From an economic point of view, the transition from the twentieth to the twenty-first century took place in the midst of growing trade and financial interrelationships among countries, and the widespread impact of information and telecommunication technologies. Another important development was an increasing cross-national convergence in policymaking, as a result for the most part of a consensus over the fundamental features of monetary and fiscal policy, the benefits of deregulation, and the importance of letting markets allocate capital, labor, and other resources. The global economy was simply tending towards greater integration under a liberal set of rules (Abdelal 2007; Stiglitz 2002). As Robert Gilpin (1987: 389; 2000) once put it, the late twentieth century resulted in an “increasing interdependence of national economies in trade, finance, and macroeconomic policy.” The global economy was moving in the direction of tighter integration in all of its different aspects, from production and distribution to capital and information flows. In this vein, sociologist Manuel Castells (1996: 92) argued that the global economy had become “an economy with the capacity to work as a unit in real time on a planetary scale.”

Policymakers were hoping for equal opportunities for all countries that joined this new phase of globalization. Markets were open to everyone in an apparently inclusive way. The frontier of development and well-being was extended to a greater number of economies, all of which were supposedly converging on the living standards of the most advanced countries. Policymakers and analysts also thought that the global economy was eminently governable, and that business cycles were a thing of the past. The sociologist Roland Robertson (1992: 8) summarized the new mind-set by arguing that globalization encompassed both “the compression of the world and the intensification of consciousness of the world as a whole.”

As soon as the new century was ushered in, however, a series of crises turned the global economy upside down: the bursting of the technology bubble, a string of high-profile corporate scandals, and, above all, the global economic and financial crisis triggered by the implosion of the American subprime mortgage market. The “great recession” accentuated a trend towards a two-speed global economy. Despite difficulties in some of them, emerging economies weathered the storm much better than both developing and developed markets, surging ahead economically and financially while the richest and the poorest economies languished and wrestled to cope with high private and public indebtedness.

The global economic, social, and political landscape is being transformed by the growth of social categories such as the middle class and the millionaires. In Europe and the United States these two groups took off during the 1920s, and resumed their growth during the 1950s and 1960s, at a time when Japan joined the trend. Nowadays most of the growth, however, comes from the emerging economies, while the tendency towards greater inequality is resulting in a shrinkage of the middle class in the US and an expansion of the class of millionaires and billionaires. These trends are transforming the global economy and society, creating numerous business opportunities, and also posing serious economic, political, social, and environmental challenges.

The growth of the middle class is one of the most important trends of the last 150 years. However, until very recently, the middle class was the largest social stratum only in relatively rich countries. Over the last 30 years, hundreds of millions of people have been lifted out of poverty in many parts of the world, including Brazil, China, India, Indonesia, Mexico, and Thailand, to name but a few countries. As a result of these changes, the size of the global middle class will soon become larger than the number of people living under the poverty line for the first time in history. Given the values, preferences, and yearnings of the middle class, its rise to global prominence will have major implications for society, politics, and the global economy.

The middle class has been defined in various ways. At the time of the French Revolution, the middle class referred to the bourgeoisie, i.e., the new ascending urban traders, artisans, and professionals, vastly outnumbered by the peasantry and seeking to become politically influential at the expense of the landed aristocracy. In the nineteenth century, Karl Marx referred to the middle class as the petit bourgeoisie, namely, a class between the proletariat (i.e., the working class) and the ruling capitalist class. The sociologist Max Weber echoed this distinction in his extensive studies of social stratification. Hard work, security, and frugality are values commonly associated with the middle class.

