Introduction to

Chapter I International Business

The purpose of this chapter is to review briefly some of the major topics and issues
involved in international business transactions. The remaining chapters of the book will
expand on the topics outlined in this chapter. The first part of Chapter One highlights the
tremendous growth in international business transactions and some of the causes behind
this expansion. One factor that has aided the expansion of international trade is the
development of a supranational trade law. Chapter One therefore introduces the reader to
the concept of international customary law.
We will examine the ways international business is transacted. The concepts of direct
and indirect exporting, licensing, and direct foreign investment will be introduced. This
discussion will provide a basic understanding of the perceived advantages and
disadvantages of each method of transacting international business. These methods will
be explored further in Chapter Three, along with hybrid ways of transacting business,
such as franchising and joint venturing.
The
second
half of Chapter
One will focus on
the risks involved
in international
business transactions. The great opportunities presented by international business
transactions do not come without risk. Some risks are the same as those in purely
domestic transactions; others are unique to the international business environment. First,
we will analyze how companies evaluate such risks. Second, we will review the generic
risks associated with international business transactions, including risks associated with
cultural and language differences, currency risks, legal risks, and political risks. Finally,
we will look at the tools that have been developed to minimize and manage such risks.
We conclude by discussing strategies for managing international business risks, including
the development of an export plan, use of intermediaries, and a form of international
business known as countertrade.
Ultimately, the goal of teaching international business law is to sensitize future
entrepreneurs to the risks of international business and the ways to manage such risks. A
savvy entrepreneur is adept at analyzing risk and is knowledgeable about the techniques
to minimize risk. After Chapter One introduces the reader to the risks of international
business transactions, the rest of the textbook will explore more fully how such risks are
minimized in the areas of exporting, direct foreign investment, and intellectual property
transfer.

The Global and Regional Marketplace

The relaxation of international trade barriers after the Second World War has produced a
dramatic increase in world trade in goods, services, and technology
1

http:,
U.S. Bureau of Economic
Affairs:
http://www.state.gOv/e/
eb/tpp. Information on U S.
liade programs with links to
NAFTA and WTO Web sites.

Part 1

licensing. A number of factors have facilitated this expansion in international trade including:

http:,
U.S. Department of
Commerce Buieau of
Economic Analysis:
http://www.bea.doc.gov.
Provides statistics pertaining
to economic activm.

Legal and Ethical Environment of International Business

Seven Rounds of General Agreement on Tariffs and Trade (GATT) Negotiations

The expansion of GATT with the adoption of the 1994 World Trade Organization (WTO)
Agreements into other areas, such as trade in services, technology' transfer, and foreign
investment
The deepening of regional trading blocks, such as the European Union (EU) and the North
American Free Trade Area (NAFTA)
The disintegration of the Soviet Union and Warsaw Pact and the advent of "emerging
economies," many of which have become members of the EU
Dramatic advances in telecommunications and information technologies
The development of vibrant international capital markets in Europe and North America
Economic reform based upon capitalist models currently under way in the People's Republic of
China

This list is far from exhaustive, but it illustrates the fact that we live in an age of dynamic
global economic development and interdependence. It should be noted that the threat of terrorism
worldwide, emphasized by the attack on September 11, 2001, has placed a degree of uncertainty on
international trade and travel that is difficult to measure.
The forces listed here have resulted in significant increases in cross-border trade in
manufactured goods and services, international joint ventures, mergers, acquisitions, strategic
alliances and affiliations, infrastructure projects, privatization, and international direct investment.
The liberalization of trade and investment rules has created a "world of opportunities" for the
international entrepreneur.1 The lure of profits from international business transactions has drawn
many domestic businesses into the global marketplace. The mobility of goods and services has
enabled domestic companies to search the world for new markets to sell their products and to
procure component parts used in the manufacture of their products. The producer of goods and
services, or the innovator of technology, can maximize profits with a global business strategy. This
strategy encompasses not only developing foreign markets for a company's products but also
outsourcing materials, labor, and component parts. Even a company that takes a more isolated
domestic sales strategy is likely to be affected by international developments.
The best measure of globalization has been the tremendous growth in the international trade in
goods. Exhibit 1.1 illustrates the trend in world trade over the past few decades and into the early
part of the current decade.
A second measure of globalization is foreign direct investment (). FDI represents the
capital investments made by companies in other countries. It includes the purchase of real estate,
manufacturing plants, service and distribution centers, or foreign businesses. Between 1981 and

1985, total world FDI

averaged $98 billion
per year. By 1997,
FDI had reached $440

billion. According to the United Nations Conference on Trade and Development, foreign direct
investment inflows increased to $735 billion in 2001. The increase in world FDI has, much like
trade, occurred mostly in the three major regional trade aieas of Europe, the Americas, and East
.Asia. Globalization is likely to expand both at the regional level and at the

Sec, gcru rallv Ward Bouer " the tutiire Slrucuue of the Global Legal Maiketplace." The Metropolitan Corporate Counsel
(1999).

Chapter 1 Introduction to International Business Transactions

EXHIBIT 1.1

Trends in World Trade Integration (trillions of dollars)

Source The World Bank, (Anbnl Piosptrts 15 (Washington, D 1995) Reprmted with permission. Copyright 1995 bv
the International Bank loi Reconstruction and Development and the World Bank

worldwide level. The causes of this expected growth include the advance of global
telecommunications and the increased transferability of services and intellectual property. Service
and knowledge industries, such as entertainment, education, and health care, will benefit from the
expansion of the General Agreement on Tariffs and Trade (GATT) into areas other than the sale
of goods. The upward trend in services and intellectual property trade will continue in the next
decade and beyond. The average annual growth rate for trade in commercial services between 1980
and 1993 was 7.7 percent, compared with 4.9 percent for trade in goods. The dollar value of trade
in commercial services grew to $1.6 trillion, with an annual growth rate of 6 percent by 2002, while
the annual growth rate of trade in goods was 4 percent.

Laws of International Business Transactions

International law generalh refers to the historical!) developed transnational rules and norms that
national courts use to regulate three primarv relationships: (1) the relationship between two nations,
(2) the relationship between a nation and an individual, and (3) the relationship between persons or
entities from different countries. This book is primarily concerned with the last tvpe of relationship
the person-to-person relationship between two parties transacting business across national
borders. The first two tvpes of relationships will be reviewed at times, however, because of their
effect upon private business relationships. Thus, the

hup:,
World Bank:
http://www.
worldbank.org. Provides
statistics and information on
international trade and
finance.

hup://
International Court of
Justice: http://www. iejcij.org.

http:
l inks to lex
developments:
http://lexmercatoria.net.
Tins Web sue describes itself
as a monitor tor
developments in international
customan law and Intei net
infrastruc lure

I'art 1

Legal and Fthical Ermmrnnent ot International Business

regulations promulgated b\ the World Trade Oiganizanon (WTO) will be studied because of their
direct impact on the export and import of goods, scnices, and intellectual property rights.
There are numerous sources of international business law. Article 38 of the Statute of the
International Court of Justice'- lists the sources of international lav. In order of superiority the\
are (1) international conventions' and treaties, 4 (2) intei-national custom or general practice. (3)
general principles of lav recognized bv civilized nations, and (4) judicial decisions and scholarh
writings. These arc the same sources of law often used bv pri\ate paities in international litigation
or arbitration proceedings.
The primary source of law in international business transactions is, however, the private
contract entered into bv the business parties. The contract is the first source of law referred to by a
court or arbitiation panel in resolving a contract dispute. At times, howe\ci, the contract raav fail to
provide a solution, either because it does not deal with the issue in dispute or because the parties
inteiprct the contiact different!}. It was once said that "no written contract is ever complete; even
the most carefully drafted document rests on volumes of assumptions that cannot be explicitly
expressed."1 This quote illustrates that a substantial core of an\ international business transaction is
non-legal in nature. Businesspcople prefer the language of business and are often unconcerned with
the legal language of the formal contract document.
Despite this informal attitude, the language of business does tend to be "codified" into legally
recognizable customs and trade usage. This transformation is a well-worn tradition that dates back
to the medieval lex mercatoria.b The lex mer-catoria, or law of merchants, premdes the mechanism
in which day-to-day uses and practices are recognized by businesspeople. as well as bv courts and
arbitral tribunals, as international customan law. It has also been said that "the transforma tion of
international business law signifies more than just an incremental normative change; it signifies a
quite radical revision in the ven prism through which we view transnational deals and disputes."''
This statement indicates that the latter half of the twentieth century saw a broad transformation in
international trade and business. This transformation has resulted in a broad expansion of
international business law.
The reality of trade liberalization and the rapid expansion of exporting in services and
licensing, combined with the technological enhancement of business relationships, have increased
the number of international conventions and supranational responses to globalization. Business
students should incorporate these conventions and standards in their perspective of international
business transactions because they aie often the vehicle for overcoming cultural, language, and
legal differences in cross-border transactions.

2.

