Module 9

Politics and Laws

Reasons behind the regulations of International Business Behavior

In 1945, President Harry Truman stated, “When Kansas and Colorado have a quarrel over the water in
the Arkansas River, they don’t call out the National Guard in each state and go to war over it. They bring a suit
in the Supreme Court of the United States and abide by the decision. There isn’t a reason in the world why we
cannot do that internationally” (Cheeseman, 2016, p. 903). Customs, which vary among global communities and
international organizations, are a primary reason why the world cannot pursue such an answer to trade and
commerce dealings. The priorities and aims for Chinese businesses differ from those of Brazil. Each of those two
countries have radically different business perspectives from the United States. For this reason, international law
utilizes customs, treaties, and organizations to guide relationships among nations, with the goal of allowing each
country as much leverage as possible over its own business dealings.

International Law

International law relates to the policies and procedures that govern relationships among nations (Clarkson,
Miller, & Cross, 2018). These are crucial for businesses for multiple reasons.

1. There is not a single authoritative legislative source for global business affairs, nor a single world court
responsible for interpreting international law (Cheeseman, 2016, p. 903). There is also not a global executive
branch that enforces international law, which leaves global business affairs particularly vulnerable.

2. If a nation violates an international law and persuasive tactics fail, then the countries that were violated, or
international organizations tasked with overseeing global trade, may act. Often these actions use force to correct
the offenses and may include economic sanctions, severance of diplomatic relations, boycotts, or even war
against the offending nation (Clarkson, Miller, & Cross, 2018, p. 439).

The purpose of international laws is to permit countries as much authority as possible over their own
international business affairs, while maximizing economic benefits of trade and working relationships with other
nations. Since many countries have historically allowed governance by international agreements when
conducting global business, there exists an evolving body of international laws that facilitate global trade and
commerce.
Primary Sources of International Law

International customs, treaties, and organizations are the primary sources of international law (Clarkson, Miller,
& Cross, 2018, p. 439).

Three distinct components are sources for how international law is

understood, defined, and interpreted around the world.

The three components work together to guide how nations understand, define, and interpret international laws
that govern global business affairs.

1. International Customs

Customs are general practices between nations that guide their business relationships. According to the
Statute of the International Court of Justice, international customs are “accepted as law” (Clarkson, Miller, &
Cross, 2018, p. 439). While customary international law (CIL) is not written, nor does it require ratification to
become binding, CIL nonetheless provides guidelines for how nations conduct business affairs (Bradley &
Gulati, 2010, p. 204). One example of a custom is the international protection of ambassadors. For thousands of
years, ambassadors have been protected while serving diplomatic missions. For this reason, countries protect
foreign ambassadors with the understanding that any harm caused to ambassadors would be a violation of
international law.
2. International Treaties

Treaties and other agreements between nations are authorized and ratified by the countries that
acknowledge their legality. There are two different types of agreements: bilateral, which is formed by two
nations; and multilateral, which is formed by several nations. The Peru-United States Trade Promotion
Agreement is an example of a bilateral agreement. It was signed in 2006, ratified by Peru the same year, and
ratified by the United States in 2007. This bilateral agreement is considered beneficial to the United States
because it improves access to Peruvian goods, while promoting security and democracy in the South American
country. The North American Free Trade Agreement, or NAFTA, is an example of a multilateral agreement. It
was ratified in 1994, when Mexico joined the previous trade agreement between the United States and Canada.
In September 2018, the Trump administration successfully completed re-negotiations with Mexico and Canada
that lasted over one year. Among other aims, these negotiations worked to increase auto industry wages for
workers in Mexico and modify pharmaceutical regulations with Canada.

3. International Organizations

International organizations are comprised of officials who represent member nations that have
established a treaty to oversee shared interests, including trade and commerce. The U.S. participates in more than
120 bilateral and multilateral organizations around the world. International organizations adopt resolutions that
standardize behavior and create uniform rules related to trade and commerce. Two of the most significant
international organizations established in the twentieth century that significantly impact U.S. trade and
commerce are the United Nations and the European Union.

The Foreign Corrupt Practices Act (FCPA)

U.S. Foreign Corrupt Practices Act. FCPA makes it unlawful for a U.S. person or company to offer, pay,
or promise to pay money to any foreign official for the purpose of obtaining or retaining business.

The Foreign Corrupt Practices Act (FCPA), enacted in 1977, generally prohibits the payment of bribes to
foreign officials to assist in obtaining or retaining business. The FCPA can apply to prohibited conduct anywhere
in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and
agents. Agents can include third party agents, consultants, distributors, joint-venture partners, and others.