Perhaps the most tantalizing question about the twenty-first century has to do with the identity of the dominant global power, or whether there will be one at all. If the United Kingdom reigned supreme during much of the nineteenth century and the United States dominated the second half of the twentieth, are we to assume that a different global power will emerge during the twenty-first? For some, the answer is obvious and it points to China (e.g., Jacques 2009; Subramanian 2011). For others, the United States will hold its sway, albeit with a severely diminished capacity to act unilaterally (Nye 1990, 2010). For a third group of observers and commentators, including cold-warriors like Henry Kissinger, the twentyfirst century will be characterized by an uneasy balance among several global powers (Bremmer 2010a; CSM 1989; Kissinger 2011). It is clear that “we are now at the start of what may become the most dramatic change in the international order in several centuries, the biggest shift since European nations were first shuffled into a sovereign order by the Peace of Westphalia in 1648” (Ramo 2009: 7–8).

A millennial perspective on the comparative size of populations and economies might be a good place to start analyzing this debate. Table 12.1 presents the data for selected economies. Back in the year AD 1000 China was not even the largest country in terms of population or GDP – India was and had been for at least the previous one thousand years. Five hundred years later the two countries were still running head to head, each still larger than all of Western Europe combined in terms of population or GDP. It was not until the power of steam worked its magic in Western Europe that Asia started to fall behind, and not until after World War II that the United States took the lead. At the turn of the twenty-first century, China and India commanded a large lead in terms of population, with the former's economy poised to become number one in size. Still, as of 2008 China was about a fourth as rich on a per capita basis as the most advanced countries in the world. The United States has been the world's richest large economy for nearly two centuries. Contrary to the conventional wisdom, the UK never was the world's largest economy, given that China passed on the baton directly to the US.

Running hand in hand with the extraordinary growth of emerging economies at the turn of the twenty-first century, we come across yet another clear sign that the global economy is changing. New multinational firms from countries such as Brazil, Mexico, China, India, Egypt, or Indonesia are expanding around the world, making acquisitions, and gaining market share not only in traditional industries but also in high-technology sectors. This trend has acquired such magnitude that it is rare the household anywhere around the world that does not consume or own a product branded by an emerging-market multinational (Guillén and García-Canal 2009; Van Agtmael 2007).

The figures are tantalizing. While in 1990 about 7.0 percent of all cumulative foreign direct investment in the world was accounted for by the so-called emerging-market multinationals, by the year 2000 the proportion had grown to 11.1 percent, and by 2013 it had almost trebled to 21.1 percent. In that year, emerging and developing economies accounted for 39 percent of new foreign direct investment flows. At the turn of the twenty-first century about 20.8 percent of the 64,592 multinational firms in the world were from emerging or developing countries. By 2010 the proportion had climbed to 29.1 percent of the world's total of 103,786 multinational firms (UNCTAD 2011, 2014). The economic and financial crisis that began in 2007 actually accelerated this phenomenon. While in 2008 there were 78 emerging-market firms on Fortune magazine's ranking of the world's largest 500 firms, in 2014 the figure stood at 157, with most of the increase being attributable to the number of Chinese firms, which grew from 29 to 98. A plausible scenario is that by the year 2030 more than half of cumulative foreign direct investment will be accounted for by emerging-market multinationals, and half of the Fortune Global 500 firms will be emerging-market multinationals (see the Box).

The main drivers behind this phenomenal growth in investment by the emerging-market multinationals are diverse. These firms invest in order to secure market access, inputs, and strategic assets that they lack, including brands and technologies. Many of them grew big in the domestic market and are now seeking to expand their selling opportunities by making greenfield investments and acquisitions abroad. Some of them pursued a well-defined niche market with global potential.

BARGAINING focuses on a possible division of gains from joint action through cooperation between two or more parties. Gains may include a peace dividend from the cessation of violent conflict, new revenue from joint ventures or partnerships, allocation of water in a shared river stream, etc. In bargaining games, a gain from cooperation is often called a surplus. In spite of their common interest in the division of available gains, negotiators often differ over the precise partition, given a desire to attain as large a share of the “pie” as possible. The partition of a surplus constitutes bargaining activity in many negotiations. In this chapter, the principles of bargaining theory are derived from a game theory methodology. Bargaining theories help agents assess the relative value of different offers presented to them and also determine the relative value of their offers to be made to the other during negotiation.

