THE LEGAL ENVIRONMENT OF BUSINESS © 2006 Prentice Hall Ch. 9-1 THE LEGAL ENVIRONMENT OF BUSINESS A Critical Thinking Approach Fourth Edition Nancy K. Kubasek

© 2003 Prentice Hall© 2003 Prentice Hall Ch. 3-Ch. 3-11

THE LEGAL ENVIRONMENT OF BUSINESS


THETHE LEGALLEGAL ENVIRONMENTENVIRONMENT OFOF BUSINESSBUSINESS

A Critical Thinking ApproachA Critical Thinking ApproachA Critical Thinking ApproachA Critical Thinking ApproachFourth EditionFourth Edition

Nancy K. KubasekNancy K. Kubasek

Bartley A. BrennanBartley A. Brennan

M. Neil BrowneM. Neil Browne

Nancy K. KubasekNancy K. Kubasek

Bartley A. BrennanBartley A. Brennan

M. Neil BrowneM. Neil Browne

© 2006 Prentice Hall© 2006 Prentice Hall© 2006 Prentice Hall© 2006 Prentice Hall

The International Legal The International Legal Environment of BusinessEnvironment of Business

CHAPTER 9CHAPTER 9


Ch. 9-Ch. 9-22



Chapter 9 OverviewChapter 9 Overview

All business is international businessAll business is international business

Opportunities for U.S. companiesOpportunities for U.S. companies

Competing in a global marketCompeting in a global market



Dimensions of the International Dimensions of the International Environment of BusinessEnvironment of Business

PoliticalPolitical EconomicEconomic

CulturalCulturalLegalLegal

EthicalEthical



Economic DimensionsEconomic Dimensions

Growth rateGrowth rate

Central planning or market economyCentral planning or market economy

Disposable incomeDisposable income

Transportation infrastructureTransportation infrastructure



Political DimensionsPolitical Dimensions

DemocraticDemocratic TotalitarianTotalitarian

DecentralizedDecentralized CentralizedCentralized

Free Market Free Market Planned EconomyPlanned Economy

Civil LibertiesCivil Liberties StabilityStability



Cultural DimensionsCultural Dimensions

Definition

“Culture consists of learned norms of a society based on values, beliefs and attitudes”

Definition

“Culture consists of learned norms of a society based on values, beliefs and attitudes”



Elements of CultureElements of Culture

LanguageLanguage

ReligionReligion

Group MembershipGroup Membership

AttitudesAttitudes

EducationEducation



Legal DimensionsLegal Dimensions

National Legal Systems:National Legal Systems:

Common LawCommon Law

Civil LawCivil Law

Islamic LawIslamic Law

Socialist LawSocialist Law

Hindu LawHindu Law



Common LawCommon Law

Origins in England and its coloniesOrigins in England and its colonies

Case LawCase Law

PrecedentPrecedent

RetrospectiveRetrospective



Civil LawCivil Law

Origins in Europe Romano-GermanicOrigins in Europe Romano-Germanic

Code or Statutory LawCode or Statutory Law

RegulatoryRegulatory

ProspectiveProspective



Islamic LawIslamic Law

Religious-Based:Religious-Based: fundamentally from the Koran fundamentally from the Koran

Set forth in the Shari’aSet forth in the Shari’a

Woven into all aspects of daily life, the family, Woven into all aspects of daily life, the family, and institutions of governmentand institutions of government



Socialist LawSocialist LawOrigins in socio-economic theories of MarxOrigins in socio-economic theories of Marx

Law applied to advance the collective Law applied to advance the collective ownership of property and the means of ownership of property and the means of productionproduction

Private rights subordinate to collective Private rights subordinate to collective rights as expressed through the staterights as expressed through the state

Ultimate goal is to evolve beyond the need Ultimate goal is to evolve beyond the need for lawfor law



Hindu LawHindu LawReligious origins in the Sastras and the Religious origins in the Sastras and the VedasVedas

