CHAPTER 4

Chapter 4: The Legal Environment

Introduction

●​ The legal environment of international business is complex and varies by country.

●​ Companies must comply with national, international, and local laws that regulate business
activities.
●​ Legal differences can influence market entry and affect a company's ability to operate globally.
●​ Some companies, like Facebook, Google, and Amazon, have struggled with China’s strict
government regulations and internet censorship laws.
●​ A strong legal system fosters economic growth and business stability, while weak legal
enforcement can lead to corruption and inefficiency.

1. Types of Legal Systems

Every country has a different legal framework that governs business operations. There are five main
types:

1.1 Common Law

●​ Based on precedent (past court decisions).

●​ Judges interpret and apply previous rulings when deciding cases.
●​ Used in the United States, United Kingdom, Canada, and Australia.
●​ Example: A lawsuit in the U.S. might reference previous similar cases to determine the outcome.

1.2 Civil Law

●​ Based on written codes and statutes (not court precedents).

●​ Judges apply strict legal rules instead of interpreting past decisions.
●​ Used in France, Germany, Japan, and many Latin American countries.
●​ Example: In France, businesses follow the Napoleonic Code, which dictates corporate legal
requirements.

1.3 Theocratic Law

●​ Based on religious principles (e.g., Islamic Sharia Law).

●​ Found in Saudi Arabia, Iran, and parts of Africa.
●​ Example: In Saudi Arabia, businesses must follow Islamic banking laws, which prohibit interest
on loans (riba).

1.4 Customary Law

●​ Based on traditional practices and customs.

●​ Common in indigenous communities and rural areas.
●​ Example: In some African and Pacific Island communities, land disputes are settled by tribal
elders.

1.5 Mixed Legal Systems

 ●​ A combination of two or more of the above systems.
●​ Found in China, India, South Africa, and Russia.
●​ Example: China blends civil law (statutes) with customary law in rural regions.

2. Common Legal Issues in International Business

2.1 Crime and Corruption

●​ Corruption includes bribery, fraud, and favoritism in business dealings.

●​ Countries with strong legal enforcement tend to have higher economic growth.
●​ Example: Scandinavian countries have low corruption, while Venezuela and Nigeria struggle
with bribery in business.

2.2 Regulatory Changes

●​ Governments often change business laws to encourage economic growth.

●​ Example: In Georgia, reforms to simplify business registration helped attract foreign investment.

2.3 Product Liability & Consumer Protection

●​ Different countries have varied regulations on product safety and consumer rights.
●​ The European Union (EU) has strict consumer protection laws.
●​ Example: In the U.S., companies must follow FDA (Food & Drug Administration) regulations
for food and pharmaceuticals.

2.4 Intellectual Property (IP) Protection

●​ Protects patents, copyrights, and trademarks from being copied or stolen.

●​ Strong IP laws encourage innovation and investment.
●​ Example: Apple has sued Samsung multiple times for copying iPhone designs.

3. Illegal vs. Unethical Conduct in Business

3.1 Difference Between Illegal and Unethical Conduct

●​ Illegal Conduct: Violates established laws (e.g., tax evasion, fraud).

●​ Unethical Conduct: May be legal but goes against moral principles (e.g., paying low wages,
excessive pollution).
●​ Example: A company using child labor in a country where it’s legal might still be considered
unethical.

3.2 Corporate Social Responsibility (CSR)

●​ Many businesses follow CSR principles to balance profitability with ethical responsibility.
●​ CSR focuses on fair labor practices, environmental protection, and ethical sourcing.
●​ Example: Nike faced backlash for using sweatshops but later adopted CSR policies to improve
labor conditions.
4. Important International Laws Affecting Businesses

4.1 Foreign Corrupt Practices Act (FCPA)

●​ Prohibits bribery of foreign government officials.

●​ Applies to all U.S. companies operating internationally.
●​ Example: Walmart was investigated for bribing officials in Mexico to speed up store openings.

4.2 International Trade Laws

●​ World Trade Organization (WTO): Regulates global trade and resolves disputes.
●​ Example: The WTO ruled against China’s unfair steel export subsidies in 2016.

4.3 General Data Protection Regulation (GDPR)

●​ A strict EU law governing how businesses handle customer data.

●​ Companies must get explicit consent before collecting personal data.
●​ Example: Facebook was fined €746 million for GDPR violations in 2021.

Key Terms and Definitions

Term Definition

Rule of Law The principle that laws apply equally to all individuals
and businesses.

Common Law A legal system based on court decisions and precedents.

Civil Law A legal system based on written codes and statutes.

Theocratic Law A legal system based on religious teachings (e.g., Sharia

law).

Customary Law Legal traditions based on cultural customs and practices.

Intellectual Property (IP) Legal protections for inventions, trademarks, and creative
works.

Corruption Unethical or illegal behavior, including bribery and fraud.

Foreign Corrupt Practices Act (FCPA) U.S. law prohibiting bribery of foreign officials.
 General Data Protection Regulation EU law that protects consumer data privacy.
(GDPR)

Corporate Social Responsibility (CSR) A company’s commitment to ethical and sustainable

business practices.

