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Chapter-Three

Differences in Legal Systems Legal systems vary across countries for historical, cultural, political, and religious reasons. Access to the legal system also varies from country to country. The basis of different legal systems is discussed below. The United Kingdom and its former colonies all follow a legal system based on common law. Common law is law based on the cumulative wisdom of judges decisions on individual cases through history. Thus, each countrys legal system evolves as individual cases set precedents. Statutory laws, those enacted by legislative action, also vary among common law countries, as does the administration of the law. The te t provides e amples of differences between the U.!. and "ritain in terms of statutory laws and the administration of law. Civil law is the worlds most common form of legal system. #t is based on a detailed listing, or codification, of what is and is not permissible. A main difference between common law and civil law lies with the role of the judge. #n the common law system the judge acts as a neutral referee, while in a civil law system, the judge ta$es on many of the tas$s that would be completed by lawyers in a common law system. Religious law is based on the officially established rules governing the faith and practice of a particular religion. A country that follows such a system is called a theocracy. The te t provides an e ample of how religious law affects a companys loan opportunities in a %uslim society. Bureaucratic law, followed by communist countries and dictatorships, is whatever the countrys bureaucrats say it is, regardless of the formal law of the land. "ureaucratic law is fre&uently inconsistent, unpredictable, and lac$ing in appeal procedures.

Domestically Oriented Laws 'ome country law clearly affects a firms domestic operations, but it may also affect a firms international operations by regulating international business activities that originate inside the countrys borders, affecting the ability of domestic firms to compete internationally, and affecting business activities that occur outside the countrys borders.

Laws Directly Affecting nternational Business Transactions A country may attempt to induce a second country to change an undesirable policy by imposing sanctions ( restraints against commerce with that country. #n e treme cases, an em!argo )a comprehensive sanction against all commerce with a given country* may be imposed ( such as #ndias embargo on trade with +epal in the early ,--.s. !anctions are often used to limit the e port of high/technology goods that may have military applications )sometimes called dual-use products*. Attempts by the home country government to regulate a firm0s activities outside of the country0s borders constitute a practice $nown as e"traterritoriality. An e ample

of e traterritoriality discussed in the te t is the 'elms/"urton Act. Another e ample of e traterritoriality is the 1oreign 2orrupt 3ractices Act )see 4oing 4lobal, ahead*. Laws Directed Against #oreign #irms $ationali%ation occurs when a government ta$es possession of assets belonging to a foreign company. 5hen the government ta$es possession without compensating the firms it is called confiscation. 5hen the host government compensates the private owners for the assets, the transfer is called e"propriation. &rivati%ation is the conversion of state/owned property to privately owned property. #t is the opposite of nationali6ation and creates opportunities for international businesses. %any governments place constraints of foreign ownership of firms in certain industries. 1or e ample, the U.!. limits foreigners to 78 percent ownership of U.!. television and radio stations. 2ountries can also constrain foreign %+2s by imposing restrictions on their ability to repatriate profits to their home country.

The mpacts of '$Cs on (ost Countries )conomic and &olitical mpacts. The presence of %+2s affects the host country economically, politically, and culturally. 9conomically, an %+2 may have positive and not/so/positive effects. The capital investments %+2s ma$e can help create jobs. The ta es they pay can help host governments finance a variety of programs. Technology transfer can ma$e whole industries in the host country more efficient. 'owever, sometimes %+2s can drive domestic firms out of business, creating unemployment. They also often benefit from ta holidays and other policies that reduce the positive effects that otherwise might have been generated. "ecause of their si6e, %+2s are often able to counter efforts of host country governments to restrict their activities. Cultural. 9 posure to %+2s and their products may also alter the norms, standards, and behavior of the host country. 2onsumer preferences and e pectations often change with new products and new business practices.

Dispute Resolution in nternational Business 5hen resolving disputes in international business, four &uestions must be answered: ),* which countrys laws apply; )7* in which country should the issue be resolved; )<* what techni&ue should be used to resolve the conflict//litigation, arbitration, mediation, or negotiation; and )=* how will the settlement be enforced; #n many cases, the answers to the &uestions are specified in contracts between companies. 'owever, in other cases each party may see$ to hear the case in the court system most favorable to its own interests. This process is $nown as forum shopping. The principle of comity provides that a country will honor and enforce within its own territory the judgments and decisions of foreign courts, with certain limitations. 1or the principle to apply, reciprocity must be e tended between the countries, proper notice must be given to the defendant, and the foreign court judgment must not violate domestic statutes or treaty obligations.

%any companies see$ing to avoid the costs and uncertainties of litigation will try to settle their dispute through ar!itration, the process by which both parties to the conflict agree to submit their cases to a private individual or body whose decision they will honor. 2ompanies involved in a dispute with a government have a more limited set of options. 1or e ample, the #oreign Sovereign mmunities Act of *+,- of the U.!. provides that the actions of foreign governments against U.!. firms are generally beyond the jurisdiction of U.!. courts. 'owever, most countries will try to protect their firms from discriminatory actions by foreign governments by negotiating bilateral treaties.

T() T)C($OLO. CAL )$/ RO$')$T 2ountries change and shape their technological environment through investment. #nvestments in infrastructure and human capital have allowed developed countries to continue to prosper in world mar$ets despite high wages paid to their wor$ers. Technology transfer also affects the technological environment in host countries around the world. %+2s bring new technologies with them when they start operations in countries where they were not present before. 1or technology transfer to occur, a country must be careful to protect // through its legal environment // intellectual property rights.

T() &OL T CAL )$/ RO$')$T &olitical Ris0 &olitical ris0 assessment is a systematic analysis of the political ris$s faced by international businesses in foreign countries. 3olitical ris$s include any changes in the political environment that may adversely affect the value of the firms business activities. %ost political ris$s fall into one of three categories: ownership ris$ )where the property of the firm is threatened through confiscation or e propriation*, operating ris$ )where the ongoing operations of the firm and>or the safety of its employees are threatened through changes in laws, environmental standards, ta codes, terrorism, and so forth*, and transfer ris$ )where the government interferes with the firms ability to shift funds into and out of the country*. 'acropolitical ris0 affects all firms in a country, while a micropolitical ris0 affects only a specific firm or firms within a specific industry. The te t provides e amples of each type of ris$. !ome degree of political ris$ e ists in every country. The depth of analysis necessary to assess its magnitude depends on the type of business and its li$ely duration in the host country. 1irms can then ma$e a tradeoff between political ris$ and the li$ely rate of return of a particular investment. %ost developed countries have created organi6ations to insure firms against political ris$. #n the U.!., firms can obtain insurance from the Overseas &rivate nvestment Corporation 1O& C2 for protection from nationali6ation, insurrections or revolutions, and foreign/e change inconvertibility. !ee 2hapter !i for further discussion of ?3#2. The 'ultilateral nvestment .uarantee Agency 1' .A2 , a subsidiary of the

5orld "an$, is another source of insurance against political ris$. #n addition, firms may obtain protection from private insurance firms.

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