MGCR 382 Chapter Notes - Chapter 3: Bilateral Investment Treaty, Comity, Napoleonic Code

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MGCR382 Chapter 3 Notes: Legal, Technological, Accounting, and Political Environments
The Legal Environment
an international business must obey the laws not only of its home country but also the laws of all the host
countries in which it operates both sets of laws can critically affect the way international firms conduct their
business
determine the markets firms may serve, the prices they can charge for their goods, and the cost of necessary inputs
such as labour, raw materials, and technology also affect the location of economic activity
Differences in Legal Systems
In the U.S., in times of economic distress firms can lay off workers with minimal notice and severance pay. In Belgium,
firms wishing to trim their white-collar workforces must provide each worker with three months’ notice, three months’
severance pay, or some combination of two for every five years the employee has worked for the firm.
In the U.S., easy availability of lawyers and nondiscriminatory access to its legal system are helpful to international
businesses wishing to settle disputes with suppliers and customers. South Korea suffers from a shortage of lawyers
because of its tough bar exam. Thus many international businesses are forced to resolve disputes privately rather than
utilize South Korea’s courts.
Common law based on the cumulative wisdom of judges’ decision on individual cases through history. These cases
create legal precedents, which other judges use to decide similar cases
foundation of the legal systems in the United Kingdom and its former colonies
laws affecting business practices vary somewhat among countries, creating potential problems for the uninformed
international businessperson
statutory laws (those enacted by legislative action) also vary among the common law countries
Civil law based on a codification of what is and is not permissible. The civil law system originated in biblical times with
the Romans. Its dominance was reinforced by the imposition of the Napoleonic code on territories conquered by Napoleon
one important difference between common 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 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, determining the
scope of evidence to be collected and presented to the court
Religious law based on the officially established rules governing the faith and practice of a particular religion
Muslim firms and financial institutions have had to develop alternative financing arrangements to acquire and
finance capital leasing arrangements
Family-owned firms are often influential in countries where legal systems are based on the Koran because
members of an owner’s extended family may be the best available source of capital
Absence of due process and appeals procedures
Theocracy a country that applies religious law to civil and criminal conduct
Bureaucratic law whatever the country’s 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
Protections that may appear in the country’s constitution may be ignored if government officials find them
inconvenient
The ability of an international business to manage its operations is often compromised by bureaucrats
confronted with arbitrary rules or decision that have the force of law
Law of consistency, predictability, and appeal procedures
Managers should rely on the expertise of local lawyers in each country in which they operate to help them comply with
the specific requirements of local laws and to counsel them on substantive differences in due process, legal liabilities, and
procedural safeguards
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Domestically Oriented Laws
Some are primarily designed to regulate the domestic economic environment managing its workforce,
financing its operations, marketing its products, developing and utilizing technology
May indirectly affect the ability of domestic firms to compete internationally by increasing their costs, thus
reducing their price competitiveness relative to foreign firms
May also affect the business practices of foreign firms operating outside the country’s borders. Often firms whose
products are geared to the export market alter their production techniques to meet the regulations of the importing
countries, even though the firms’ operations are legal within their home country
Laws Directly Affecting International Business Transactions
Politically motivated and designed to promote the country’s foreign policy or military objectives
Sanctions restraints against commerce restrict access to high-technology goods, withdraw preferential tariff
treatment, boycott the country’s goods, deny new loans
Embargo a comprehensive sanction against all commerce with a given country
Important form of sanction is 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
Extraterritoriality attempt to regulate business activities that are conducted outside their borders
Antiboycott provisions
Helms-Burton Act directed against international firms that “traffic” in the assets of U.S. companies that were
confiscated by the Cuban government when Castro assumed control over time the Cuban government has
leased or sold many of these confiscated assets to foreign companies; authorizes the U.S. government and the
former U.S. owners of the confiscated assets to take action against their new foreign owners
Laws Directed Against Foreign Firms
Nationalization when leftist governments obtain power, they choose to transfer ownership of resources from the
private to the public sector most vulnerable are industries that lack mobility (natural resource, capital-
intensive)
Expropriation when the host government compensates the private owners for their losses
Confiscation when the host government offers no compensation
Privatization the conversion of state-owned property to privately owned property opposite of nationalization
and creates opportunities for international business
Most state-owned enterprises sold to the private sector are unprofitable, undercapitalized, and overstaffed
attractive for companies looking to expand operations into new markets
Stems from political ideology and economic pressure
Also resulted from competitive pressures that firms face in global markets
Constraints on Foreign Ownership
Many governments limit foreign ownership of domestic firms to avoid having their 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
The Impacts of MNCs on Host Countries
Economic and Political Impacts
May make direct investments in new plants and factories, thereby creating local jobs
Pay taxes, which benefit the local economy and help to improve educational, transportation, and other municipal
services
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 in a local economy
Sheer size often gives MNCS tremendous power in each country in which they operate
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