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1. Introduction

Introduction

We first discuss the scope of this book and the major themes of the developing field of international business transactions that we will be exploring in subsequent chapters.

I. Some Background Considerations

A.

Scope and Approach of This Book

International business transactions (IBTs) are private business transactions that are international in character. The international element exists when the parties have their places of business in different nation-states; when these transactions involve the movement of goods, services, technology, or capital across the boundaries of different nations; or when transactions between parties of one state have a direct effect in a different state. IBTs may be categorized, at least in general terms, according to the extent of penetration in international markets. The first level of penetration is a simple exportimport transaction, for example, a sale of goods involving a seller from the United States and a buyer from Germany. If this is successful and the company finds a sufficient demand for its products, the seller may establish an agent in Germany or a distributor of its products who will attempt to increase the sellers penetration of the targeted markets. After this step, the U.S. seller may decide to engage in contract manufacturing, the third level of penetration. This can involve licensing a German entity to manufacture its products in Germany for sale and distribution in Germany and other European countries. A significant issue in such a licensing transaction is technology transfer because the seller will need to allow the German manufacturer some access to the sellers intellectual property rights. Alternatively, or after the term of the licensing agreement, the U.S. seller may decide to set up its own operations in Germany by establishing a business entity of which it is the sole or part owner. The U.S. seller would have the choice of setting up its own operations from scratch by establishing a German subsidiary or of buying an existing German business entity. In either case, this would be what is termed foreign direct investment. If there is sufficient demand for the U.S. companys products, not only in Germany and Europe, but around the world, our imaginary U.S. company may employ similar strategies in many nations. If it is successful, our company will become a world-class business known as a multinational enterprise (MNE). A similar scenario would exist if the seller in the example above were selling services, such as financial services or insurance, instead of products. This book will examine all of these transactions and trace this progression from the simple contract of sale to the establishment of foreign direct investment. Of course, each IBT has its own particular character, and real IBTs are variations on the themes just described. Nevertheless, we believe this progression is a useful way of studying the subject 1

in an academic setting. After this introductory chapter provides some background considerations, the next five chapters of this book will trace this progression. Chapters Two, Three, and Four concern the international sales transaction and Chapters Five and Six examine agency/distributorships, contract manufacturing, and foreign direct investment. Although we weave intellectual property issues into most of the earlier chapters, we devote all of Chapter Seven to the protection of intellectual property rights, an issue of fundamental importance in international business today. Chapter Eight then turns to dispute resolution in an international business context. Finally, Chapter Nine concerns corporate social responsibility and examines the obligations of MNEs concerning issues of human rights, labor conditions, and the environment. The transactions that are the focus of this book are private transactions that affect the interests of private or nongovernmental parties. The parties to most of the transactions examined in this book are business entities, companies, or MNEs. We want to distinguish the transactions that are the subject of this book from international transactions that affect public rights (such as where government entities engage in business activity that may affect the rights of its citizens as a whole) and the rights of other nations (such as when one nation engages in the sale of military equipment to another or when one nation assists another in rebuilding its economy and industry after some calamity, such as war). The IBTs that we examine in this book not only involve private parties but they also involve areas of commerce traditionally deemed as areas of private law such as contracts, property, and torts. Public laws that affect IBTs such as antitrust, securities, customs, exchange controls, and general economic regulation will be discussed by way of background but will not be the focus of this book. One of the hallmarks of private law is that the parties have the freedom to contractually alter private law rights and obligations. By contrast, public laws are generally mandatory in nature and do not permit parties to alter their impact or effect. The distinction between private and public law brings us to another important point about the focus and orientation of this book. We want to distinguish the scope and subject matter of this book from another field, international trade law or international economic law. While this field is related to the field of IBT that is the subject matter of this book, we believe that it is fruitful to view international business transactions and international trade/economic law as separate although related fields that should be the subject of separate courses in the law school curriculum. International trade/economic law concerns the attempts by nations, acting in their sovereign capacities, to regulate economic and commercial activity between themselves and the conduct of such activity by their nationals through mandatory public laws. For example, export and import controls such as customs classifications, quotas, tariffs, and other customs controls belong to the field of international trade/economic law. Laws governing unfair trade practices that allow importing nations to impose sanctions on unfairly priced imports also belong to the field of international trade law. The principal organization that is involved in the regulation of international trade/economics is the World Trade Organization (WTO), with its headquarters in Geneva, Switzerland. Another important body in the regulation of international trade is the European Union (EU), consisting of 27 states (as of this writing), including virtually all the nations of western and central Europe. On trade and economic issues, the EU is charged with the complete economic integration of its member economies by eliminating all trade barriers and by adopting a common economic policy, including customs duties, with respect to nonmember states. While we consider the WTO, the EU, and other international and regional

I.

Some Background Considerations

1. Introduction

NOTE ON IBT AND INTERNATIONAL TRADE LEGAL SKILLS


As the fields of international business transactions and international trade law are different, will a lawyer practicing in both fields need different skills? If so, how do the skills necessary for IBTs differ from those necessary for international trade law issues? In IBTs, the focus is on negotiating, structuring, and implementing transactions against a background of private laws that allow for bargains altering rights and obligations by contract. The party sitting across the table is usually another private party. In international trade law, the focus is on compliance with mandatory public laws, and the party that one normally deals with is a governmental authority with regulatory and enforcement powers. Both types of skills are necessary to help clients take full advantage of business opportunities.

B.

Counsel in International Business

We now consider the role of the lawyer in IBTs. It should not be surprising that the growth of international business and trade of all kinds in the latter part of the twentieth century and the first part of the twenty-first century has also transformed the legal profession. As MNEs expand abroad, many will require their company lawyers to spend extended assignments overseas and advise their overseas businesses. As many of the worlds most successful law firms have MNEs as their clients and as their clients have expanded their reach around the world, law firms have also expanded their capabilities and offices in order to meet their clients changing needs. We are now in the era of the multinational law firm as many firms believe that it is essential to have international capability in order to compete in the global marketplace. Some of the worlds largest law firms have branch offices around the world and follow a business model that is similar to that of MNEs.