In a two-person bargaining situation, for example, two individuals “have the opportunity to collaborate for mutual benefit in more than one way” whereas each individual has the desire to maximize her gain in bargaining, in solving the joint efficiency problem, bargainers have to search for a mutually beneficial but unique contract that determines “the amount of satisfaction each individual should expect to get from the situation” (Nash 1950, 155). In so doing, we ask such questions as how knowledge about the division, enforceable through a binding agreement, can lead to a reasonable share of the available gain. In this context, we are not so concerned about what people have to do to achieve those payoffs, in contrast with strategic settings where players have to act independently without being able to prearrange each other's actual behavior and its outcome. As will be seen in the section immediately following, this chapter departs from the previous ones, in which deviation from a Pareto optimal solution is derived from a situation in which individual incentives play a prominent role with diverging interests.

In this chapter, bargaining problems are constituted by both a payoff distribution and strategy coordination. In particular, the “rules of a bargaining game” have implications for whether and when an agreement can be reached and, if it can, what the likely division is.

THE NEGOTIATION process and bargaining models presented in earlier chapters provide a guide in narrowing down the predicted outcome, but they are in themselves incomplete. In game-theoretical models, actors have stable and well-defined preferences based on utility calculations in striving to maximize their gains and minimize their losses. In formal models (presented in Chapter 5), a “bargaining set” for a given problem is intricately deduced from the value of a negotiator's alternating offer. As negotiators interact through different stages (seen in Chapters 6 and 7), their preferences have to be adjusted to a new understanding of their counterpart's interests and priorities. In Chapter 8, we saw how bargaining actions reset mutual expectations through a series of adaptations to each other's offers. When bargaining is understood in the traditional utility formation (e.g., payoff maximization), its process is largely considered separate from psychological or institutional decision-making process. However, a negotiator's choices tend to be subject to a decision-maker's bias and are also shaped by institutional and political constraints.

This chapter starts from the premise that understanding a real-world negotiation process and its effect on outcomes has to go beyond the examination of negotiator interactions based on their preferences and utility functions. The chapter discusses the interference of negotiators' perceptions and attributes as well as system influences on a negotiation process and its consequences. It will begin with motivational and cognitive models that explain the role of perception and emotions in decision-making. Recognizing that international negotiation is likely to be propelled by decisions involving larger groups, in the second half of the chapter, I will also incorporate institutional decision-making procedures and the interference of concerns of subgroups on each side in our analysis. In general, government decision-making is entangled with organizational rivalry and bureaucratic politics. The growing number of subactors makes issues that were originally invisible or less visible gain new prominence since parochial interests now have to be satisfied in an external negotiation. With the intervention of more subactors, intraparty (and crossparty) coalition-building plays a crucial role in shaping the final outcome of negotiation.

THE FUNCTION of many international negotiations is to develop an explicit agreement for the allocation of benefits and/or costs. In resolving opposing interests, each side's demands need to be reconciled and transformed through a form of joint decision-making. As we shall see later, the efficiency of negotiation is often hampered by a lack of sufficient information about each other's priorities for effective decision-making. In fact, negotiators may not always find it easy to define even their own best interests and alternatives especially in a setting that entails multiple actors, evolving sets of issues and their linkages. Since many negotiations are neither self-contained nor stand alone, they navigate in the past history of conflict and other contexts of relationships. When the parties encounter uncertainties, negotiation behavior may evolve over time as they interact.

In the remainder of this book, we focus not only on a process internal to the negotiation (i.e., what is happening at the table) but also on its context. As is discussed in this chapter and the one immediately following, a negotiation process is examined by changes in negotiators’ activities, their interactions and effects. While Chapter 8 looks at bargaining behavior and mechanisms (e.g., concession-making patterns), Chapter 9 covers the role of “nonrational” factors (i.e., the interference of psychological biases and institutional and political interests) in shaping negotiation process and outcomes. In Chapters 10 and 11, we will look at how the increased number of disputants and issues, as well as the presence of interveners, has a direct bearing on the behavior and strategies of all participants.