The FCPA also requires issuers to maintain accurate books and records and have a system of internal
controls sufficient to, among other things, provide reasonable assurances that transactions are executed and
assets are accessed and accounted for in accordance with management's authorization.
 The sanctions for FCPA violations can be significant. The SEC may bring civil enforcement actions
against issuers and their officers, directors, employees, stockholders, and agents for violations of the anti-bribery
or accounting provisions of the FCPA. Companies and individuals that have committed violations of the FCPA
may have to disgorge their ill-gotten gains plus pay prejudgment interest and substantial civil penalties.
Companies may also be subject to oversight by an independent consultant.

The SEC and the Department of Justice are jointly responsible for enforcing the FCPA. The SEC's Enforcement
Division has created a specialized unit to further enhance its enforcement of the FCPA.

The role of international law in the conduct of international business

The purpose of international laws is to permit countries as much authority as possible over their own
international business affairs, while maximizing economic benefits of trade and working relationships with other
nations.

International business is an essential part of a growing global economy. The integration of national
economies into a global economic system – known as globalization – has been one of the most important
developments over the last century, prompting an extraordinary swell in international trade, commerce and
production.

The connection of markets and peoples has produced global value chains that account for a sizable share
of trade growth, global gross domestic product and employment in both developed and developing countries.

As such, international business has become a vital condition for economic and social development – especially
for low-income countries. The ways in which this business is conducted can have a significant impact on the
fortunes and futures of a nation.

Why do we need international business laws?

International business law comprises the various legal aspects of conducting business across borders,
including business transactions, entity formation and funding, intellectual property protection, regulatory
compliance, dispute resolution and international trade policy. They are put in place to regulate the business
operations of a company and their supply chain across different nations.

Upholding international laws is meant to protect against exploitation of a thriving economy or the
oppression of a more vulnerable nation. Consequently, the impact of law-making must be carefully considered;
the recent political crisis sparked by the Prime Minister’s proposed changes to the negotiated Northern Ireland
Protocol is a prime example of this.
 Trade or commerce is often at the center-point of these considerations, as the economic impact of a
certain policy or transaction can be widespread. Multiple jurisdictions must be consulted. Trade agreements
provide rules that assimilate and support fair and lawful trade between respective countries, and – ultimately –
make business transactions easier.

International commercial law consists of a body of legal rules, conventions, treaties, domestic legislation
and commercial customs that governs international business transactions. These laws facilitate mutually
beneficial cooperation between respective countries, spanning economics, licensing, tariffs and taxes, and many
other elements of business.

Why is international trade so important?

On a business scale, international trade is essential for increasing revenue, broadening a customer base
and ensuring a longer product lifespan. Companies can also benefit from currency exchange fluctuations and
gain access to a wider pool of potential employees. The majority of Fortune 500 corporations operate locations
overseas, while all boast an international client list.

The impact of the Covid-19 crisis has highlighted the importance of globalization. Following the
pandemic, businesses (both big and small) are increasingly relying on international trade to improve commercial
viability, with 34% citing a desire to expand internationally and 51% of business leaders influenced to change
their view on the value of exports.

Going global: Things to consider

For any company intending global expansion, the following are legal questions it will need to consider.

 Labor and employment law: If a business hires or subcontracts overseas, it is subject to the respective
country’s labor and employment laws. Consulting legal counsel is essential in helping companies with
compliance and risk mitigation.

 International trade compliance: Whenever a business transaction crosses borders, it invokes the national
security and economic interests of the respective countries. This area of business law spans the
navigation of imports, exports and sanctions. It’s also of great importance to have an understanding of
corrupt nations and which countries are off limits (such as the trade sanctions taken against Russia
during the Ukrainian crisis).

 Corporate structure: If a business is setting up a branch or subsidiary overseas, where and how it chooses
to establish a new business carries costs, capital requirements and tax consequences.
  Taxes: Before going global, a corporation will want to carefully examine whether the foreign country
has a tax treaty with their domestic nation, and the particular tax consequences of conducting business
there.

 Intellectual property: Spanning patents, copyrights, trademarks or trade secrets, intellectual property is a
valuable asset. Securing and enforcing these rights can be costly. However, contractual arrangements
including licenses and employment agreements can be established before venturing overseas to mitigate
risks and lower the expense.
Finances: The movement of money carries risk and complexity. An organization must adhere to any
applicable foreign currency exchange controls. The employment of a legal advisor can assist in keeping
payments secure.

 Termination of a business: Before setting up shop overseas, it’s best to consider an exit strategy if all
goes wrong. It can be a complicated and expensive process to close an international venture.
Government approval may be needed and there can be significant tax consequences as well as employee
rights compliance.