Ihe Ink mammal Couu <>i Ju^uce (KJ) 01 Woild C o i n t is kxatecl lhe Unfile in ihe Netherlands Its statute.
a pait ot lhe L nued Nations ( h.ii ler. du tales t la ]< lion ,md pnucis oi lhe conn a. The lerni (omentum is used in
connection w i t h inullilateKil agKcilients as opposed to bilateral ai langcmerif-. 1. The Vienna t.omt utum on the I av\
of'Ticaties dc fines a 1>((H) as " international agieeminl between States
and \1 bv unci national latw" I nder I S law. a t i ea l\ becomes f'edc law and is landing on ledeial. stare
and loial go\cinineiiLs j \ithui Rosen ) Relict lions on the ISC' 45 Ohio Sinir Lira' /. 2S7 (4) (j. Sc
e, gent ralh. R. (joodi 'C'sa^c and Its Rt (eption in Tiansnational omiucici.il law " 4b hit 1 - omp. I .Q. 1 (1111171:
I otd Mustill "The New l.c\ Mercalotht: Tin Hist lwenn 1 i\c Vt .as. 4 bbilxitton Intctnatiunid So (lltSS) 7 Kenneth
Randall & ]ohn E Nouls. ' V New tor Tint i national Business Tiansactionv" 71 Wtrthlilgoit
I lllifiw/l / nw (hiatteih 5 624 ( l'-).

Chaptci 1

Inlmduction to International Business Transactions

The acceptance of generally recognized contract principles, the trend toward economic trade
unions, the adoption of international conventions, and the growth of international customarv law
have all led to common approaches among national legal systems in the area of international
contract law. In the long term, international unification and harmonization arc likely to reduce
transaction costs relating to international contract formation.

International Customary Law

Following standard practices, custom, and trade usage can minimize the risk of legal disputes
stemming from contractual misunderstandings. These secondary sources of international business
law can be divided into two general groups, the first of which includes international conventions or
regional initiatives aimed at harmonizing rules about cross-border transactions. Examples are the
Hague Rules8 on the liability of international carriers of goods by sea and the Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS) within the GATT. 9 Regional efforts
generally re\olvc around major free trade areas such as NAFTA and the EU and also include
broader-based institutions such as the Organization for Economic Cooperation and De\elopment
(OECD).
The second group, the lex mercaloria or customary international law, has developed to bridge
language, cultural, and legal differences among businesspeople throughout the world. The materials
and manuals produced by the Internationa) Chamber of Commerce (ICC) in Pat is illustrate the
evolution of the lex . The ICC was created in 1919 to promote free trade and private
enterprise and to represent business interests at the international level. Members include national
councils from more than sixty countries. Headquartered in Paris, France, the ICC is a
nongovernmental organization whose current mission is to promote world trade, harmonize trade
practices, and provide practical services to businesspeople. These services include the International
Court of Arbitration in Paris, the Centre for Maritime Cooperation in London, the Counterfeiting
Intelligence Bureau in London, and the Institute of International Business Law and Practice in
Paris. The ICC's UCP 500 (Uniform Customs and Practices for Documentary Credits) 10 and its
INCOTERMS 2000 manual (trade terms) arc examples of international trade customs that have
risen to near-universal acceptance in the international banking and business communities.
International business transactions require a firm understanding of the substantive laws of the
country in which one intends to transact business, and of any relevant international conventions.
Clarity of writing will not overcome the immutable (mandatory) rules of a given country or
international convention. For example, a clearly written, principal-friendly termination clause in an
agency agreement will not survive the evergreen provisions found in a number of European
countries. An evergreen provision is a statutory preemption of the termination and commission
clauses found in agency contracts.

http://

Department of State
Private International
Law Datable:
http://www.state.gov/
s/l/c3452.htm. Provides
information on
international transactional law compiled
bv the Office of Legal
\dvisci.

INTERN ATIONA L

8.

The Hague Rules i odified t mled Slates as the ( aniage of Gouds Sea Act (COGSA) m J936. ^hith applies to
an international \pon oi niipoit shipment lmolwng a bill of lading foi itanspou from 01 to a US
poll. 9 -Ygieement on Tiade-Related \spc CES of Intellec tual PmperO Rights (TRIPS). ] Agiet nienl on faiiffs and
loidi (GAI 1) April 1". 1994. 10. I"hi I'C I'iiasf iist published in 1933 and subsequent^ ie\iied in 1951. 1962. 1074 1983.
and 1993 L'CP 00 t ame into <. I(e< t on jamtai \ 1 19<-4

Pait 1 Legal and Ethical Lmironment of Intel national Business

Preventive Contracting and the CISG

Most international business disputes stem from poorly written contracts or the parties'
failure to recognize kev substantive issues. Given the universal nature of business
transactions and the globalization of the marketplace, contractual failures attributable to
inherent linguistic and cultural differences have significantly diminished, but when they
do occur, they can lead to high transaction costs. Another cause of legal disputes is the
existence of fundamental differences in national rules interpreting contractual terms.
Thus, a primary way to understand the risk of international business transactions is to
re\iew cases and arbitral decisions dealing with contract disputes.
Under the United Nations Convention on Contracts for the International Sale of
Goods (CISG),11 a written contract is not required and a contract ma\ be proved by "
means including witness testimony." 12 In practice, manv business transactions are
characterized by a high degree of informality. An English court noted in this regard: "One
has to bear in mind that commercial men do not look at things from the lawyer's point of
view."13 Despite the informal nature of business contracting and the common use of
standard forms, howe\er, it is likely that sophisticated business-people are fully aware of
their national rules of contract and the supportive legal sanctions. For fbat reason, it is
recommended that even sale of goods transactions governed by the CISG should be
based upon at least a semiformal writing. This seems especially necessary, given the
difficulty of procuring reputable business partners in foreign countries and the obstacles
of language and culture, including differences in negotiating styles. These factors, and the
potential difficulty and expense of obtaining a legal remedy in a foreign country, justify
the additional time spent researching legal issues and writing a contract. A carefully
written contract often highlights the latent differences of language and law while there is
time to reconcile differences before the execution of the contract. Preventive contracting
diminishes the likelihood of disputes about contract interpretation.
What are the generally recognized principles of international business law? What are
some of the fundamental contract law differences among the major national legal systems
of which the U.S. entrepreneur should be aware? What are the typical characteristics of
the export or import contract? These questions will be addressed in Chapters Seven and
Eight on international contract and sales law.
Behind every business transaction are the fears of nonperformance and of one party's
using the law to obtain a legal or equitable remedy. Understanding international contract
dispute resolution is important in order to negotiate and draft an effective contract. Just as
prenuptial agreements are written in anticipation of a possible divorce, contracts should
be written in anticipation of possible contract disputes. What can international
businesspeople write into their contracts to make dispute resolution less likely to be
needed? What can they write into the contract that would make dispute resolution less
painful or costly in the event it is necessary? What can be included in the contract to
increase the chances for success in a dispute resolution? These questions will be
addressed in Chapter Four on international commercial dispute resolution.
11

United Nations Convention "it Contrails for the Intel national Sale ot Coods \piil II. 1480, t N. Doc.
A'CONF<J7'lK. Annex I, iepnnteri in 19 I.L M. 66K. 12. CISC at Article 11 13 Hugh Beale & Tom Dtl^dale, "Conn
acts Betwern Businessmen. Planning and the L'se ot Contractual Remedies
2 Hnttsh \\ of Law if So(irt\ lb, 4 (1975).

Chaptei 1

Introduction to International Business Transactions

Scope of International Business Transactions

All business transactions imohe considerable risk. The essence of being a busi-nessperson or
entrepreneur is a willingness to confront risk of loss, in the search for profits. Profit seeking or risk
taking underscores the capitalistic, free-market system. The most consistently successful
entrepreneurs are those who take steps to avoid or at least minimize risk, and risk-aversion
techniques and strategies have been developed to pro\ide stability and security to business
transactions. Risk minimization is essential for both domestic transactions and those that cross
national boundaries, but there are profound differences in approach between international and
domestic business transactions.
The basket of risks associated with an international transaction is different in many ways from
that of a U.S. domestic transaction. Businesses' efforts to minimize risk diffei, too. Many
international risk management devices, although long-standing, are likelv to be unfamiliar to the
U.S. businessperson on his or her initial foray into exporting, licensing, or direct foieign
investment. International dealings are further complicated by the fact that the basket of risks to be
confronted is constancy fluctuating, depending on the type of business entitv, the type of good or
service being sold, the country of the other party, the country of performance, and the means of
transportation.
At the broadest level of analysis, the risk characteristics depend largely on the type of
transaction. Transactions are categorized under four general groupings: exporting-importing (sale
of goods), sale of services (consulting, distribution, transportation, marketing, sales), licensing
(technology or intellectual property transfer), and direct foreign investment (foreign operations).
This classification is overly simplified because many transactions display characteristics of two or
more categories. We will examine vehicles of doing businesslike franchising, joint venturing, and
countertradeindependently of classification, since these three vehicles are hybrids of two or more
of the four broader categories. The franchise transaction generally involves the contractual transfer
or licensing of a bundle of intellectual property lights, know-how, trade secrets, and possibly the
sale of goods or services. The joint venture is most closely associated with direct foreign investment but may also involve the transfer of goods, services, technology, and capital. Countertrade is
a form of exporting used to overcome the risks of currency convertibility local participation
requirements, and restrictions against the repatriation of capital, profits, or hard currency.
Countertrade can also be used within the framework of a joint venture or technology transfer. These
forms of doing business internationally will be more fully explored in Chapter Three on
international business strategies.

