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Chapter 3: Legal, Technological, Accounting and Political Environments

Week 3 Day 1

Su Jin Victoria Yeon, Copyright 2015

KEEP YOUR HOMEWORK ASSIGNMENT WITH YOU


Learning Objectives


1. Describe the major types of legal systems confronting international businesses

2. Explain how domestic laws affect the ability of firms to conduct international business

3. List the ways firms can resolve international business disputes4. Describe the impact of the host country’s technological environment on

international business5. Identify the factors that influence national accounting systems6. Explain how firms can protect themselves from political risk

Opening Case – Harry Potter goes to China


Harry Potter’s publisher in China had to confront cultural, legal and politicalissues Children’s books in China are often political tools used to shape young readers’ values. Much of the “whimsy” of Rowling’s writing was difficult to capture in Chinese. As Harry Potter was being launched in China, its release was jeopardized by a

government campaign against “feudal superstition.” A counterfeit fifth Harry Potter novel (titled Harry Potter and the Leopard-Walk-Up-to-Dragon) was being sold as if it had been authored by J.K. Rowling.

Two weeks after the release of Harry Potter and the Half-Blood Prince, unauthorizedChinese translations of the book were available for sale on the streets of Beijing.

Despite widespread piracy, an estimated 8 million legal copies of Rowling’s workshave been sold in China to date.

The Legal Environment


Differences in Legal Systems The rules, or laws, that regulate behavior

Along with the processes by which the laws are enforced Through which redress (compensation) for grievances (complaints) is obtained

Very important in IB Regulate business practice Define the manner in which business transactions are to be executed Set down the rights and obligations of those involved in business transactions

The legal environments of countries differ significantly Can affect the attractiveness of a country as an investment site / market

Influenced by the prevailing political system The govt of a country defines the legal framework The laws that regulate business often reflect the rulers’ dominant political ideology



Common Law Based on the cumulative wisdom of judges’ decisions on individual cases through history Statutory Law

Enacted by legislative action

Civil Law Based on a codification or detailed listing, of what is and is not permissible

Religious Law Based on the officially established rules governing the faith and practice of a particular religion Theocracy

A country that applies religious law to civil and criminal conduct

Bureaucratic Law Whatever the country’s bureaucrats say it is Usually the legal system in communist countries and in dictatorship



Common Law Based on tradition, precedent, and custom

TraditionA country’s legal history

PrecedentCases that have come before the courts in the past

CustomThe ways in which laws are applied in specific situations

Judges: interpret the law It may apply to the unique circumstances of an

individual case

Some degree of flexibility The UK, and the Common Wealth Nations

(Common law + Statue law – made from the parliament)

Civil Law Based on a detailed set of laws organized into

codes More than 80 countries operate with a civil law

system Germany, France, Japan, and Russia, Korea (based on the constitution)

Tend to be less adversarial (argumentative) than a common law system

Judges: apply the law Relied upon detailed legal codes

Less flexible



Religious (Theocratic) Law The law is based on religious teachings Islamic law, Hindu law, Jewish law Islamic law

Primarily a moral rather than a commercial law Intended to govern all aspects of life Foundation:

the Koran, the Sunnah, decisions and sayings of the Prophet Muhammad, the writings of Islamic scholars

Religious law creating problems for firms The teaching of Koran condemns charging interest on loans

Rely on leasing arrangements rather than borrowing moneyE.g. Iran banks often charge up-front fees that act as a substitute for loan interest payments, and owners of bank deposits receive shares of the bank’s profit rather than interest payments



Bureaucratic law The ability of an international business to manage its operations is often compromised

by bureaucrats Lack of consistency, predictability, and appeal procedures



Domestically Oriented Laws Primarily designed to regulate the domestic environment May indirectly affect the ability of domestic firms to compete internationally

E.g. labor costs for manufacturers in Germany, France, Belgium are among the world’s highest Government-mandated benefits packages

Unintentionally affect the business practices of foreign firms operating outside the country’s borders Firms whose products are geared to the export market

Alter their production techniques to meet the regulations of the importing countries E.g. Grupo Herdez – choose to alter its production processes in Mexico to sell its goods in the US

Drying up the chilies

Laws Directly Affecting International Business Transactions


National laws that are explicitly designed to regulate IB activities Often politically motivated, designed to promote the country’s foreign policy or

military objectives

Sanctions Restraints against commerce with that country E.g. restricting access to high-technology goods, withdrawing preferential tariff

treatment, boycotting the country’s goods and denying new loans US sanctions against Sudan and Myanmar for human rights violations

