THE LEGAL ENVIRONMENT OF BUSINESS

THE LEGAL ENVIRONMENT

OF BUSINESS

A Critical Thinking Approach

Fourth Edition

Nancy K. Kubasek
Bartley A. Brennan
M. Neil Browne
2003
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Ch. 3-1
9-1

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CHAPTER 9
The International Legal
Environment of Business

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Ch. 9-2

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Chapter 9 Overview
All business is international business
Opportunities for U.S. companies
Competing in a global market

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Dimensions of the International

Environment of Business
Political

Legal

Economic

Cultural
Ethical

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Economic Dimensions
Growth rate
Central planning or market economy

Disposable income
Transportation infrastructure

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Political Dimensions
Democratic

Totalitarian

Decentralized

Centralized

Free Market

Civil Liberties
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Planned Economy

Stability
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Cultural Dimensions
Definition

Culture consists of learned

norms of a society based on
values, beliefs and attitudes

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Elements of Culture
Language
Religion
Group Membership
Attitudes
Education
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Legal Dimensions
National Legal Systems:
Common Law
Civil Law
Islamic Law

Socialist Law
Hindu Law
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Common Law
Origins in England and its colonies
Case Law
Precedent
Retrospective

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Civil Law
Origins in Europe Romano-Germanic
Code or Statutory Law
Regulatory
Prospective

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Islamic Law
Religious-Based: fundamentally from the Koran
Set forth in the Sharia
Woven into all aspects of daily life, the family,
and institutions of government

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Socialist Law
Origins in socio-economic theories of Marx
Law applied to advance the collective
ownership of property and the means of
production
Private rights subordinate to collective
rights as expressed through the state
Ultimate goal is to evolve beyond the need
for law
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Hindu Law
Religious origins in the Sastras and the
Vedas
Law advances compliance with the caste
system
Focus on family and succession

Codified into Indias national laws

As a former British colony, India also
shares some common law traditions
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International Law
Traditional View:
Public

Private

Realistic View:
Public sector actions can directly affect
private international agreements
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Sources of International Law

Customs
Treaties
Judicial Decisions
Scholarly Writings
International Organizations
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Examples of International Law

Visas

Tax treaties
Certain intellectual
property right
protections
FCN treaties
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Multilateral
trade
agreements:
NAFTA

ASEAN
WTO
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Methods of Engaging in International

Business
Trade: Stay Home and Export

Low Risk

Distributors

Low/Medium Risk

Sales Reps

Licensing, Franchising

Direct Investment
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Medium Risk

High Risk
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International Trade
DEFINITION

Export and import of goods

and services from one
country to/from another

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Reasons for International Trade

Ricardo: The Economic Theory of
Comparative Advantage
Relative efficiency
Assumptions in the model vs. the
real world: There is no free trade

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International Licensing
Broadly applicable as to subject matter
of license
Trade Secrets

Copyrights

Trademarks

Patents

Technology

Know How

Trade Dress
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Franchising Agreements
Structure of the Franchise Agreement:
Licensor permits use of licensed property
Licensee pays royalties and fees based on
sales

Examples: McDonalds, KFC

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Foreign Direct Investment

Usually via Multinational
Corporations
Subsidiary

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Joint Venture

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Motivation for Foreign Investment

Expand markets
Get close to customers

Use foreign resources

Cheaper labor

Fewer regulations
Acquire knowledge
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Subsidiaries & Limited Liability

When is the parent

corporation liable for acts
of subsidiary?