Indirect and Direct Exporting

The most popular method of transacting business internationally remains the export of goods and
services, which is generally divided into indirect and direct exporting. The principal advantage of
indirect exporting for a smaller company is that it ptovides a wa\ to penetrate foreign markets
without the complexities and risks of direct exporting. A number of different kinds of intermediary
firms are utilized in the area of indirect exporting. A company may contact commission agents or
buying agents who find foreign firms that want to purchase U.S. products. Such

http:/
International Trade
Administration.
http://www.trade.gov.
Provide;, export ;ISSLStancc and information
on doing business with
foreign countries.

http://
V S. government links:
http://firstgov.gov.
Provides links to all
relevant government
Web bites.

agents seek to obtain the desired items at the lowest possible price and are paid a
commission by their foreign clients. In some cases, the agents may be foreign
government agencies or quasi-governmental firms empowered to locale and purchase
desired goods.
An indirect exportci ma) also hire an export management company (EMC). An
EMC, in essence, acts as the export department for one or several produceis of goods or
services. It solicits and transacts business in the names of the producers it represents or in
its own name for a commission, salary or retainer plus commission. Some EMCs offer
immediate pa\ merit for products, either by arranging financing or bv directlv pint basing
products tor resale. EMCs usuallv specialize by product line or bv foreign market. The
best EMCs know their products and markets very well and usually ha\e well-established
networks of foreign distributors already in place. This immediate access to foreign
markets is one of the principal reasons lot-using an EMC. One disadvantage to using an
EMC is that a manufacturer ma) lose control o\cr foreign sales. Control is an important
issue for a manufacturer concerned with maintaining its product and compam image in
foreign markets.
A manufacturer that wants to minimize its involvement may sell its goods to an
export trading company (ETC). An ETC takes title to the product and exports for its
own account, and for the manufacturer the transaction is essentially a domestic sale.
Some special ETCs are organized and operated b\ producers. These tvpes of ETCs can be
organized along multiple- or single-industry lines and can represent producers of
competing products. The U.S. Congress has encouraged the growth of ETCs through the
enactment of the Export Trading Company Act of 1982, which allows banks to make
equity imestments in commercial ventures that qualify as ETCs. In addition, the ExportImport Bank (Eximbank) of the United States is allowed to make working capital
guarantees to U.S. exporters. The Office of Export Trading Company Affairs (OETCA),
within the U.S. Department of Commerce, promotes the formation and use of U.S. export
intermediaries and issues export trade certificates that provide limited immunity from
U.S. antitrust laws.

An
indirect
exporting method
similar to using an
ETC is selling
goods to an export

agent or remarketer. Export agents or remarkeiers purchase products directly from the
manufacturer and then pack and mark the products according to their own specifications.
They sell overseas through their contacts in their own names and assume all account
risks. The U.S. manufacturer relinquishes control over the marketing and promotion of
its product, which could have an adverse effect on future sales efforts abroad.

Direct Exporting
A compam new to direct exporting generally treats export sales no differently from
domestic sales, using existing personnel and organizational structures. However, there are
advantages to separating international from domestic business, including centralization of
specialized international market skills and focusing of marketing efforts. Regardless of
how a company organizes.for exporting, it should ensure that the structure facilitates the
marketer's job. Experience shows that a company's success in foreign markets depends
less on the attributes of its products than on its marketing methods.
Once a company has been organized to handle exporting, it must select the proper
channel of distribution in each market. These channels include sales

Chapter 1

Introduction to Irutrnational Business Transactions

representatives, agents, distributors, retailers, and end users. A foreign sales

representative is the equivalent of a manufacturer's representative in the United States.
The representative uses the company's product literature and samples to present the
product to potential buyers; a representative often handles many complementary lines
from different manufacturers. The sales representative usuallv works on a commission
basis, assumes no risk or responsibility, and is under contract for a definite period of
time. The contract defines territory, terms of sale, method of compensation, reasons and
procedures for terminating the agreement, and other details. In contrast, a foreign agent
normally has authority to make commitments on behalf of the firm he or she represents.
Any contract should state whether the representative or agent does or does not have legal
authority to obligate the firm.
The foreign distributor is a merchant who purchases merchandise from a U.S.
exporter, resells it at a profit, and generally provides after-sales support and service. The
distributor usualh carries an inventory of products and spare parts and maintains adequate
facilities and personnel for normal servicing operations. The U.S. expoiter must caiefulh
screen all potential representatives, agents, or distributors. The following information
should be obtained and reviewed: (1) current status and histoiy, including background on
principal officers; (2) personnel and other resources (salespeople, warehouse, and service
facilities); (3) sales territory covered; (4) current sales volume; (5) typical customer
profiles; (6) methods of introducing new products into the sales territory; (7) names and
addresses of U.S. firms currently represented; (8) trade and bank references; and (9), if a
foreign company, the company's view of the in-country market potential for the exporter's
products. This information is not only useful in gauging how much the representative
knows about the exporter's industry but also provides valuable market research in its own
right. Credit reports are available from commercial firms and from the Department of
Commerce's International Company Profiles program. To protect itself against possible
conflicts of interest, a U.S. firm must also learn about other product lines that the foreign
firm represents.14

Evaluating Risks Through Market Research

To be successful, international entrepreneurs and exporters must assess foreign markets
through market research. Exporters engage in market research primarily to identify' their
marketing opportunities and constraints and also to identify and find prospective
customers. A company's market research should determine the largest foreign markets for
its products and identify trends, outlook, conditions, practices, and competitors in those
markets.
In conducting primary market research, a company collects data directly from the
foreign maiketplacc through interviews, surveys, and other direct contacts with
representatives and potential buyers. Primary market research has the advantage of being
tailot ed to a companv 's needs and answering specific questions, but it is time-consuming
and expensive. Because of the expense of primary market research, most films rely on
secondary data sources (see Focus on Transactions: General Sources for Market
Research).
14

MOM ot the in.m ]i.il Tin- s< ( non on dirra cvporting was taken fiom ihe National Trade Data Bank, a jnodutt ot SIAI I
S\ I .S. Orpaimicnl of ( .

10

Part 1 Legal and Ethical Environment of International Business

General Sources for Market Research

Focus on Transactions

Export America.
This monthlv publication of the L;.S.
Department of Commerce contains recent
news stories, market analyses, technical
advice on exporting, uade leads, and
success stories of export marketing.
FedBizOpps. FedBizOpps is the selfdescribed "single government point-ofentry for Federal government pioLurement
opportunities over S25,000."' FedBizOpps
provides government buyers with the
ability to publicize opportunities through
the direct posting of information on the
Internet. In addition, commercial vendors
seeking federal markets for their goods and
services can utilize the FedBizOpps Web
site to "search, monitor and retrieve
opportunities solicited by the entire Federal
contracting community." Trade
Information Center. A comprehensive
source for U.S. companies seeking
information on federal programs and
activities that support U.S. exports,
including information on overseas markets
and industry trends, the center maintains a
computerized calendar of U.S. governmentsponsored domestic and overseas trade
events. Export.Gov. The official export
portal for the U.S. government, Export.Gov
provides basic information about exporting,
partner and trade leads, trade events, export
finance, shipping documentation and
requirements, and pricing. Of particular
importance is the market research provided
by the portal. This market research consists
of country and industry market reports,
trade

agrecmenti and statistics, agricultural

market research, project feasibility studies,
and cotintrv-specific quick reference
guides. Global Business Opportunities
(GLOBUS). The GLOBUS database
pro\ides dailv trade leads from the Trade
Opportunities Program and the Department
of Agriculture, as well as dailv summaries
of procurement activities from the Defense
Logistics Agency, the United Nations, and
the Commerce Business Daily leads.
Economic Bulletin Board (EBB). The PCbased EBB is an online source for trade
leads as well as the latest statistical releases
from the Bureau of the Census, die Bureau
of Economic Analysis, the Bureau of Labor
Statistics, the Federal Reserve Board, and
other federal agencies. National Trade
Data Bank (NTDB). The NTDB contains
export promotion and international trade
data collected by fifteen U.S. government
agencies. Updated each month and released
on CD-ROM, the data bank enables access
to more than 100,000 documents. The
NTDB contains the latest census data on
U.S. imports and exports by commodity
and country; the complete Central
Intelligence Agency (CIA) World
Factbook; the complete Foreign Traders
Index, which contains more than 50,000
names and addiesses of individuals and
firms abroad interested in importing U.S.
products; and many other data sources.
Small Business Administration (SBA).
The SBA markets research-related general
resources.

Secondary market research is conducted .in three basic ways. The first is by keeping abreast of
world events that influence the international marketplace, watching for announcements of specific
projects, or simply visiting likely markets. The second is by analyzing trade and economic
statistics. Trade statistics are generally compiled by product category and by country. These
statistics provide the U.S. firm with information about shipments of products over specified periods
of time.

Chapter 1

Introduction to International Business Transactions

11

Demographic and general economic statistics such as population size and makeup, per capita
income, and production levels by industry can be important indicators of the market potential for a
company's products. The third method of secondary market research is obtaining the ad\ice of
experts, including those at the U.S. Department of Commerce and other government agencies;
attending seminars, workshops, and international trade shows; hiring an international trade and
marketing consultant; talking with successful exporters of similar products; and contacting trade
and industry association staff.
Working with secondan sources is less expenshe and helps the company focus its marketing
efforts. However, the most recent statistics for some countries may be more than two years old.
Also, statistics on sale of services are often unavailable. Yet, even with these limitations, secondary
research is a valuable and relatively easy first step for a company to take (see Doing Business
Internationally: A Step-by-Step Approach to Market Research).