Embargo A comprehensive sanction against all commerce with a given country E.g. the UN embargoed goods to or from South Africa during the 1980s to protest its

apartheid policies



Dual-use products High-technology products that may be used for both civilian and military purposes E.g. Boeing had to pay a $15 million fine in 2006 because it sold China 94 commercial

airline with a tiny gyro chip that could be used to guide air-to-surface missiles in violation of the Arms Control Export Act

Extraterritoriality Attempts by the home country government to regulate business activities that are

conducted outside its borders E.g. US anti-trust law – if US firms engage in activities outside their borders that diminish

competition in the US market, they face US anti-trust lawsuit Pilkington PLC: the British owner of flat glass Sued by the US government for limiting the ability of its US licensees to use the technology in

the international markets (hurting US exports and reducing the incentives of US flat glass producers to invest in R&D)

Laws Directed Against Foreign Firms


Nationalization Transfer ownership of resources from private to the public sector For industry that lack mobility, natural resource industries, capital intensive industries

E.g. mining, oil production, steel, chemicals, and oil refining 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 The opposite of nationalization & creates opportunities for IBs Resulted from: political ideology & economic pressures (competition)



Constraints on Foreign ownership Governments limit foreign ownership of domestic firms to avoid having their

economies or key industries controlled by foreigners E.g. Mexico restricts foreign ownership in its energy industry Canada limits foreign ownership of newspapers to 25% to protect the country’s culture from

being inundated by other countries (the US)

Restrictions on repatriation of foreign MNCs’ profits earned in the host country Repatriate: returning to their home countries

How do restrictions on repatriation of profits affect MNCs? May discourage MNCs from investing in the first place Restrictions can be formulated in a way that export operations are encouraged E.g. Poland: encourages firms to expand their exports from their Polish operations by allowing

companies to repatriate all of their profits earned from exports

The Impact of MNCs on Host Countries


Economic and Political Impacts

Cultural Impacts Raise local standard of living Introduce new products and services that are previously unavailable Local people can develop new norms, standards, and behaviors

Positive Negative

More choices to consumers, better products through higher competition Job creation – new plants and factories Increase work for local contractors and suppliers MNC paying tax increased tax revenue for the host nations Technology transfer

Increased competition Loss of jobs and profits Local economy becomes more dependent on the success of the MNCs

Dispute Resolution in International Business


Four major questions to be answered for an international dispute to be resolved1. Which country’s law applies?2. In which country should the issue be resolved?3. Which technique should be used to resolve the conflict? Litigation, arbitration, mediation or negotiation?

4. How will the settlement be enforced? In many cases, the answers to the questions are specified in contracts between

companies Forum shopping If the contract does not contain answers to the first two questions, Each party may seek to have the case heard in the court system most favorable

to its own interest forum shopping

Dispute Resolution in International Business


Principle of comity A country will honor and enforce within its own territory the judgments and

decisions of foreign courts, with certain limitations Three conditions that has to be met for the principle to apply

Reciprocity must be extended between the countries The defendant is given proper notice The foreign court judgment does not violate domestic statutes or treaty obligations

Arbitration The process by which both parties agree to submit their cases to a private individual

or body whose decision they will honor Disputes can often be resolved more cheaply

Due to its speed, privacy and informality

The Technological Environment


Countries change and shape their technological environment through investment Investments in infrastructure and human capital have allowed developed countries to

continue to prosper in world markets despite high wages paid to their workers

Technology transfer The transmittal of technology from one country to another Some countries promoted technology transfer by encouraging FDI

E.g. Hungary and Poland enticed firms like GE and GM to build new factories there by using tax and other incentives

Saudi Arabia: mandated that oil companies wishing the extract its crude oil hire and train Saudi petroleum engineers learned state-of-the-art exploration and extraction methods on the job

The Protection of Intellectual Property


Intellectual property Property that is the product of intellectual activity

E.g. computer software, a screenplay, a music score, or the chemical formula for a new drug etc. Systems that establish ownership rights over intellectual property

Patents, copyrights, and trademarks Patents

Grants for the inventor of a new product or process, giving them exclusive rights for a defined period to the manufacture, use, or sale of that invention

Copyrights The exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and

disperse their work as they see fit Trademarks

Designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products

“Knowledge” has become an important economic value

The Protection of Intellectual Property


Intellectual property law To reward the originator of a new invention, book, musical record, clothes design,

restaurant chain, and the like, for this or her idea and effort Stimulate innovation and creative work

Provide an incentive for people to search for novel ways of doing things Reward creativity

