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Conflict and resolution: CASE STUDY

avoiding political and legal


pitfalls—the case of Enron in India 4
Dr. Frank L. Bartels
School of Business, James Cook University

‘It is the world’s largest trader of energy . . . but (1) conflictual political behaviour prevails when:
Texas-based ENRON Corp cannot seem to shake (a) the actions of MNEs and Governments have high
off its Indian headache. For the umpteenth time in strategic salience for the other party;

Case study
six years, it has become locked in a dispute over (b) both sides perceive the situation as a zero-sum
its power project at Dabhol, in the Indian state game; and
of Mararashtra. And again, the dispute is with its (c) the parties have sufficient power to affect the
sole customer, the Mararashtra State Electricity uncertain outcomes of their bargaining over who
Board.’ wins and who loses; and
The Economist, 21 April 2001, p. 57. (2) intensity of political behaviour on the part of govern-
ments and MNEs is greater when:
(a) the stakes are higher;
Introduction (b) opportunities to leverage and arbitrage govern-
This case focuses on the international market ment policies are more abundant; and
environment and political behaviour—particularly, the (c) the firm’s political competencies are more
dynamic and conflictual co-existence of Corporations developed or can be enhanced.
and States—within national regulation of the impacts of
Multinational Enterprises (MNEs). Firstly, modern Furthermore, firms entering the global game of Foreign
relations between MNEs and governments have evolved Direct Investment (FDI) and foreign market servicing face
through four distinct eras: domination by MNEs (1945– cultural adjustment costs. Therefore, given the ‘flagship’
1960s); confrontation by governments (1960s–1970s); nature of a market access investment with strategic
accommodation (1980s); and contention to appropriate salience, as the biggest investment project since Indian
gains from MNEs activity (1980s–1990s and beyond). economic liberalisation, ENRON should have developed
Secondly, ‘the rivalry between states and the rivalry and demonstrated high political competencies. It did
between firms and the rivalry between states and firms neither (until well after 1996) despite having a presence
for a secure place in the world has become much fiercer, in India since 1992.
far more intense’ (Stopford et al, 1991, p. 1). Thirdly,
‘Transnational Corporations have become central
organisers of (global) economic activities’ (UNCTC, The nation, state,
1992, p. 1). The balance between the two predominant
perspectives on international engagement—inter-
ENRON and their
dependency between the firm and economic environ- political and
ment, and interdependency between the firm and
political-legal environment—is tilting in favour of the legal crisis
latter. This defines areas and sources of conflict visible The case of ENRON cannot be divorced from India’s
in the involvement in India by ENRON Development economic trajectory of central planning, with attendant
Corporation (EDC). India represents market environment factionalism and centre versus state tensions within the
extremes in which MNEs encounter—‘a land of indescrib- federal bureaucracy. At independence in August 1947, the
able complexity and contrast’ (Thomas and Philip, 1994, Indian economy exhibited the ‘old international division
p. 92) of labour’ typical of colonial economies—piecemeal
In viewing the case, two perspectives are cogent: incorporation of agricultural production; limited, although
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significant, industrial sector development based technocrat Manmohan Singh as Finance Minister.
principally in and around Bombay and Calcutta; and a However, this could not prevent the economic
very high level of primary sector exports. This created the liberalisation strategy being assailed by a change in party
peculiarly Indian version of import substitution—the control of government at the state level. The attempt by
‘license raj’ (essentially extensions of war-time controls) India to ameliorate its image as a viable market and
subjecting establishments or expansions of productive investment location is encapsulated by Mr N. K. P. Salve—
capacity to approvals from three ministries—Industry, India’s Power Minister—‘Enron is not simply another
Commerce and Finance and linked to allocating foreign power project, the credibility of our reforms depend on it’
exchange. Perversely, this strategy suited firms which (Nicholson, 1995a, p. 4). In the post-1989 world, MNEs
managed to penetrate the license wall, either by find themselves in unfamiliar territory where they need
themselves or through technology Joint Ventures with an stability and a predictability essential for private sector
Indian collaborator, since they could then exploit the activity but obtain instead a challenging and perplexing
protected domestic market via inherent monopolistic- combination—the fusion of markets on the one hand
oligopolistic advantages. To date, despite liberalisation in (which they welcome unreservedly) and fission in politics
1991, the persistence of this wall is reflected in the Indian on the other hand (for which they are unprepared).
