Companies operating across borders face a stark choice in how they manage political risk: rely on traditional government relations, or build a broader capability called business diplomacy. The two approaches share some tools, but they differ in scope, timeframe, and ambition. This article explains what separates them, why the distinction matters more in a fragmenting global order, and how decision-makers can apply each approach. Drawing on research from the Clingendael Institute, McKinsey, the University of Kansas, and the World Economic Forum, it offers a practical framework for navigating geopolitical risk.

Abstract

This article examines the strategic distinction between business diplomacy and traditional government relations as tools for managing cross-border political risk. Government relations is defined as a primarily domestic, organization-to-government function centered on lobbying, regulatory engagement, and public affairs. Business diplomacy is defined as a broader, multi-market capability that uses coalitions of state and non-state actors to shape a firm’s entire geopolitical risk environment. Drawing on the Clingendael Institute’s policy work, the International Centre for Governance and Policy, McKinsey Global Institute trade research, World Economic Forum economist surveys, and peer-reviewed research from the University of Kansas, the analysis identifies when each approach applies, the tools each requires, and the risks—particularly overcommitment—that accompany corporate diplomatic activity. The piece concludes with a decision framework for strategists and policymakers operating in an increasingly multipolar order.

Executive Summary

The global operating environment is fragmenting. A World Economic Forum survey of chief economists found 94% expect further fragmentation of goods trade over the next three years (World Economic Forum, 2025). McKinsey Global Institute research shows trade is reconfiguring toward politically aligned partners rather than geographically close ones (McKinsey, 2025). For multinational corporations, these shifts elevate political risk from a peripheral concern to a core business risk.

Traditional government relations—built for influencing policy within a single, stable jurisdiction—is necessary but no longer sufficient. Business diplomacy extends the discipline across borders, assembling coalitions and networks designed to manage risk before it becomes a crisis. Yet business diplomacy carries its own hazard: research from the University of Kansas demonstrates that aggressive “frenemy” strategies can leave firms held hostage by their own foreign investments.

The strategic recommendation is integration. Use government relations for contained, single-market policy goals. Use business diplomacy for risk that spans markets, involves non-state actors, or threatens the broader operating environment. Use both when a domestic win could trigger backlash abroad.

Key Takeaways

• Government relations is narrower and largely domestic. It focuses on the organization-to-government relationship—lobbying, regulatory engagement, and policy influence within a given country.
• Business diplomacy is broader and global. It uses coalitions of state and non-state actors to shape a firm’s entire geopolitical risk environment across multiple markets.
• The geopolitical context has shifted. A World Economic Forum survey found 94% of chief economists expect further fragmentation of goods trade within three years, raising the stakes for cross-border firms.
• Trade now follows political alignment. McKinsey research finds trade increasingly flows between politically aligned countries, making geopolitical positioning a determinant of market access.
• Government support is no longer guaranteed. Cases like Spain’s Repsol losing its Argentine subsidiary YPF show that home governments cannot always protect firms abroad.
• Business diplomacy carries its own risks. Research from the University of Kansas shows that aggressive “frenemy” strategies can backfire, leaving firms held hostage by their own foreign investments.

What is the difference between business diplomacy and government relations?

Business diplomacy and government relations differ mainly in scope and objective. Government relations manages a firm’s relationship with government officials to influence policy, typically within one country. Business diplomacy manages a firm’s entire geopolitical risk environment across many countries, using coalitions of governments, NGOs, media, and other firms.

The Clingendael Institute, the Netherlands Institute of International Relations, defines business diplomacy as an approach that adapts the skills and mindset of the government diplomat to the needs of the firm. It centers on the strategic use of coalitions of state and non-state actors to shape the firm’s geopolitical risk environment.

Government relations sits within a wider family of public affairs activities. According to the International Centre for Governance and Policy, government relations refers to the efforts businesses, organizations, or individuals undertake to interact with government officials and influence public policy decisions. Lobbying is a subset of this work—the most direct form of policy engagement.

The table below summarizes the core distinctions.