Differences in intellectual property laws between the countries Differences in enforcement of the law See Table 3.1 of the text book Differences in patent practices which could lead to conflicts

Japanese law: allow firms to file numerous patents even with a minor modification of an existing patentUS law: requires patentable inventions to be novel, useful, and nonobviousPatent flooding: a company files a series of patent applications protecting narrow, minor technical improvements to a competitor's existing patents

E.g. CyberOptics vs. Yamaha

The Accounting Environment


The Roots of National Differences Legal system

Common law vs. civil law nations Common law countries: accounting procedures typically evolve from the decisions of

independent standards-setting boards Civil law countries: accounting practices are determined by the law

Source of capital Cultural values and attitudes

E.g. the detailed accounting procedures laid down by the French government France’s statist (the principle that the government should own or control most of a country's industry and economy) tradition

German: strong anti-inflation biases are embedded in German accounting proceduresReaction to the tragic hyperinflation of the early 1920s that wiped out much of its middle classes

The Accounting Environment


The Roots of National Differences International political ties

Most members of the British Commonwealth have adopted the accounting principles and procedures of the UK

Former colonies of France and the Netherlands have adopted those of their colonial rulers

Economic system Centrally planned economy:

the accounting system is driven by the need to provide output-oriented information to the state planners

Market-oriented system: managers and investors require profit- and cost-oriented information

Differences in Accounting Practices


Valuation and revaluation of assets Accounting system: assumption that a firm’s assets should be valued on a historical

cost basis Asset = Asset’s original cost – depreciation Due to inflation, the Market Value > Book Value resolution of this problem differ

among different nations E.g. Dutch: permitted to raise their value; UK: professional discretion of the accountants; US:

illegal

Valuation of inventories Two principal methods for valuing inventories

LIFO (Last in First out) vs. FIFO (First in First out)FIFO: the oldest inventory items are recorded as sold first

Clearer estimate of the value of the firm’s existing inventoriesLIFO: the most recently produced items are recorded as sold first

LIFO tends to raise the firms reported cost in times of inflation

Differences in Accounting Practices


Dealing with the tax authorities A firm’s accounting records are the basis on which taxes are assessed It examines how laws in the country affect companies’ tax burdens

Use of accounting reserves Accounting reserves

Accounts created in a firm’s financial reports to record foreseeable future expenses that might affect its operations

Difficult to assess firms’ performance as different countries have different laws regarding the use of accounting reserves

Other differences Capitalization of financial lease Capitalization of R&D Treatment of goodwill

Goodwill: an intangible asset that arises when one company acquires another, but pays more than the fair market value of the net assets (total assets - total liabilities)

Impact on Capital Markets


The differences in accounting practices can distort the measured performance of firms incorporated in different countries Difficult to assess the performance of companies E.g. the US govt requires that companies listed on the NYSE follow strict accounting

practices, the NYSE worries that it might lose out to non-US stock markets

Attempt for creating “international” financial standard the International Accounting Standards Board (IASB) created a transparent approach

to financial reporting, International Financial Reporting Standard (IFRS) Have been negotiating to standardize their treatment of accounting issues Long way to go

The Political Environment


Political risk assessment A systematic analysis of the political risks they face in foreign countries

Political Risk Any changes in the political environment that may adversely affect the value of a firm’s busines

s activities Ownership risk

The property of a firm is threatened through confiscation Operating risk

The ongoing operations of a firm and the safety of its employees are threatened through changes in law, environmental standards and terrorism

Transfer riskThe government interferes with a firm’s ability to shift funds into and out of the country

See Table 3.2 Macro-political risk: Affects all firms in a country Micro-political risk: Affects only a specific firm or firms within a specific industry



Assessing political risk Involves constant monitoring by MNCs

The employees of the firm Some of the best sources of information Embassy officials and international chambers of commerce, or consulting firms International business publications Governments

Political risk exists in every country The nature and importance of those risk vary

E.g. French farmers’ protest against Disney land Paris and McDonald’s The ethnic cleansing by Serbian nationalists in Kosovo destroyed the economic viability of firms

The depth of analysis necessary to assess its magnitude depends on;- The type of business Its likely duration in the host country

Firms can then make a tradeoff between;- Political risk vs. The likely rate of return of a particular investment



Government-owned or –sponsored organizations to insure firms against political risks Overseas Private Investment Corporation (OPIC)

Promote international business activity through reduction of political risk MNCs face in their foreign opertions

Insure US overseas investment against nationalization, insurrection or revolutions, and foreign-exchange inconvertibility

OPIC’s insurance is limited to firms operating in countries with which the US has singed bilateral investment treaties

Multilateral Investment Guarantee Agency (MIGA) Subsidiary of the World Bank Provides insurance against political risk

Homework #4 – due next Friday


Read the case “Risky Business in Venezuela” Answer the four case discussion questions Do not spend more than 2 pages answering the questions You may use bullet points Keep your answers brief but think! Type your answers

Due date: Friday, 20th of March by 11 a.m.

