REGULATORY ENVIRONMENT FOR

INTERNATIONAL BUSINESS
LECTURE 1
THE LAW AND THE ECONOMY: THE LEGAL TOOLBOX FOR INTERNATIONAL
ECONOMIC RELATIONS AND REGIONAL INTEGRATION
A UNIFIED FRAMEWORK FOR
INTERNATIONAL BUSINESS

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IB STUDY

 framework is built on these assumptions, it is important to explicitly discuss them.

IB = I + B
 Assumption
1. that as a discipline, IB has two components—international (I) and business (B)
2. that the unit of analysis of IB research is primarily (but not exclusively) at the firm
level (or the B level).
 The starting point to conduct such multilevel analysis is an interest in the firm—
the B part in IB. IB study =/= MNE Study

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MAJOR INSTITUTIONS

 International Monetary Fund

 World Bank
 World Trade Organization
 Regional Integration

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ECONOMY AND LAW

 The relationship between law and economic activity – domestic and international
 To explain the purpose and function of international economic law. it is necessary
to remove general misunderstandings regarding the relationship between
domestic law and the economy, and as well as regarding the “purpose” of
regulating economic activity.

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THE PURPOSE OF LEGAL REGULATION IN ECONOMIC
ACTIVITY

 State intervention in the economy is at times conceived as the necessary corollary

of “market failures”. This approach presumes that, under normal circumstances,
markets would function freely. State intervention, in contrast, would only play a
role in exceptional situations.
 This vision finds further support in the popular discourse of “deregulation” of the
economy (as we will see in the following paragraphs, such “deregulation” is, in
fact, a different kind of regulation).
 Where is not regulation? What is a car? What is electricity? What is a road?

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THE SHORTCOMINGS OF THE “MARKET
FAILURE” APPROACH
 Is it fair to conclude that the market is so riddled with “failures” that it cannot
function unless based on an omnipresent legislation and, therefore, an
omnipresent state?
 The answer is: No.
 Instead, accounts of state intervention as purely a consequence of market failures seem
inaccurate. This conclusion stands regardless of the stake that each of us takes
regarding the virtues or flaws of the market in allocating economic resources.

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THE SHORTCOMINGS OF THE “MARKET
FAILURE” APPROACH
 States do not intervene “because of” market failures. Rather, they step in due to
the social nature of the economy.
 The economy is driven by the interaction of different agents with diverse interests. As
with any social activity, this requires legal regulation.
 Indeed, one could even contend that a market without regulation is not a market, but
rather a “black market”.
 Maybe less brilliant but definitely more provocative is to understand law as a market
creator instead of a market mend.

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THE FOUR MAIN ELEMENTS OF A CAPITALIST
ECONOMY ARE LEGAL CONSTRUCTS

 The four main elements of a capitalist economy - money, the firm, capital and
salaried work - are legal constructs.
 Furthermore, the first and the last require permanent involvement of the State and
public institutions.
 A firm requires very sophisticated regulation in order to grant it legal personality
separate from its owners.
 Capital in not just an undefined “K” in a “factors of production model” but a highly
regulated instrument (rather, a set of instruments) whose ownership grants rights on
the decisions of the firm and participation in its earnings.

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THE SIGNIFICANCE OF INTERNATIONAL
ECONOMIC LAW
 The economy is a social activity regulated by law. Each state assembles and puts in
motion the “set of laws” that moulds this social activity.
 Law and economics are not contrary concepts (this applies for both the national and
international arenas).
 The existence of international economic operations and transactions is an
undeniable fact and creates the need for an international “set of laws” to rule such
activities.
 While at the domestic level we can find a specific entity devoted to the creation and
management of the set of laws that moulds economic reality (the different powers and
levels of government as configured by the local constitution), no such entity exists at the
international level.
 In fact, international economic law can only be created through international treaties and
agreements between states

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WORKING OF INTERNATIONAL LAW

 The existence of international economic law thus entails the appearance of a

second mechanism that may overlap with domestic law. In order to reconcile this
fact with our set of lights metaphor some caveats must be introduced:
1. The main goal of IEL is to shape economic reality and the participation of distinct
economic agents. IEL can not work directly and acts though domestic mechanism.
2. IELs are limited, hence the main concern in any discussion about international
economic law must be the one referring to selectivity. What topics should be
included? Why these and no others?
3. The international scenario are unsustainable because of the different character of
the domestic and the international systems

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DOMESTIC VS. INTERNATIONAL LEVEL:
TWO DIFFERENT PERSPECTIVES
 One of the main problems that results from the interaction between domestic law
and international economic law is that the same portion of reality can be “seen” or
“lit” from different perspectives.

