international business, 5th edition

chapter 3
legal, technological, and political forces

Chapter Objectives 1
Describe the major types of legal systems confronting international businesses Explain how domestic laws affect the ability of firms to conduct international business List the ways firms can resolve international business disputes
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Chapter Objectives 2
Describe the impact of the host countrys technological environment on international business Explain how firms can protect themselves from political risk

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The Legal Environment

While domestic firms must follow laws and customs of home country, international businesses must obey laws of home country and all host countries.

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National legal systems vary dramatically for historical, cultural, political, and religious reasons. The rule of law, the role of lawyers, the burden of proof, the right to judicial review, and the laws themselves differ from country to country.
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Legal Systems

Common Law

Civil Law

Religious Law

Bureaucratic Law

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Common Law
Based on wisdom of judges decisions on individual cases through history Cases create legal precedents

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Common law is the foundation of the legal systems in the United Kingdom and its former colonies, including the United States, Canada, Australia, India, New Zealand, Barbados, Saint Kitts and Nevis, and Malaysia. Common law is based on the cumulative wisdom of judges decisions on individual cases through history. These cases create legal precedents which other judges use to decide similar cases. Common law has evolved differently in each common law country.

In addition to differences in case law, statutory laws, which are laws enacted by legislative action, vary among common law countries.
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Countries Using Common Law

United States
Canada Australia India New Zealand

Barbados
Saint Kitts Nevis Malaysia

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Civil Law
Based on codification of what is and is not permissible
Originated in biblical times with the Romans Reinforced by French Napoleonic code Judge determines scope of evidence collected and presented

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 An important difference between common law and civil law systems is apparent in the roles of judges and lawyers. In a common law system, the judge serves as a neutral referee, ruling on various motions by the opposing parties lawyers. These lawyers are responsible for developing their clients cases and choosing which evidence to submit on their clients behalf. In a civil law system, the judge takes on many of the tasks of the lawyers.
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Hong Kong follows many traditions of the British Common Law legal system.

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Religious Law
Based on the officially established rules governing faith and practice of a particular religion A country that applies religious law to civil and criminal conduct is called a theocracy

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 Iran is an example of a theocracy. A group of mullahs, or holy men, determine legality through their interpretation of the Koran.
Countries relying upon religious law often have other features such as an absence of due process and appeals procedures.

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Bureaucratic Law
Bureaucratic law is the legal system in communist countries and in dictatorships.

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Bureaucratic law is whatever the countrys bureaucrats say it is, regardless of the formal law of the land. Contracts can be made or broken at the whim of those in power. In countries relying on bureaucratic law, the ability of an international business to manage its operations is compromised by bureaucrats. International managers are often confronted with arbitrary rules. This is frequently a complaint for businesses operating in China.
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Laws Affecting International Business Transactions

Sanction Embargo

Extraterritoriality

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Laws may be explicitly designed to regulate international business activities. Sanctions are restraints against commerce. They may take many forms including restricting access to hightechnology goods, withdrawing preferential tariff treatment, boycotting a countrys goods, and denying new loans. One form of sanction is to export controls on high-technology goods. Many technologically advanced countries control the export of socalled dual-use products that may be used for both civilian and military purposes.
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 An embargo is a comprehensive sanction against all commerce with a given country. It may be imposed by countries acting in unison or alone.
Countries may also attempt to regulate business activities that are conducted outside their borders. This is known as extraterritoriality. Antiboycott provisions in U.S. trade law have extraterritorial reach.

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Sanction
Sanctions are restraints against commerce.

They may take many forms including restricting access to high-technology goods, withdrawing preferential tariff treatment, boycotting a countrys goods, and denying new loans.

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 One form of sanction is to export controls on high-technology goods. Many technologically advanced countries control the export of so-called dual-use products that may be used for both civilian and military purposes. US imposed sanctions against India and Pakistan after violation of rule of US nuclear non-proliferation laws.
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Embargo
An embargo is a comprehensive sanction against all commerce with a given country. It may be imposed by countries acting in unison or alone. US has unilaterally embargoed trade with Cuba since 1961.

UN embargoed all trade with Iraq after invasion of Kuwait in 1990s.

3-22 India embargoed Nepal unilaterally in 1990s.

Extraterritoriality
Countries may also attempt to regulate business activities that are conducted outside their borders. This is known as extraterritoriality.

