domestic exporters must have a suitable level of knowledge of the complex circumstances of modern commerce. Professional or sector associations contribute to this knowledge greatly, through devoted work on further education of entrepreneurs and their adaptation to the global business environment. They are also irreplaceable in improving the dialogue with the government with the goal to create an export-oriented economy, the culture of export and the preconditions for an easier and better achievement of export goals by using measures to create a positive entrepreneurship climate, stimulation of export, technology development and enhanced competitiveness.

The basic tasks of creators of a country’s economic development strategy on the international level are the identification of its actual export capacity and potentials on targeted markets, definition of a list of investment priorities and definite projects, definition of target activities in the world focused on attracting investors with a desired profile, designation of priority markets and methods of approach to these markets, developing strategies for economic promotion in the recipient countries, and defining basic obstacles to achieving desired goals. The process of defining these strategies is related to the existence of a broad consensus in the country among all the protagonists of international economic cooperation as well as to political support. Only on the basis of defined priorities and created platforms can diplomatic missions in the world work in an organized manner towards the affirmation of economic interest goals in the recipient countries.

Conclusion

Economic diplomacy as management of the mechanisms to achieve economic goals on bilateral and multilateral levels is a key instrument for developing efficient collaboration on a global level. The complementariness of economic interests which arises from the collaboration between countries or regions, as well as efficiently overcoming the differences caused by the differing ways in which countries perceive their economic priorities, will contribute to the development of stronger social, economic and political relationships in the world, and in this process the role of diplomacy is irreplaceable.

We are living in the time of endless opportunities. For those who have the necessary knowledge, computer skills and access to global information infrastructure, almost anything becomes possible. It is necessary to become aware of our objective capabilities and needs, the reality of the moment, the circumstances of our environment, to improve our knowledge and self-education and to use innovation and excellence in our daily work. With these elements, even a small business venture or manufacture in a developing country can become successful on the globalized market – especially with the support of a reliable, professional and efficient economic diplomacy.

Nancy Butijer
Directorate for International Economic Cooperation
Ministry of Foreign Affairs and European Integration, Republic of Croatia

 

1Brian Hocking, Diplomacy of Image & Memory: Swiss Bankers and Nazi Gold (Diplomatic Studies Program; Discussion Paper No. 64, University of Leicester, April 2000).

2Marketing a Conutry: promotion as a tool for attracting foreign investment. Revised edition (World Bank, Wahnington DC, 2000).

 
 




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