1

The Legal and Political Environment of Global Business

KEY LEGAL ISSUES IN INTERNATIONAL BUSINESS

International law

International treaties

Contractual relationships

Dispute resolution

Extraterritoriality

Trade and investment regulation

Financial flows regulation

Ownership regulation

Sanctions and embargoes

Intellectual property protection

Reporting requirements

2

Private International Law / Contracts

Private international law is concerned with three areas:

(1) Choice of law (e.g., When making a contract with a distributor in France, Microsoft determines in advance which country’s laws should be used to enforce the contract)

(2) Choice of forum (which country has jurisdiction to hear / try cases in the event of a conflict)

(3) Recognition and enforcement of judgements

3

Private International Law / Contracts (Cont’d)

International contracts attach rights, duties, and obligations to thecontracting parties in three types of business transactions:

(1) Sales of goods and services (directly or via an intermediary)

(2) Licensing and franchising (a contract allowing a firm to manufacture and/or sell a good or service abroad, usually in conjunction with the use, for a fee, of the original manufacturer’s intellectual property, marketing assets, or other)

(3) Direct Investment (the operation of a foreign branch office or other facility, creation of a foreign subsidiary, or participation in a joint venture with another firm, abroad)

4

Legal Recourse for Resolving Disputes

Conciliation: A formal process of negotiation whose objective is toresolve differences in a "friendly" manner. Less aggressive thanarbitration. Practiced particularly in China.

Arbitration: Dispute settlement procedure in which an objective thirdparty hears both sides and makes a decision. Uses intermediaries such asrepresentatives of chambers of commerce, trade associations, or thirdcountry institutions (e.g., London Court of Arbitration; InternationalChamber of Commerce; Chamber of Commerce of Paris).

Litigation: Lawsuits carried out in public courts. Considered the lastresort for resolving disputes and avoided by most firms because of cost,delays, aggravation, etc. Often, the biggest winners are the lawyers.

5

Extraterritoriality

Reflects a government’s attempts to set or enforce its own laws andpolicies outside of the home country.

Antitrust laws • Regulate business activities that restrain competition or trade; • Means by which US government prevents the creation of

monopolies;• Vary from country to country (e.g. strong in USA; weak in Japan);• Extraterritoriality example: The US government sued Pilkington

PLC, a British glassmaker, for perceived violation of US antitrust laws.

Foreign Corrupt Practices Act• Passed in 1977, made it illegal for Americans to offers bribes or

similar forms of payment in the conduct of international business;• Ignores the fact that bribery is a way of life in some countries.

6

Bases for Legal Systems: Four TypesIslamic Law Middle East, Africa, and many parts of Asia (about 1/5 of the world population) Based on the Koran, prescribes behavior regarding social and economic activity Overriding objective is social justice Some elements are many centuries old

Socialist Law: Former USSR and its satellites; derived from the Marxist-Socialist system Emphasizes rights of the state over rights of the individual Now becoming “Westernized”

Common Law UK, Canada, Hong Kong, and other countries (formerly) of the British empire Based on tradition, past practices, and legal precedents established by the courts More open to interpretation by courts and thus more flexible than Code Law

Code Law: Most countries of the world Based on comprehensive written statutes (laws enacted by legislative bodies) All inclusive (in contrast to Common Law), covering all aspects of commercial, civil, and criminal behavior, although subject to some interpretation by courts

Example: Under Common Law, intellectual property rights are determined by use; under

Code Law, determined by registration

7

Global Political Environment and Its Affect on (International) Business

INTEREST GROUP EXAMPLE ISSUE

Government / Politicians ==> National industrial policy favoring local firms

General Public ==> Nationalism / Concerns about local culture

Religious Bodies ==> Anti-Islam concerns

Big Labor ==> Anti-imports

Competing Businesses ==> Concerns about local resource consumption

Customers ==> Pricing policies

Stockholders ==> Insufficient profits

Minority Groups ==> Perceived discrimination / Sexual harassment

Conservationists ==> Environmental protection

Other Special Interest Groups ==> You name it

8

Company Strategy for Dealing with Political Issues

1. Constantly scan the environment to track existing and potential issues

2. When an issue is identified, define its nature

3. Identify current and potential action of special interest group(s)

4. Identify key individuals and institutions that can influence issue outcomes (e.g., government agencies, courts, the media)

5. Formulate objectives for addressing the issue and strategies for reaching those objectives

6. Determine the impact of implementing various strategies (e.g., via cost/benefit analysis)

7. Choose best strategy(s) and implement

9

SAMPLING OF INTERNATIONAL ACCOUNTING PRACTICES

Foreign financial statements often don’t come out for up to a yearfollowing year’s end (compared with a few months in the USA)

ASSETS• Securities Valuation

– Most countries: lower of cost or market value– Denmark: Cost method– Brazil: Encourages firms to adjust to reflect monetary corrections.

• Receivables– USA: Carried net of an allowance of uncollectable accounts– Belgium, France, India, Spain, South Africa: The allowance has

generally not been established.– Germany: Allowance may be carried as a liability rather than as a

contra-asset.

• Inventory Valuation– Most common method worldwide: FIFO – Japan and Brazil: Weighted average cost is preferred– Australia: LIFO is not allowed

10

INTERNATIONAL ACCOUNTING PRACTICES (CONT’D)

• Ownership Stakes over 50%– Most places: Full consolidation into headquarters financial statements– India and South Korea: Usually don’t consolidate– Switzerland: Consolidated statements are often unaudited– Germany, Italy,Finland: Foreign firms may be excluded from consolidation

• Plant, Property, and Equipment Valuation– USA, Canada, Japan, Germany: Historical cost– Latin America and Much of Europe: Replacement cost or other– Latin America: Inflation-adjusted market value– South Korea: Fixed assets may be periodically revalued for inflation but are

subject to a 3% revaluation tax.

INCOME STATEMENT• Depreciation

– Most of the world: Straight line depreciation is the norm– Latin America & other high inflation countries: Based on re-valued

book value (thus, total accumulated depreciation can exceed original purchase cost)

• R&D Costs– Most of the world: Expensed as incurred– South Korea and Spain: Capitalized– Belgium, Malaysia, and Italy: Both conventions are practiced.