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 The Helms-Burton Act is the most controversial application of extraterritoriality affecting international business today. This act is directed against international firms that traffic in the assets of U.S. companies that were confiscated by the Cuban government when Castro assumed control in 1959. The act authorizes the U.S. government and the former U.S. owners of the confiscated assets to take action against new foreign owners.
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Laws Directed Against Foreign Firms

Nationalization

Expropriation

Confiscation

Privatization

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Countries may pass laws that are explicitly directed against foreign-owned firms. When governments choose to transfer ownership of resources from the private to the public sector, this is called nationalization. Industries that lack mobility are most susceptible to this, such as crude oil production and mining. When the host government compensates the private owners for the loss, the transfer is called expropriation. When the host government offers no compensation, the 3-26 transfer is called confiscation.

Privatization is the conversion of state-owned property to privately-owned property. It is the opposite of nationalization and it creates opportunities for businesses.
Many governments limit foreign ownership of domestic firms to avoid having economies or key industries controlled by foreigners. Countries can also constrain foreign MNCs by imposing restrictions on their ability to repatriate (return to their home countries) the profits earned in the host country.
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Nationalization
Countries may pass laws that are explicitly directed against foreign-owned firms. When governments choose to transfer ownership of resources from the private to the public sector, this is called nationalization. Industries that lack mobility are most susceptible to this, such as crude oil production and mining. Many Arab oil producing countries nationalized 3-28 the properties of Western Oil firms after 1973.

Confiscation
When the host government offers no compensation, the transfer is called confiscation. Cuban government of Castro confiscated the properties of US firms after their regime.

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Expropriation
. When the host government compensates the private owners for the loss, the transfer is called expropriation.

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Privatization
Privatization is the conversion of state-owned property to privately-owned property. It is the opposite of nationalization and it creates opportunities for businesses. Privatization gained momentum in 1980s for 2 reasons, that were political and economical.

Argentina, Mexico, Chile, UK privatized telecommunication services.

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Constraints on Foreign Ownership

Many governments limit foreign ownership to avoid the control of MNCs on economy. Canada restricted foreign ownership of Newspapers to 25% to protect countrys culture. US limited foreign ownership for Television and Radio to 25% (same as European Union).

Repatriation is also used as constraint, in which MNCs are not allowed to send their profits to their countries. 3-32

Economic and Political Impacts of MNCs on Host Countries

Advantages
Higher standards Job creation

Disadvantages
Competition Job loss

Tax benefits
Technology transfers

Dependency on economic health

Political power

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MNCs affect every local economy in which they compete and operate. MNCs may make direct investments in new plants and factories, thereby creating local jobs. Such investments provide work for local contractors, builders, and suppliers. MNCs also pay taxes, which benefit the local economy and help to improve educational, transportation, and other municipal services. Technology transfer can also have positive local effects. 3-34

MNCs may also have negative effects on the local economy. To the extent that MNCs compete directly with local firms, the MNCs may cause these firms to lose both jobs and profits. As a local economy becomes more dependent on the economic health of an MNC, the financial fortunes of the firm take on increasing significance. When retrenchment by an MNC is accompanied by layoffs, cutbacks, or a total shutdown of local operations, the effects can be devastating to a local economy.
MNCs also may have a significant political impact, either intentionally or unintentionally. Their sheer size often gives them tremendous power in each country in which they operate. Furthermore, there is always the possibility that this power may be misused. Even when it is not, MNCs are often able to counter efforts by host governments to restrict their activities. The MNCs simply threaten to shift production and jobs to other locations.
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Cultural Impacts of MNCs on Host Countries

Advantages
Improved standard of living Introduction of new products Better health care More sanitary food products

Disadvantages
Abuse of less developed policies in the areas of safety and environmental concerns Negligent product offerings

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As they raise local standards of living and introduce new products and services previously unavailable, people in the host cultures develop new norms, standards, and behaviors. Some of these changes are positive, such as the introduction of safer equipment and machinery, better health care and pharmaceuticals, and purer and more sanitary food products. Other changes are not positive. Nestl, for example, has received much criticism for its promotion of infant formula in the worlds developing countries.
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Dispute Resolution
Which countrys law applies?
In which country should the issue be resolved? Which technique should be used to resolve the conflict?

How will the settlement be enforced?