constitution which provides ‘three lists for demarcating Notwithstanding the advantages of scale from access to
areas of jurisdiction: the union list, the state list, and the larger markets and the weakening of the nation-state, the
concurrent list’ (Kumar and Thacker-Kumar, 1996, p. 11) problem in this process of agglomeration and fragmen-
and continues to frustrate MNEs. tation is that without the state—tangible operative
The principal economic players in society—large, institutions and viable structures—there cannot be FDI
nationally-based industrial capital and regional rich and foreign market servicing.
farmer and commercial élites, who constituted the International market engagement is concerned with
majority of Congress Party activists and legislators at how MNEs deal with environmental, endemic and
regional level—in a devolved system of government structural market failure. In India in general, although
possess considerable political influence. After negotiating with the bureaucracy at the central level may
independence a third element was introduced—the not be difficult, the going can be very arduous at the state
bureaucracy—comprising a managerial cadre overseeing level, and there is scant attention to how MNEs develop
state-owned enterprises and parastatal organisations. a posture of dialogue with other than incumbent
The high expectations of full-scale economic authorities. This incapacity is the kernel of the ENRON
liberalisation in 1991 have not been fulfilled. Of the debacle in India and shapes the agenda for avoiding
19,000 FDI proposals valued at some US$130 billion political and legal pitfalls.
lodged with the government by the mid-1990s, and the The assault on ENRON took place in 1995 after
hoped for attraction of US$10 billion per year that foreign market entry in June 1992 and three years of
peaked in 1998, only a fraction has been implemented negotiations with ‘at least 30 state and central
and state subsidies are still about 15% of GDP. This government ministries and departments’ (Nicholson,
means that state electricity boards are still financially 1995b, p. 23). In a spectacular fashion, it had a severe
unviable because their ability to invest in new capacity impact on the ENRON’s Dabhol Power Project investment
and alleviate the chronic problem of power shortfalls are in the state of Maharashtra. The market access FDI (the
severely constrained. The government’s solution to this most significant in India since the 1991 economic
perennial problem—contracting MNEs to construct large- reform) was planned by ENRON with minor equity
scale projects—produced the ENRON crisis of 1995/96 positions of 10% each for BECHTEL and General Electric.
which is the subject of the discussion. The US$2.8 billion investment was negotiated and
agreed in 1991 with the central government and the
ENRON’s political Congress (I) government of Maharashtra, as the first part
of a multi-billion US$ competitive tendering for eight
and legal power projects. This initiative intended to address the
massive and perennial problem of the Indian economy—
predicament power shortfalls.
In 1991 the government signalled its commitment to The underdeveloped political competencies and
major change in economic strategy by appointing a inability of MNEs to deal with other than incumbent
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governments was given vivid illustration through dramatic operations in particular. The Congress (I), in power for
events leading to political and legal conflict. The strategic 44 years, captured only 25% of graduate voters as
capability of ENRON was unable to position its against 36% for the BJP. Even more strikingly, the social
organisation, despite ample warning signs, in a manner group which above all embodies elite characteristics—
that would prevent political changes and law suits high caste graduate Hindus—registered a 52% vote for
jeopardising valuable investments. Conflict broke out fully the BJP as against 25% for Congress (I).
after the victory of the opposition coalition of two ultra-
right Hindu nationalist parties in the March 1995 state
elections. The Maharashtra regional party, the Shiv Sena
Avoiding ‘stepping
(SS) (the major coalition partner), and the nationally into the wrong
spread Bharatiya Janata Party (BJP) had made vigorous
resistance to market access by foreign capital a central puddle’
plank of their election campaign. By the beginning of The central logic of the ENRON case is that when the
April 1995, the new state government was talking about fission of politics–fusion of markets dynamic confronts
‘corrective measures against Enron’ (Sidhva and state–MNEs relations, and results in local ‘losers’
Nicholson, 1995, p. 7). By the end of June a ministerial (parastatal managerial cadres, vested interests),
committee had recommended cancellation of the globalisation is resisted and conflict ensues. Corpora-
project. This cancellation was effected on 4 August 1995, tions have financial relations with political parties. What
despite some critical evaluation in anti-BJP/SS sections is the potentiality of MNEs becoming better political
of the Indian press following some blood-curdling threats entities?