economic institutions in this book and how they impact the private transactions that are the subject of this book, these institutions will not be our focus as in a course on international trade law. Of course, international trade law is an important course of study in its own right. To this end, we have authored a separate casebook, Chow and Schoenbaum, International Trade Law: Problems, Cases, and Materials (Aspen 2008), which treats the field of international trade law in detail and is intended as the international trade law companion to this book. To be sure, we do cover topics relating to international trade law in this book and some of this coverage will be in depth because all IBTs operate against the background of international trade and economic regulation. In many chapters we blend and interweave topics of international trade law into our materials on private transactions. Our approach is to select those topics of international trade law that are most immediate and pertinent as the necessary background for understanding the progression of topics that we cover: the sales contract, distribution, licensing, and foreign direct investment. However, our coverage of international trade is selective as it is for the primary purpose of understanding the private transaction. We do not attempt to provide systematic coverage of international trade/international economic law. To give you a sense of how we use and select international trade law topics in this book, consider that in our coverage of the international sales transaction we cover the importers compliance with U.S. customs laws, a trade law topic, in detail. We believe that this is the trade law topic that is most closely connected to the transactional issues related to the sale of goods and that affects the IBT practitioner at a micro level on a day-to-day basis. Our assumption is that when our students go on to represent one of the parties in an international sale they are most likely to represent a U.S. party. The trade law issues of most importance to the U.S. party will generally occur when the U.S. party is the buyer-importer. The buyer must satisfy U.S. customs laws, which will determine the amount of the tax or customs duty that must be paid by the buyer-importer. As the amount of duty that must be paid is a significant issue for most buyers, we cover this topic in depth. On the other hand, we believe that the trade law issues are generally less complex when the U.S. party is the seller. In this case, the U.S. seller must comply with U.S. export controls and related laws, but these issues are generally less complex so we cover this topic in less detail. Our approach to treating the trade law issues in a sales transaction reflects how we treat the trade law issues in all of the areas covered in this book: We cover selected trade law materials that are most important to the private transaction. You will find that we introduce the selected trade law materials at the end of some chapters (Chapter Two on the sales contract and Chapter Seven on the protection of intellectual property), at the beginning of others (Chapter Six on foreign direct investment), and in some cases we interweave the trade law material throughout the materials on the private transaction (Chapter Five on technology transfer). We believe that a book focusing on the private business transaction against a carefully selected set of materials relating to international trade law offers enough substance and challenges for a separate course. We also believe that a fruitful course of study for the student interested in international business law would be a course on IBT followed by a separate, advanced course on international trade law. This casebook along with its companion book, Chow and Schoenbaum, International Trade Law; Problems, Cases, and Materials (Aspen 2008), are designed to be a complete and concise package for the study of international business law as far as these vast and complicated fields can be studied in law schools.

1.

Issues Faced by Lawyers


The issues confronting a lawyer in IBTs can be divided into two categories: issues of competence and issues of ethics. No lawyer can be expected to be competent in all of the legal issues that can arise from IBTs. A lawyer will often be faced with foreign laws and foreign languages. How should the lawyer best advise his or her clients in this situation? Where the lawyer is a partner in a law firm, the client is often an MNE; where the lawyer is in-house counsel, the client is usually top management such as the chief executive officer or a vice president of a business division. The role of the lawyer in these situations may be to manage a group of local foreign lawyers and experts. Issues of ethics can be complex in an international setting. Most nations, including the United States, have codes of professional ethics for lawyers. In an international setting, one issue is whether the lawyer is subject to the ethic rules of the foreign nation in which the client is doing business. How should the lawyer advise a client when dealing with a culture in which corruption is rampant and where bribery of government officials and private parties is commonplace? Does a lawyer have any duty to consider larger economic and political issues in representing MNEs that are doing business in a developing (poor) nation? These are also issues that we will be exploring in this book.

I.

Some Background Considerations

1. Introduction

2.

Role of Counsel for an MNE

As the most important actors in IBTs today are MNEs, as further discussed in Section IV.B of this chapter, we now provide an overview of the legal department of an MNE and the work and challenges of an in-house lawyer. Our hypothetical MNE is Acme, an MNE based in the United States and engaged in the consumer products business around the world. Acme has a large legal department headed by a general counsel. Large companies have in-house lawyers because these lawyers, as employees of the company, are viewed as being more loyal and as having a greater familiarity with company business. Many companies like to know that a business manager can simply walk down the hall and chat with a company lawyer or pick up the phone and ask a lawyer to attend a meeting or to answer a question. Business managers are less likely to enjoy this level of service or have such access to legal services if they must depend only on outside law firms. Today, the general counsel may be called the global general counsel to reflect the realities of the modern corporation. Most general counsels are members of the elite top-management group of the MNE and are at the level of a vice president or senior vice president of the corporation, which is usually one level below that of the most senior executives (often called presidents who head up entire important regions or business units of the company, such as President of Acme, North America where geographical divisions are used or President, Acme Hair Care where business divisions are used). Presidents are usually one level below and the general counsel is usually two levels below the chief executive officer. In most companies the legal department is viewed as support because the main business of the MNE is the product or service that it sells. The main business of Nike is producing athletic shoes and sports apparel and the main business of Coca-Cola is producing soft drinks; the role of their legal departments is to provide support for the main business of the company. This is one major distinction between an in-house lawyer and a lawyer at a law firm where the main business of the company is providing legal services. The reporting structure for in-house lawyers is generally divided along two lines. On legal work, in-house lawyers often report to business managers. The general counsel would report to presidents of regions or business departments and to the CEO. Each lawyer would also report functionally to his or her superior in the legal department hierarchy with the general counsel at the top. Our hypothetical MNE has a U.S. headquarters where the global general counsel will be located. In addition, the MNE has regional general counsels, such as a General Counsel, Asia-Pacific or a General Counsel, Europe. These lawyers report to the global general counsel and are one level below the general counsel (but who aspire to attain that position eventually) and are either vice presidents or directors. A country with major business operations will also have a country general counsel, who is generally one level below the regional general counsel in the hierarchy (e.g., General Counsel, Greater China). A country general counsel is usually a director or an associate director within the company. The country general counsel will have a legal staff of lawyers who are senior counsels or below. To give you a sense of the legal work of an in-house lawyer, lets take a look at the work of the legal department of Acme-China, our hypothetical foreign investment enterprise in China that is further examined in Chapter Six on foreign direct investment. Acme is a world-class company that manufactures famous brands of shampoo, soap, skin lotion, cosmetics, and other household products for the booming China market. Chinas