Feature	Traditional Government Relations	Business Diplomacy
Primary focus	Influencing public policy and regulation	Managing geopolitical risk
Geographic scope	Typically a single country	Multi-country and global
Key actors engaged	Legislators, regulators, officials	Governments, NGOs, media, civil society, international institutions, other firms
Timeframe	Short to medium term	Long term and preventive
Core tools	Lobbying, regulatory engagement, policy advocacy	Coalitions, stakeholder networks, contingency planning
Primary objective	Favorable laws and regulations	A shaped, lower-risk operating environment

What is traditional government relations?

Traditional government relations is the practice of managing an organization’s relationship with government to influence public policy. It covers monitoring legislative developments, building long-term relationships with officials, navigating regulatory environments, and developing positions on issues that affect the business.

The International Centre for Governance and Policy describes government relations as the broadest of the public affairs terms in one sense—covering all the ways a private sector organization manages its relationship with government at every level, from local authorities to national ministers and regulators.

Within government relations, two related activities deserve clarification:

• Lobbying is the most direct form. It involves directly advocating for or against specific legislation or regulations through contact with lawmakers, policymakers, or their staff. In many democracies, lobbying is regulated and subject to disclosure requirements.
• Public affairs is wider still. It encompasses efforts to influence public opinion through media relations, community outreach, and stakeholder engagement. In the words of the International Centre for Governance and Policy, lobbying is what you do in the room with a minister; public affairs is everything that gets you into that room.

Government relations works well in stable, rules-based environments. Its limitation is reach. The approach focuses on a single jurisdiction and a defined set of official actors, which leaves firms exposed when risk originates beyond a single government’s control.

What is business diplomacy and how does it work?

Business diplomacy is a strategic capability that helps firms anticipate, manage, and shape geopolitical risk across all the markets in which they operate. Rather than lobbying one government for a specific outcome, business diplomacy builds durable networks of influence and assembles coalitions around shared interests.

According to a Clingendael policy brief by Shaun Riordan, a former British diplomat, effective business diplomacy rests on several capabilities:

• Geopolitical risk audit: Analyzing threats to a firm’s operations at both global and market-specific levels, then integrating that analysis into commercial strategy.
• Geopolitical stakeholder audit: Identifying the governmental and non-governmental actors who shape those risks.
• Networks of influence and information: Developing multi-level relationships that allow a firm to shape policy environments and anticipate problems.
• Coalitions of the willing: Building alliances based on common interests rather than shared worldviews. These can include international institutions, sub-national governments, NGOs, and other firms acting as power and influence multipliers.
• Contingency and crisis planning: Preparing for events ranging from staff evacuation to legal action.

A defining feature is what Riordan calls a “4D” vision—one that extends across time and geography. Business diplomacy aims to ensure that solving a problem in one market does not create new problems in another, or damage the firm’s reputation at home. Its successes are often invisible, because preventive diplomacy is measured by the crises that never occur.

Why do multinational firms need more than government relations?

Multinational firms increasingly need business diplomacy because home governments cannot always protect them abroad, and because political risk now originates from many actors at once. Traditional government relations, built for single-jurisdiction policy influence, is not designed for this complexity.

Several forces drive the gap:

Home governments balance competing interests. When Argentina expropriated the subsidiary YPF, Spanish oil company Repsol received limited support from its own government, which had to weigh other priorities. Recourse to international law offered little practical relief. The case illustrates a hard truth: a firm’s nationality does not guarantee protection.

Diplomatic capacity has thinned. Riordan notes that shrinking diplomatic budgets force many firms to operate where their national diplomatic service has little presence or weight. In such settings, major corporations often hold better access and influence than their own embassies.

The rules-based order is fragmenting. As the global system shifts toward multipolarity, firms must navigate competing rule sets and value systems. Older threats once thought rare—expropriation, nationalization, political pressure—have resurfaced.