from US and UK administrations (an attempt at MNEs require a more stringent awareness that
leveraging source government policies), and dire political formations, such as the SS and the BJP, generate
warnings from central government ministers about the conflict by representing interests that do not necessarily
damage to India’s chances of attracting further inward perceive globalisation or liberalisation as conferring any
FDI. In a volte face, chastened by possibilities of high benefits. Their social base typically rests upon state
damages and litigation costs, and amid deepening employees (who perceive liberalisation as a threat) and
confusion, the state government indicated suddenly that industrial and commercial interests with local or regional
it had not terminated the contract, and was open to (i.e. state level) markets. Classically, in loosing the
‘renegotiation’. The renegotiations with ENRON resulted in competition for barriers, they perceive the entry of MNEs
a revised agreement with the Maharashtra government as crowding them out. Even worse they see themselves
being concluded on 8 January 1996. being marginalised—one reason for the increase in the
These events and pitfalls were evidently a complete SS/BJP vote in Bombay City in March 1995. These host
surprise to ENRON and a nasty shock to both foreign and reactions to a specific consequence of liberalisation
Congress (I) governments. However, despite evident extend beyond the ranks of those who actually recorded
political machinations in a pre-election period, there are a vote for the SS/BJP alliance. The favourable comment
long-term factors at work which will not only affect future from sections of the press, not historically aligned to such
FDI in India but which may have more general application parties, indicates that their agenda possesses an
to market access by other international firms. MNEs have extensive legitimacy among the Indian middle-classes.
to better develop their organisational ‘wherewithal’ to In other words, the ENRON affair was neither an
deal, not with incumbent authorities, but with latent and ‘accident’ nor isolated. It was a consequence of the
nascent political forces. Subsequent events confirmed federal–state strategy of liberalisation and ENRON’s lack
the ‘invitation to power’ presented to the BJP after the of awareness of social forces which perceived the
April 1996 elections and the application of bargaining strategy as a threat, and which had appropriate political
power and the strategic salience of ENRON’s actions. Exit organisations to articulate their opposition to MNEs. First,
poll data from the elections indicates how the social conflict prevailed because of: the strategic salience of
elite—the segment of the population normally considered ENRON’s FDI (the first, the largest, the most valuable
to be the most favourably inclined towards deregulation— market servicing project since the 1991 reforms); the
supported a party which emphasised hostility to zero-sum game situation, perceived by the nationalist
globalisation in general and towards MNEs and the tendency (using ENRON as a whipping boy helped
‘baggage’ that they bring along in FDI and marketing considerably in the SS/BJP’s winning of state power);
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the state demonstrated sufficient and necessary power to intermediation between the future apparatus of the state
create uncertainty over investment outcomes. Secondly, and the market. It may be argued that ENRON (an
the level of political behaviour, while intense on the part engineering project oriented firm—which recruited
of the state, was feeble (in effect, absent—certainly in the extensively from the managerial ranks of the US military)
early phases of FDI) on the part of the MNE. The Chief could not deal with other than central government
Executive Officer (CEO) of ENRON—Rebecca Mark—let because it had not internally available an organisational
slip, in a moment of unguarded candour reflecting poor mechanism or mandate to deal with any other locus of
political capability, the words ‘we never thought for a power. In a world of fragmented polity, this is precisely
moment we would have to fight a political campaign.’ what MNEs need to develop. ENRON’s view of the host
(Euromoney, Oct 1995, p. 32) At the time, it could be location could be said to be distorted by perception of its
reported that ‘ENRON had no friends in India. They still ‘good’ relations with central authority. The question
have no friends, only contractual obligations’ (Euro- arises—How does the strategic centre of MNEs deal
money, Oct 1995, p. 31). Only after the state had simultaneously and in a meaningful way, with incumbent
demonstrated its power to affect negatively the results of governments and their oppositions? MNEs by their very
bargaining and conflict for the MNE, and thereby shift the definition maintain simultaneous engagements with
relationship to a zero-sum game, did ENRON become a spatially differentiated sovereign authorities across
political animal. economic borders. Learning to manage concurrent and
Both ENRON (whose ignorance is explicable) and the spatially differentiated relationships with authorities
central government (who certainly should have known within borders is required increasingly. One example of
better) were lulled into a feeling of complacency based the requirement has been that of MNEs in South Africa
on an assumption that the policies of liberalisation and during the apartheid era.
globalisation are unstoppable. They are not and the The ENRON case demonstrates clearly that the
hostility of large sections of the Indian population will not position of even the most powerful MNEs appears
evaporate since these sections have the potential to precarious (because of the extended articulation of
propel into office parties reflecting their aspirations. integrated international sourcing, production and
Investing MNEs need to take these elements into account marketing networks) when FDI and foreign involvements
for it is not simply the case that this is a purely Indian are approached with organisational structures incapable
phenomenon. of dialogue with other than central government.