Group discussion Report #2 (due next Friday)


With your group members discuss; About third week reading About third week case And discuss based on case discussion questions

Discuss following statement“What is the impact of vigorous enforcement of intellectual property rights on the world economy? Who gains and who loses from strict enforcement of these laws?”

Report due date: 20th of March by 11 a.m. Group report / Individual Report (sheets are downloadable from the

website http://ecampus.cbnu.ac.kr)

PLEASE HAND IN YOUR HOMEWORK NOW


Case StudyRisky Business in Venezuela

Week 3 Day 2


Clarifications of the Lecture


Learning Objectives


1. Describe the major types of legal systems confronting international businesses

2. Explain how domestic laws affect the ability of firms to conduct international business

3. List the ways firms can resolve international business disputes4. Describe the impact of the host country’s technological environment on

international business5. Identify the factors that influence national accounting systems6. Explain how firms can protect themselves from political risk

Answers from the question


The Difference between Civil Law vs. Statutory Law Civil Law vs. Common Law

Civil Law Common Law

Legal System

Legal system originating in Europe whose most prevalent feature is that its core principles are codified into a referable system which serves as the primary source of law.

Legal system characterized by case law, which is law developed by judges through decisions of courts and similar tribunals.

Role of judgesChief investigator; makes rulings, usually non‐binding to 3rd parties.

Makes rulings; sets precedent; referee between lawyers.

Countries

Spain, China, Japan, Germany, most African nations, all South American nations (except Guyana), most of Europe

United States, England, Australia, Canada, India

Constitution Always Not always

PrecedentOnly used to determine administrative of constitutional court matters

Used to rule on future or present cases

Answers from the question


Common Law vs. Statutory Law

Civil Law & Statutory Law Statutory law is the subordinate of civil law Civil law is a type of legal system

Common Law Statutory LawCreation of new

lawsThe law evolves with new decisions made by judges in courts.

New laws are issued by various government agencies.

Operational Level Procedural SubstantiveAlso known as Case law Written law

Nature Instructive PrescriptiveOrigin Precedent or judiciary Government or legislature



Nationalization Expropriation

When the host government compensates the private owners for their losses

Confiscation When the host government offers no compensation

Privatization Constraints on Foreign ownership Governments limit foreign ownership of domestic firms to avoid having their

economies or key industries controlled by foreigners



National laws that are explicitly designed to regulate “International Business” activities Often politically motivated, designed to promote the country’s foreign policy or

military objectives

1. Sanctions2. Embargo3. Dual-use products4. Extraterritoriality

Extraterritoriality


Attempts by the home country government to regulate international business activities that are conducted outside its borders Examples1. Anti-trust Law (US)

(Competition Law): law prohibiting activities outside the US that diminish competition in the US market US vs. Pilkington PLC (British) – owner of most important patents for producing flat glass Pilkington limited its US licensees to use the technology in international markets

Hurting US exports & decrease ↓ incentives of US flat glass producers to invest in R&D2. Anti-boycott provisions (US)

Prohibits US firms from complying with any boycott ordered by a foreign country that prohibits trade with a country friendly to the US

Directed against a resolution (1954) adopted by the League of Arab States Calls for a boycott of any firm that does business with Israel

E.g. Baxter International – selling discounted hospital supplies to Syria allegedly as a bribe for Arab states terminating their boycott of the company

Violating anti-boycott law & paid a fine of $6.6 million3. The Helms-Burton Act (US)

Extraterritoriality


3. The Helms-Burton Act (US) Directed against international firms that “traffic” in the assets of US companies that were confiscated by

the Cuban government when Fidel Castro was in control in 1959 Cuban government confiscated many firms that were owned by US and sold or leased the assets to

foreign companies The act was to take action against their new foreign owners The US govt can deny entrance (to the US) of officers of companies that benefit from the use of these

confiscated assetsE.g. Canada’s Sherritt Corporation – producer of nickel and cobalt from a mine formerly owned by US’s Freeport McMoRan

In the eyes of the US govt In the eyes of other countries

To ensure that foreign companies do not profit from Cuban property that was stolen from US owners

An ill-conceived policy of trying to bludgeon them into joining America’s anti-Castro crusade

Class Discussion


Globalization


Discuss the following issue

“What is the impact of vigorous enforcement of intellectual property rights on the world economy? Who gains and who loses from strict enforcement of these laws?”

