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THE LEGAL ENVIRONMENT OF BUSINESS

© 2006 Prentice Hall Ch. 9-1
THE LEGAL ENVIRONMENT
OF BUSINESS
A Critical Thinking Approach
Fourth Edition
Nancy K. Kubasek
Bartley A. Brennan
M. Neil Browne
© 2003 Prentice Hall Ch. 3-1
© 2006 Prentice Hall
The International Legal
Environment of Business
CHAPTER 9
THE LEGAL ENVIRONMENT OF BUSINESS
Ch. 9-2
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Ch. 9-3
Chapter 9 Overview
All business is international business
Opportunities for U.S. companies
Competing in a global market
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Dimensions of the International
Environment of Business
Political Economic
Cultural Legal
Ethical
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Economic Dimensions
Growth rate
Central planning or market economy
Disposable income
Transportation infrastructure
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Political Dimensions
Democratic Totalitarian
Decentralized Centralized
Free Market Planned Economy
Civil Liberties Stability
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Cultural Dimensions
Definition
“Culture consists of learned
norms of a society based on
values, beliefs and attitudes”
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Elements of Culture
Language
Religion
Group Membership
Attitudes
Education
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Legal Dimensions
National Legal Systems:
Common Law
Civil Law
Islamic Law
Socialist Law
Hindu Law
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Ch. 9-10
Common Law
Origins in England and its colonies
Case Law
Precedent
Retrospective
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Civil Law
Origins in Europe Romano-Germanic
Code or Statutory Law
Regulatory
Prospective
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Islamic Law
Religious-Based: fundamentally from the Koran
Set forth in the Shari‟a
Woven into all aspects of daily life, the family,
and institutions of government
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Socialist Law
Origins in socio-economic theories of Marx
Law applied to advance the collective
ownership of property and the means of
production
Private rights subordinate to collective
rights as expressed through the state
Ultimate goal is to evolve beyond the need
for law
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Hindu Law
Religious origins in the Sastras and the
Vedas
Law advances compliance with the caste
system
Focus on family and succession
Codified into India‟s national laws
As a former British colony, India also
shares some common law traditions
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International Law
Traditional View:
Public sector actions can directly affect
private international agreements
Realistic View:
Public Private
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Sources of International Law
Customs
Treaties
Judicial Decisions
Scholarly Writings
International Organizations
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Examples of International Law
Visas
Tax treaties
Certain intellectual
property right
protections
FCN treaties
Multilateral
trade
agreements:
NAFTA
ASEAN
WTO
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Methods of Engaging in International
Business
Low Risk
Trade: Stay Home and Export
Low/Medium Risk
Medium Risk
Licensing, Franchising
High Risk
Direct Investment
Distributors Sales Reps
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International Trade
DEFINITION
Export and import of goods
and services from one
country to/from another
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Reasons for International Trade
Ricardo: The Economic Theory of
Comparative Advantage
Relative efficiency
Assumptions in the model vs. the
real world: There is no „free trade‟
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International Licensing
Broadly applicable as to subject matter
of license
Trade Secrets Copyrights
Patents Trademarks
Technology Know How
Trade Dress
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Franchising Agreements
Structure of the Franchise Agreement:
Licensor permits use of licensed property
Licensee pays royalties and fees based on
sales
Examples: McDonald’s, KFC
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Foreign Direct Investment
Usually via Multinational
Corporations
Joint Venture Subsidiary
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Motivation for Foreign Investment
Expand markets
Get close to customers
Use foreign resources
Cheaper labor
Fewer regulations
Acquire knowledge
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Subsidiaries & Limited Liability
When is the parent
corporation liable for acts
of subsidiary?
