Modified from an earlier answer

The lynchpin to Saddam's strategy for holding onto Kuwait rested upon his very skewed understanding of global politics and where Iraq stood within the international community. Iraq had garnered economic and military support from the various Gulf states during the Iran-Iraq War (for example, the Iraq Air Force had some dispersal airbases around the Gulf) and Saddam conflated this soft support with actual diplomatic strength. In 1989, the Saudis signed a non-aggression and military assistance pact with Iraq, and Saddam misconstrued as tacit Saudi approval of isolating Kuwait. He believed that since Iraq had protected the region from Iran, it would accept the price by acquiescing to the conquest of Kuwait. As Saddam explained to the Yemeni president in August 1990:

Iraq…who defends them [the Arabs] for ten years [and] they consider his defense as a liability against [Iraq]?…The time has come for every person to say…I’m Arabian…I’m Saddam Hussein…[If] Iraq will pay this amount of money to develop the Arab nation and to defend it [then] the other Arab countries must pay this amount of money…if they don’t we will fight them.

Saddam had hoped that overtures to various Gulf states would fracture any attempt by the Saudis and exile Kuwaitis to form a response against his invasion. Although there was some validity to this assessment of Arab unity, Saddam woefully underestimated the fact that his use of armed force to resolve differences with Kuwait unified political opinion against him within the region.

Further afield, Saddam also did not understand the geopolitical changes that happened in 1989. In November 1990, his foreign Minister Tariq Aziz gave him optimistic reports that Gorbachev was not in favor of military action and would act to restrain the Americans:

as I have shared my opinion with you, deducing that the Soviet Union has no interest in a war of this manner happening and at this large scale. Maybe at the beginning and at different intervals the idea of a surgical [military] operation came up. [T]o hit Iraq and force it to withdraw from Kuwait, as maybe a disciplinary move for Iraq; it possibly entered their mind, but when they saw the reality and the fact that the Iraqi power was not something they could control in days or weeks and that this war will lead to major destruction in the region and to political and economic imbalance; and because the Soviet Union is worried about Europe and has internal problems, sir, they couldn’t imagine that the situation would explode in the Middle East, seeing that it is their southern border. If a war of this manner happens the situation will explode, the Islamic factor, the nationalistic factor, the oil, and security all these would explode….and as Primakov said to you when you met, after you told him that we would hit Israel, that that was a nightmare they didn’t want to see…[A] nightmare to the Soviet Union, not out of love or care for us, but a nightmare.

Additionally, Saddam hoped that France, which had developed economic and military ties to Iraq in the 1980s, would also break apart the Coalition. Both of these estimates were off base. Although the USSR was not happy about Gulf War, it was more preoccupied with the domestic turmoil that in hindsight was the signal of its impending breakup. A foreign intervention in the Middle East was the last thing Gorbachev needed, especially with memories of Afghanistan debacle still fresh. Aziz played up Mitterrand's ambiguous statements about the invasion and claimed that France would not jeopardize its domestic tranquility because of its large Algerian Muslim population. Attempting to use the French to split the Coalition had the opposite effect and the French behaved in a much more hardline fashion than Aziz anticipated. In some ways, Saddam learned the wrong lesson from the fall of the Berlin Wall; it made him feel that the age of the Superpowers was ending when instead it was leaving the US much greater latitude to act.

In short, Saddam believed that if he occupied Kuwait, it would be a diplomatic and military fait acompli. Iraqi strategy was that by turning Kuwait into a large fortified area, the Coalition would naturally fracture and Iraq's occupation would be assured. In a ministerial conference of August 1990, he said:

[W]e should focus on the historical event, such as the war between France and Germany in 1870 and during the First World War when France retrieved the Alsace Lorraine region and kept it united under regional policy laws, municipal laws, and autonomy after the First World War. France gradually extended its authority to this region until it became internationally and constitutionally part of France.

To be fair to Saddam, there were elements of his grand strategy that were viable. The problem was the Iraqi dictator had a pattern of consistently misreading his strengths. The Coalition was highly contingent upon a number of factors. Saddam thought time was on his side and to an extent he was correct. In May 1991 meeting with his senior army commanders he noted “we expected the entire world to react; we could not believe how long it took them to enter [the area].” Part of his rationale behind seizing Kuwait was that its borders were arbitrary colonial impositions and that both Arab leaders and the Arab street felt that these borders had no ultimate validity.

While this view of the Middle East's borders was popular (and still is), Saddam's rhetoric and his actions, especially his use of military force to resolve the borders, threatened the very leaders he was trying to win over. His rationale for seizing Kuwait run roughshod over international law, Iraq had reaffirmed its earlier 1932 acceptance of Kuwait's borders in 1963 when it accepted Kuwait as a member of the Arab League. This gave any opposition to the invasion legal leverage to justify a military action.

The longer the Kuwait crisis dragged on, the partisans in the West for a diplomatic solution gained more traction and news of massive Iraqi fortifications in Kuwait fostered sensationalist reporting in the West about Saddam's "Line of Death," as exemplified by this 1990 LA Times piece projecting a thousand US casualties a day for liberating Kuwait. In this context, it was in Saddam's best interests to keep the crisis in a stalemate through astute shuttle diplomacy, but his intransigence on many key issues actually had the opposite impact. It hardened the resolve of Coalition leaders to act and finally be done with this vexing problem through force and isolated Iraq from any neutral support. Primakov, for example, was initially somewhat sympathetic to a diplomatic solution for the crisis, but his meetings with the Iraqi dictator in October 1990 ended in frustration. Primakov explicitly warned Saddam about the real possibility of military escalation and promised Soviet support for the Iraqi retention of the Kuwaiti islands of Bubiyan and Warbah, a Kuwaiti oil field, and international mediation over the Palestinian issue. But Primakov made it clear that such support would only come if Saddam would make clear steps to evacuate Kuwait, which was a step Saddam was unwilling to take. Neither Gorbachev nor the Arabists within the Kremlin relished such a strong American force in the Gulf and poised to attack a Soviet-friendly state, yet Saddam's intransigence meant that Gorbachev threw his support for UNSCR 678.

Saddam's inflexible position that Kuwait was an eternal and integral part of Iraq fatally compromised his diplomatic strategy. The Soviets even showed a willingness to deal with Iraq during the air campaign as Primakov traveled to Baghdad as a last-ditch effort at mediation. That such efforts were taking place this late into the crisis illustrated that there was a strong element within the international community that favored negotiations but would not countenance Iraqi control over Kuwait. Although whether or not the US-led coalition would have accepted these compromises is hypothetical, it was not entirely outside the realm of possibility that Iraq could have exited Kuwait with real territorial gains had Saddam realized keeping Kuwait was a nonstarter for any diplomatic resolution of the crisis.

One of the more pertinent examples of his misreading of international reaction was his handling of approximately 800 Western hostages (guests in Iraqi parlance) left inside Iraq. Saddam met with delegations from individual countries who would plea for the release of these individuals throughout August and November 1990. Based upon his statements in a Revolutionary Command Council meeting on 1 November 1990, he thought that this would create an international peace movement by making connections with other world leaders. He asserted in meetings that all he needed was to win two UNSC leaders to his side and the coalition would fall apart. What he was blind to was the fact that this hostage situation was a public relations disaster for Iraq. Saddam intended these meeting to demonstrate he was a tractable and sane leader when they often demonstrated the opposite. Here's an archived ABC report on how Saddam's public relations bid failed, the "guests" looked decidedly uncomfortable.