growing middle class seems to have an insatiable appetite for premium international brands. Acme has an in-house legal department in China. What are the types of tasks that these lawyers are expected to undertake? Acmes lawyers in the China legal department had helped to set up the initial joint ventures engaged in the various consumer products industries by drafting the legal documents when Acme first entered the China market. For the very first joint venture established by Acme in the late 1980s, Acme hired an international law firm to draft the joint venture documents and to work with Acme in securing all of the approvals required by Chinas government authorities. After the first joint venture, Acmes in-house lawyers in China had acquired a set of joint venture documents and familiarity with the approval process, so Acmes management then internalized all of this work to save on costs. Recently, Acmes lawyers have advised management to eschew forming joint ventures with local Chinese partners in favor of establishing wholly foreign-owned enterprises (WFOEs). (For a detailed discussion of the joint venture, WFOE, and various business entities in China, see Chapter Six at p. 48990.) Although Acmes joint ventures and WFOEs are now well established in China, Acme must still have contacts with Chinas many government authorities on a regular basis and the contacts are usually done through the legal department, which is designated as the single point of contact within the company (although sometimes the government affairs department is also involved). Acmes joint ventures, although given managerial autonomy by law, are still formally under the supervision of a government authority with regulatory power over Acmes industry. Acme must file reports with supervisory authorities once a quarter on its business activities and must regularly consult with tax authorities on the amount of the companys tax liabilities and submit tax invoices to the government. All of these contacts between Acme and Chinese authorities will be conducted through the legal department. As Acme is planning to establish new joint ventures in other product lines, to reorganize and combine some of its joint ventures as wholly foreignowned subsidiaries of Acme, and to increase the capital of some of its existing joint ventures, Acmes lawyers are very busy meeting with Acme-Chinas managers to review and plan all of these changes. Acmes lawyers must also meet with Chinese government authorities on a regular basis to keep them apprised of the planned changes as their approval is needed. Chinese authorities will also provide Acme with their input on whether such changes are feasible and how to structure the transactions. All of this work, of course, requires that Acmes lawyers be intimately familiar with Chinas laws, legal system, and political system. While Acmes lawyers can now handle most issues, they occasionally seek help from outside law firms and accounting firms on issues that require special expertise, such as tax or reorganization and merger issues. As Acme is an aggressive and ambitious company, it is always offering new products for the China market and actively promoting existing products. Acmes legal department needs to file new trademark applications with Chinas national trademark authorities for each new brand that is introduced and for each new variation on an existing trademark, which the marketing department is constantly proposing as it changes the style and appearance of the products to keep them fresh and appealing to changing consumer tastes. Where products involve new patents, Acmes lawyers must also file patent applications with Chinas national patent authority. Acmes legal department also works closely with the marketing department, which is organized with brand managers in charge of each brand such as Seagull Shampoo. Acmes brand managers work closely with international advertising agencies to promote new commercials, and Acmes inhouse lawyers must review all advertising to see that it complies with Chinas stringent

I.

Some Background Considerations

1. Introduction

advertising laws. The legal department also works with the marketing department to secure approvals from Chinas Ministry of Telecommunications in Beijing for all new television commercials. Acmes lawyers also review sales and purchasing contracts from their purchasing department, which must buy a large amount of raw materials from local suppliers in order to manufacture its products. In addition, Acmes lawyers are busy offering advice to Acme-Chinas human resources department on the many personnel and labor issues that arise on a daily basis. Acme also currently has a serious commercial piracy problem in China as many counterfeit Acme products have appeared on the market. Acmes in-house lawyers protect their intellectual property rights by hiring private investigation companies and outside law firms specializing in intellectual property to pursue counterfeiters and enforcement actions. Counterfeiting in China is a major problem that we will examine in detail in Chapter Seven.

3.

Challenges for the International Lawyer

to legitimately differing opinions and where, as a result, risk is more difficult to assess. But China is not alone in having an undeveloped legal system. The lack of a mature, predictable legal system and the general absence of the rule of law are common problems in developing countries all over the world. Conducting business in an environment that lacks a mature legal system can give rise to greater uncertainty and more frequent and serious disagreements on the degree of risk involved than in a developed legal system, such as that of the United States. A developing countrys lack of a mature legal system also creates challenges in dealing with local foreign lawyers. For example, in China the ranks of the legal profession have increased dramatically with the opening up of China to foreign business and trade in 1978. The prospect of undreamed-of riches for the elite of the legal profession, intense competition for a handful of multinational clients, and a nascent awareness of legal ethics all contribute to a professional environment in which sharp practices and improper conduct are all too common. For many Chinese lawyers, the goal is to achieve the result desired by the client by whatever means necessary so as to retain the clients business rather than to use independent judgment to offer candid and objective legal advice that may not always be what the client wants to hear. Using illegal tactics such as bribing a judge, a prosecutor, or other government officials without the clients knowledge is made easier in a legal environment that is often inaccessible to foreign clients. Lacking Chinese language skills and contacts within the Chinese legal system, many foreign clients have no means to independently check on the work done by local lawyers. Of course, these issues are not unique to China by any means. Issues of legal and business ethics are common problems in developing countries.

NOTES AND QUESTIONS


1. Large law firms are routinely engaged in international transactions and some firms have branch offices in many different countries. While a typical large firm may have separate departments for corporate, tax, intellectual property, and litigation, these firms generally do not have an international business transactions department. Why? Which department handles international business transactions? 2. Given the realities of law firm practice, would you counsel law students to present themselves to law firms as aspiring IBT lawyers?

The picture presented above shows Acmes lawyers and its business managers working busily and harmoniously and as a team in promoting Acmes business and earning profits, but there are opportunities for conflicts and challenges in the workplace as well. One of the important tasks of Acmes lawyers is to ensure that Acme is in compliance with all of Chinas laws and this may involve reining in some of the more aggressive tactics of Acmes business managers. This role sometimes casts the company in-house lawyer in the role of a naysayer who is perceived as always saying no and bringing negative news to the companys business managers. In some companies, lawyers may even be disliked by the business departments if they are viewed as too risk averse and as constantly creating obstacles to business plans or frustrating the cant miss strategies of an up-and-coming star manager. Of course, in-house lawyers occasionally experience similar conflicts with business departments in a domestic setting as well, but these conflicts can be especially acute in an international setting. Business managers who are assigned abroad are usually given three- to five-year assignments with the understanding that a promotion awaits them after a successful performance there and a return to the MNEs headquarters in the United States. Managers are judged on what they have accomplished, that is, how many new joint ventures they have established, how many new products were introduced, and how much sales revenues have increased during their assignments. These business managers feel pressure to perform and produce within a short period of time during their overseas assignment, which is now often considered to be critical for long-term advancement within many corporations. Some business managers have been tempted to pursue very aggressive strategies, knowing that they will be rewarded when their assignment is over and that problems with their risky strategies may not arise until years later long after they have departed the foreign branch and have been promoted. In this situation, conflict can arise between ambitious business managers who seek business results (and professional advancement within the company) and the in-house lawyer whose job is to protect the company from unnecessary risks. Another reason for greater potential conflict in the international workplace is that often the laws of developing countries are incomplete or unclear and the legal system less than predictable. For example, like that of many other developing countries, Chinas legal system contains many gaps and ambiguities and is subject to rapid change. There are many gray areas in Chinas legal system where the legality of certain actions is subject

PROBLEM 1-1
Foreign investment laws in China currently provide that applications to establish joint ventures with a capital investment of over $50 million in certain industries must be submitted to the Ministry of Commerce (MOFCOM) in Beijing for approval. Joint ventures with investments below $50 million can be approved at the local level. In the 1990s, some local approval authorities began the practice of allowing joint venture applicants to split a single application to establish a joint venture of over their approval limit into two or more applications on the theory that local approval is legal so long as each application is under the approval limit. The local authorities allowed the splitting of applications even though all of the applications really concerned a single joint venture and even though the total capital invested in the joint venture that was finally established was over their approval limit. Some lawyers viewed this tactic as an artifice to circumvent

I.