In this chapter, negotiation functions are examined in light of the way they are instrumental in reaching a joint decision by overcoming substantial differences. A negotiation process is, in part, presented as segmented into a trend or a series of uninterrupted events, ranging from decisions on coming to talks, putting a serious offer on the table or reaching a closure rather than continuing to haggle. Such activities as information exchange, debate and bartering are involved in developing agreement packages. However, these activities are embedded in an overall mechanism of interactive dynamics of negotiating parties.

THROUGHOUT this book, we have examined what it takes to get a mutually acceptable and desirable negotiation outcome. In understanding the effect of a behavior and strategies in negotiator interactions, we have studied what is involved in negotiating. As a negotiated settlement is presumed to be voluntary, an agreement has to favor everyone. In this book, we have also assumed that negotiating behavior is driven by self-interest; an outcome should bring advantage to all sides. In fact, no rational actor is supposed to agree to a proposal that leaves him/her worse off than the status quo ante. In an economic lexicon, a rational bargaining outcome is represented by a Pareto efficient allocation of values, where a further increase in one party's welfare should not be obtained at the sacrifice of the other's. More importantly, being rational in negotiation translates into making the best decisions to realize one's own objectives or maximize one's own interests (Bazerman and Neale 1992). In that sense, our main interest has not been “getting to yes” (Fisher and Ury 1981).

At the heart of negotiation lies a need to resolve a tension between efficiency and distribution in the outcome (Princen 1992). In a bargaining dilemma, negotiators are caught up in a contradiction between their need for joint action and conflict over the terms of the final agreement (Craver 2012). Cooperation is essential in enhancing efficiency for the maximization of mutual gains, while competition is generated by the existence of many possible outcomes, each favoring a different party. Bargainers can reach an agreement in such a way as to improve their joint welfare by enlarging the pie through cooperation. At the same time, the main impetus of bargaining is to maximize individual total gain, thus creating conditions for a dispute over how to “divide the pie.” Thus concerns for absolute gain do not alleviate interest in seeking equal or greater share than an opponent.

Given the dubious link between individual gain and collective efficiency, opposing parties instinctively prefer to protect or build a competitive edge than to simultaneously pursue joint interests.

In providing an introduction to international negotiation and bargaining, this book presents essential concepts and approaches. Its ultimate goal is to serve as a guide for readers to cultivate an ability to analyze negotiation problems and circumstances. Thus the book is oriented toward helping students, diplomats or other practitioners develop an overarching knowledge base with a look at pertinent social science theories relevant to examining and tackling real-world issues.

Understanding international negotiation and analysis will be an important task in considering the costs of ignoring many problems faced by humanity. There is no shortage of disputes, involving territorial claims, trade imbalance, security dilemma, pollution and so forth. It would be ideal to achieve results that are beneficial to all parties concerned. However, that may often not be the case due to competitive settings inherent in international politics. Thus it becomes more important, in a negotiation analysis, to uncover the characteristics of interdependent interests embedded in a structural relationship. This book approaches negotiation from the perspectives of strategic interaction where one actor's situation is fully dependent on another actor's action. Bargaining strategies can be considered in the context of cooperation and conflict embedded in negotiating relationships.

An interactive process in various settings can be succinctly illustrated by game theories that provide basic tools in understanding the structure of bargaining relationships. Reflecting on this theme, the first part of this book is devoted to game theories, laying a foundation for more complex analysis. For those who are not familiar with game theories, the core concepts are introduced in a step-by-step manner. In so doing, game theory chapters start with basic assumptions and eventually move on to illustrate the theory's relevance to diverse settings such as global warming and North Korean denuclearization.