A Step-by-Step Approach to Market Research

Screen potential markets

Step I. Obtain export statistics that indicate

product exports to various countries. Step
2. Identify five to ten large and fastgrowing markets for the firm's product.
Examine them oyer the past three to five
years. Has market growth been consistent
year to year? Did import growth occur even
during periods of economic recession? If
not, did growth resume with economic
recovery?
Step 3. Identify some smaller but fastemerging markets that maj provide groundfloor opportunities. If a market is just
beginning to open up, there may be fewer
competitors. Growth rates should be
substantially higher in these countries to
qualify as up-and-coming markets, given
the lower starting point.
Step 4. Target three to five of the most statistically promising markets for further
assessment. Consult with Department of
Commerce district offices, business associates, freight forwarders, and otheis to help
refine targeted markets.
Assess targeted markets
Step I. Examine trends foi company products as well as related ptoducts that could
influence demand. Calculate overall consumption of the product and the amount

accounted for by imports. Obtain economic

backgrounds and market trends for each
country. Demographic information, such as
population and age, can be obtained from
International Population Reports published
by the U.S. Bureau of the Census and the
United Nations' Statistical Yearbook.
Step 2. Ascertain the sources of competition, including the extent of domestic
industry production and the countries of
origin of the major competitors in each
targeted market. Look at each competitor's
U.S. market share. Step 3. Analyze factors
affecting marketing and use of the product
in each market, such as end user sectors,
channels
of
distribution,
cultural
idiosyncrasies, and business practices.
Step 4. Identify any foreign barriers (tariff
or non-tariff) to the product being imported
into the country*. Identify anv U.S. barriers
(such as export controls) affecting exports
to the country. Country information kits
produced by the OPIC can be helpful.
Step 5. Identify any U.S. or foreign government incentives to promote exporting of
the product or service.

continued

12

Part 1 Legal and Ethical Environment of International Business

A Step-by-Step Approach to Market

3. Draw conclusions
After analyzing the data, the rompam may
conclude that its marketing resources
would be applied more effectively to a few
countries. In general, efforts should be

Research (continued)
directed to fewer than ten markets if the
rompain is new to exporting; one ot too
countries mav he enough to start with.
The compam 's inter nal lesoui ces should
help determine its level of effort.

Souur. .National Trade Data Rank a product ot .STAT I S\ t S .- ot Commeice

Risks of International Business Transactions

The numerous risks associated with international business transactions \ary, depending on
the method of transaction, such as trade, licensing, or direct investment. Thev also \ary
b> what countries the business parties are located in or what country the transaction is to
be performed in. The country where a party is a citizen or national is its home country. If
a party is transacting business in a foreign country, then that country is referred to as the
host country. The varieties of risk that exist to some degree for all countries and all
methods of transacting business ran be grouped into categories. This section will analyze
four categories of international business risks: cultural and language, currency, legal, and
political.
The types of risks that an international businessperson faces, as well as the methods
utilized to minimize such risks, vary from transaction to transaction, depending on a
number of variables. Two of the most fundamental variables are the identity of the host
country and the type of transaction. In general, the level of risk escalates in the three
basic ways of conducting international business, from exporting-importing to licensing
and from licensing to direct foreign investment. We will investigate the different types of
risks involved in these areas of international business transactions. The importance of
assessing host country risk is highlighted by a review of three comparative scenarios (see
pages 13-14). In each scenario, representatives of a U.S.-based compam must weigh the
risks of doing business in two countries by using one of the three basic market entry
strategics discussed in the previous section. The italicized words represent key concepts
that will be defined and explored throughout the textbook.
Using these three scenaiios, we can begin to understand the complexity of the risks
involved in international business transactions. A successful international businessperson
is sophisticated and able to recognize risks and take the appropriate precautions.

Risks in Developing Countries

The level of risk in transacting business in manv developing countries is considerably
higher than in developed countries. Some countries are marked b\

Scenario I: Sale of Goods to Nigeria and Canada

Nigeria has been rated near the bottom of the recent
International Coniiplion I'nceptiom index and Global
Conuption Rcpmt published b\ Tianspaiencv International, a
non-go\enimenlal organization (,XGO) It ma\ be difficult to
undertake business dealings in Nigeria withoutbeing asked to
give a bribe To best understand the risks of doing business
with such a counlrs, it is prudent to order a politi-tal mk
teporthom a professional risk assessment company It js also
advisable to contact the U.S. Stale Depaitment for
information. It is imperative to fully investigate the foreign
parts, including ti edit and reference checks. A strong
compliant e progwmwiW need to be in place to prevent the giving of bribes in violation of the U.S. Foreign Coi > upt Ptactices
Act. In addition, the official Nigerian currency unit, the naira.
is not convertible to a hard cur re like the U.S. dollar,
European euro. 01 British pound. Payment in one of these
hard currencies is unlikeh because of government restrictions
against the lepatriation of such currencies from the countn.
Thus, the risk of doing business, even in the relatiselv riskfree method of exporting, mas be too great a problem in a
place like Nigeria.
Ans exporting to snch a rountrv needs to be supported by
a confirmed letter oj credit from a reputable international

bank. The currency convertibility and I N T E R N ATI O N A L

repatriation problems could be
overcome through a countertrade transaction in which goods
are exchanged for each other or an export transaction is
linked to an import transaction. Another device to eliminate
the risk to a company is to find an export trading company
willing to perform the transaction on its own account.
Finally, the costs and feasibility of obtaining political and
credit ri.sk insurance should be investigated. The OP1C,
Eximbank, and the MIGA provide various types of insurance.
In contrast to exporting to Nigeria, exporting to Canada
offers a low level of risk. Country and currency risks are
minimal, given that Canada is a stable, industrialized country
and a member of the NAFTA. Although currencs fluctuations
are possible, the Canadian dollar is freely convertible into the
U.S. dollar. Currency fluctuation risk may be a concern in a
long-term transaction, and both parties may manage that risk
through a variety of hedging techniques. In a one-shot export
transaction, the risk of a dramatic currency rate change is
unlikeh-. The U.S. exporter can eliminate all currency risk bv
simply requiring payment in U.S. dollars.

Scenario 2: Licensing Technology to the People's

Republic of China and France
The licensing of technology and the transfer of intellectual
property rights present the next level of risk in international
business transactions. Whenever discloses confidential infoimation and trade secrets to a third party, there is
always a risk that the information ma\ be further disclosed to
unauthorized parties. The problem is confounded when that
disclosure is made in a foreign country that is not protectee
of intellectual property.
China has acceded to numerous intellectual property
rights conventions, such as the Berne Convention, but in the
past the level of trademark, cops right, and patent infringement thiough puacs and counterfeiting has been rela-tiseh'
high. Costh and time-consuming legal action to prevent the
importation of illegal gray market goods has been the onls
effectise countei measure. It is hoped that China's lecent
induction into the WTO svill result in greater enforcement of
intellectual piopcrts lass" In the meantime, the Ik en so) needs
to negotiate a tiansfei agieemtnt that includes contractual
piotections against the misuse of the licensed information.
The problem remains ss hethei such protections sull be
enforced To reduce the cost of enforcement and increase the
likelihood of success, the

I N T E R N AT I O N A L

licensor should consider altei native dispute resolution

methods such as mediation and arbitration. It is also
important for the licensor to understand that, unlike in the
United States, the licensing agreement may not be a totally
private affair. Uess developed countries, former communist
countries, and China often require gosernment approval and
registration of licensing agreements. The contract is likely to
be reviesved, and pro-licensor clauses modified. Clauses
most susceptible to revision include the royalty,
confidentiality, termination, and grant back clauses.
In contrast to China, France has an established record of
intellectual property protection. It is important for the
intellectual property owner to register its rights under the
patent, cops right, and trademark laws of France before
entering any transfei agreement. The license 01 transfer
agreement is generalh enforced as written under French lass-,
but superseding EU Regulation <, dealing with licensing of
patents and intellectual property- must be addressed, and
certain provisions that arc-legal undei U.S. lasss maybe
illegal under FU competition (antitrust) law.

14

Pari 1 Legal and Ethical Environment ol International Business

Scenario 3: Purchasing a Company in the Russian

Federation and Germany
The riskiest of all international business transactions is direct
foreign investment, which can range from opening a branch
office to purchasing an existing companv or building a
manufacturing facility. Foreign direct investment is riskv
primarilv because it makes a companv susceptible to a wide
range of host country Inws, These laws cover the a;eas of
employment and labor, environment, health and safety,
product liability, and taxation. In considering direct foreign
investment, the first decision is what tvpe of legal vehicle
should be t hosen to operate the foreign enterprise. The most
popular way of doing business is to establish an independent
subsidiary under the laws of the host cotmtrv.
In purchasing an existing compam in Russia, the gieatest
risk is the uncertainty in the meaning and enforcement of
commeicial laws. Most of the current Western-styled laws
were enacted following the fall of communism in 1991. The
supporting jurisprudence found in Western legal systems has
yet to be developed bv the Russian courts; in fact, the
widespread ineffectiveness of the Russian legal system has
been well chronicled. Russia is a countrv wheie the use
oiajotr/l venturrmth an established Russian partner might be
advantageous. A joint partner can share the risks and provide
a portion of

N T E R N AT I O N A L

I N T E R N AT I O N A L

the capital 01 offer necessary

government contacts and a dis- I N T E R N AT I O N A L
tribution s\stem. Joint ventures
have to be appi oved or regislei ed with government agencies, and failure to register can lead to severe negative
consequences such as the dissolution of the joint venture. In
contrast, purchasing a companv in Germany is much the
same as buying a company in the United States. Theie is
little likelihood of government expropriation or
nationalization in Germany. Germain's pro-worker labor
laws, however, prohibit an acquiring firm tiom ignoring
existing collective bargaining agreements. The employmenlat-will doctrine of the Lnited States allows an acquiring firm
to downsize the workforce with litde legal restraint, but in
Germanv employment is viewed as a property right that must
be respected. Anv substantial changes in the workforce, such
as layoffs or plant closings, must be submitted to a works
council made up of employees. Finally the corporation laws
in both Russia and Germany should be researched. The
limited liability provided bv the corporate entity is sacrosanct
in U.S. law, but in foreign legal systems an attempt to pierce
the rorporale veil to hold a parent companv or a joint venture
partner liable is more likeh to be successful.