The approval of the revised agreement concerning The approach to a high context business and cultural
ENRON by the short-lived BJP cabinet in May 1996 environment exemplified by India with the mind set of a
reinforces this point. Far from demonstrating the victory low context culture (that of the USA) without capacity for
of global realities over local parochialism, it may be seen dialogue of an essentially political nature carries high risk
as a cynical manoeuvre by the BJP in an unsuccessful of political conflict and legal failure. In October 1996, it
attempt to repudiate the charges of unfitness to govern was reported that ENRON’s FDI was ‘still mired in
that were being made against them prior to the controversy.’ With the Bombay High Court having just
confidence debate. It remained, therefore, a provisional concluded its hearings in the 14th PIL (Public Interest
rather than substantive decision. The ability of ENRON to Litigation) filed against the company’s Indian subsidiary,
pursue, and win, redress in India and internationally as the Dabhol Power Company (DPC), it is hardly surprising
well as the logic of its own strategy of internationalisation that DPC’s director, Joseph Sutton, was provoked to say
via infrastructure projects, meant that the carrot of a that ‘PILs are an abuse of the judicial process, a weapon
further US$10 billion of power project investment in India of harassment, and actually harm public interest since
was always going to be hard to resist. However, events are they cause uncertainty for foreign investors’. The saga of
still uncertain because, despite renegotiation and expan- conflict came to a close only after ENRON had
sion, there is the financial inability of the state to acquire demonstrated intense, almost brutal, political behaviour.
equity in the expanded project and local antagonism to Among its actions were: leveraging the US Energy
ENRON continues. Department; suing the Indian state for US$300 to 500
As MNEs continue to be the drivers of world prosperity million; pursuing arbitration in international and Indian
among their organisational attributes should be not only courts (to eventually win 24 law suits); and dangling the
the ability for their production chains to span national irresistible prize of US$10 billion in further FDI. The
and regional boundaries, but also the capacity for development of political behaviour by the MNE in this
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conflict has been intense. In early 1997, the same CEO, are introducing situations where MNEs require high
who had previously admitted naiveté in the extreme, political capability to manoeuvre through cross-border
could boast ‘political uncertainties don’t bother me transactions. An inability to develop this capability can
anymore’ to dismiss the power of the state while paying lead to spectacular political and legal failure with
heed to wisdom from a former ENRON adviser, ‘Indians concomitant financial losses. An alternative strategy for
must be stroked if you want them to purr. ENRON went at ENRON might have been to negotiate with all the local
the country like an Exocet missile’ (Euromoney, Oct interests over a longer time to produce a consensus that
1995, p. 33). The saga is far from over as ‘government its market servicing was ‘a good thing’—in other words not
officials are repeating accusations thrown around in the being perceived as part of the globalisation process at all.
mid-1990s that ENRON is behaving arrogantly’ (The Thus they could insulate themselves from any general
Economist, 21 April 2001, p. 57). hostility to globalisation generated within the Indian polity.
The validity of such a strategy is supported by the fact that
‘other power companies have taken their cue from Enron’s
Better ways experience’ (Kripalani, 1997b, p. 24) and behaved in a
political manner.