Some Background Considerations

10

1. Introduction

central-level requirements, but many parties favored this approach because it avoided an application to Beijing with all of the delays and more intense scrutiny that would follow. A senior finance manager in Acme-China comes to you, Acmes in-house counsel, and says, Can we just split our application to establish our new $60 million joint venture into two $30 million applications and submit them to the local authorities who have promised to approve the deal in 30 days so that we avoid the hassle and the two-year wait for approval in Beijing? You know that I need to get this done because I am going back to the United States next year when Im up for Vice President. Ill also put in a good word with your boss in the United States who says that he is looking for a new General Counsel, North America. Look, I know that you have some reservations but you admit that the law is unclear. Anyway, the local authorities have already told us that they will approve the application so we are covered. If MOFCOM raises any questions we can just say that the local authorities approved the application and told us that this procedure was lawful. So please draw up the two applications and get them to me by the end of the week. Lets get a beer after work at the White Swan Hotel and talk about this further. My treat. As you leave work that evening for the White Swan, you remember from your professional ethics class in law school that you are to represent your client zealously and within the boundaries of the law but then realize that this axiom isnt very helpful in this situation. You also think about how nice it would be to move back to the United States and get a promotion. What do you tell the finance manager?

C.

Cultural Concerns

PROBLEM 1-2

You are in-house counsel at Acmes subsidiary in Russia and have a disagreement with a business manager over the legality of certain payments that are being made to the local government authorities in connection with some needed approvals. You are concerned that these payments might be considered to be illegal bribes under local law and may also raise problems under the U.S. Foreign Corrupt Practices Act (see Chapter Six, pp. 42043), but your business manager argues that these are lawful administrative fees and that this is a gray area as all of Acmes competitors are paying them. You have a meeting with the business manager and lay out the five reasons you think that the payments are illegal, but the manager says, Okay, youve done your job by laying out the risks for me. Im willing to take the risks so lets make the payments. As you are quite opposed to the payments, you then suggest that the company get an opinion letter from an outside local counsel. You can see that the business manager is irritated with you (and you worry momentarily about your annual review from the manager), but the manager finally agrees to abide by the opinion letter of the local lawyers. You hire one of a number of newly established local Russian law firms specializing in foreign investment and you explain your position and the position of the business manager on the payments. One week later, you get an opinion letter signed by the local firm stating that, under local law, it is absolutely clear that the payments are illegal, and listing the five reasons that you stated. You also get a bill for $15,000 and a letter with a long list of other areas in which the law firm is eager to help you. Do you give the opinion letter to the business manager? How would you suggest getting an opinion letter from outside counsel in this situation? What cautions about dealing with outside law firms does this episode suggest?

In an age where people, goods, services, capital, and technology now routinely cross national boundaries, issues of differences and clashes in culture that affect IBTs have also become more common. By culture, we refer to the values and norms shared by a group and the groups economic, social, political, and religious institutions. Although consideration of cultural issues may not have been traditionally considered part of the work of an international transactions lawyer, a lawyer who ignores cultural issues in an IBT today does so at his or her own peril. Cultural differences between countries have a direct impact on particular IBTs in two ways. First, cultural issues should be part of the background business case for a private transaction, but unlike economic, legal, and marketing issues (all part of traditional business and legal analysis), cultural issues may be ignored to the detriment of the transaction. For example, when the Walt Disney Company bought a tract of land near Paris to construct Disneyland Paris, Disneys management team in the United States assumed that the promise of jobs and economic development would result in widespread local support for the new theme park. Instead, the local populace valued its traditional rural lifestyle over economic development and offered spirited resistance to the Disney project, much to the surprise of Disneys management. In addition, a Disney theme park had been a spectacular success in Japan, but the Japanese were far more receptive to U.S. culture than many of the French who, if anything, were lukewarm toward American culture. Although these were important considerations, the experienced business and legal officials at Disney never considered the cultural factors. See Jeanne M. Brett, Negotiating Globally 8 (2001). One explanation for the failure of the Disney officials to fully consider the cultural factors is that these factors are not present in the United States, the business environment to which Disney officials were accustomed, and so were ignored in the companys initial forays into the international market. A second way that differences in culture can affect IBTs is in negotiating styles. Lawyers are often called on by their clients to negotiate across cultures: A lawyer might negotiate a sales contract with a German buyer and a joint venture with a Brazilian partner for the same client. Understanding differences in negotiating styles can be advantageous to the lawyer or business executive. Failure to understand cultural differences might result in value being left on the table, that is, in a deal where both parties are not as well off as they could be if barriers in culture and negotiating styles could be overcome. Cross-cultural negotiation skills have become highly sought after in the modern age as we have acquired a better understanding of cultural differences. According to one view, there are certain prevalent cultural categories that are reflected in negotiation strategies and styles: individualism versus collectivism, egalitarianism versus hierarchy, and low-context versus high-context communications. See Brett, supra, at 1521. Most countries fall into these categories. Individualist cultures place the interests of the individual above those of the collective; hierarchical cultures, unlike egalitarian cultures, emphasize differentiated social status and deference to social superiors and associate social power with social status; negotiators from low-context-communications cultures emphasize direct, explicit exchanges, whereas those from high-contextcommunications cultures emphasize indirect exchanges that must be understood against a complex and unstated background of social values. See id. Negotiators from individualist, egalitarian, and low-context-communications cultures, such as the United States, use direct, confrontational styles, whereas negotiators from collectivist, hierarchical, and high-context-communications cultures, such as China, prefer to use indirect negotiation styles that avoid confrontation. Where there is a negotiation between persons with

I.

Some Background Considerations

11

12

1. Introduction

officials on establishing a joint venture and then to travel to Chile to negotiate a foreign direct investment deal the following week. Would you advise the business executive to follow this prescription? What would you suggest?

clashing negotiation styles, such as from the United States and China, the difference in styles could lead to poor communication and misunderstanding that results in a less than optimal result for both parties. Another, perhaps even greater concern to lawyers and their clients is that they may be disadvantaged and exploited by the other partys skillful negotiators who are used to working in cross-cultural contexts. From the viewpoint of the lawyer negotiating on behalf of a client, the goal is to avoid both results that can arise from the pitfalls of culture.

PROBLEM 1-3

NOTES AND QUESTIONS

1. A large literature on cultural issues in international business has emerged. In particular, experts urge caution in dealing with non-Western cultures that may have deeply embedded cultural norms that differ from Western values. Take the following example dealing with the Chinese:

In light of the success of fast-food franchises such as McDonalds and Pizza Hut in China, Joes Blue Collar Burgers, an Ohio company with locations around the Midwest, is considering expansion into China. Joes has been able to successfully compete against famous fast-food chains in the Midwest based on its no-frills, working-class image, offering burgers at half the price of more flashy fast-food chains. Joes decor also reflects its image and approach. Joes founders grew up during the Great Depression and have consistently stressed frugality in the companys corporate philosophy. Food is served in clean but plain and somewhat austere surroundings. Joes has signs in various places in its restaurants stressing thrift in daily life, a return to the simple non-materialistic values of rural America, and the rejection of a wasteful, luxury lifestyle. Joes has developed a niche in the U.S. market and has been earning modest but steady profits for many years. Joes management sees no reason why using the same strategy to compete against fast-food competitors in China will not be just as successful as it was in the United States. Do you see any issues relating to culture with Joes approach to China?