Law advances compliance with the caste Law advances compliance with the caste systemsystem

Focus on family and successionFocus on family and succession

Codified into India’s national lawsCodified into India’s national laws

As a former British colony, India also As a former British colony, India also shares some common law traditionsshares some common law traditions



International LawInternational Law

Traditional View:Traditional View:

Public sector actions can directly affect Public sector actions can directly affect private international agreementsprivate international agreements

Realistic View:Realistic View:

PublicPublic PrivatePrivate



Sources of International LawSources of International Law

CustomsCustoms

TreatiesTreaties

Judicial DecisionsJudicial Decisions

Scholarly WritingsScholarly Writings

International OrganizationsInternational Organizations



Examples of International LawExamples of International Law

VisasVisas

Tax treatiesTax treaties

Certain intellectual Certain intellectual property right property right protectionsprotections

FCN treatiesFCN treaties

Multilateral Multilateral trade trade agreements:agreements:

NAFTANAFTA

ASEANASEAN

WTOWTO



Methods of Engaging in International Methods of Engaging in International BusinessBusiness

Low RiskLow RiskTrade: Stay Home and ExportTrade: Stay Home and Export

Low/Medium RiskLow/Medium Risk

Medium RiskMedium RiskLicensing, FranchisingLicensing, Franchising

High RiskHigh RiskDirect InvestmentDirect Investment

DistributorsDistributors Sales RepsSales Reps



International TradeInternational Trade

DEFINITION

Export and import of goods and services from one country to/from another

DEFINITION

Export and import of goods and services from one country to/from another



Reasons for International TradeReasons for International Trade

Ricardo:Ricardo: The The Economic TheoryEconomic Theory of of Comparative AdvantageComparative Advantage

Relative efficiencyRelative efficiency

Assumptions in the model vs. the Assumptions in the model vs. the real world: There is no ‘free trade’real world: There is no ‘free trade’



International Licensing International Licensing Broadly applicable as to subject matter of licenseBroadly applicable as to subject matter of license

Trade Secrets Copyrights

PatentsTrademarks

Technology Know How

Trade Dress



Franchising AgreementsFranchising Agreements

Structure of the Franchise Agreement:Structure of the Franchise Agreement:

Licensor permits use of licensed propertyLicensor permits use of licensed property

Licensee pays royalties and fees based on Licensee pays royalties and fees based on salessales

Examples:Examples: McDonald’s, KFC McDonald’s, KFC



Foreign Direct InvestmentForeign Direct Investment

Usually via Multinational CorporationsUsually via Multinational Corporations

Joint VentureJoint VentureSubsidiarySubsidiary



Motivation for Foreign InvestmentMotivation for Foreign Investment

Expand marketsExpand markets

Get close to customersGet close to customers

Use foreign resourcesUse foreign resources

Cheaper laborCheaper labor

Fewer regulationsFewer regulations

Acquire knowledgeAcquire knowledge



Subsidiaries & Limited LiabilitySubsidiaries & Limited Liability

When is the parent corporation liable for acts of subsidiary?

When is the parent corporation liable for acts of subsidiary?



Case 9-1: Case 9-1: In Re Union Carbide at BhopalIn Re Union Carbide at Bhopal Action against both parent and subsidiary Action against both parent and subsidiary

for wrongful death and injuries resulting for wrongful death and injuries resulting from lethal gas leak at chemical plant in from lethal gas leak at chemical plant in IndiaIndia

Issue: Forum shoppingIssue: Forum shopping

Decision: Case removed to India from U.S. Decision: Case removed to India from U.S. courtcourt

Reason: Reason: Forum non conveniensForum non conveniens



Forum Non ConveniensForum Non Conveniens Where act occurredWhere act occurred

Where witnesses and evidence are Where witnesses and evidence are

Where business is incorporatedWhere business is incorporated

Local, not U.S. work force employed at the Local, not U.S. work force employed at the plantplant

