Bulletin #08 ​
Balancing Act: The Role of Commercial Diplomacy in Harmonizing Private and Public Objectives
August 15, 2023
As the integration of the global economy slows, and governments flirt with varying aspects of industrial policy, understanding the mechanics of decision-making within business and government becomes increasingly crucial. The United States and China offer clearly contrasting approaches to their pursuits of national power while balancing private and public sector objectives and constraints. By briefly exploring these contrasting models, we illuminate the inherent complexity in harmonizing these objectives, and the role of a key strategic tool that can help us strike this balance—commercial diplomacy.The U.S. models of governance and market economy create what we can describe as a dual-objective system, where both private businesses and the public sector operate on separate constrained optimization tracks. Each pursues its objectives, faces its constraints, and utilizes its decision variables in distinct ways.
For businesses, the primary objective is often profitability. This goal is pursued within a set of constraints such as technological abilities, regulatory compliance, market competition, and shareholder expectations. To optimize within these bounds, businesses utilize decision variables, strategic options like production decisions (related to quantity and production technique), location decisions, pricing strategies, or investment decisions to enhance their bottom lines.
Parallel to this concept, the government aims to achieve broader societal objectives such as national security, prosperity, international order, or promoting values or influence globally. Government constraints include budgetary limitations, geopolitical realities, and expectations of the public. Decision variables range from diplomatic, military, economic, and information measures.
While the dual-objective system of the United States often fuels a dynamic interplay between the public and private sectors, it can also create friction. There are instances where this divergence, instead of spurring growth, can put the U.S. economy and national power at risk. For instance, Lockheed Martin's decision to sell rockets to a foreign entity, for example, might optimize its profitability objective, but if the transaction compromised U.S. national security—a paramount government objective—then the discord between private and public goals becomes painfully clear.
In stark contrast, China operates what we might term a single-objective model. Here, the objectives of the public and private sectors are essentially the same and thus create a combined public-private value. This model uses shared decision variables, recognizes mutual constraints, and follows a unified optimization strategy. The approach reduces potential friction between government and business and aligns decisions towards the common goal of national power. However, this approach often comes at the expense of the entrepreneurial spirit. The dominance of national interest often directs innovation efforts within firms towards the greater good of the country, potentially sidelining individual company growth and progress. Each of these models, while distinct in their approach, carries unique advantages and challenges. The American model nurtures innovation and competition through the independent optimization of each entity but may lead to misalignments between business practices and public policies. Conversely, China's model presents a unified front but may dampen the entrepreneurial spirit due to its singular, top-down objective.
Enter commercial diplomacy. Commercial diplomacy facilitates dialogue between the public and private sectors, aiding each in understanding the objectives, constraints, and decision-making levers of the other. It can help realign business practices with public policies – if properly incentivized – and ensure that mutual respect is maintained for each entity's goals and limitations.
Using our Lockheed Martin example, commercial diplomacy could play a pivotal role in balancing the firm's profit goals with the U.S. government's national security objectives. The process could involve negotiating export restrictions or identifying alternative markets that do not pose a threat to national security concerns, ensuring a balanced outcome that respects the constraints and objectives of both parties.
In a world where the spheres of the private and public sectors often overlap and decisions in one sphere echo strongly in the other, the important role of commercial diplomacy cannot be overstated. It stands as a vital bridge between business interests and governmental objectives that together drive a nation's progress. It's an approach that respects the complexity of multi-criteria optimization and helps to navigate it, with the goal of enhancing government-business synergy while preserving the spirit of independent optimization—fostering innovation, competition, and individual enterprise.