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Many international business contracts specify answers to these questions to reduce uncertainty and expense in resolving disputes. The courts of most major trading countries will honor and enforce the provisions of these contracts, as long as they are not contrary to other aspects of the countrys public policy. If a contract does not contain answers to the first two questions, each party to the transaction may seek to have the case heard in the court system most favorable to its own interests, a process
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known as forum shopping. Forum shopping allegedly places U.S. manufacturers at a disadvantage in international markets. Monetary awards are higher in U.S. courts, so many plaintiffs lawyers attempt to use these courts to adjudicate foreign lawsuits for product defects in U.S.-made goods sold internationally. In contrast, a foreign manufacturer of a good sold outside the United States would not face the threat of having to defend its product in a U.S. court because the 3-40 manufacturer lacked a tie to that forum.

Principle of Comity
A country will honor and enforce within its own territory the judgments of foreign courts Conditions of the principle: 1. Reciprocity is extended between the countries; that is, country A and country B mutually agree to honor each others court decisions. 2. The defendant is given proper notice. 3. The foreign court judgment does not violate domestic statutes or treaty obligations.
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 Whether a foreign court order is enforced is determined by the principle of comity. The principle of comity provides that a country will honor and enforce within its own territory the judgments and decisions of foreign courts, with certain limitations. For the principle to apply, countries commonly require three conditions to be met.

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 1. Reciprocity is extended between the countries; that is, country A and country B mutually agree to honor each others court decisions. 2. The defendant is given proper notice. 3. The foreign court judgment does not violate domestic statutes or treaty obligations.
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Arbitration
Arbitration is the process by which both parties to a conflict agree to submit their cases to a private individual or body whose decision they will honor.

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 Because of the costs and uncertainties of litigation, many international businesses seek less expensive means of settling disputes over international transactions. Often business conflicts will be resolved through alternative dispute resolution techniques, such as arbitration. Because of the speed, privacy, and informality of such proceedings, disputes can often be resolved more cheaply than through the court system.
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The Technological Environment

The application of scientific knowledge for practical purposes. Technological environment is its resource based.

Some countries, such as Australia, Argentina, and Thailand, are blessed with much fertile agricultural land.
Other countries, such as Saudi Arabia, South Africa, and Russia, are endowed with rich 3-46 natural resources like oil, gold, and diamonds.

The Technological Environment

Infrastructure

Agricultural land Resources

Low-cost labor

Rich natural resources

Skilled labor
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The foundation of a countrys technological environment is its resource base. Some countries, such as Australia, Argentina, and Thailand, are blessed with much fertile agricultural land. Other countries, such as Saudi Arabia, South Africa, and Russia, are endowed with rich natural resources like oil, gold, and diamonds. Countries such as China and Indonesia have abundant labor supplies, while other countries, such as Iceland and New Zealand, do not. The availability or unavailability of resources affects what products are made in a given country. The 3-48 easy availability of

low-cost labor allows firms in China and Indonesia to produce labor-intensive products for the world market. Conversely, firms in Iceland and New Zealand are net importers of such products because these firms lack low-cost labor, which hinders their ability to manufacture labor-intensive goods profitably. Countries may change or shape their technological environments through investments. Many countries, such as Canada, Germany, and Japan, have invested heavily in their infrastructureshighways, communications systems, waterworks, and so forthto make producing and distributing products easier.
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 Investment in infrastructure strengthens technological environment, like Canada, Germany and Japan did.

Investment in human capital is mandatory in improving technological environment.

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Technological transfer
Another mean for technological improvement is Technology Transfer. Some countries encourage it by FDIs.

eg. Poland and Hungary, when moved from communism to capitalism, enticed General Motors and General Electronics by giving tax advantages.
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 Few countries invite FDIs to the companies that want to access countries resources and/or customers. Country, here conditions transfer of technology by operating in that country. Eg. Saudi Arabia conditioned that oil companies wishing to extract crude oil must hire and train Saudi petroleum engineers. - China permitted General motors to manufacture BUICKS in Shanghai after agreement to build 5 research centers in China to train Chinese engineers. 3-52

 A country feels at ease to transfer the technology when government of host country agrees to protect the intellectual property rights of the firm.

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Intellectual Property
Patents

These often forms the basis of a firms Copyrights competitive Trademarks advantage or core & Brand names competency in the global market.

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 An important determinant of a countrys technological environmentand the willingness of foreign firms to transfer technology to the countryis the degree of protection that its laws offer intellectual property rights. Intellectual propertypatents, copyrights, trademarks, brand names, and so forthis an important asset of most MNCs. It often forms the basis of a firms competitive advantage/core competency in the global marketplace. The value of intellectual property can quickly be damaged unless countries enforce ownership rights of firms. Countries that provide weak protection for intellectual property are less likely to attract technology-intensive foreign investments. Weak intellectual property protection also discourages local firms from developing intellectual property of their 3-55 own.