Non-state actors carry real power. NGO campaigns, amplified by social media, can halt major projects. China Power invested heavily in local social projects around the Myitsone dam in Myanmar, yet an NGO campaign still persuaded the government to block it. Spending on community goodwill failed because it was not integrated into a broader strategy.

The current data underscores the urgency. The World Economic Forum’s January 2025 Chief Economists Outlook found near-unanimity—94%—that goods trade will fragment further over the next three years. McKinsey Global Institute research adds that trade is reconfiguring toward politically aligned partners; between 2017 and 2024, the average “geopolitical distance” of trade fell by 7%. Political alignment, not just cost or proximity, now shapes where business can be done.

What tools and strategies define each approach?

The two disciplines draw on different toolkits, though they overlap at the edges. Government relations favors direct, targeted instruments. Business diplomacy favors networked, multi-actor strategies designed to work across borders simultaneously.

Government relations tools are best suited to a single, stable jurisdiction:

• Direct lobbying of legislators and regulators
• Submitting evidence to parliamentary or regulatory bodies
• Monitoring legislative and policy developments
• Building relationships with key officials

Business diplomacy strategies are built for volatility and scale:

• Coalition-building across governments, firms, and civil society
• Multi-market stakeholder mapping and network cultivation
• Scenario-based contingency and crisis planning
• Isolating “problem actors” who cannot be persuaded, by building alliances with those who can

Riordan offers a useful contrast. Lobbying tends to be more narrowly focused, both in time and thematically, and its aggressive pursuit of bringing key people on-side can provoke resentment. It also risks unintended consequences: a win in one country can trigger backlash in another. Business diplomacy explicitly guards against this by accounting for cross-market spillovers.

A concrete example of coalition power: when the Bulgarian government proposed mining regulations that discriminated against foreign firms, Canadian mining companies assembled a coalition with their government, the European Commission, and other firms to persuade Bulgaria to amend the framework. The result came not from a single lobbyist, but from aligned pressure across multiple actors.

What are the risks of corporate diplomatic activity?

The main risk of corporate diplomatic activity is overcommitment. A firm that leverages its political influence to broker outcomes can become trapped by its own foreign investments, losing the bargaining power it sought to gain.

Research from the University of Kansas by Professor Minyoung Kim, the Frank T. Stockton Professor of Strategic Management, published in the Journal of International Business Studies (Bucheli, Durán & Kim, 2024), introduces the concept of corporate diplomatic activities (CDAs): political activities that multinationals deploy to influence relations between their home and host countries for strategic benefit.

Kim’s study warns of a “frenemy” trap. When a multinational negotiates on a host country’s behalf and then invests in site-specific assets there, the host government can treat those assets as hostages—using them to pressure the firm into lobbying its home government again. As Kim notes, firms in the study implemented corporate diplomatic activities to create a large pie but did not enjoy it fully, because they became the host country’s hostage and thus lost their bargaining power.

History offers parallels. During 1959–1963, after Ghanaian independence, the U.S. firm Kaiser Industries used its political connections in Washington to facilitate development loans. A modern echo: Kim’s research notes that the more a U.S. multinational invests in China, the more likely it is to lobby Washington against policies limiting Chinese opportunities. Influence and exposure rise together.

The lesson for strategists is balance. Business diplomacy creates value, but value creation and value capture are not the same thing. A coalition that delivers market access can also deepen dependency. Effective practitioners weigh both sides before committing fixed assets to a contested environment.

When should firms use government relations vs. business diplomacy?

Choose government relations when the risk is contained within one stable jurisdiction and the goal is a specific policy or regulatory outcome. Choose business diplomacy when risk spans multiple markets, involves non-state actors, or threatens the firm’s broader operating environment.

These approaches are complementary, not mutually exclusive. The strongest organizations deploy both and know when each applies:

• Use government relations if your primary concern is domestic legislation, a regulatory approval, or a policy change in a single, rules-based market.
• Use business diplomacy if you operate across politically divergent markets, face expropriation or nationalization risk, or depend on supply chains exposed to geopolitical fragmentation.
• Use both if a domestic policy win could provoke backlash abroad—a scenario where coordinated, cross-market strategy prevents one success from becoming another market’s problem.