The Cultural Challenge in International Business

Culture is an important element embedded in the society in a firm manner. By nature, culture is known
to be extremely complex and dynamic and is known to be having a significant impact on every single element,
party and authority of the society. Culture is also known to be having a major contribution in the success of
business organizations. Performance of business activities at the international level can contribute in providing
new opportunities for business that can be exploited in order to initiate growth and earn more amount of profit. It
is important to note that it is not an easy task and is affected by a number of challenges and risks that have to be
dealt with by the business in order to be successful in the international market. One of such challenge is the
barriers of culture. Differences in culture are known to be having differences in values, and at times, these
differences end up being stark. In the business organizations, styles of marketing and communication are
different in accordance with different cultural values. As a significant example, politeness being considered in
the United States of America may not be considered polite in China. Hence, in order to deal with this problem, it
is extremely important for learning the intricacies in culture with respect to the place at which business is being
conducted.
Importance and Role of Culture in International Business
Culture has various definitions, but in the simplest terms, culture refers to the norms, beliefs,
ideas, attitudes, and social behavior of an individual or society. In a way, culture is the coming
together of different experiences, values, beliefs, and ideas that influence the behavior and attitude of
a community, a particular person, or a group. Some essential cultural elements are religion, language,
gender roles, social structure and dynamics, traditions, laws, and customs.
Cultural adaptation in international business encompasses organizational culture as well as
national cultures and traditions. It helps the organizations to have a better understanding of how local
businesses and the workforce function.
Some aspects of the significance of culture in international business to better understand how it
shapes global companies:
1. Entry into new markets
Conducting international business involves entering new markets. Companies must display
sensitivity towards different cultures when dealing with foreign clients or planning a marketing
campaign for their foreign subsidiaries. Business executives should start by studying the local market's
beliefs, values, and customs.
2. Business negotiations
Different cultures have distinct perspectives on business negotiations. While some consider
negotiations a signed contract between two parties, others view it as the beginning of a strong
business relationship. Therefore, you must understand how your counterpart views a negotiation’s
purpose, whether they want to build a long-term rewarding relationship or are looking at it as a one-
time deal.
3. Personal styles
Culture in international business strongly influences personal style, from an individual’s dressing
sense to interacting with others. Each culture has its customs and formalities for business negotiations
and meetings. Hence, knowing the subtleties of foreign cultures and respecting appropriate
formalities go a long way in making the right impression and bagging crucial business deals.
4. Team organization
Culture is a decisive factor that affects how organizations negotiate a deal. While some believe in
consensus decision-making, others believe in the supremacy of a single leader who takes all decisions.
Whether the culture promotes hierarchical roles or societal equality, these values affect all parties in a
business deal. Hence, business executives should understand how teams in different cultures organize
and participate in decision-making.
5. Inclusion and diversity
An organization that welcomes cross-cultural people, ideas, and customs create a benchmark as
an inclusive and diverse workspace. Sensitivity and acceptance of diverse cultures help create a
dynamic and talented workforce. Plus, these values leave a lasting impression on clients, customers,
investors, and stakeholders.