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Case 9-1: In Re Union Carbide at Bhopal

Action against both parent and
subsidiary for wrongful death and
injuries resulting from lethal gas leak at
chemical plant in India
Issue: Forum shopping
Decision: Case removed to India from
U.S. court
Reason: Forum non conveniens
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Forum Non Conveniens

Where act occurred
Where witnesses and evidence are
Where business is incorporated
Local, not U.S. work force employed at the
plant
Translation of language problems
Local regulations applied to the plant
Costs and effort required for U.S. venue
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Joint Ventures
Defining characteristic: Usually
created for a single purpose and a
limited time
Some countries require all foreign
investment via joint ventures

Entities may be private,

government, or both
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Risks of Engaging in International

Business
Expropriation
Sovereign Immunity Doctrine and
FSIA
Act of State Doctrine
Export and Import Controls
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Case 9-2: Keller v. Central Bank of Nigeria

Foreign Sovereign Immunities Act (FSIA)
No jurisdiction by U.S. court unless
commercial activity is found
Held: Illegal action does not preclude a
finding of commercial activity

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Case 9-3: Philippines v. Marcos

FACTS
Civil RICO action to recover fraudulent
transfers of funds
Injunction also sought to freeze funds
Defense: Act of State (by head of state)

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Case 3-3: Philippines v. Marcos

HOLDING
Act of State Doctrine based in balance of
power among three branches of government
Judiciary will not intrude on foreign affairs
conducted by executive branch
The doctrine does not extend to Marcos
situation
U.S. Court has jurisdiction and affirmed
injunction
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Case 9-4: U.S. v. Haggar Apparel

FACTS
Haggar ships pants to Mexico for sewing
and permapressing, then ships finished
goods back into U.S.
General rule: such a procedure is exempt
from customs duty

U.S. Customs declared permapress to

be manufacturing, not assembly; duty
levied
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Case 9-4: U.S. v. Haggar Apparel

HOLDING
Lower court ruled in favor of Haggar,
refunding duty

Court of Appeals reversed and held for

Customs
Rule: Customs classifications are made
at port of entry, but such decisions must
conform to statutory standards

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Risks Relating to Currency

Currency Controls
Currency Value Fluctuation

A Partial Solution: Hedging

Forward Contracts

Futures Contracts
Options
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Legal and Economic Integration

Three Examples:
1. WTO
2. European Union
3. NAFTA

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World Trade Organization

Created 1995
Based upon GATT

Goals: Eliminate Barriers to Trade

Prohibit Nontariff Barriers

Reduce Tariffs and Subsidies

Protect Intellectual Property
Rights
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WTO: Structure and Function

Rulemaking

Dispute Resolution

Ministerial
Conference

Consultation
between Members

General
Council

Dispute Settlement
Panel
Appellate Body

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WTO: Concerns and Criticisms

Sovereignty v. Trade
Environmental Laws
Consumer Protection
Labor Laws

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European Union
Origins in the European
Economic Community 1957
Goals: Free movement of
goods, services, capital, and
people across member
borders

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EU: Steps toward Realization

Treaty of Rome 1957 Customs Union
Single European Act 1986 Common
Market
Maastrich Treaty 1991
Monetary Union
Political Union
Uniform labor and social security laws
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EU: Structure and Membership

Council of Ministers One per state
EU Commission 20 members, control
functional areas called Directorates
Parliament Elected by states
European Court of Justice
Jurisdiction over EU v. state disputes

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North American Free Trade Agreement

NAFTA ratified in 1994
Fifteen year phase in period
Purpose: Eliminate barriers to free
flow of goods, services, and
investments in Canada, U.S. and
Mexico
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NAFTA: Structure
Trade Commission
Secretariat
Arbitral Panels
Dispute resolution via five member
panels

Offers relatively quick and final

decision
Example: UPS Case v. Mexico
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Global Dispute Resolution

Arbitration: The most often used method of
resolving international business disputes
Supported by:
UN Convention on the Recognition of
Foreign Arbitral Awards

International Center for the Settlement of

Investment Disputes
International Chamber of Commerce Rules
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Other Forms of Dispute Resolution

Mediation
Conciliation
Litigation
Contractual Clauses
Choice of Forum
Choice of Law
Language
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Summary
Managers need to consider all
aspects of international business
Important areas include: political,
economic, cultural, and legal
Increasingly, international
organizations shape the rules of
global trade
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Ch. 9-47