For firms with the scale to justify it, Riordan recommends developing in-house business diplomacy capabilities. Smaller firms can buy these capabilities from consultancies, chambers of commerce, or other institutions.

Building resilience in a fragmenting world

The distinction between business diplomacy and government relations is becoming a strategic necessity. Government relations remains essential for shaping policy within stable markets. But as fragmentation deepens—evidenced by supply chain restructuring, rising nationalism, and trade flowing along political lines—firms that rely on lobbying alone leave themselves exposed.

Decision-makers should start by auditing their geopolitical risk across every market, mapping the state and non-state actors who shape that risk, and identifying where coalition-building could shift the environment in their favor. Just as important, they should weigh the danger of overcommitment that the “frenemy” research reveals. Influence carries obligations, and fixed assets in contested markets can become liabilities.

The firms best positioned for the next decade will treat geopolitical risk as a core business risk—not a peripheral concern—and build the diplomatic capability to match.

Frequently asked questions

Is business diplomacy the same as corporate social responsibility?
No. Corporate social responsibility focuses on a firm’s reputation and social impact. Business diplomacy focuses on managing geopolitical risk. As the Clingendael work notes, business diplomacy is not about the image or reputation of a firm unless that is central to managing geopolitical risk. Reputation can be one input, but the objective is risk management, not goodwill alone.

Can small companies practice business diplomacy?
Yes, though usually through external support. Larger multinationals can build in-house capabilities, while smaller firms typically buy them from consultancies, chambers of commerce, or specialized institutions. The underlying methodology—risk audits, stakeholder mapping, and coalition-building—applies regardless of firm size.

Is lobbying part of business diplomacy?
Lobbying can be one tool within a broader business diplomacy strategy, but the two are not the same. Lobbying targets specific policymakers in a single jurisdiction. Business diplomacy coordinates influence across many markets and actors, taking care that a win in one country does not cause harm in another.

Why can’t firms just rely on their home government for protection abroad?
Home governments balance many competing interests, and a firm’s needs may not align with broader national priorities. The Repsol/YPF case in Argentina showed that even a major national company can receive limited support when its government weighs other concerns. Shrinking diplomatic budgets further reduce the help firms can expect overseas.

What is the biggest mistake firms make with corporate diplomacy?
Overcommitting fixed assets in contested markets. University of Kansas research shows that firms which broker deals and then invest in site-specific assets can become hostages, giving host governments leverage to extract further concessions. The strategic error is treating influence as purely an asset, without accounting for the dependency it can create.

References and end notes

• Bucheli, M., Durán, X., & Kim, M. (2024). My best frenemy: A history-to-theory approach to MNCs’ corporate diplomatic activities. Journal of International Business Studies, 55(3), 326–341. DOI: 10.1057/s41267-023-00660-9.
• Clingendael Institute (Netherlands Institute of International Relations). Riordan, S. Policy work on business diplomacy and the adaptation of diplomatic skills to firm-level geopolitical risk management.
• International Centre for Governance and Policy. Reference materials on government relations, lobbying, and public affairs.
• McKinsey Global Institute (2025). Geopolitics and the geometry of global trade: 2025 update. Finding: average “geopolitical distance” of trade fell by 7% between 2017 and 2024.
• University of Kansas, School of Business (2024). “Geopolitical tensions provide multinational corporations with diplomatic leverage, but ‘frenemy’ strategy can backfire.” Commentary on Professor Minyoung Kim’s research.
• World Economic Forum (2025). Chief Economists Outlook, January 2025. Finding: 94% of surveyed chief economists expect further fragmentation of goods trade over the next three years.

End note on case studies: The Repsol/YPF (Argentina), China Power/Myitsone dam (Myanmar), Kaiser Industries (Ghana, 1959–1963), and Canadian mining companies/Bulgaria (European Commission coalition) cases are drawn from the cited Clingendael and University of Kansas sources and the historical record they reference.