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Case 9-1: In Re Union Carbide at Bhopal
 Action against both parent and
subsidiary for wrongful death and
injuries resulting from lethal gas leak at
chemical plant in India
 Issue: Forum shopping
 Decision: Case removed to India from
U.S. court
 Reason: Forum non conveniens
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Forum Non Conveniens
Where act occurred
Where witnesses and evidence are
Where business is incorporated
Local, not U.S. work force employed at the
plant
Translation of language problems
Local regulations applied to the plant
Costs and effort required for U.S. venue
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Joint Ventures
Defining characteristic: Usually
created for a single purpose and a
limited time
Some countries require all foreign
investment via joint ventures
Entities may be private,
government, or both
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Risks of Engaging in International
Business
Expropriation
Sovereign Immunity Doctrine and
FSIA
Act of State Doctrine
Export and Import Controls
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Case 9-2: Keller v. Central Bank of Nigeria
 Foreign Sovereign Immunities Act (FSIA)
 No jurisdiction by U.S. court unless
“commercial activity” is found
 Held: Illegal action does not preclude a
finding of “commercial activity”
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Case 9-3: Philippines v. Marcos
FACTS
 Civil RICO action to recover fraudulent
transfers of funds
 Injunction also sought to freeze funds
 Defense: Act of State (by head of state)
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Case 3-3: Philippines v. Marcos
HOLDING
 Act of State Doctrine based in balance of
power among three branches of government
 Judiciary will not intrude on foreign affairs
conducted by executive branch
 The doctrine does not extend to Marcos
situation
 U.S. Court has jurisdiction and affirmed
injunction
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Case 9-4: U.S. v. Haggar Apparel
FACTS
 Haggar ships pants to Mexico for sewing
and permapressing, then ships finished
goods back into U.S.
 General rule: such a procedure is exempt
from customs duty
 U.S. Customs declared „permapress‟ to
be manufacturing, not assembly; duty
levied
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Case 9-4: U.S. v. Haggar Apparel
HOLDING
 Lower court ruled in favor of Haggar,
refunding duty
 Court of Appeals reversed and held for
Customs
 Rule: Customs classifications are made
at port of entry, but such decisions must
conform to statutory standards
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Risks Relating to Currency
Currency Controls
Currency Value Fluctuation
A Partial Solution: Hedging
Forward Contracts
Futures Contracts
Options
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Legal and Economic Integration
Three Examples:
1. WTO
2. European Union
3. NAFTA
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World Trade Organization
Created 1995
Based upon GATT
Goals: Eliminate Barriers to Trade
Prohibit Nontariff Barriers
Reduce Tariffs and Subsidies
Protect Intellectual Property
Rights
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WTO: Structure and Function
Rulemaking
Ministerial
Conference
General
Council
Dispute Resolution
Consultation
between Members
Dispute Settlement
Panel
Appellate Body
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WTO: Concerns and Criticisms
Sovereignty v. Trade
Environmental Laws
Consumer Protection
Labor Laws
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European Union
Origins in the European
Economic Community 1957
Goals: Free movement of
goods, services, capital, and
people across member
borders
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EU: Steps toward Realization
Treaty of Rome 1957 – Customs Union
Single European Act 1986 – Common
Market
Maastrich Treaty 1991
Monetary Union
Political Union
Uniform labor and social security laws
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EU: Structure and Membership
Council of Ministers – One per state
EU Commission – 20 members, control
functional areas called “Directorates”
Parliament – Elected by states
European Court of Justice –
Jurisdiction over EU v. state disputes
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North American Free Trade Agreement
NAFTA ratified in 1994
Fifteen year phase in period
Purpose: Eliminate barriers to free
flow of goods, services, and
investments in Canada, U.S. and
Mexico
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NAFTA: Structure
Trade Commission
Secretariat
Arbitral Panels
Dispute resolution via five member
panels
Offers relatively quick and final
decision
Example: UPS Case v. Mexico
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Global Dispute Resolution
Arbitration: The most often used method of
resolving international business disputes
Supported by:
UN Convention on the Recognition of
Foreign Arbitral Awards
International Center for the Settlement of
Investment Disputes
International Chamber of Commerce Rules
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Other Forms of Dispute Resolution
Mediation
Conciliation
Litigation
Contractual Clauses
Choice of Forum
Choice of Law
Language
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Summary
Managers need to consider all
aspects of international business
Important areas include: political,
economic, cultural, and legal
Increasingly, international
organizations shape the rules of
global trade