arbitrary government actions, excessive taxation, ineffective legal and dispute res olution systems,
and a high degree of conuption. These countries find it difficult to interest foreign investment.
Therefore, the best and possibly the only way to conduct business in these countries is by
exporting. Some countries have passed laws to assure foreign investors and businesspeople by
legally attempting to reduce the risks of doing business. Mexico passed the Foreign Investment Act
of 1993 in order to attract and protect foreign investment. It opened large portions of the Mexican
market to foreign ownership. However, in certain strategic economic industries, apptoval of the
National Commission of Foreign Investments is needed for foreign ownership of greater than 49
percent, while some industries, such as oil, electricit\, and railroads, remain reserved for Mexican
nationals. The Foreign Investment Act provides expedited procedures to gain governmental
approvals.
Russia has enacted a regulation on hard ctlrrencv control that attempts to placate foreign
investors' fears about the repatriation of hard currencies. The law requires anv purchase or sale of
foreign currencies to be approved by the Central Bank of the Russian Federation. Currency control
is also delegated to the State Customs Committee, the Ministry of Finance, and Inspector of
Currency Control. However, Article 8 of the Hard Cunencv Law recognizes the right of
nonresidents

Chapter 1

Introduction to International Business Transactions

15

"to freely transfer, export, and transmit hard currency if that hard currency was previously
transferred or imported to the Russian Federation." The law mandates strict bookkeeping
requirements for all hard currency transactions. Residents and nonresidents must maintain records
of their hard currency operations for a period of five years.
In 2004, the National People's Congress, the legislative assembly of the People's Republic of
China, voted to amend the national constitution to provide formal governmental guarantee of
private property rights. The amendment specifically provided that "legally obtained private property
of the citizens shall not be violated." The amendment <; onstitutes a formal renunciation of the
Maoist doctrine that condemned private ownership of property and serves to place such ownership
on an equal legal footing with state-owned property. Such standing benefits not only the indigenous
Chinese business community but also the growing number of foreign entrepreneurs maintaining
investments in the country since the initiation of economic reforms in the late 1970s.

Language and Cultural Risk

In the past, a major obstacle to international business transactions was the transacting parties'
differences in language and cultural background. Language difficulties have diminished
significantly because of the precipitous rise in foreign language proficiency. Nonetheless, even
when dealing with a foreign counterpart who speaks English, misunderstandings can still occur.
One device to overcome language differences is to have the contract drawn in the languages of both
parties. But the Falcoal, Inc. v. Kurumu case that follows illustrates that even this precaution may
fail to overcome inconsistencies that may result from translation. The language problem in this case
revolves around the

Falcoal, Inc. v. Kurumu

660 F.Supp. 1536 (S.D.Tex. 1987)

David Hittner, District Judge. Plaintiff Falcoal, Inc. is an

American corporation having its principal place of business
in Houston, Texas. Defendant Kurumu (TKI) is a commercial
entity, owned and controlled by the Turkish government. TKI
decided to import a portion of Turkey's coal supply. In an
attempt to solicit bids, TKI issued a notice announcing a
"sartname" ("terms and conditions"). This announcement was
made in local Turkish-language publications. The sartname
distributed bv TKI was issued in Turkish and provided by its
terms that any conflicts as to its terms would be settled by
reference to the original Turkish language version. Falcoal
submitted the bid that was ultimateh accepted by TKI.
Falcoal's bid was signed and submitted bv its authorized
agent, Zihni, a Turkish compam. The negotiation of the
contract took place entirelv in x\nkara, Turkey.

After the parties had agreed to the terms, Zihni prepared

two copies of the contract, an English version and a Turkish
version. Although the parties assert that they believed the
content of the two versions to be identical, the English
contract and the Turkish contract contain forum selection
clauses which directly contradict each other. The Turkishlanguage version provides that "the final jurisdiction for the
settlement of any disputes, in the case of the PURCHASER
[TKI] submitting a claim, lies within the jurisdiction of the
Houston commercial courts and, in the case of the
SUPPLIER [Falcoal] submitting a claim lies within the
jurisdiction of the Ankara commercial courts." The Englishlanguage contract, by contrast, provides that anv dispute
"shall be Finally settled in Houston and submitted to the
jurisdiction of the Courts of the U.S.A. if the claim is put
forward by Supplier [Falcoal] and in

16

Pair 1

Ankara, Tuikev, and submitted to the Tuikish Couits if the claim is

put forwaid b\ Buver [ I K I]
Pursuant to the contract. Falcoal was to deliver 100,000 tons of
coal to a shippei of choice. Falcoal agreed to post a
performance bond in an amount equal to 10 percent of the contract
piice and, pursuant to this agreement, Citibank International-Ankara
issued a per-toi mance bond in fa\ oi oi TKI in the amount of
S400,000 This bond was sectued b\ a lettei of credit opened bv
Falcoal at Citibank International-Dallas. The contiaci further
provided that, to secure pav ment for the coal, TKI as to open a
lettei of credit in New York fortv fi\ e dav s before shipment. TKI
failed to open this letter of redit. When the coal was not shipped,
TKI, allegedlv wiongfullv and without authorization, diew on
Falcoal's peifoimance bond. Falcoal .subsequenth brought this suit
against TKI alleging breach of contiact for failing to open the New
York lettei of credit in Falcoal's favor, conveision and fraud for
wrongfulh drawing on Falcoal's pcifoiniance bond, and injurv to
Falcoal's business leptuation. TKI has moved to dismiss, alleging
lark of subject mattei jurisdiction ancl lack of personal jurisdiction.

Subject Matter Jurisdiction

TKI asserts that this Court lacks subject mattei jurisdiction because
TKI, as an entiu of the Turkish government, has sovereign immunity
undei the Foreign Sovereign Immunities Act of 1976 (FSIA), 28
U.SC. 1602 el seq However, Falcoal contends that TKI waived
sovereign immunitv b\ agi eeing to a foi um selection clause and
falls within the commercial exception of the FSIA. The waiver
provision and commeicial exception aie found in section 1605(a):
Section 1605 (a) A foieign slate shall not be immune from the
jurisdiction of rout ts of the United States or of the States m an)
ease(1) in xt'/urh the foreign state has waived its immunity either
explicitly or by implication, notwithstanding am, withdrawal of the
waiver which the foreign state may pvrpmtto effect except in
accordance with the terms of the waiver,
(2) in which the actum is based upon a commeicial activity
carried on in the United States ft the foreign Stale, or upon an act
performed in the United Stales in connection with a commeicial
activity of the foreign state elsewhere; oi upon an act outside tlie
territory oj the I 'nited States in connection with a commeicial
activity of the foreign slate elsewhere and that ad causes a direct
effect in the I nited States.
This Court would find ment to Falcoal's "waivei" argument, were the
F.nghsh version forum clause the onlv clause at issue. Howevei, the
Court cannot ignoie the existence of the lurkish contract, whose
forum clause provides for suit in Houston when TKI is the plaintiff.
That contiact expicvssh provides for suit against TKI m

Legal and Ethical Fmn eminent of Inlet national Business

Tuikev Cleath, tinder the facts of (his case where, as here, there are
two contradictoi v foi um clauses and wheie die issue of which
foium clause should tontiol is vigoiouslv contested, the Englishlanguage clause cannot be said to constitute a waivei of soveieign
immuiiitv.
"I he Court next teviews Falcoal's aigumeiit that TKFs actions
place it within the exceptions to sovereign nnmu-nitv set forth in
section 1605(a)(2) Cleailv tins action is not one ''based upon
commeicial activitv canicd on [bv IKI] in the United States " I he
FSL\ defines such commercial activitv as activitv "having substantial
ontact with the United Stales." The meie provision for ment in
the United States, howevei, is not a "substantial contact' meeting the
tesl foi commeicial activitv undei the FSIA. It lemains foi this Court
to determine whcthei TKTs conduct falls within the thiid clause of
section 1605(a)(2) as to whethei the conduct alleged against TKI
constitutes "an act outside the teintorv of the United States in
connection with a commeicial activitv of the foreign state elsewhere"
which "causes a direct effect in the United States." At issue is the
definition of "direct effect."
asserts, and Falcoal has not shown olheiwise. that it has had
no contacts with the Texas forum, nor in fact with the United States,
other than us involvement in the contiact which is the subject of this
suit That contract was solicited, negotiated, drafted, and executed in
furkev and in the Turkish language. The contract itself does not
establish minimum contacts with the Texas forum. Not does TKI's
agreement to pav through a lettet of ciedit in New Yoik create
peisonal jurisdiction. Ihus, in the instant case the constitutional
requirements foi exercise of in [jeisonam jurisdiction are lacking.
In an effort to lesolve the tension between 28 U.S. S 1605(a)
(2) and 28 U S.C 1330(b). courts have taken two approaches.
Some have held that an effect cannot reach the level of "direct"
effects described in the statute and thus soveieign immunitv cannot
be overcome, unless the effect fulfills the "minimum contacts"
requirement. Other courts have given "direct effect" its lileial
meaning and found such an effect when an American corpoiation has
suffered a direct financial injuiv due to a foieign sovereign's conduct
This Couitfinds the lattei appioach to be most leasonable. The Couit
holds that the conduct of TKI in drawing on Falcoal's peiformance
bond was an action which caused a direct effect in the United States,
ancl thus TKI cannot claim soveieign immunitv fiom this suit.
Subject mattei jurisdiction, therefore, exists ;