Key Takeaways

1.​ Legal systems vary globally and impact how businesses operate.
2.​ Companies must comply with different international laws, including anti-corruption and data
privacy rules.
3.​ Corruption, product liability, and ethical concerns can create challenges for international
businesses.
4.​ Intellectual property protection is essential for innovation and competitiveness.
5.​ Businesses must balance legal compliance with ethical responsibility through Corporate
Social Responsibility (CSR).
●​ Understanding the legal environment is crucial for businesses expanding internationally.
●​ Companies that respect local laws and ethics are more likely to succeed in global markets.
●​ Legal challenges can be minimized by working with local experts and adapting business
practices to different regulatory systems.

Summary of Sample Cases from Chapter 4: The Legal Environment

These cases emphasize the impact of legal systems, corruption, intellectual property rights, and
international compliance laws.

Case Study 1: SEC Enforcement of the Foreign Corrupt Practices Act (FCPA)

Summary:​
The U.S. Securities and Exchange Commission (SEC) has been actively enforcing the Foreign
Corrupt Practices Act (FCPA), which prohibits U.S. companies from engaging in bribery with foreign
officials. A review of FCPA cases from 2017 to 2019 showed numerous violations involving global firms.

Key Takeaways:

●​ The SEC imposed fines on multiple companies for paying bribes in foreign countries.
●​ The enforcement actions increased compliance costs for multinational businesses.
●​ Companies operating internationally must have strict anti-bribery policies to avoid legal
penalties​.

Case Study 2: General Data Protection Regulation (GDPR) Compliance - WhatsApp and Facebook
Summary:​
After Facebook acquired WhatsApp in 2014, it attempted to share WhatsApp user data with its main
platform. However, EU regulators intervened, citing violations of the General Data Protection
Regulation (GDPR).

Key Takeaways:

●​ The GDPR requires explicit user consent before sharing personal data.
●​ Facebook was fined for failing to comply with European privacy laws.
●​ This case demonstrates the importance of data protection laws in international business​.

Case Study 3: Adidas vs. Ecco - Intellectual Property Dispute

Summary:​
Adidas sued Ecco, a footwear company, for trademark infringement related to its iconic three-stripe
design. Adidas claimed that Ecco’s shoes created brand confusion by using a similar pattern.

Key Takeaways:

●​ Intellectual property (IP) protection is crucial in global markets.

●​ Companies need to register trademarks in multiple jurisdictions to protect their brand.
●​ This case highlights legal challenges in enforcing IP rights across different legal systems​.

Case Study 4: China’s Crackdown on Fake Apple Stores

Summary:​
In 2011, Chinese authorities shut down several fake Apple stores that were selling counterfeit iPhones
and MacBooks. The stores looked identical to real Apple retail locations, tricking customers into
believing they were official.

Key Takeaways:

●​ Trademark enforcement varies by country, making global brand protection difficult.

●​ Businesses should work with local legal teams to monitor counterfeit risks.
●​ Stronger international cooperation is needed to fight global intellectual property theft​.

These cases illustrate how companies face legal, ethical, and regulatory challenges in global business.
The FCPA, GDPR, and intellectual property laws play a crucial role in maintaining fair business
practices worldwide.

Final Case Study: Can Korean Entertainment Companies Compete with Pirates?

Introduction: The Rise of Hallyu (Korean Wave)

 ●​ Over the last 15 years, South Korean entertainment, particularly K-dramas, has gained global
popularity.
●​ Shows like Descendants of the Sun have been viewed over 2 billion times in China.
●​ South Korea’s entertainment exports exceeded $5.3 billion in 2014, growing at 13% annually​.

The Problem: Piracy in the Digital Age

●​ Most international viewers watch South Korean dramas for free on illegal streaming websites.
●​ Piracy websites like mysoju.in and others profit from ads while providing unauthorized
low-quality streams.
●​ Major Korean content providers (MBC, KBS, SBS) constantly battle piracy, but taking down
illegal sites is like fighting a Hydra—for every site removed, new ones appear​.

Legal Challenges in Enforcing Copyright

●​ Many piracy websites operate in foreign countries, making it difficult to take legal action.
●​ The global nature of the internet means content can be copied and distributed instantly.
●​ South Korean entertainment companies struggle to monetize international audiences because
consumers prefer free illegal options.

Possible Solutions: Learning from History

1.​ Ad-Based Streaming Model

○​ Instead of fighting piracy, Korean content providers could embrace free streaming with
ads.
○​ Similar to Hulu and YouTube, this model generates revenue through advertisements.
2.​ Improving Streaming Quality
○​ Legal platforms should offer better viewing experiences (e.g., faster servers,
high-definition quality).
○​ Users might prefer legal options if they provide a superior experience over piracy sites.
3.​ Partnerships with Streaming Platforms
○​ Platforms like Netflix and Viki successfully distribute Korean content legally.
○​ More exclusive licensing deals could reduce piracy while ensuring profitability​.

Key Takeaways

●​ Korean entertainment is booming, but piracy threatens profits.

●​ Legal enforcement is difficult because pirate sites operate internationally.
●​ The best strategy might be embracing ad-supported free streaming while offering better user
experience than pirate sites.
●​ OnDemandKorea and Netflix partnerships may help combat piracy while monetizing global
audiences.