Building international business: a matter of trust

Reading time: 6 minutes

31 Mar
31/03/2016
Foto del profilo di Olga Annushkina

by Olga Annushkina

SDA Professor of Strategic and Entrepreneurial Management

In general, people do not trust foreigners.

How many times while embarking on a taxi journey in a foreign country you brace yourself for yet another delusion in the human kind. High probabilities are, you think, that your trip will be intentionally longer than it should have been, the driver won’t accept credit cards or will not have any change so that your tip will be approaching the value of your kids’ annual pocket money allowance or that you will have to pay for extra charges as highway tolls, festivities, luggage or weather. If you have time and a certain attitude, you may take precautions by asking a local acquaintance or a hotel concierge to arrange your trip, by checking Google maps for the directions or by consulting travellers websites for a “normal” city-airport taxi fare. Quite a bit of fuss for only one transaction, isn’t it?

On a much larger scale the deficit of cross-cultural trust is daily translated into the exponential insurgence of additional costs, unnecessary activities and simply personal worries in large multinational organizations.

Trust and cultural diversity

TrustPsychologists say we tend to trust more those who look like us. In one of her experiments Lisa DeBruine asked participants to “click on the face you find more trustworthy” and many chose their own slightly modified images, leading the researcher to conclude that facial resemblance increased judgements of trustworthiness.

This hard truth is an important obstacle for the international projects, in which we are forced in building trust towards people or organizations that are so different in so many ways: values, languages, communication rules, notions of good manners, approaches to the decision-making and to the conflict-solving, even concepts of beauty and of hygiene.

Trust is an important element of doing business abroad also because business practices showed important limitations of legal forms of behaviour enforcement, be it between joint venture partners, suppliers and customers, foreign investors and local governments, employees and foreign employers, or simply between two persons from two different countries.

Cross-border disputes are difficult and costly experiences and legal solutions are not always available. To take one example, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention) was not ratified by a number of countries in African continent (such as Ethiopia and Namibia), but also by Taiwan and Turkmenistan, depriving the international investors of a possibility to avoid costly and lengthy litigations in case of disputes. Countries ratified the New York Convention do not always fully apply its rules as in the famous case of Bhatia International in which the international arbitral awards were set aside by an Indian court decision. And I already wrote about the dispute between Chinese Wahaha and French Danone for which the arbitral award decided by Stockholm Chamber of Commerce was not enforced in China.

On the national level Fukuyama linked the general level of trust inside of a society with its economic prosperity: when trust reins among people and organizations, they spend less time and money on monitoring their counterparts’ honesty, opportunistic behaviours and on preparing lengthy legal contracts. Trust reduces the so called transaction costs – costs inherent to the organization of every single economic transaction: selection of a partner for the transaction, negotiation, preparation of a contract and then the contract control and enforcement.

Similarly, a high level trust in one’s international partner may significantly simplify a cross-border transaction. Fukuyama also spoke about the importance of trust inside of organizations as intrafirm relationships are not immune at all to the transaction costs. This importance of trust is very well-known in large and complex multinationals. The headquarters are often obliged to incur important coordination costs aimed at preventing eventual opportunistic behaviours by managers of its numerous subsidiaries.

The fundamentals of trustworthy relationships

TrustTo understand the underlying reasons of cross-cultural lack of trust let us analyse how trustworthy relationships are formed.

The matter of trust emerges when one player is not certain about the actions of another player. Trust has two facets. On one hand, we speak about trustworthy people or organizations whose integrity, honesty and reliability we do not question. In the international context this first aspect of trust may already create some misunderstanding as the notion of acceptable and trustworthy behaviours vary among different national and even regional contexts. Secondly, trustworthy people’s actions are coherent with our expectations. Their actions are self-enforced in cases when no “punishment” or “benefit” is foreseen by the formal contract or agreement. They act in their own will.

Our trust, or the perception that the partner will be and behave in certain way depends on three components. Firstly, our past experiences usually negatively or positively influence our propensity to trust foreigners, foreign organizations or institutions, even people of a certain nationality. Our experiences can be direct or indirect, experienced by people we trust or read about from trustworthy sources. Secondly, the national environment with its culture, legal context and business ethics may create more or less favourable setting for the creation of a trustworthy relationship. Some national cultures are risk-averse. Some legal contexts are really weak and counterparts seek alternative solutions to “frame” their economic transactions. In the third place, the information about the counterpart’s background, past behaviour, belonging to certain business networks influences our propensity to trust the person or organization in front of us. Our knowledge about the foreign partner should be sufficient to predict its behavior with a high level of probability. This kind of knowledge is usually collected through several rounds of interaction and is usually an indicator of an existing relationship. In some cases the deep knowledge of a foreign partner allows us to see them as “one of us”, thus bringing our trust to another, “co-identification”, level.

trustReducing the negative impacts of the lack of trust

Lack of trust increases our costs when doing business abroad and there are ways to reduce its negative impact.

Firstly, we have to remember about the importance of information sharing in building trust: so the first step is to collect data about your potential foreign partners and, importantly, to share information about yourself without taking for granted the flawless cross-border travel of your reputation. The information sharing should be given time as when you start thinking the time is ripe to invest in your reputation in a certain region – allow me – it is too late.

Secondly, large multinational organizations should be aware about the internal trust issue and engage in dealing with it, for example by starting with the information sharing initiatives. Technology helps in sharing information and building trust too.

Thirdly, critical examination of one’s past experiences is another step to take: we question whether the intrinsic high or low level of trust in a foreign counterpart is “objectively” justified or is partly influenced by direct or indirect past experiences.

Finally, the most desired outcome of any cross-border negotiation should be not only a well-prepared legal contract but also the relationship based on trust that will assist you in reducing the contract enforcement costs and in eventually dealing with the whole variety of situations that were not legally formalized.

As, paraphrasing Billy Joel, “some contracts are just a lie of a heart: they may not want them to end but it will, it’s just a question of when”.

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