In the real world, we should not hold an illusion that a single theory provides all-encompassing answers, predicting the outcomes of our interactions with others. Guided by diverse research traditions in international negotiation, multidisciplinary contributions are quite evident in this book. Behavioral, psychological, political and institutional aspects of decision-making are brought to understanding a negotiation process in the remainder of the book. Thus different theories have been pulled together to provide both sufficient depth and breadth in developing a coherent picture of a complex phenomenon of international negotiation.

IF ANY deal is struck, settling on a precise point in a bargaining range is necessary. In real-world bargaining situations, a single determinate solution is not easily found due to incomplete information or misinformation. Even after the discovery of a range of possible settlements, the outcome – in terms of the partition of the benefits or costs to be shared – is still indeterminate. In this chapter, bargaining is described as a search for a range of feasible settlement options and selection of an outcome that sticks out from the rest. It is contrasted with static bargaining theory, which concentrates mostly on the initial conditions and outcome rather than the procedures in use. The chapter examines bargaining actions as part of an adaptive process with an incremental logic. Modification in one negotiator's behavior triggers a change in the perceptions of their counterpart that, in turn, is likely to reset the former's bargaining position. Its evolutionary dynamics can be examined to narrow the gap between a cooperative game setting and actual bargaining behavior.

Through an interactive process, two or more bargainers are engaged in seeking an agreeable focal point in a situation where possible outcomes are mutually beneficial but the order of their preferences is negatively correlated. For instance, whereas two countries could be better off with a new trade agreement, prospects for different relative gains would generate discord on sectors to be open to the other side's industries. When universal mechanisms for allocation of benefits are not established or accepted, for instance, in the division of land or irrigation water in a shared river, the difficulty lies in how to single out one among multiple prominent alternatives (Brochmann and Hensel 2011). Different settlement points have advantages for each side, generating competition over selection. It is essentially the challenge faced in the Battle of the Sexes where agreeing to one point is mutually better off, yet differing interests generate discoordination of activities.

Therefore, a bargaining problem falls in the familiar territory of a negotiation dilemma: how players in conflict arrive at an agreement that serves their mutual interest while individuals have incentives to hold out for a more favorable settlement (Filzmoser and Vetschera 2008).

NEGOTIATION structures often entail different types of cooperation and conflict relationships that are complicated by uncertainty about the other actor's moves. During the Cuban Missile Crisis, each superpower's competitive strategies could have resulted in the outbreak of a nuclear war if the Soviets had not backed down. Despite the warnings of many scientists and the need for regulation, the competitive overfishing around the globe continues, which will eventually cause the collapse of the marine ecological system. As will be seen in this chapter, these and other settings can be explained by game-theoretical concepts and models. Even though they may not be able to present all the obvious solutions to various problems, the games of Chicken, Battle of the Sexes, Stag Hunt and their hybrids can at least tell us about types of obstacles to developing a cooperative arrangement that enhances everyone's welfare.

In competitive situations, commitments to a negotiated settlement might not be adhered to if cooperation has to be self-enforced with the involvement of costs. When individual incentives play a prominent role, this creates a situation where decision-makers have to act independently without being sure of the other's abiding by the contract. This chapter examines how different game-theoretical models explain the dynamics of cooperation and conflict under uncertainty in action. In some two-player games, as illuminated by a nuclear arms race, seeking to gain a competitive advantage does indeed impede cooperation. In other games such as Stag Hunt, maximum gains are attainable only through coordinated action, but there is no guarantee for actors to take such action. As is noticeable in this chapter, the Nash equilibrium serves as a key concept for explaining the stability or instability of strategic relationships. The chapter will also examine qualitative changes in the dynamics of relationships and payoffs with the extension of two-player games to multiparty interactions.

The Nash equilibrium

In a game where outcomes are derived from mutual interactions, deliberating one's best response stems from the consideration of what other players do. The Nash equilibrium (NE), the best-known solution concept, is actually based on a simple notion that every game has a set of strategies, each of which is the best response to the other player's corresponding one (Heap and Varoufakis 2004).