Case Study Discussion


Risky Business in Venezuela


Venezuela has huge oil reserves, nearly 300 Billion barrels, which is comparable to the reserves found in Saudi Arabia.

Although the location of the oil fields makes it accessible to the lucrative North American market, the quality of the oil makes it expensive to drill

Hugo Chavez (1999~2013) Elected president in 1999 with the pledge of promoting economic independence and

reducing income inequality, Proven popular with the country’s poorer districts

PDVSA (Petróles de Venezuela SA) The world’s 5th largest exporter of oil Even though the price of oil has been escalating, production and revenues have

declined because of the government’s domestic and foreign policy agendas



Chavez Ordered PDVSA to divert some of its cash flows to fund his social development goals

Over $60 billion Ordered oil to be sold to Cuba, Argentina, Ecuador and numerous Caribbean nations well

below market prices Ordered PDVSA to sell 115,000 barrels of oil a day to Cuba at preferential prices Ordered PDVSA to sell 250,000 barrels of heating oil to Massachusetts at prices 40% below their

market value during the cold winter of 2005-6 just to dismiss what he said about the Bush Administration

Offered China significant discount to world prices Used his political power to punish foreign firms that prevented him from achieving his goals Nationalized foreign owned businesses in the following industries: oil, cement, steel, rice

processing and packaging and supermarkets Confiscation of two of Owens-Illinois’s (Glass Container manufacturer) factories in Venezuela Expropriation of Sidetur (the country’s largest privately owned steel manufacturer)



PDVSA Production decreased due to underinvestment in infrastructure and development of

new fields Its revenues was hurt by deals that Chavez had signed to promote his domestic and

foreign policy agenda

Price controls were also implemented, and the Bolivar was devalued, forcing the remaining private firms to suffer huge losses Inflation ↑↑ Currency devaluation Economy ↓↓

These anti-business policies have caused many foreign firms to leave Venezuela, and to move capital and investments out of the country



Characterize the types of investments that are most vulnerable to political risks

Characterize those that are least vulnerable. What factors influence an investment’s vulnerability?



Suppose you are employed by a pension fund that has been asked to lend $100 million to PDVSA. PDVSA indicated that it is willing to pay an interest rate 5 % above the rate currently being paid by US Treasury bills, so your boss is definitely interested in examining the proposal. Your boss assigns you the task of conducting a political risk assessment of the project. Begin by listing all the types of political risks that could possibly affect the ability of your pension fund to receive interest payments and the return of its principal in a timely fashion.

Having developed this list, assess the likelihood that the risks will arise. Which ones are most critical to you? What can you do to reduce these risks to your pension fund?



What can domestic and foreign investors do to reduce their political risks?



What can Venezuela do to restore confidence of potential investors?

Homework #5 – due next Wednesday


Read Chapter 4 – The Role of Culture Answer following questions

1. What is culture?2. What are the primary characteristic of culture?3. Describe the difference between high-context and low-context cultures4. What are cultural clusters?5. What are individualism and collectivism? How do they differ?6. Discuss the differences in pay systems between U.S. and Japanese firms. To what extent are these

differences culturally determined?7. What is power orientation?8. What is uncertainty orientation?9. What are aggressive and passive goal behavior? How do they differ?10. What is the self-reference criterion?

Do not spend more than 2 pages (Type your answers) Try and keep your answers brief Due date: Wednesday, 25th of March by10 a.m.

Homework #4 – due next Friday


Read the case “Quacking up a Storm of Business” Answer the four case discussion questions Do not spend more than 2 pages answering the questions You may use bullet points Keep your answers brief but think! Type your answers

Due date: Friday, 27th of March by 11 a.m.

Group discussion Report #2 (due next Friday)


With your group members discuss; About third week reading About third week case And discuss based on case discussion questions

Discuss following statement“How would you evaluate your country on each of Hofstede’s dimensions? Why?”

Report due date: 27th of March by 11 a.m. Group report / Individual Report (sheets are downloadable from the

website http://ecampus.cbnu.ac.kr)

Chapter 3: Legal, Technological, Accounting and Political …contents.kocw.net/KOCW/document/2015/chungbuk/younsujin/... · 2016-09-09 · Alter their production techniques to meet

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