 A patent is a grant from the Government, which confers on the grantee, for a limited term of 20 years:

1) When patents has been granted in respect of a product. 2) When the patents has been granted in respect of a process.

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 Copyright deals with the protection of literary and artistic works. These include writings, music, and works of the fine arts, such as paintings and sculptures, and technology-based works such as computer programs and electronic databases.
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 A trademark is a sign that individualizes the goods of a given enterprise and distinguishes them from the goods of others. It can be in the form of words, designs, letters, numerals or packaging, slogans, devices, symbols, etc.

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International Treaties Protecting Intellectual Property Rights

International Convention for the Protection of Industrial Property Rights (i.e., the Paris Convention) Berne Convention for the Protection of Literary and Artistic Works Universal Copyright Convention Trade-Related Intellectual Property Rights Agreement
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 Most countries have passed laws protecting intellectual property rights. Protection of such rights has also been promoted by numerous international treaties. Among these are the International Convention for the Protection of Industrial Property Rights (more commonly known as the Paris Convention), the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, and the Trade-Related Intellectual Property Rights agreement (part of the Uruguay Round). On paper these laws and treaties would appear to provide adequate protection to owners of intellectual property. However, not all countries have signed the treaties. Further, their enforcement by many signatories is lax.
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 Pakistan, in accordance with WTO runs IPO (intellectual property organization) Being a signatory to Trade Related Intellectual property Rights, Agreement (TRIPs) under WTO, Pakistan required up-gradation of its intellectual property infrastructure in tandem with global trends. Accordingly the existing legislation on Intellectual Property i.e. Copyrights, Patents and Trademarks has been upgraded and the revised laws have been promulgated.
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 Software piracy cost reached was $12 billion in 1999, that reached up to $63.4 billion in 2011 as reported in Singapore on 14th May 2012.

Copyrights piracy cost for U.S was by $3 billion in 1999 that reached to $58 billion a year recently.

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 Registration of trademarks and brand names can also cause problems in international business. First to File approach is used in domestic country. Firm may popularize itself domestically to explore international market; where some other entrepreneur has already applied intellectual property rights for the same. J C penny of Singapore did same for the J.C. Penny of U.S.
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Political Risk Assessment

Ownership risk

Operating risk

Transfer risk

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Experienced international businesses engage in political risk assessment, a systematic analysis of the political risks they face in foreign countries. Political risks are any changes in the political environment that may adversely affect the value of a firms business activities. Most political risks can be divided into three categories:

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Table 3.2 Examples of Political Risks

Expropriation
Confiscation Campaigns against foreign goods Mandatory labor benefits legislation Civil wars
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Inflation
Kidnappings, terrorist threats

Repatriation
Currency devaluations

Increased taxation

 Ownership risk, in which the property of a firm is threatened through confiscation or expropriation. Operating risk, in which the ongoing operations of a firm and/or the safety of its employees are threatened through changes in laws, environmental standards, tax codes, terrorism, armed insurrection, and so forth. Transfer risk, in which the government interferes with a firms ability to shift funds into and out of the country.
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Levels of Political Risk

Macropolitical risk

Micropolitical risk

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Macro political risk

A macro-political risk affects all firms in a country; examples are the civil wars that tore apart Sierra Leone, Zaire, Bosnia, and Rwanda in the 1990s or the recent conflicts in Afghanistan, Iraq, and Liberia.

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 A micro-political risk affects only a specific firm or firms within a specific industry. Saudi Arabias nationalization of its oil industry in the 1970s is an example of a governmentally imposed micro-political risk, as is the Venezuelan governments recently announced requirements that foreign oil companies renegotiate their contracts with the government.
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Basic Country Knowledge

Is the country a democracy or dictatorship?

Does country rely on free market or government controls?

Does government view foreign firms as positive influence? Are firms customers private or public?

Does government act arbitrarily?

Is existing government stable?
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 Any firm contemplating entering a new market should acquire basic knowledge of that country, learning, for example, about its political and economic structures in order to control the firms political risks. The firm needs answers to such questions as those presented in the slide. What and how much information a firm needs to assess political risk will depend on the type of business it is and how long it is likely to be in the host country. The greater and longer-lived a firms investment, the broader its risk assessment should be. Some degree of political risk exists in every country, although the nature and importance of these risks vary.
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