A U.S. company had a contract from a German buyer to sell bicycles produced in China. When the first shipment was ready, there was a problem. The bikes rattled. The U.S. buyer did not want to accept the shipment, knowing that they would not be acceptable to the German customer, whose high-end market niche was dominated by bikes that were whisper quiet. What to do? In U.S. culture, the normal approach would be to tell the manufacturer that the rattling bikes were unacceptable and that the problem had to be fixed. In China, such a direct confrontation would be extremely rude and cause much loss of face. Knowing this, the U.S. manager went to the Chinese plant, inspected the bicycles, rode a few, and asked about the rattle. Is this rattle normal? Do all the bikes rattle? Do you think the German buyer will think there is something wrong with the bike if it rattles? Then he left. The next shipment of bikes had no rattles.1

PROBLEM 1-4
Texas Barbecue Ribs, a successful Houston-based restaurant chain, is considering an expansion into Europe. Texas Ribs serves supersized portions of smoked ribs, southernstyle coleslaw, and crunchy fries with its slogan Everything Comes Bigger in Texas in an interior setting with bold colors, a southwestern motif, and loud Texas country music. The restaurant has been quite successful in the Southwest and the South. What cultural issues might Texas Ribs face in European markets? How would Texas Ribs do in China?

We believe that the suggested approach has a number of pitfalls. For example, under the suggested approach, when does the U.S. manager find out whether the problem has been resolved? How much time must the U.S. manager spend in following this approach? Do you see any other issues with this approach? How would you suggest handling this problem without causing loss of face? 2. How should managers handle cross-cultural negotiations? Here is one suggestion:

Be prepared for interests and priorities to have a cultural basis. If you are proposing to bring economic development to a region, find out how people in the region feel about economic development before you get to the negotiation table. Prepare for the negotiation by understanding the culture. See how the culture is classified according to the cultural values of individualism versus collectivism and egalitarianism versus hierarchy. Do some background research so you have a good understanding of the other negotiators political, economic, and social environment. Make sure you have your own interpreter. Use your interpreter to help you understand the cultural factors influencing the other partys interests and priorities.2

II. The Growth of International Business Since the Second World War

Suppose that you are advising a senior vice president in charge of international business development who is scheduled to fly to Japan for a three-day meeting with Japanese

This section explores some of the important developments in the international arena that form the modern historical background for international commercial and business transactions. The second half of the twentieth century, particularly the last two decades of the century, was marked by a surge in international business and trade of all kinds and the integration of the economies of the world to a greater extent than ever before. Today, the immense flow of business and trade across national boundaries on a daily basis is a distinguishing feature of the modern world. International trade in goods, technology, services, and investment across national boundaries are commonplace.

1. Brett, supra, at 8. 2. Id. at 204205.

II.

The Growth of International Business Since the Second World War

13

14

1. Introduction

FIGURE 1-1 Exports of Goods and Services as a Percentage of Gross Domestic Product (Measured at Current Prices)
1960 17.2 14.5 19.0 10.7 47.7 22.8 29.3 20.9 5.2 2007 34.7 26.5 46.9 17.6 74.9 52.6 55.9 26.3 12.1

Country Canada France Germany Japan Netherlands Sweden Switzerland United Kingdom United States

Source: OECD National Accounts Volume 2009.

China and its sphere of influence in Asia meant that the expansion of international business and trade excluded a significant portion of the world as the Cold War froze in place the barriers to business and trade that had existed between the West and the East at the end of the Second World War. After the Second World War, China purposefully isolated itself by shutting its doors to the world (with the exception of trade with the Soviet Union until China split with the Soviet Union in the 1960s) in a fervent, if misguided, attempt at self-sufficiency. Second, because GATT was viewed as a rich nations club, many developing nations did not wish to participate in GATT. Third, until the 1980s, many developing nations, some freed from colonization only at the end of the Second World War, did not trust developed nations and, as a result, erected restrictive laws against international business and trade. In the past two decades, several significant developments have vastly accelerated the pace of international business and trade. The disintegration of the Soviet Union and its satellites in Eastern Europe removed the barriers to trade and exchanges that had existed since the end of the Second World War. In 1978, China adopted economic reforms and created one of the worlds most active and important markets for international business and trade. In conjunction with this vast sea change in the political arena, the information technology revolution, started in the United States in the 1990s, created new opportunities for trade and world integration that seemed impossible only a decade before. Developing nations began to view economic development as a priority, and now aggressively compete for investment dollars from developed nations. During the last round of GATT negotiations that led to the establishment of the WTO, developing nations played an important role. Today, about three-quarters of WTO members are developing countries. A major development of the fourth Ministerial Conference of the WTO held in Doha, Qatar in November 2001 was the explicit recognition of the needs of developing countries in the future work program of the WTO. This Conference resolved to open a new comprehensive trade negotiation, the Doha Development Agenda, which is still ongoing at this writing, to address not only traditional trade issues, but also the need to open world markets to products and services produced by developing countries.

III.

Modern Forms and Patterns of International Business and Commerce


There are four principal channels of international business and trade in the modern world: trade in goods, trade in services, technology transfer, and foreign direct investment. Our focus in this book is on the private transactions in each of these four channels and not the international trade law aspects that we will examine only by way of background. Each of these topics will be the focus of one or more chapters or sections of this book.

This surge in international business and trade can be traced to several major historical events. First, at the end of the Second World War, the United States and some of its allies met at the Bretton Woods Conference in New Hampshire, which led to the creation of the legal institutions that would create the postwar legal framework for world trade: the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT). The world economy had just endured a decade and a half of immense turmoil and disruption. Protectionist trade measures in the form of excessive tariffs and protective currency regulations had triggered hostilities among nations, a worldwide depression, and an immensely destructive world war. The United States and its allies wanted to put into place a set of international institutions to prevent the economic policies that led to world tensions and hostilities. One of the lessons affirmed by the Second World War is that when economic conflict exists among nations, military conflict may not be too far behind. The IMF was established to create restrictions on national regulation of currency and foreign exchange controls. The IMF also became a lender of last resort for those developing nations that were unable to repay their foreign loans. The World Bank was created in 1944, first to aid in the reconstruction of Europe and then to provide loans to support the developing world. A third organization, the International Trade Organization (ITO), was proposed to encourage free trade by reducing tariffs, the customs duties imposed on imported goods. While the ITO was still being discussed, a group of nations negotiated the GATT, a package of tariff reductions, which was designed as an early boost to trade liberalization after the Second World War. Due mainly to opposition by the United States, the ITO was never approved. After the demise of the ITO, a small staff was created in Geneva to handle basic administrative tasks for the GATT. In 1995, the World Trade Organization was established to administer the GATT and to assume the role originally intended for the ITO. Although these international institutions helped to increase international business and trade, there were limits on its expansion after the Second World War. First, the existence of the Soviet Union and its satellite countries and the Peoples Republic of

A.