Translation of language problemsTranslation of language problems

Local regulations applied to the plantLocal regulations applied to the plant

Costs and effort required for U.S. venueCosts and effort required for U.S. venue



Joint VenturesJoint Ventures

Defining characteristic: Usually Defining characteristic: Usually created for a single purpose and a created for a single purpose and a limited timelimited time

Some countries require all foreign Some countries require all foreign investment via joint venturesinvestment via joint ventures

Entities may be private, Entities may be private, government, or bothgovernment, or both



Risks of Engaging in International Risks of Engaging in International BusinessBusiness

ExpropriationExpropriation

Sovereign Immunity Doctrine and Sovereign Immunity Doctrine and FSIAFSIA

Act of State DoctrineAct of State Doctrine

Export and Import ControlsExport and Import Controls



Case 9-2: Case 9-2: Keller v. Central Bank of NigeriaKeller v. Central Bank of Nigeria

Foreign Sovereign Immunities Act (FSIA)Foreign Sovereign Immunities Act (FSIA)

No jurisdiction by U.S. court unless No jurisdiction by U.S. court unless “commercial activity” is found“commercial activity” is found

Held: Illegal action does not preclude a Held: Illegal action does not preclude a finding of “commercial activity”finding of “commercial activity”



Case 9-3:Case 9-3: Philippines v. Marcos Philippines v. Marcos FACTSFACTS

Civil RICO action to recover fraudulent Civil RICO action to recover fraudulent transfers of fundstransfers of funds

Injunction also sought to freeze fundsInjunction also sought to freeze funds

Defense: Act of State (by head of state)Defense: Act of State (by head of state)



Case 3-3:Case 3-3: Philippines v. Marcos Philippines v. Marcos HOLDINGHOLDING

Act of State Doctrine based in balance of power Act of State Doctrine based in balance of power among three branches of governmentamong three branches of government

Judiciary will not intrude on foreign affairs Judiciary will not intrude on foreign affairs conducted by executive branchconducted by executive branch

The doctrine does not extend to Marcos situationThe doctrine does not extend to Marcos situation

U.S. Court has jurisdiction and affirmed U.S. Court has jurisdiction and affirmed injunctioninjunction



Case 9-4:Case 9-4: U.S. v. Haggar Apparel U.S. v. Haggar Apparel FACTSFACTS

Haggar ships pants to Mexico for sewing Haggar ships pants to Mexico for sewing and permapressing, then ships finished and permapressing, then ships finished goods back into U.S.goods back into U.S.

General rule: such a procedure is exempt General rule: such a procedure is exempt from customs dutyfrom customs duty

U.S. Customs declared ‘permapress’ to U.S. Customs declared ‘permapress’ to be manufacturing, not assembly; duty be manufacturing, not assembly; duty leviedlevied



Case 9-4:Case 9-4: U.S. v. Haggar Apparel U.S. v. Haggar Apparel HOLDINGHOLDING

Lower court ruled in favor of Haggar, Lower court ruled in favor of Haggar, refunding dutyrefunding duty

Court of Appeals reversed and held for Court of Appeals reversed and held for CustomsCustoms

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



Risks Relating to CurrencyRisks Relating to CurrencyCurrency Controls Currency Controls

Currency Value FluctuationCurrency Value Fluctuation

A Partial Solution: HedgingA Partial Solution: Hedging

Forward ContractsForward Contracts

Futures ContractsFutures Contracts

OptionsOptions



Legal and Economic IntegrationLegal and Economic Integration

Three Examples:Three Examples:

