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Lecture 2

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Management Core
MGCR 382
David Schumacher

Legal environment 11/28/2013 12:52:00 PM Should know:  Major legal systems  Explain how domestic law affects ability of firms to conduct international business  List ways firms can resolve international disputes Legal environment Variation of national legal systems is due to:  Historical reasons  Cultural reasons  Political reasons  Religious reasons DIffert types of legal systems Explicit legal systems: --> i.e. those that are clearly stated, leaving no room for doubt  Common law o Found in “common wealth countires”- i.e. those of british heritage  Ex. US, enlish parts of Canada (i.e. everywhere but quebec- fucking French) o Inductive approach  “bottom up”  start with a case and look at various options available for judgement based on other previous cases of the same type o based on cumulative wisdom of judge’s decisions on individual cases  creates  legal precedence  statutory laws  laws enforced or created by legislative nation  i.e. in Canada this would be laws created by the UK – the ones each country follows varies  civil law o found in continental Europe and quebec  first established in Roman empire, but was spread over Europe by Napoleon  note that common law is the national law of Canada, but provincial law differs in each province o decutive approach  “top down”  laws are based on one book that has a detailed listing of what is and is not permissible --> main differences b/w common and civil law = role of the judges o common law: judge is a neutral referee, ruling is determined based on what the lawyers bring to the table  it is the lawyer’s job to collect evidence and present their clients case o civil law: judge takes on task of the lawyer  determines the scope of the evidence to be collected and presents each sides case Other legal systems  Religious law o Found in the middle east  Note that countries who use this type of legal systems are known as a “theocracy” o Officially established rules governing the faith and practice of a particular region  Bureaucratic law o Found in communist countries and dictatorships  Whatever the country’s bureaucrats say, goes. The people don’t have a fair trial or say in the matter o Without consistence/unpredictable making it arbitrary  They create rules and laws to follow but they don’t necessarily follow them themselves  Lots of corruption!!  Difficult for IB to enter into a market and manage its business if its operations will be continuously compromised by bureaucrats How domestic laws affect the ability of firms to conduct IB  Domestic effects o Employment laws  Over time, wages, severance packages, unions o Financing operations  Securities, banking regulations, accounting standards o Marketing  Advertising, distribution  Advertising is difficult in religious law countries because they differ so much from what is seen in NA o Developing and utilizing technology  International effects o Competitive disadvantages  Domestic firms seeking to expand abroad may experience difficulties and be put at a disadvantage if they do not understand host country’s legal system  Domestic firms seeking to go abroad may also experience disadvantages caused by certain laws in their own country  Ex. the labor cost is very high in france and germany which means they have to charge more for their products. This hinders their ability to be competitive in the international scale because no one wants to purchase expensive goods o Affects business practices of foreign firms operating outside the country’s boundaries  Companies looking to export their products need to comply with their destination country’s laws, even though their products in their own domestic country is acceptable o Outsourcing  Difficult to recruit help when laws may be against them Laws that directly affect IB  Sanctions o Form of retaliation  restraints against business in countries who impose infavourable policies against home country  essentially penalties for not following the law o Used for political motives  Ex. Restricting access to technological goods, withdrawing preferential governmental treatment, boycotting a country’s goods  Technological goods are important  Ex. USA has sanctions against china because they sold china some equipment they thought china was going to use for airplanes but ended up using it for military air crafts  Embargos o Complete shut out of trade  Ex. Due to Cuban missle crisis there is an embargo in cuba against the US  Extraterritoriality o A law of decree that is active outside of implementing country in attempts to limist transactions outside of country’s borders  Ex. America: non-taxed money was stored in swiss abnk accounts. US has put up a lot of rules against putting money in swiss bank accounts because this can be very shady Laws directed against foreign firms  Nationalization o Shifting from privatization to public ownership in industries (public -= government owned)  Ex. the shift of hydroelectricity in quebec from being privately owned to “hydro quebec” o Typically in “left wing political parties” o 2 forms of nationalization  expropriation: the government takes your company but gives you compensation  typical for foreign firms who get their firms nationalized by host government  confiscation: the government takes your company and thats it  Privitization o Going form public state ownership to private ownership o Good for IB  2 driving forces  political ideology  economic pressures  helps better the quality of life o found in certain industries:  manufacturing, transportation, telecommunications  Repatriation o Restictions on MNC ability to return the profits earned in host country back to home country  A way the host government makes the foreign companies give back to their domestic economy  May create rules that force foreign firms to re- invest some of their profits into host economy o Serves to limit foreign ownership in domestic firms to avoid having their economies controlled by foreigners MNC impacts on host countries  Economic implications o Positive effects:  Creates more jobs (ex. FDI)  Greater selection for consumer  Competition is good for consumer  Benefits local economy through tax payments  Improves education, infrastructure, municiple services  Technology transfer/sharing o Negative effects  Strong competition from foreigners  Could lead to collapse of host country’s weak industry  Local economy can become too dependant on economic health of MNC  Ex. if a big foreign firm enters a waek economy, them paying taxes will build up the ecnomoy. But what happends when they stop?  