International Business and Cross-cultural Challenges

The relationship between culture and international business has its rough patches. Enlisted
are few of the cross-cultural challenges that affect businesses globally:
Understanding local business practices
One of the core cultural issues in international business is the failure of organizations to
understand local business customs. Ignorance of how to conduct business in a foreign country without
considering cultural, political, and economic influences is a significant roadblock in international
trade.
For instance, in some Asian countries, culture strongly influences how the workforce responds
to management roles. In Japan, social hierarchies are valued, and seniors are paid the utmost respect.
In the US, there is a comparatively flat organizational structure.
Identifying regional differences
Most often, organizations focusing on the bigger picture overlook regional differences in
emerging markets. Subcultures go beyond regional and ethnic variations to include other elements,
such as differences in female and male consumer behavior and thinking.
Adapting business models to the local market
Culture strongly influences consumer attitude and behavior. However, many companies go by the
one-size-fits-all approach without realizing that personalization is the secret to creating a large and
diverse customer base. They must restructure their business models to reflect local customs, habits,
and preferences of different buyer personas.
Adapting human resource policies
Attracting, retaining, and leveraging global talent can be challenging for a culturally ignorant
foreign company that employs local staff. Organizational commitment, job satisfaction, motivation,
and conflict resolution vary across cultures. The key to understanding these differences is rethinking
the human resource policies to accommodate local cultural profiles. Human Resource teams should
be aware of the cultural differences while recruiting and communicating with foreign employees.
Creating a diverse and inclusive workplace
A diverse and inclusive workplace attracts and retains top global talent, responds to the diverse
needs of customers, increases access to new clients, fosters creativity, and drives innovation. Diversity
and inclusion issues vary across nations, and one shall take note that bias, discrimination, and cultural
conflicts are barriers to international trade.
Adapting management practices
Every organization has unique management models and practices with specific underlying
cultural principles. While it sounds perfect, the problem arises when these practices dissipate across
cultures without factoring in cultural variations. It becomes the organization’s responsibility to
educate its staff on how to overcome the multiple layers of cultural barriers.
Addressing the Cultural Barriers in International Business
Given the significance of culture in international business and the cross-cultural challenges
involved, it makes sense to ask:
How do we overcome the cultural barriers in international business?
Effective and successful cross-cultural management in international business can be daunting. It is not
enough to be aware of the cultural barriers disrupting international business relations - you must also
be prepared to tackle the issues.
Create a culturally aware workplace
One of the best ways to overcome cultural differences in global business is to create space for
the cultural requirements of your colleagues and employees in a foreign country. For instance, factor
in cultural and religious holidays, customs, and dietary needs and integrate them into your
organization’s policies to make everyone feel included.
Promote open communication
International business and cross-cultural communication go hand-in-hand. Promoting a culture of
open communication is the only way culturally diverse teams can overcome their differences and
work together. Global leaders must lead by example. They should promote open communications,
listen to everyone’s opinions, and create a safe and transparent workspace. Employees should have a
safe space to talk about their challenges without any judgment.
Engage in diversity training
When companies try to include and accept people from diverse cultural backgrounds, they take
one step in the right direction of overcoming cultural barriers in international business. Diversity
training is an effective tool that allows employees to identify hidden prejudices, biases, and other
obstacles and create opportunities wherein employees can learn how to embrace diversity.
Cultivate a shared company culture
When you have a culturally diverse team, the best way to unite the members is by establishing
a
strong company culture reflecting the interests of all team members. As a team leader, you must
ensure that your team functions like one unit to discuss differences, voice grievances, and find
solutions to business challenges. When members work remotely, it’s crucial to create a team culture
beyond stereotypes.
Understand the local culture
Before you get busy conducting business operations in a new market, focus on understanding
the region’s business practices. Instead of taking a full-blown global approach, start with a localized
mindset and gradually implement changes in your business.
Cultural Differences in International Business
Recognizing how culture influences international business is indispensable to avoiding
misunderstandings among employees and clients and create a stellar image in new markets.
Accepting cultural diversity in global organizations gives you a broad spectrum of business experience
and novel insights to tackle real-world business problems.
Culture in international business differs from the general meaning of culture per se, affecting global
companies in five broad areas: interaction, communication, organizational hierarchy, and workplace
etiquette.
1. Interaction
Professional gestures and interactions that are acceptable in one culture may be offensive or
inappropriate in a different cultural setup. Thus, if you are accustomed to shaking hands, making eye
contact, and kissing people on the cheek as part of formal interactions in your country, the same may
not apply to foreign clients and business partners. Learning about acceptable and suitable business
etiquette becomes crucial.
For instance, while the Japanese consider addressing someone by their first name in a first meeting
disrespectful, Americans are more comfortable using first names in a formal setup.
2. Communication
Communication methods vary across cultures. So, understanding the language and
communication style of your target market is an excellent way to bridge cultural gaps in the
international business arena. For example, Israeli and American cultures emphasize straightforward
methods of communication, unlike the Japanese, who rely on indirect communication. Likewise, Finns
tend to be brief and use direct communication strategies, whereas Indians typically communicate in
indirect and subtle ways.
3. Organizational hierarchy
Different cultures perceive organizational hierarchy differently. When expanding into new
markets, you must realize that your host country’s approach and attitude towards the corporate
structure may differ from yours. Hence, it could be challenging to define roles in cross-cultural teams
or determine who has the authority on the other side.
While Japan has a straightforward organizational structure promoting hierarchy, Sweden has a flat
organizational hierarchy that emphasizes equality. Furthermore, while the Chinese and Japanese
stress consensus decision-making, it is more common for American teams to have a leader with
ultimate authority.
4. Workplace etiquette
Differences in workplace etiquette are a vital consideration when discussing culture's impact on
international business. When you engage with multinational teams, you will encounter stark
differences in workplace etiquette, reflecting cultural diversity. Let’s consider punctuality. You must
reach in time when dealing with American, Japanese, Russian, or South Korean clients and colleagues.
On the other hand, arriving early for an appointment is standard in Germany. But when in Malaysia,
China, Mexico, Ghana, or Nigeria, arriving late for meetings is acceptable.
Negotiation Style
While engaging in international business, negotiation becomes a principal component. The way
people behave and communicate reflects their negotiation style. Organizations must understand the
accepted negotiation norms in different countries and act accordingly.
For instance, in some Asian countries, negotiations are deemed crucial for building stronger business
relations. However, it is seen as a contract focusing on a win-lose process in Spain.