1.1. WTOWTO

2.2. European UnionEuropean Union

3.3. NAFTANAFTA



World Trade OrganizationWorld Trade Organization

Created 1995Created 1995

Based upon GATTBased upon GATT

Goals: Eliminate Barriers to TradeGoals: Eliminate Barriers to Trade

Prohibit Nontariff BarriersProhibit Nontariff Barriers

Reduce Tariffs and SubsidiesReduce Tariffs and Subsidies

Protect Intellectual Property Protect Intellectual Property RightsRights



WTO: Structure and FunctionWTO: Structure and Function

RulemakingRulemaking

Ministerial Ministerial ConferenceConference

General General CouncilCouncil

Dispute ResolutionDispute Resolution

Consultation Consultation between Membersbetween Members

Dispute Settlement Dispute Settlement PanelPanel

Appellate BodyAppellate Body



WTO: Concerns and CriticismsWTO: Concerns and Criticisms

Sovereignty v. TradeSovereignty v. Trade

Environmental LawsEnvironmental Laws

Consumer ProtectionConsumer Protection

Labor LawsLabor Laws



European UnionEuropean Union

Origins in the European Origins in the European Economic Community 1957Economic Community 1957

Goals: Free movement of Goals: Free movement of goods, services, capital, and goods, services, capital, and people across member people across member bordersborders



EU: Steps toward RealizationEU: Steps toward RealizationTreaty of Rome 1957 – Customs UnionTreaty of Rome 1957 – Customs Union

Single European Act 1986 – Common Single European Act 1986 – Common MarketMarket

Maastrich Treaty 1991Maastrich Treaty 1991

Monetary Union Monetary Union

Political UnionPolitical Union

Uniform labor and social security lawsUniform labor and social security laws



EU: Structure and MembershipEU: Structure and Membership

Council of Ministers – One per stateCouncil of Ministers – One per state

EU Commission – 20 members, control EU Commission – 20 members, control functional areas called “Directorates”functional areas called “Directorates”

Parliament – Elected by statesParliament – Elected by states

European Court of Justice – European Court of Justice – Jurisdiction over EU v. state disputesJurisdiction over EU v. state disputes



North American Free Trade AgreementNorth American Free Trade Agreement

NAFTA ratified in 1994NAFTA ratified in 1994

Fifteen year phase in periodFifteen year phase in period

Purpose: Eliminate barriers to free Purpose: Eliminate barriers to free flow of goods, services, and flow of goods, services, and investments in Canada, U.S. and investments in Canada, U.S. and MexicoMexico



NAFTA: StructureNAFTA: StructureTrade CommissionTrade Commission

SecretariatSecretariat

Arbitral PanelsArbitral Panels

Dispute resolution via five member Dispute resolution via five member panelspanels

Offers relatively quick and final decisionOffers relatively quick and final decision

Example: UPS Case v. MexicoExample: UPS Case v. Mexico



Global Dispute ResolutionGlobal Dispute Resolution

Arbitration: The most often used method of Arbitration: The most often used method of resolving international business disputesresolving international business disputes

Supported by:Supported by:

UN Convention on the Recognition of UN Convention on the Recognition of Foreign Arbitral AwardsForeign Arbitral Awards

International Center for the Settlement of International Center for the Settlement of Investment DisputesInvestment Disputes

International Chamber of Commerce RulesInternational Chamber of Commerce Rules



Other Forms of Dispute ResolutionOther Forms of Dispute Resolution

MediationMediation

ConciliationConciliation

LitigationLitigation

Contractual ClausesContractual Clauses

Choice of ForumChoice of Forum

Choice of LawChoice of Law

LanguageLanguage



SummarySummaryManagers need to consider all Managers need to consider all aspects of international businessaspects of international business

Important areas include: political, Important areas include: political, economic, cultural, and legaleconomic, cultural, and legal

Increasingly, international Increasingly, international organizations shape the rules of organizations shape the rules of global tradeglobal trade

Documents

THE LEGAL ENVIRONMENT OF BUSINESS © 2006 Prentice Hall Ch. 9-1 THE LEGAL ENVIRONMENT OF BUSINESS A Critical Thinking Approach Fourth Edition Nancy K. Kubasek