Trade in Goods
Traditionally, states engaged in international business and trade principally through trade in goods. Since the end of the Second World War, international trade has been

III.

Modern Forms and Patterns of International Business and Commerce

15

16

1. Introduction

driving the process of globalization and integration of the worlds economies. Merchandise exports have jumped from $1.9 trillion in 1980 to $13.9 trillion in 2007.

FIGURE 1-2 Growth of World Merchandise Exports in the Past Two Decades (in $ Billions) and Percentage Share

their developed counterparts. High-technology products are now the largest source of foreign exchange for developing countries. In 2006, exports of technology-intensive products by developing countries reached 23 percent of total manufactured exports. See UNCTAD, The Global Information Society: A Statistical View 2008, 73 (2008) (available at http://www.unctad.org/en/docs/LCW190_en.pdf). The role of technology (intellectual property) as an engine of international business and economic development for developing nations is another emerging world trend.

Year 1980 1985 1990 1995 2000 2005 2007

World 1,932 1,875 3,423 5,104 6,373 10,399 13,898

Developed Countries 65.5 68.4 71.7 68.0 63.0 56.3 53.9 EU 36.4 35.6 40.5 40.4 33.5 38.0 37.7 USA 11.7 11.7 11.5 11.5 12.3 8.7 8.4

Developing Countries 34.5 31.6 28.3 32.0 37.0 43.7 46.1

B.

Trade in Services

Source: IMF International Financial Statistics (2008).

The traditional measure of trade competitiveness has been determined by share of world exports. Under this criterion, 20 economies, consisting primarily of developed countries led by the United States, Germany, and Japan, maintained about a two-thirds share of world trade for the past two decades. However, if one focuses on percentage gains in the share of world exports for the period from 1990 to 2006, then a different list emerges that is led by China and other developing countries. This trend foreshadows a greater role for developing nations in international business and trade in the future. FIGURE 1-3
The 20 winner economies, based on export market share gains,1990-2006 (Percentage) 9.2

The 20 economies with the largest export market shares, 2006 (Percentage)

6.2 0.9 0.8 0.7 0.5

8.6 8.0

5.4

Germany United States China Japan France Netherlands United Kingdom Italy Canada Belgium Korea Singapore Mexico Taiwan/China Saudi Arabia Spain Malaysia Switzerland Sweden United Arab Emirates 10 0 2 4 6 8

4.1

China Mexico Korea Singapore Poland Saudi Arabia Malaysia India UAE Thailand Hungary Turkey Kuwait Vietnam Chile Brazil Ireland Angola Spain Philippines

Source: UNCTAD Handbook of Statistics (2007).

Another significant trend is that the growth in exports is tied directly to the level of technology involved. Exports grow faster the higher the level of technology involved in the product and the less the reliance on natural resources as a source for the product. In the area of technology-intensive exports, developing countries are growing faster than

Unlike the trade in goods, the international trade in services involves no packages crossing a national boundary and a customs frontier. The intangible nature of the trade in services makes it inherently more difficult to measure in concrete terms. Some trade in services can be defined by a physical activity such as transport, hotel, or insurance services, but other types of services such as consultancy or education are more intangible and may be more difficult to define and measure. While the measurement of the trade in services is subject to greater difficulties than the measurement of the trade in goods, trade in services has been growing on a rapid basis paralleling the growth in the trade in goods. In 2006, services accounted for almost three-fourths of the gross domestic product (GDP) of developed countries, the worlds principal export markets for services. By 2006, services had surpassed almost 51 percent of GDP in developing countries. See UNCTAD Handbook of Statistics 2008, 426 (2008). While services have become an important part of domestic economies, trade in services has so far lagged behind trade in goods. Of the almost $34.3 trillion in total trade in merchandise and commercial services in 2007, trade in goods accounted for $27.9 trillion while trade in services accounted for $6.4 trillion. See id. at 23, 242243 (calculations based on UNCTAD data). However, among developed countries, the worlds principal export markets, the export of commercial services has grown at a faster rate (9.6%) than the growth in the export of goods (8.4%) for the period from 1985 to 2007. See id. at table 1.1, 5.1 (calculations based on UNCTAD data) (available at http://stats.unctad.org/handbook/ReportFolders/ReportFolders.aspx). Examples of major services exports are sea and air transportation, travel, communications, insurance, financial, computer and information, legal, and other business services. As the tradeability of services increases as a result of modern information and communication technologies, it can be expected that the production of a growing number of services will shift to developing countries as was the case with manufacturing. The growth in foreign direct investment fueled primarily by MNEs, further discussed below, may foreshadow an expansion in the export of services. As companies expand their operations on a global basis, they will also move research and development, marketing, sales, accounting, human resources, and other services abroad as well. A number of MNEs are relocating these services to lower-cost sites and are exporting them back to the United States. In the developing world, Asia appears to be more advanced than other regions in attracting the relocation of services.

C.

Foreign Direct Investment


Foreign direct investment refers to the acquisition by a business entity resident in one nation of a lasting ownership interest in a business entity resident in another nation,

III.

Modern Forms and Patterns of International Business and Commerce

17

18

1. Introduction

usually obtained through the investment of capital, technology, and other resources. Up to the mid-1980s, foreign trade in goods was the most significant channel of international trade between states. Exports grew much faster than FDI in the 1950s, 1960s, and 1970s. In the 1980s, however, this pattern began to change and the growth rates in FDI began to exceed the growth rates in merchandise trade. Coinciding with the disintegration of the Soviet Union and its satellites, FDI began to rise dramatically in the 1980s and has now become the principal impetus behind the deepening of world economic integration. As the following diagram indicates, world real industrial production has risen by 60 percent over this 24-year period or by an annual growth rate of 2 percent. International merchandise trade as represented by export figures has increased by 210 percent over this whole period or by 4.8 percent annually, more than twice as rapidly as industrial production. An even more dramatic increase occurred in the area of FDI. From 1973 to 1997, FDI increased by 780 percent or by an annual growth rate of 9.5 percent, twice as large as the merchandise growth rate.

