Country Risk by Legal Systems

• commercial law: specifically covers business transactions
• private law: regulates relationships between persons and organizations, including contracts and liabilities
• in many countries, the legal system favors home country nationals
• governments in host countries impose various laws and regulations on foreign companies doing business there
• foreign investment laws: affect the type of entry strategy firms choose as well as their operations and performance
• many nations pose restrictions on inward FDI
• foreign investment law example: Indonesia restricts foreign investment in certain industries to protect country's security and cultural assets
• foreign investment law example: the US restricts foreign investments that might affect national security; proposed investments can be reviewed by US Committee on Investments
• governments can impose laws and regulations to set controls on operating forms and practices
• controls on operating forms and practices example: in China, the government requires foreign investors for the telecommunications market to seek joint ventures with local firms
• marketing and distribution laws: determine which practices are allowed in advertising, promotion, and distribution
• marketing and distribution laws example: Finland, France, and Norway prohibit cigarette advertising on television
• marketing and distribution laws example: Germany prohibits comparative advertising
• laws on income repatriation: limit amount of net income or dividends firms can remit to their home country headquarters
• in Germany, companies must follow strict recycling regulations
• environmental standards in Mexico are looser and less well enforced than some other country but are reluctant to strengthen them for fear that foreign MNEs may reduce their investments there
• CISG (uniform text of law for international sales contracts) now has 75 countries covering about 75% of world trade
• the government in China has developed legislation to ensure security and privacy due to rapid spread of internet and e commerce
• in Russia, courts lack substantial experience ruling on business matters
• country risk arises not only from the host country's legal environment but also the home country's legal systems

  1. Foreign Corrupt Practices Act (FCPA)
  2. accounting and reporting laws
  3. financial reporting transparency
• extraterritoriality: application of home country laws to persons or conduct outside national borders
• extraterritoriality example: French court ordered Yahoo! to bar access to Nazi related items on its website
• Foreign Corrupt Practices Act: bans firms from offering bribes to foreign parties to secure or retain business
• one problem with the FCPA is that a bribe is not clearly defined, as the FCPA draws a distinction between these and facilitation payments
• FCPA fines for firms up to $2 million and individuals $100,000
• Brazil encourages firms to adjust portfolio valuations in accounting because of historically high inflation
• Canada uses historical costs when valuing physical assets in accounting
• countries in Latin America use inflation adjusted market value
• R&D costs are expensed as incurred in most of the world but capitalized in South Korea and Spain
• Dodd Frank Wall Street Reform and Consumer Protection Act: aims to increase transparency in US financial sector
• the EU introduced Basel III global regulatory standard to increase quality and transparency of banks
• one of the best sources for proactive environmental scanning are employees in host country
• consulting firms such as Verisk, Maplecroft, and Business Entrepreneurial Risk Intelligence specialize in country risk assessment
• conciliation: formal process of negotiation with objective to resolve differences
• arbitration: process in which neutral third party hears both sides and decides in favor of one party based on objective assessment of the facts
• litigation: one party files a lawsuit against another to achieve desired ends