forward The case demonstrates that firms confront a variety of
The case of ENRON in political and legal conflict political and legal barriers when operating internationally
stimulates new views of international marketing— as illustrated by ENRON’s firm specific disadvantages
environment and management—for organisational which placed it in conflict with Indian hosts. The situation
capability in engaging with emergent (or nascent) is a metaphor with India representing large power
political movements given trends in global deregulation distance and collectivist behaviour in juxtaposition with
that add new complexities to internationalisation. Due to ENRON as an internationalising firm from a country
political fission and market fusion, MNEs require an characterised by small power distance and individualist
increasingly sophisticated ability to engage concurrently behaviour. It fell short in its sensitivity to developing high
with a wide range of political actors. In a world context (civil society rather than contractual) relations
characterised by intensifying social tensions caused by with actors in the political system (other than central
disruption consequent upon the reduction of barriers, authority). Employing the model—Political Capability
MNEs face the potential of losing substantial assets Imperative—MNEs could identify processes and
if they fail to engage in this activity of political structures required to attain legitimacy in circumstances
legitimisation. In these circumstances, it is reasonable of fragmenting polity. Firstly by scrutinising non-
to propose that there are returns to value on the economic, non-financial performance variables such as
development by MNEs of high political capability in order level, frequency and intensity of cross-cultural engage-
to gain maximum legitimacy in prevailing conditions of ments, ‘surfacing assumptions’ (Minkes, 1994, p. 81)
hostile host attitudes to globalisation. In the case of and interactions by management operatives and
ENRON it would appear that the MNE possessed, for a location-bound organisational decision-making to
long time, a low political capability in an environment ascertain learning. Secondly, by looking anew at variables
with an increasingly hostile attitude towards globalisation which capture cultural separation. Hofstede’s (1984) four
and an explicitly anti-MNE bias. variables form but one subset of factors which
This is analogous to the problems experienced by encapsulate the issues towards which MNEs should be
companies which fail to take into account the dynamics acquiring proactive sensibility. Other factors include the
of re-contextualisation and internationalisation. ‘If . . . etymological effects of socio-linguistics on managerial
cultural hegemony were the case, however, one would behaviour in international marketing at the interface of
expect products transferred cross-culturally to retain their MNE managers and hosts, and the emergence of
original meanings in their new environment. But . . . they oppositional social forces which overtly perceive MNEs as
don’t. More often than not there is a kind of skidding of malign, in intent and outcome, and therefore to be either
the meanings of these products when placed within new constrained or rejected.
environments.’ The complex interweaving of declining bloc The paucity of management’s attention to roles and
‘spheres of influence’ discipline and a strengthening tasks in the new environmental, strategic and organi-
dynamic for world trade and investment combined with sational context (globalisation) increases the need for
frequently increasing hostile host attitude to globalisation, managers to develop applications from a sophisticated
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view of the business and marketing environment. From a References


strategic marketing perspective, the organisational
Hofstede, G. (1984) Culture’s Consequences—international
boundaries of the firm have become increasingly fuzzy
differences in work related values, Sage, London.
and permeable. While MNEs have adjusted well to
Kripalani, M. (1997) ‘Investing in India, Business Week,
immediate operational implications, they have barely
11 August, pp. 20–24.
begun to grapple with the task of developing the new
Kumar, S. and Thacker-Kumar, L. (1996) ‘Investing in
skills and capabilities required in this case. ENRON
India: Strategies for Tackling Bureaucratic Hurdles’,
appears typical in taking its time to develop the kind of
Business Horizons, Vol. 39, No. 1, January–February,
behaviour that avoids political and legal pitfalls—besides,
pp. 10–16.
does it matter? As ENRON ‘is losing interest in owning
Minkes, A.L. (1994) ‘Process, Conflict and Commitment
power plants in poor countries’ (The Economist, 21 April
in Organizational Decision-making’, Journal of General
2001, p. 57).
Management, Vol. 20, No. 2, Winter, pp. 78–90.
Questions Nicholson, M. (1995b) ‘The politics of Indian power: a
dispute over a US$920 Million project is unsettling
1 Identify and characterise the nature of the
foreign investors’, Financial Times, 20 June, p. 23.
marketing environment represented by a
Nicholson, M. (1995a) Lights go out for India’s foreign
developing country such as India.
investors, Financial Times, 4 August, p. 4.
2 What are the kinds of market research and
Sidhva, S. and Nicholson, M. (1995) ‘BJP to review power
environmental assessment that would have
deal with US group’, Financial Times, 5th April, p. 7
proved useful to ENRON?
Stopford, J., Strange, S. and Henley, J.S., Rival States,
3 Identify and discuss the major errors that
Rival Firms: Competition for World Market Shares,
ENRON appears to have made in its Indian
Cambridge U.P., Cambridge UK.
market entry.
The Economist (2001), 21 April, p. 57.
4 ENRON’s problems ‘are not over’. How can
Thomas, A.S. and Philip, A. (1994) ‘India: Management in
ENRON solve its Indian headache?
an Ancient and Modern Civilization’, International
5 Given the difficulties in marketing in Develop-
Studies of Management Organization, Vol. 24,
ing Countries, why should firms like ENRON
Nos. 1–2, pp. 91–115.
engage with countries like India?
UNCTC (1992) ‘World Investment Report 1992: Trans-
national Corporations as Engines of Growth’,
UNTCMD, UN, July, N.Y.