Personal Jurisdiction
Consliuitionallv, this Court cannot exercise peisonal jinisdiction
ovei TKI unless TKI has taken some action

Chapter 1

Intioduction to International Business Transactions

that ma\ be consulted as an ex:picssion of waive i or implied

consent to the exeicisc of such jutisdicnoii Falcoal contends
that such an implied consent is found in the foinm selection
clause of the Fnglish version ton tract. This Coiut could find
waiver, howevei, onh if it weie found that the Tuikish
language clause is imen foiceable and the English version
\alid The Gouit thus fared with the existence of two
contiadicton clauses, must look to the law of the appiopiiate
forum to detei-mme w h i c h clause to enfoite. Because the
contract was solicited, negotiated and executed in Turkey
Tuikish law must apph. Both parties agiee that, ere Texas
law to apph, the existence of contiadiclorv clauses would
evidence a lack of met ting of the minds on the issue of
foiuin foi suit, and the clause should be diopped from both
contracts. However, m the absence of a determination of
similai Tuikish law, the clauses cannot be eliminated from
the contract. Although this Court finds that TKJ has been
divested of its soveieign immunity to this suit b\ us actions in
Tuikev having a dirett effect in the United States and, thus,
subject mattei junsdiction

17

exists, the Court finds that it lacks personal jurisdiction over

TKI. Motion to Dismiss is GRANTED.

Case Highlights
Importance of the forum selection clause in
international contracts
Use of letters of credit and performance bonds to secure
payments and performances
Defense of sovereign immunity, along with the waiver
and "commercial activity" exceptions
Determining if a court has personal jurisdiction over the
defendant through the "minimum contacts" or "direct
effects" standards
Importance of determining the appropriate law to be
applied
Importance of selecting the language that controls when
more than one language contract is executed

pivotal issues of where the parties mav sue under the contract's forum selection clause and whether
the I .S. court had personal jurisdiction over the foreign defendant.

Risks of Cultural Differences

Business executives who hope to expand abroad should learn about the history, cultuie, and
customs of the countries to be visited. Business manners and methods, religious customs, dietary
practices, humor, and acceptable dress vary widelv fiom country to country. For example, one
should never touch the head of a Thai or pass an object ovei it: the head is consideied sacred in
Thailand. In addition, one should avoid using triangular shapes in Hong Kong, Korea, and Taiwan:
the triangle is considered a negative shape. The number 7 is considered bad luck in and good
luck in Slovakia, and it has magical connotations in Benin. The number 10 is bad luck in Korea,
and 4 means death in Japan. Red is a positive coloi in Denmark, but it represents witchcraft and
death in mam African countries. A nod means no in Bulgaria, and shaking the head from side to
side means ves. The OK sign commonly used in the United States (thumb and index finger forming
a circle and the other fingers raised) means zero in France, is a svmbol for money in Japan, ancl
cairies a yulgar connotation in Biazil. The use of a palm-up hand and moving index finger signals
"come here" in the United Slates and some other countries, but it is considered vulgar in otheis. In
Ethiopia. lepeatedlv opening and closing the palm-down hand means "come here."
Understanding and heeding cultural variables such as these are critical to success in
international business and travel, l a c k of familiarity with the business practices, social customs,
and etiquette of a country can weaken a company's

&

N T E R N AT I O N A L

18

http:.

Depailmcnt of Stale:
http://www.state.gov.
The U.S State
Department publishes
commeicial guides for
numerous foreign.
countries This is A good
plate to itart to learn
about differences in
culture and business
customs.

I N T E R N ATI O N A L

I'ait I

Legal and Hthical Environment of Intel national Business

position in the market, prevent it accomplishing its objecthes, and ultimately lead to
failure. Some of the cultural distinctions that U.S. firms face most often include
differences in business stvles, attitudes toward development of business relationships,
attitudes toward punctuality, negotiating styles, gift-giving customs, greetings,
significance of gestures, meanings of colors and numbers, and customs regarding titles.
U.S. firms must pay close attention to different styles of doing business and the degree of
importance placed on developing business relationships. In some countries,
businesspeople have a vcrv direct style; in others, they have a subtler style and value a
personal relationship more than most U.S. businesspeople. For example, in the Middle
East, engaging in small talk before engaging in business is standard practice.
The U.S. businessperson must also consider foreign customs. For example, attitudes
toward punctuality vary grcatlv from one culture to another and, if misunderstood, can
cause confusion. Romanians, Japanese, and Germans are very punctual, whereas people
in many of the Latin countries have a more relaxed attitude toward time. The Japanese
considei it iude to be late for a business meeting but acceptable, even fashionable, to be
late for a social occasion. In Guatemala, on the other hand, one might arrive from ten
minutes early to forty-fi\c minutes late for a luncheon appointment.
Proper use of names and titles is often a source of confusion in international business
relations. In many countries (including the United Kingdom, France, and Denmark), it is
appropriate to use titles until use of first names is suggested. First names are seldom used
for doing business in Germany. Visiting business-people should use the surname
preceded by the title. Titles such as "Herr Dircktor" are sometimes used to indicate
prestige, status, and rank. In Thailand, people address one another by first names and
reserve last names lor very formal occasions and written communications. In Belgium, it
is important to address French-speaking business contacts as "Monsieur" or "Madame,"
while Dutch-speaking contacts should be addressed as "Mi." or "Mrs." To confuse the
two is a great insult.
Customs concerning gift giving are extremely important to understand. In some
cultures, gifts are expected, and failure to present them is considered an insult, whereas in
other countries offering a gift is considered offensive. Business executives also need to
know when to present gifts, where to present gifts, what type of gift to present, what
color the gift should be, and how manv to present. Gift giving is an important part of
doing business in Japan, where gifts are usually exchanged at the first meeting. In sharp
contrast, gifts are rarely exchanged in Germany and are usually considered inappropriate.
Gift ghing is not a normal custom in Belgium or the United Kingdom either, although in
both countries flowers are a suitable gift when invited to someone's home.
Customs concerning the exchange of business cards vary, too. Although this point
seems of minor importance, observing a country's t aid-giving customs is a key part of
business protocol. In Japan, for example, the Western practice of accepting a business
card and pocketing it immediately is considered rude. The proper approach is to carefully
look at the card after accepting it, observe the title and organization, acknowledge with a
nod that the information has been digested, and perhaps make a relevant comment or ask
a polite question. In addition, it is essential to understand the impoitance of rank in the
other country, know who the decision makers are, be familiar with the business st\le of
the

Chapter 1 Introduction to International Business Transactions

foreign company, and understand the negotiating etiquette and nature of agreements in the
country.13
Another facet of international business concerns selling practices. Because cultures vary, there
is no single code b\ whk h to conduct business. Certain business practices, however, transcend
culture barriers: (1) answer requests promptly and clearly; (2) keep promisesa first order is
particularl) important because it shapes a customer's image of a firm as a dependable or
undependable supplier; (3) be polite, courteous, and friendly; and (4) personally .sign all letters.
The importance of religious practices should not be underestimated; religious and cultural
differences not only directly affect a foreign entrepreneur in the negotiation of a contract but also
subsequently affect employees and agents in the performance of the contract. The Kern v.
Dynalectron Corporation case that follows illustrates the challenges faced b\ an organization in
conducting its business in a foreign country.

Kern v. Dynalectron Corporation

577 F. Supp. I 196 (N.D.Tex. 1983)

Belew, District Judge. Wade Kern filed this religiousdiscrimination suit puisuant to Title MI of the Rights
Act of 1964, 42 U.S.C. 2000e-2000e-17 (1976) against
Dynalectron Corpoiation. On August 17, 1978, Wade Kern
entered into a written contract of employment with the
Defendant, Dynalectron Corporation, to perform duties as a
helicoptei pilot. The work to be performed in Saudi Aiabia
consisted of firing helicopters over crowds of Moslems
making their pilgrimage along Muhammad's path to Mecca.
Those pilots who were stationed atjeddah would be required
to fh into the holy area, Mecca. Saudi Arabian law, based
upon the tenets of the Islamic religion, prohibits the entry of
non-Moslems into the hol> area, Mecca, under penalty of
death. Thus, Dynalectron, in accordance with its contract
with Kawasaki, requires all pilots stationed atjeddah to he (or
become) Moslem. Had Wade Kern continued to work for
Dynalectron, he would have been based in Jeddah and,
therefore, his conversion from Baptist to Moslem would have
been required. Defendant later offered Kern a job as a
member of the aircrew, a position not requiring his conversion. However, Kern declined to take that job. Kern filed a
sworn complaint with the Equal Kmplcnmcnt Opportunity
Commission alleging that he was denied an emplo\ment
opportunity with Defendant due to its discrimination against
him because of his religious beliefs.

One of the several ways in which the defendant can

carry his burden is by estabiishing that the discrimination
was not unlawful since religion may be a bona fide
occupational qualification (B.F.O.Q.). The B.F.O.Q. defense
is set forth in 703(a) of Title VII:
Notwithstanding any other provision of this title it shall not
be an unlawful employment practice jor an employer to hire
and employ employees on the basis of religion, sex, or national
origin in those certain instances where religion, sex, or
national origin is a bona fide, occupational qualification reasonably necessary to the normal operation of that particular
business or enterprise.
The use of the word "necessary" in section 703(e) requires
that we apply a business necessity test, not a business
convenience test. There can be no question but that nonMoslem pilots stationed in Jeddah are not safe as compared
to Moslem pilots. Therefore, Dynalectron's discrimination
against non-Mostems in general, and Wade Kern specifically,
is not unlawful since to hire Moslems exclusively for this job
"is a bona fide occupational qualification reasonably
necessary to the normal operation of that particular
business," 703(a) of Title VII. Notwidistanding the
religious discrimination in this case, the Court holds and
finds that the B.F.O.Q. exception is properly applicable.