Political implications o Influence policy by using their large size  Ex. if company threatens to leave unless a certain law is passed, the government will most likely comply if that company offers 10000 jobs  Most effective in smaller countries o Can influence the political structure of a country  Ex. they can loosen the tight grip the government has on its people  Cultural implications o Raise standards of living o Introduce new products o Nutritional habits o Change what is culturally acceptable  Ex. in india there are many call centers for American firms. When people call in to these help centers they would be upset to speakto someone with an Indian accent so there are intense cultural training regims in india so people lose their accents and speak more like an American Dispute resolution in IB  4 essential questions o which country’s law apply? o Where should the issue be resolved? o How should the conflict be resolved? o How will the settlement be enforced?  Disputes are resolved through business contracts- 3 different kinds exist o Forum shopping  Look for the country where you would have the most favourable terms for a business contract o Principal of comity  When there are bilateral agreements b/w states to recovnize one another’s major court rulings  If they sign this agreement, then court rulings on major issues will apply in both countries  Ex. In USA if they create a trading law then this law needs to also be applied in canada  this requires 3 conditions to be met  reciprocity is extended b/w the countries  i.e. there is a mutual agreement to honour the courts decisions  defendant is given proper notice  foreign court jdgement does not violate domestic statues or treaty obligations  if a law is passed in one country that is involved in a treaty than ALL countries within that treaty must abide by that law as well o arbitration  both parties submit cases to external 3rd party which will review them and come up with a solution that they both must honour  cheaper, faster alternative to going to court Technological environment 11/28/2013 12:52:00 PM How technological environment of host country affects IB Changing or shaping technological environments  2 ways: o Investments in:  Infrastructure  Main driving force behind attractiveness of host country’s economies --> fundamental means for growing a business  If you don’t have a solid infrastructure then no one will want to invest in your country  Main problem with brazil is their poor infrastructure  Bad roads = bad transportation  few ports = hard to export to them/import from them  main problem for india as well  horrible electrical system that causes mass black outs – no business wants to come in risking that  Human capital  Education- investing in building more schools o Technology transfer through  FDI  Business requirements  Ex. must invest some money back into their domestic markets Intellectual property rights  Intellectual property = Essentially the basis for a firms competitive advantage  Means of protection: o Laws  for protection of IP is very important  Foreign firms with advanced technology will be less likely to enter a market who does not have protection for this type of stuff – they don’t want to risk it being taken from them  If laws are not consistence then many international conflicts will occur o Brand names o Trademarks o Patents  Be careful of “patent flooding”  i.e. continually re-patenting a product even though there were only minor changes done  this makes it difficult for competitors to develop any kind of product similar to that without infringing on intellectual property of that cheating firm  Big issue for MNC entering foreign markets o Accounting Enironment 11/28/2013 12:52:00 PM Identify key factors that influence national accounting standards Roots of national differences in accounting  Legal o Civil vs common law  Common: procedures revolve around decisions of independent standard-setting boards  Ex. GAAP in US  Civil law: codify their national accounting standards and procedures  Practices are determined by law, not by groups of highly qualified professionals as seen in common law o Enforces the accounting standards and laws  Cultural o Accounting practices mirror traditions  Economic o Capital markets  Political Differences in accounting practices  Determining value for assets o Historical cost vs market value (accounts for inflation)  Note; germany is extremely strict about accounting standards – they value assets at acquisition cost  Determining values for inventory o FIFO  Clearer interpretation of firms holdings o LIFO  Inflation will impact the COGS  Dealing with tax authorities o Ex in US: have to create 2 different balance sheets  1 to give to tax authorities and another you can be more descrete on b/c you only show investors o Ex Germany: again very rigid – only have 1 balance sheet  The one you give to tax authorities is the same you give to shareholders  Using accounting reserves o Accounting reserves = accounts created in firms financial reports that record forseable future expenses that might affect operations  Also used to smooth out fluctuations in earning flows  Can add huge sums to reserve in years they did really good and dip into reserves during bad years o Note: germany has a lot of flexibility with this account in order to have very aligned financial statements from year to year Other differences:  Financial leases  R&D expenses  Goodwill o Premium you pay for value of intangible assets of company  Ex. efficient production scheme, human capital, brand name Capital market impact on accounting standards  Performance: o Has to do with size of accounting reserves  Investments  Loans o Giving a loan to a firm  Best to do so in US due to public disclosure policies – transparent financial sheets that give reliable numbers  Not so good to do for german firms – lump together a lot of numbers so you don’t get as clear of a picture of the riskiness of loans  Think of levendary case: o Levendary was a private firm that went public, then expanded internationally  As a public firm they have pressure to record IFRS and US GAAP so it is transparent for investors o When you have national laws about
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