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THE DIFFERENT INTERACTIONS “LIT” BY THE IEL
(BETWEEN STATES, STATES AND INDIVIDUALS AND BETWEEN INDIVIDUALS)

 It is to distinguish two different types of interactions covered by the legal

regulation of the economy:
1. The interactions between private economic agents or individuals (i.e. relations
between “equals”; which does not exclude the possibility of one of these “equals”
being the state or any of its branches, acting as a mere economic agent).
2. The relationships between these private economic agents (i.e. “individuals”) and
the state. It is noteworthy that, due to the omnipresence of both the state and the
public regulation of the economy, this second category is omnipresent.

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THE DIFFERENT INTERACTIONS “LIT” BY THE IEL
(BETWEEN STATES, STATES AND INDIVIDUALS AND BETWEEN INDIVIDUALS)

 In both cases we are in the presence of “state legislation” (i.e. legislation “by” the
state) that applies to individuals (legislation “for” the individuals).
 Similarly, IEL remains economic law and, as such, it is a “law for individuals”. It
applies to both interactions between individuals that result from their economic
activity and, more importantly, to the relationships of these individuals with the
state and its various branches. IEL, however, is also international and, thus, it is a
law “between states” and not “state legislation.”

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THE DIFFERENT INTERACTIONS “LIT” BY THE IEL
(BETWEEN STATES, STATES AND INDIVIDUALS AND BETWEEN INDIVIDUALS)

 This topic is sometimes presented in a confusing manner. Indeed, two completely

different aspects – the subject of regulation (the “what”) and the instrument of
regulation (the “how”) – are often muddled.
1. As for the “what”, or the object of regulation, it is clear that IEL and domestic law
may well regulate the same issues. While IEL is particularly focused on ruling the
relationships between the state and individuals, its object of regulation does not
exclude interactions between individuals.
2. With respect to the “how”, or the means of regulation, IEL deploys mainly an
indirect technique of regulation and creates obligations on states, mandating them
to adjust their own sets of laws in accordance with international rules.
 Nevertheless, it must be kept in mind that IEL can also project its norms directly
on the excerpts of reality that it intends to mould.

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OTHER MEANS AT THE STATE’S DISPOSAL TO MOULD REALITY
– BOTH NATIONALLY AND INTERNATIONALLY

 So far, we have insisted on the binding union between law and economy and
between market and regulation. But this reasoning should not lead us to infer two
erroneous conclusions: First, that all economic activities are regulated; and,
second, that the law is the only tool at disposal of the states to mould the
economy. The first of these conclusions has just been addressed, so we will now
focus on the second conclusion.

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OTHER MEANS AT THE STATE’S DISPOSAL TO MOULD REALITY
– BOTH NATIONALLY AND INTERNATIONALLY

 On one hand, we must always bear in mind that the law can be infringed (even
systematically). If that is the case, the ability of the law to mould reality can be
diminished or even vanish. Moreover, the application of a piece of legislation may
entail effects opposite to the ones originally envisaged by the norm. Indeed,
lawmakers are often unaware of the possibility that a regulation may well end up
producing unforeseen effects. This is an additional reason why policymakers
should be cautious when enacting legal regulations.

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OTHER MEANS AT THE STATE’S DISPOSAL TO MOULD REALITY
– BOTH NATIONALLY AND INTERNATIONALLY

 On the other hand, we should not downplay the state’s ability to shape reality
through non-legal means. Indeed, legislation is not the only instrument at their
disposal.
 States can rely on two additional tools with which to mould reality:
1. Public activities (including the granting of subsidies to certain economic activities
carried out by private agents);
2. The redistribution of income through budgetary transfers. These tools are also
helpful in the arena of international economic relations.
 Furthermore, international economic relations can be handled (precisely due to
their “international” quality) through the traditional diplomatic mechanisms of
dialogue and cooperation

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