15. The in this section ^v.is Liken hum the National Bank pioduct of STAT-t'SA, U Dcp.n
tTiicnl of f ommei ce

20

Pait 1

In Fernandez v. V/yrm Oil Co., (i53 F.2d 1273 (9lli Cir.

1981), a female plaintiff sued her employer foi
drscnminatorily not promoting hei because she was female.
The job to which she would have been promoted required her
to deal with South American businessmen who preferred not
to do business with females. Theie, the Court stated that the
mere fact that it was an international case did not distinguish
it from other cases wherein it was held that mere customer
prefeience would not justify the use ot the B.F.O.Q.
exception. The requirement that an individual be a Moslem
to perfoim the duties of a helicopter pilot in certain portions
of Saudi Arabia is a bona fide occupational qualification
within the meaning of 42 U.S C. 2000e-2(e). Thus. Kern
volun tarilv and unilaterally rescinded his agreement to woik
for Defendant and thus breached his obligation undei the
contract.

Legal and Fthical Environment of International Business

Case Update
The district couit's decision was upheld the U S Court of
Appeals lor the Fifth Circuit in Kern v. Dynaleclwii Cot
. 746 F.2d 810 (5th . 1984).

Case Highlights
The use of a written employment conti act to limit
the emplovei's liabilities
Extraterritorial application of U.S. employment
discrimination laws
The Bona Fide Occupational Qualification defense
(B.F.O.Q.) to an employment discrimination claim
Religion as a B.F.O Q. irr some international business
situations

Currency Risks
Currency risks ate a concern in almost all business ttansactions that cross national bordets. There
are three sepaiate risks that relate to currency and international business transactions convertibility,
repatriation, and currency rate fluctuation. A buver and a seller in different countries rarely use
the same currency. Payment is usualh made in either the buyer's or the seller's cunency or in a
mutually agreed-on currency that is foreign to both parties. Convertibility is the issue of whether
one currency is convertible into another currency. Easily convertible curtencies aie generally
referred to as hard currencies. The world's hard currencies include the U.S. dollar, British pound,
Luropcan euro, Swiss franc, and Japanese \en.
Unlike countries with hard curt encies, countr ies with soit currencies do not pos sess sizable
exchange reset ves and surpluses in their balance of payments needed to comcrt their currencies
into hard ones. Russian tables cannot be converted to U.S. dollars, which lea\es the U.S.
businessperson with limited options, specifically, reinvest the rubles in the Russian ecotiomt or find
an alternate means of payment, such as countertrade. An exporter or investor can overcome any
convertibility problem by requiring payment in a hard currency.
The second currency risk, repattiation, mav present itself when a foreign party attempts to
remove hard currency from a host countiv. Some foreign countries ha\e enacted currency laws that
block the movement of hard currencies outside the countrv Less developed countries, for example,
have limited hard currency reset ves and do not allow them to be used for the purchase of private
goods. Once again, countertrade mav be the only option available to overcome the repatriation risk
of doing business in such countries.
The third anci bioadest tvpe of currency risk is the devaluation of the currency of payment.
The relative value between the dollar and the buyer's currency mav change between the time the
deal is made and the time payment is received. If the U.S. expoi tei agrees to payment in a foreign
rencv and is not properly protected,

Chapter 1 Introduction to International Business Transactions

a devaluation ot the loieign cui lencv could cause the exporter to lose money in the transaction.
One of the simplest \va\s for a U.S. exporter to avoid this type of risk is to quote prices and requite
pavment in U.S. dollars. Then the burden and risk are placed on the buyer to make the currency
exchange. If the buyer asks to make payment in a foieign currency the exporter should consult an
international banker befoie negotiating the sales contract. International banks can help one hedge
against such a risk, if necessary bv agreeing to purchase the foreign currency at a fixed price in
dollars regardless ol the value of the currency when the customer pays. If this mechanism is used,
the fees charged by the bank should be included in the price quotation.
The Iiernuia Distributor v Hernina Snmng Company case illustrates how a party did
not anticipate the risk of a currency rate fluctuation. In this case, a poorly written open price term"'
resulted in significant monetary losses due to an unanticipated curiencv fluctuation.
A loreign importer or exporter can minimize the risk of a negative currency rate change
thiough techniques of hedging. This is accomplished by entering into forward, future, or option
contracts. Some investors specialize in arbitrage, which is the simultaneous buying and selling of
the same foreign exchange in two or more markets to take advantage of price differentials. A
forward contract requires two parties to e\c hange specified amounts of mo currencies at some
future time. The

Bernina Distributors, Inc. v. Bernina Sewing Machine Company

646F2d434 (IOth Cir. 1981)

Distiibutoi of sewing machines biought action against

impoiter ol sewing machines for breath of contract.
Defendant Bernina Sewing Machine fompam (Impoiter), a
Utah corporation, hnpoits and supplies Bernina sewing
machines to plaintiff Beinina Distributors, Inc. (Distributor).
The problems that have arisen relate mosth to pricing and aie
caused bv the fluctuations of exchange rates and decreases in
the value of the U.S. dollai versus the Swiss iianc. The case
invohes a long-term supph contiact to run for se\en years.
The contiact contained an open price team in which "prices
are automatical!* subject to change when factorv costs aie
met eased." Impoitei is required to pav in Swiss francs. The
open price term allowed Importer to mciease puce as
follows- "(a) To the extent of anv increase of factory imoice
costs to Importer, (b) the extent ol anv mciease m dun
chaigcs. (c) To the extent of increases in insurance, freight,
handling, bioker and poitfees, or othei similai chaigcs.
Increases to dutv or factory invoice costs shall be adjusted as
thev occur. Inci eases to all othei chaiges shall be adjusted at
the

commencement of each calendar \ear." But with the

precipitous decline of the dollar in i elation to the Swiss
franc, Importer's costs nearly doubled and thus hahed its rate
of return pei dollai invested.
Logan, Circuit Judge. Importer maintains that the risk
of currencv fluctuations had not been considered oi allocated
in the contract and that under the Uniform Commercial
Code, this "open price teim" should be determined according
to v\hat the court finds to be -sonable. We believe that the
contiact provisions are quite comprehensive and hence, the
staUilon provision is inapplicable to this case. Thus, we
believe the contract places the risk of a diminishing profit
margin on the Importer and that the Importei bears the risk of
currencv fluctuations I he Importer also asserts that the
court's mterpre tation makes the contiact impiacticable under
2-615 of the Uniform Commeicial Code. The U.C.C.
excuses pei-foimance undei a contiact when performance
"has been made impracticable b\ the occurrence of a
contingent the nonoccurrence of which was a basic
assumption on which the contract was made." In our view the
instant

lb Open teim his to i i pi Lei m thai Lilts m stau tin piKf m he p.ud ai a fixed amount The open puce teim
allows foi tlit id|usluu m ot the amount paid based upon sptti li ed \ai bibles ll as tosts of Ljioduc-tion t han^es m
height and msuiaiu t lales and ( hant s in tai llt I ales

22

Part 1 Legal and Ethical Environment of International Business

contract is not one made impracticable by the contingency of

the de\alued dollar. Comment 8 to 2-615 states that this
excuse does "not apph when the contingency in question is
sufficiently foreshadowed at the time of contracting." Also,
cost increases alone do not render a contract impracticable.
The loss would have to be especially severe and
unreasonable. Importer was aware of the possibility of a
reduction in profits due to exchange rate fluctuations and
could have guarded against this contingency. For example, a
cost-plus formula for determining the price could have been
utilized. Furthermore, Importer was represented by counsel
throughout and should have known that the contract provided
for pnee increases only to the extent of actual cost increases.
To grant relief on this issue would be to disturb an
agreed-upon allocation of risk between commercial equals.
The district court did not err in prohibiting Importer from
charging Distributor under the contract's "open price term" a
margin of ten percent on increased cost due to exchange rate
fluctuations. Furthermore, the contract was not rendered
impracticable due to die increase in costs to the Importer
related to the currency fluctuation.

Case Update
The Tenth Circuit Court of Appeals denied Importer's request
for a rehearing in Bernina Distributors, Int. v. Bernina Saving
Machine , 689 F.2d 903 (10th Cir. 1981).

http:/
International Finance
Corporation:
http://www.ifc.iirg. This is
the finance arm of the World
Bank.