The bulk of FDI inflows is concentrated in developed countries, with 68 percent of the world total in 2001. Some developing countries, however, have made gains in attracting FDI inflows reflecting the same pattern that we saw in the area of exports. In 2007, FDI inflows in developing countries reached 27 percent compared to an average of 18 percent during 1999 and 2000. FDI inflows in developing countries peaked at 40 percent in 2004. According to UNCTAD, the following forces are the main drivers behind the surge in FDI:

FIGURE 1-4 Global Trends in FDI3

The first is policy liberalization: opening up national markets and allowing all kinds of FDI and non-equity arrangements. In 2001, 208 changes in FDI laws were made by 71 countries. More than 90 percent aimed at making the investment climate more favourable to inward FDI. In addition, last year, as many as 97 countries were involved in the conclusion of 158 bilateral investment treaties, bringing the total of such treaties to 2,099 by the end of 2001. Similarly, 67 new double taxation treaties were concluded. The second force is rapid technological change, with its rising costs and risks, which makes it imperative for firms to tap world markets and to share these costs and risks. On the other hand, falling transport and communication costs the death of distance have made it economical to integrate distant operations and ship products and components across the globe in the search for efficiency. This is contributing, in particular, to efficiency seeking FDI, with important implications for the export competitiveness of countries. The third force, a result of the previous two, is increasing competition. Heightened competition compels firms to explore new ways of increasing their efficiency, including by extending their international reach to new markets at an early stage and by shifting certain production activities to reduce costs. It also results in international trade taking new forms, with new ownership and contractual arrangements, and new activities being located in new sites abroad.

UNCTAD World Investment Report at xvxvi (2002).

D.

Technology Transfer

Source: Horst Siebert, The World Economy 14 (2007).

3. The sharp decline in world FDI in 2001 was due to a significant drop in cross border mergers and acquisitions (M&As) as the world economy suffered a slowdown. Prices of shares used to finance the bulk of cross border M&As in prior years fell sharply as stock markets around the world crashed in 2000 after a frenzied period of huge gains fueled by massive speculation, particularly in technology stocks. The skyrocketing increases in FDI in the 1990s were due in significant part to a surge in cross border megadeals worth over $1 billion fueled by increasing stock prices around the world. See UNCTAD, World FDI Flows to Drop this Year, TAD/INF/PR/30 (Sept. 18, 2001).

In the modern era, technology (i.e., knowledge that is usually protected by intellectual property law) serves a vital role in international business, trade, and economic development. The legal issues that arise from the transfer of technology (intellectual property) will be one of the key themes that we explore in this book. How is technology transfer related to the issues discussed so far in this book? Improving export competitiveness and attracting FDI are important goals for all states in the world today, but these goals are not ends in themselves. Rather, they serve as the means to a more overarching end: economic development. For developed nations, this means improved productivity and higher standards of living; for developing nations, this means modernization and industrialization in order to overcome backwardness and poverty. For all nations, technology is critical to achieving these goals. Because of their importance in promoting economic development, intellectual property rights are the source of some of the sharpest disagreements between developed and developing nations. Developed countries dominate in the creation of technology; developing nations tend to be importers and consumers of technology created in developed countries. Many developing nations believe that intellectual property rights are unduly restricting their access to technology by denying access altogether or only

IV.

Some Important New Developments

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1. Introduction

by Britain in the nineteenth century. The rise of China is a theme that we will explore in depth in this book.

B.

The Role of Multinational Enterprises

through the payment of burdensome royalties and licensing fees. Developed nations argue that strong intellectual property laws are needed to protect their innovations. As we have seen in the discussion of exports, the higher the level of technology the faster the growth in exports. In the area of FDI, in many instances the most important contribution of the FDI is not the capital investment but the technology, know-how, and skills of the foreign investor. The element that is critical to the success of the foreign investment is often the knowledge-based component in the form of intellectual property such as patents, trademarks, copyrights, trade secrets, and know-how. As an indication of the growing importance of intellectual property in international business and trade, technology transfer, as measured by payments for royalties and licensing fees, increased dramatically at about the same rate as FDI in the past two decades. Technology payments rose from $80 billion in 1999 to $136 billion in 2005; the annual growth rate for technology payments in the decade of the 1990s was 11.1 percent, even exceeding the growth rate for FDI at 9.9 percent. See Jorn Kleinert, The Role of Multinational Enterprises in Globalization: An Empirical Overview 9 (2001). It should not be surprising that developed countries dominate in the area of technology transfer. In 2004, 90 percent of all of the royalties and licensing fees on a worldwide basis were received by the United States (45%), the European Union (31%), and Japan (14%). See World Trade Report 2006, 23 (2006). In this book, we will focus on intellectual property in international business, not on intellectual property as such. For a comprehensive treatment of international intellectual property, see Chow and Lee, International Intellectual Property: Problems, Cases, and Materials (West 2006).

The multinational enterprise is the major vehicle for promoting all four of the channels of international business and trade (goods, services, technology, and investment). MNEs play a major role in increasing the export competitiveness in the area of goods and services of host countries, especially developing countries, by providing additional capital and know-how as well as access to global, regional, and home markets. Over one-third of all worldwide trade takes place within MNEs and about 80 percent of all world trade involves at least one MNE. See Kleinert, supra, at 2425. FDI is tied directly to MNEs as they serve as the foreign investor and provide the capital and resources in the vast bulk of FDI transactions in the world today. MNEs are now also the owners of the worlds most valuable patents, trademarks, copyrights, and other forms of intellectual property and dominate the transfer of technology on a worldwide basis. A sense of the importance of MNEs in world trade and business is provided by the following UNCTAD summary:

IV. Some Important New Developments

Recent estimates suggest that there are about 78,000 [MNEs] today, with about 780,000 foreign affiliates across the globe. Their economic impact can be measured in different ways. In 2001, foreign affiliates accounted for about 73 million employees, compared to 24 million in 1990, for an estimated 3% of the global workforce; their sales of almost $25 trillion were almost twice as high as world exports in 2006, compared to 1990 when both were roughly equal; and the stock of outward foreign direct investment increased from $1.7 trillion to $12.0 trillion over the same period. Foreign affiliates now account for one-tenth of world GDP and one-third of world exports.

A.

The Rise of China and East and South Asia

UNCTAD World Investment Report at xv (2004). As an indicator of the influence of some MNEs in the world economy, according to some economic measures the largest MNEs are larger than many countries. In a comparison of the sales volume of firms with the GDP of countries, the sales of the top 200 firms accounted for 26 percent of world GDP in 1997; of the worlds 100 largest economies, 51 were MNEs and 49 were countries. See Sarah D. Anderson, John Cavanagh, and Thea Lea, The Field Guide to the Global Economy 6768 (2000). As MNEs have assumed a major role in globalization, a host of new issues has arisen. Should MNEs be subject to ethical or legal obligations because of their importance in the world economy? Do MNEs have affirmative obligations to assist in development as well? We will explore these issues in this book, but for now consider the role of MNEs in the context of the following debate concerning globalization.

C.

