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Examples of Legal and Regulatory Issues in Management

The principles described above help form the international legal and regulatory frame- work within which MNCs must operate. In the following we examine some examples of specific laws and situations that can have a direct impact on international business.

Financial Services Regulation. The global financial crisis of 2008–2010 underscored the integrated nature of financial markets around the world and the reality that regulatory failure in one jurisdiction can have severe and immediate impacts on others.16 The global contagion that enveloped the world was exacerbated, in part, by the availability of global derivatives trading and clearing and the relatively lightly regulated private equity and hedge fund industries. The crisis and its broad economic effects have prompted regulators around the world to consider tightening aspects of financial services regulation, especially those related to the risks associated with the derivatives activities of banks and their in- volvement in trading for their own account. In the United States, financial reform legisla- tion was approved in July of 2010, although the degree to which that legislation would prevent another crisis remained hotly debated.17 The nearby Closer Look box provides a comparison of proposed financial reform approaches in the EU and United States.

Foreign Corrupt Practices Act. During the special prosecutor’s investigation of the Watergate scandal in the early 1970s, a number of questionable payments made by U.S. corporations to public officials abroad were uncovered. These bribes became the focal point of investigations by the U.S. Internal Revenue Service, Securities and Exchange Commission (SEC), and Justice Department. This concern over bribes in the international arena eventually culminated in the 1977 passage of the Foreign Corrupt Practices Act (FCPA), which makes it illegal to influence foreign officials through personal payment or political contributions. The objectives of the FCPA were to stop U.S. MNCs from initiating

or perpetuating corruption in foreign governments and to upgrade the image of both the United States and its businesses abroad.

Critics of the FCPA feared the loss of sales to foreign competitors, especially in those countries where bribery is an accepted way of doing business. Nevertheless, the

U.S. government pushed ahead and attempted to enforce the act. Some of the countries that were named in early bribery cases under the law included Algeria, Kuwait, Saudi Arabia, and Turkey. The U.S. State Department tried to convince the SEC and Justice Department not to reveal countries or foreign officials who were involved in its investi- gations for fear of creating internal political problems for U.S. allies. Although this political sensitivity was justified for the most part, several interesting developments occurred: (1) MNCs found that they could live within the guidelines set down by the FCPA and (2) many foreign governments actually applauded these investigations under the FCPA, because it helped them crack down on corruption in their own country. One analysis reported that since passage of the FCPA, U.S. exports to “bribe prone” countries actually increased.18 Investigations reveal that once bribes were removed as a key competitive tool, more MNCs were willing to do business in that country. This proved to be true even in the Middle East, where many U.S. MNCs always assumed that bribes were required to ensure contracts. Evidence shows that this is no longer true in most cases; and in cases where it is true, those companies that engage in bribery face a strengthened FCPA that now allows the courts to both fine and imprison guilty parties. In addition, stepped up enforcement appears to be having a real impact. A report from the law firm Jones Day found that FCPA actions are increasingly targeting individual executives, not just corporations, and that penalties imposed under the FCPA have skyrocketed, and violations have spurred a number of collateral civil actions.

Bureaucratization. Very restrictive foreign bureaucracies are one of the biggest prob- lems facing MNCs. This is particularly true when bureaucratic government controls are inefficient and left uncorrected. A good example is Japan, whose political parties feel more beholden to their local interests than to those in the rest of the country. As a result, it is extremely difficult to reorganize the Japanese bureaucracy and streamline the ways things are done, because so many politicians are more interested in the well-being of their own districts than in the long-term well-being of the nation as a whole. In turn, parochial actions create problems for MNCs trying to do business there. The administration of

Prime Minister Junichiro Koizumi of Japan tried to reduce some of this bureaucracy, al- though the fact that Japan has had five different Prime Ministers from 2006 to 2010 has not helped these efforts. Certainly the long-running recessionary economy of the country is inspiring reforms in the nation’s antiquated banking system, opening up the Japanese market to more competition.20

Japanese businesses are also becoming more aware of the fact that they are depen- dent on the world market for many goods and services and that when bureaucratic red tape drives up the costs of these purchases, local consumers pay the price. These busi- nesses are also beginning to realize that government bureaucracy can create a false sense of security and leave them unprepared to face the harsh competitive realities of the international marketplace.

In many developing and emerging markets, bureaucratic red tape impedes business growth and innovation. The World Bank conducts an annual survey to determine the ease of doing business in a variety of countries around the world. The survey includes indi- vidual items related to starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. A composite ranking, as shown in Table 2–1, ranks the overall ease of doing business in these countries. Although developed countries generally rank better (higher), there are some developing countries (Georgia, Malaysia) that do well, and some developed economies (Greece) that do poorly. In Table 2–1 economies are ranked on their ease of doing business, from 1 to 183, with first place being the best. A high ranking on the ease-of-doing-business index means the regulatory environment is conducive to the operation of business. This index averages the country’s percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings cover the period June 2008 through May 2009.

Privatization. Another example of the changing international regulatory environment is the current move toward privatization by an increasing number of countries. The German government, for example, has sped up privatization and deregulation of its telecommunica- tions market. This has opened a host of opportunities for MNCs looking to create joint ventures with local German firms. Additionally, the French government has put some of its businesses on the sale block. Meanwhile, in China the government has ordered the military to close or sell off between 10,000 and 20,000 companies that earn an estimated $9.5 bil- lion annually. Known collectively as PLA Inc., the Chinese Army’s business interests stretch from Hong Kong to the United States and include five-star hotels, paging services, golf courses, and Baskin-Robbins ice cream franchises. When the government cut the mil- itary budget during the early 1990s, it allowed the army to make up the shortfall by earning commercial revenue. However, now the government has decided that the army must exit this end of the business and let the free market take over.21

According to one source, in 2010, Poland intensified its efforts to privatize more than 300 state-owned enterprises by the end of 2011; Turkey had issued various priva- tization tenders in the energy and electricity sectors; Nigeria was set to privatize three of the Power Holding Company of Nigeria successor companies by the end of 2011; and Pakistan had privatized 167 state-owned enterprises since its inception, yielding US$9 billion in proceeds to the government.22 As described in the International Manage- ment in Action box in Chapter 1, “Brazilian Economic Reform,” many developing coun- tries are privatizing their state-owned companies to provide greater competition and access to service.

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