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Chapter 3

MGCR382 Chapter 3 Notes - Legal, Technological, Accounting, and Political Environments.docx

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Department
Management Core
Course
MGCR 382
Professor
Nicholas Matziorinis
Semester
Winter

Description
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 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  MNCs are often able to counter efforts by host governments to restrict these activities  threaten to shift production and jobs to other locations Cultural Impacts  As they raise local standards of living and introducing new products and services previously unavailable, people in the host cultures develop new norms, standards, and behaviours Dispute Resolution  Which country’s law applies?  In which country should the issue be solved?  Which technique should be used to resolve the conflict: litigation, arbitration, mediation, or negotiation?  How will the settlement be enforced? Forum shopping – 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 favourable to its own interests  allegedly places U.S. manufacturers at a disadvantage in international markets Principle of comity – provides that a country will honour 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:  Reciprocity is extended between the countries; that is, country A and country B mutually agree to honour each other’s court decisions  The defendant is given proper notice  The foreign court judgment does not violate domestic statutes or treaty obligations Arbitration – process by which both parties to a conflict agree to submit their cases to a private individual or body whose decision they will honour. Because of the speed, privacy, and informality of such proceedings, disputes can often be resolved more cheaply than through the court system Another set of issues arises when an international business is in dispute with a national government. The legal recourse available to international businesses in such disputes is often limited. U.S. Foreign Sovereign Immunities Act of 1976 – provides that the actions of foreign governments against U.S. firms are generally beyond the jurisdiction of U.S. courts  does not grant immunity for the commercial activities of a sovereign state Countries often negotiate bilateral treaties to protect their firms from arbitrary actions by host country governments. These treaties commonly require the host country to agree to arbitrate investment disputes involving the host country and citizens of the other country. The Technological Environment  Foundations of a country’s technological environment is its resource base  The availability of resources affects what products are made in a given country  Because of their abundance of fertile land, Australia, Argentina, and Thailand are major exporters of agricultural goods  Easy availability of low-cost labour allows firms in China and Indonesia to produce labour-intensive products for the world market  Firms in Iceland and New Zealand are net importers of such products because these firms lack low-cost labour, which hinders their ability to manufacture labour-intensive goods profitably  Many countries have invested heavily in their infrastructures to make producing and distributing products easier  Many countries have invested heavily in human capital  by improving the knowledge and skills of their citizens, countries improve the productivity and efficiency of their workforces Technology transfer – the transmittal of technology from one country to another. Some countries have promoted technology transfer by encourage FDI  Other countries improved their technological base by requiring companies eager to access a country’s resources or consumers to transfer technology as a condition for operating in that country An important determinant is the degree of protection that its laws offer to intellectual property rights  important asset of most MNCs  Often forms the basis of a firm’s competitive advantage/core competency in the global marketplace  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 inte
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