Globalization
The term globalization has become a watchword of our time, a word that provokes debate and controversy. For some, globalization is a benign and inevitable development. For others, it represents the summation and cause of all social and economic ills. For most of us, however, globalization is something in between these two extremes: It brings us benefits but also creates problems that have to be dealt with and managed. What is

One of the world trends that has emerged within the past two decades is the rise of economies in Asia. Of the top ten countries that had the largest percentage gains in exports for the 19902006 period, five countries (China, South Korea, Malaysia, Thailand, and Singapore) were from Asia and this list does not include Japan, which, as an established economic power, had the fourth largest market share of exports in the world in 2006. Of these economies, China stands apart. In 2009, China had the worlds third largest economy, with a Gross Domestic Product of $4.75 trillion, behind the United States ($14.3 trillion), and Japan ($5 trillion). Chinas share of foreign trade has risen from twenty-seventh in the world in 1978 with $20.6 billion to third in the world in 2006 with $969.3 billion, an increase of almost 47-fold. The emergence of China has changed the way that many MNEs do business in the world. Within the span of just two decades, China has grown from an insignificant target of FDI to the third largest recipient of FDI with about $63 billion in 2006. According to current forecasts, China will pass Japan in 2010 to become the worlds second largest economy and within thirty years may surpass even the United States. If this were to occur, then two of the three largest economies in the world would be from Asia (China and Japan in third place) along with the United States. This could signal a shift of economic dominance away from the West for the first time in modern history. The United States dominates international trade and business in the modern era and was preceded

IV.

Some Important New Developments

21

22

1. Introduction

globalization? There are many definitions, but we prefer a short and simple one. Globalization, at least in the economic sphere, is the relatively free movement of goods, services, technology, capital, information, and people over the entire planet. Globalization has happened in the lifetimes of many who witnessed a world of nations that were separated by rigid physical, political, and technological boundaries; the pace of change has been stunning. The achievement of this degree of globalization in our time is a first in human history. Most observers assume that the growth and expansion of trade and the elimination of market and trade barriers is beneficial for all the nations involved and particularly for developing nations. MNEs, which stand to reap significant benefits from the elimination of trade barriers, are some of the most ardent proponents of further trade expansion. MNEs based in the United States have pressed the U.S. government to promote further trade and investment liberalization around the world. The U.S. government not only wishes to support the important constituency of U.S.-based MNEs, but also believes that promoting free trade and eliminating market barriers will serve an important political purpose by promoting democracy, which appears to go hand in hand with free-market capitalism. These are propositions that do not find universal acceptance either by experts or by ordinary people. It is beyond the scope of this book to consider the full impact of globalization on civil society, but consider the implications of the points in the following essay:

NOTES AND QUESTIONS

[An] important economic development of the past three decades involves the changing nature of global production. Transnational corporations (TNCs) consolidated their global operations in an increasingly deregulated global-labor market. The availability of cheap labor, resources, and favorable production conditions in the Third World enhanced both the mobility and the profitability of TNCs. Accounting for over 70 percent of world trade, these gigantic enterprises expanded their global reach as their direct foreign investments arose approximately 15 percent annually during the 1990s. Their ability to disperse manufacturing processes into many discrete phases carried out in many different locations around the world is often cited as one of the hallmarks of economic globalization. Indeed, the formation of such global commodity chains allows huge corporations such as Nike and General Motors to produce, distribute, and market their products on a global scale. Nike, for example, subcontracts 100 percent of its goods production to 75,000 workers in China, South Korea, Malaysia, Taiwan, and Thailand. Transnational production systems augment the power of global capitalism by enhancing the ability of TNCs to bypass the nationally-based political influence of trade unions and other workers organizations in collective wage-bargaining processes. While rejecting extreme accounts of economic globalization, the political economist Robert Gilpin nonetheless concedes that the growing power of TNCs has profoundly altered the structure and functioning of the global economy:

1. While globalization has powerful proponents, see, e.g., Thomas L. Friedman, The World Is Flat (2007), it also has passionate opposition. One group of objectors to globalization can be categorized as nationalist-protectionist. This group tends to blame globalization for certain social, economic, and political ills affecting their home countries. Political figures such as Pat Buchanan in the United States condemn neoliberal internationalism, free trade, and MNEs for loss of jobs at home and moral decline. See, e.g., John Gray, False Dawn (1998). A second group of antiglobalists, such as Ralph Nader, argue that economic globalization has undermined the democratic accountability of MNEs and that they are free to exploit workers and damage the environment around the world. Intergovernmental organizations such as the International Monetary Fund, the World Bank, and the World Trade Organization are the not so secret tools of MNEs. See, e.g., Ralph Nader, Free Trade and the Decline of Democracy in the Case Against Free Trade (1993). A third group, which includes academics like Amy Chua, denounces globalization for causing instability and social turmoil among developing countries and for its exacerbation of the economic disparities between the developed and the developing worlds. See, e.g., Amy Chua, World on Fire (2004). Most opponents of globalization concede that reversal of the process is impossible and that the further deepening of this process is probably inexorable. The real battleground is over how to control the damaging effects of globalization and who should bear these costs. We explore these important issues in depth in Chapter Nine, but for now consider these issues in light of the following questions that are currently being debated. 2. What kind of corporate social responsibility or obligations do MNEs have in meeting the harmful effects of globalization? Bill Gates, the founder of Microsoft, argues that MNEs should undertake projects in the fields of education, health, protection of the environment, and the alleviation of world poverty in order to supplement the efforts of governments and international agencies. Gates calls this creative capitalism. The arguments in favor of this idea are based on the concept of social compact that society grants corporations unique powers and privileges, such as limited liability, and they in turn should act to benefit society. An additional argument is that MNEs have a stake in long-term profitability and will thrive only if societal ills are addressed. Arguments against the idea that MNEs should undertake such projects are that if an MNE does not try to maximize profits it is unfair to shareholders and employees. In addition, the argument can be advanced that MNEs do not have the expertise to carry out societal projects, and they will not be accountable to any organization if they do such work. For an in-depth account of Bill Gatess ideas and the objections of his critics, see Michael Kinsley (ed.), Creative Capitalism (2008). 3. What responsibility do states and intergovernmental organizations have to manage the process of globalization so as to reduce its harmful impact on civil society?

These giant firms and their global strategies have become major determinants of trade flows and the location of industries and other economic activities around the world. Most investment is in capital-intensive and technology-intensive sectors. These firms have become central in the expansion of technology flows to both industrialized and industrializing economies. As a consequence, multinational firms have become extremely important in determining the economic, political, and social welfare of many nations. Controlling much of the worlds investment capital, technology, and access to global markets, such firms have become major players not only in international economic, but political affairs as well.

PROBLEM 1-5

Manfred B. Steger, Globalism 3031 (2002).

Assume that you are the foreign trade minister of Z, a developing country that has a host of serious economic and social problems. You are the leader of a group of developing countries that will attend a world economic summit with a group of advanced industrialized countries. At the summit, you will give a speech arguing that historical events have created a moral duty on the part of developed nations and their MNEs to provide financial assistance and compensation to developing countries. The second part of your