Case Highlights
Common practice of entering into long-term supply
contracts.
Use of open price or price escalation clauses to
adjust the contract price over the term of the
contract.
A determination that a risk has been allocated to
one of the parties defeats demand for a contract
adjustment.
Contract law allows for an excuse from not fulfilling a contract. In the sale of goods, the Uniform
Commercial Code 2-615 grants an excuse for
commercial impracticability. The law also allows
the parties to write an express excuse or force
majeure clause.
An excuse for commercial impracticability will not
be granted if the risk was foreseeable orthe burden
on a party is not undulv severe.
Since currency fluctuations are foreseeable, courts
are likely to view them as allocated risks and not
grant an excuse.
It is important to write clear and detailed clauses,
especially in long-term contracts. The Court
suggested the use of a "cost-plus" formula in the
open price term.

problem with a forward contract is that if the underlying deal falls through, the party is still
required to purchase (exchange) the other currency. The futures contract is like a bond that can be
sold prior to maturity. Either party can avoid their obligations under the contract by selling it in the
secondary market.17 A well-developed futures market provides a high level of liquidity but, just as
in the bond market, the value of the futures contract fluctuates, depending on the underlying values
of the currencies.
In the Bernina case, the importer could have hedged by entering a futures contract to purchase
Swiss francs for a fixed amount of dollars. This would have protected it against the subsequent
devaluation of the dollar. In fact, the value of the futures contract would have increased in value in
the futures market because the contract gives a right to buy Swiss francs at a lower fixed price.
Another device used to hedge currency risks is the option contract. A currency option gives a party
a right, but not the obligation, to buy or sell a currency at a fixed rate in the future; a purchaser and
a seller of foreign currencies agree on a specific tate of exchange at a future date. The purchaser
may choose to exercise or pass on the option, thus limiting the"effect of unfavorable exchange rate

17.

In 1972. the Chicago Mercantile Exchange established the hitei national \ Matket for trading in futures
conttacts.

Chapter 1

23

Introduction to International Business Transactions

fluctuations. The seller is paid a fee for tendering the option. The right to seil a currency
in the future is a put option, while the right to buy is a call option. The option is obtained
b\ paying a substantial premium whether the option is exercised or not.

Legal Risk
One of the primary risks in all international business transactions is the application and
enforcement of foreign laws. Host country laws may include restrictions on currency
conversion and repatriation of profits. If a company is deemed to be doing business in a
foreign country, then it may become subject to the legal jurisdiction of a foreign coutt.
Companies that establish a presence in a foreign country must also be concerned with
local employment laws. Many countries impose severe restrictions on the termination of
employees 01 agents, such as requiring lengthy notice requirements and substantial
severance payments. Other host country laws that should be examined include labeling,
marketing, and advertising laws; income and sales tax laws; environmental laws; product
and consumer liability laws; health and safety laws; and antitrust or competition laws. In
order to decrease the uncertainty due to the risks of foreign laws, the United States has
entered into bilateral investment treaties (BIT) with many foreign countries. These
treaties provide the basic legal framework for a company investing in a foreign country.
They generally address issues of convertibility of currency, repatriation of profits,
compensation for expropriation, protection of intellectual property, and
nondiscriminatory treatment of foreign investors.
Because of differences in language, culture, and legal systems, the intentions of
parties in an international transaction may not be easily discernible from their contract.
Therefore, it is imperative, more so than in a purely domestic undertaking, for the parties
to express carefully intended rights and obligations in a written contract. At the lime of
execution, the parties must, with the assistance of their lawyers, review each contract
clause to make sure all parties understand them.
Of course, such a model approach to contract review is not often practical. For
example, in the typical export transaction, there is no single form that both parties read
and sign. The parties simph exchange their own forms in order to effect an offer and
acceptance. Nonetheless, each parry should take the time to carefully review the terms
and conditions in the other party's form before entering into the contract. This is
especially important if it is the first transaction between the contracting parties. It is also
important, particularly in large transactions with a corporation or partnership, to \erifv the
other party's authority to bind the company to a contract.
Often the quality of a contract is erident not in what it says but in what it fails to say,
and an international contract is often the product of "studied ambiguity." 18 Vagueness or
ambiguity in contractual language is employed to achieve the illusion of agreement.
Parties make use of "a kind of Esperanto" in which "parties often draft a contract in
ambiguous form in order to achie\e agreement." 19 The roots of contract ambiguity come
from two sources, the parties negotiating the contract and those charged with its drafting.
A common scenario is that the principals negotiate

18. Johan Ste\D." \ Kind ol F.spu.mio- ] hr tioulm^ of Liability. \o] 4. V. H. Bnks. Let New ^oik. Oxturd Umveisuv
Pi ess 14
14. Ibid. p. 13

http:

International Law
Dictionary:
http://augustl.com/
pubs/diet/ pro\ides
definitions or words
and phrases used in
private and public
international law.

24

http:,
American Society of
International Lau:
http://www.asil.org.
Provides infoimation on
current developments in
international law, along
with links to international
documents and anahsis.

Part 1 Legal and Ethical Lnvironment of International Business

the general framework for an agreement and then nun over to their attorne\s the task of writing the
language of the agreement. Such brief negotiations increase the risk of ambiguity inherent in
interpersonal communication, especially within a cross-cultural context.
A key issue for international businesspeople is to determine at what stage they should enlist the
services of a lamer. Businesspeople often do not use lawyers in the negotiation stage of contracting:
the) \icw them as obstacles to rather than facilitators of agreement. The bttsinessperson-tobusinessperson, face-to-face exchange is a paradigm of how business is done, while lawyers are
relegated to the task of writing the formal documents, hi international contracting, the
businessperson, espe-cialh one new to international dealings, would be well advised to enlist an
astute international transactional lawyer, along with foreign counsel. The issue of trust aside,
international dealings should be evidenced by clearly written and highly negotiated agreements.
Legal systems can differ in substantive laws, procedures, remedies, and levels of enforcement.
Although the fundamental legal concepts dealing with business transactions are similar in the civil,
common, and socialist legal systems, idiosyncratic differences in the rules can result in unexpected
legal liabilities. For example, in Germany the ciyil law svstem recognizes the notion of naihfnst
notice20 in the area of sate of goods. In U.S. law, a party has the right to strictly enforce the delivery
date stated in the contract and can summarily reject a request for more time. In contrast, the civil
law concept of michfnst notice dictates that such dates should not be strictly enforced. A request for
additional time should be granted unless the non-breaching party can give a commercially viable
reason for not granting the requested extension.
Suppose that a U.S. businessperson enters into a contract with a German supplier for deliver}
of goods on June 1. On May 25, the German supplier sends a letter requesting an extension for
delivery to June 30. Under U.S. law, the buyer may simply reject the request and hold the German
supplier in breach of contract if the goods are not delivered on June 1. In fact, the U.S. buyer in this
instance responds by saying that the contract pi crudes for delivery on June 1 and any delivery
beyond that date will not be accepted. On June 1, the goods are not delivered, and the U.S. buyer
obtains substituted goods from another supplier. On June 30, the goods are received from the
German supplier. The U.S. buver responds by rejecting the "late" delivery. Under nachjnst notice, it
is the U.S. buyer and not the German supplier who has breached the contract. Because the U.S.
buyer failed to give a commercially \iable reason for not granting the additional time, the civil law
automatically awards the time extension. Therefore, the delivery on June SO was timely, and the
German can now sue for full contiact damages under German law.
In other instances, the rules of law mav be similar, but the available procedures and remedies
differ significantly. In some countries, the cultural abhorrence to litigation results in difficult) in

finding
adequate
legal counsel and
restricted discovery

options.21 The U.S. Federal Rules of Civil Procedure provide a liberal set of rules that allow for full
discovery of the odier party. Such sweeping discover) techniques may not be available in other
countries. Also, the remedies available to the plaintiff may be of

'20.
21.

.\(t<h['ist nouce is the lequiKinent tli.n a pain t^iam fm ixlension of lime to peifoini ihe connact upon ihe request
ol the other pain \athju\l notu e mil be examined in Chaptei tight
Disto\en is llu pietnal piocess wheieb\ the liliganls imco\ei evidence b\ questioning the opposing pain eitliei
w i l t i n g (mtei logatones) 01 in pel son {depositions! examining documents piourted b\ ibe opposing pain, and
obtaining the lestnnom of independent null p.itl\ witnesses.

Chapter 1 Introduction to International Business Transactions

a different order. The U.S. notions of treble (triple) and punitive damages are not found in most
foreign legal systems, and the U.S. and common law views that prefer to give monetarv damages
are not found in civil law countries. In civil law, the plaintiff is allowed the choice of suing foi
monetarv damages or receiving an order of specific performance that forces the other party to
honor the contract.
Finally, similarities in the substantive laws of a countrv may mask differences in the
enforcement of those laws. This can be seen in the areas of intellectual property protection and
corruption. A number of countries have ratified the primary international property rights
conventions, such as the Paris and Berne Conventions, but have been lax in their enforcement. Lax
enforcement has resulted in high levels of counterfeiting and piracy of trademarks, patents, and
copyrights. Another example is the enforcement of anti-briberv or corruption laws. All countries
prohibit bribing government officials, but lack of enforcement in some countries has resulted in a
culture where bribery has become common. Such an environment places limitations on U.S.
businesspeople piohibited from making illegal payments to foreign officials under the Foreign
Corrupt Practices Act.
A number of countries, especialK in the developing world, have enacted laws specifically
targeted to foreign investment and trade. Examples of such specialized host countiy laws include
laws that protect host country agents and distributors of foreign products from termination without
notice or payment. In some countries notably within the European Uniona foreign exporter or
manufacturer may not terminate its host country agent without paying statutorily determined
indemnity compensation or damages in concordance with evergreen statutes. Evergreen statutes
limit the ability of a principal or employer to discharge an employee or agent.
Some countries limit the amount of equitv ownership that a foreign company may hold in a
host country enterprise. These local participation requirements often result in the foreign company
creating a partnership or joint venture with nationals of the host country. Because of the limited
amount of hard currency in some countries, other laws restrict a foreign investor or exporter from
withdrawing or repatriating theii profits or royalties from the country.
Another common area of host country intervention is in the area of technology transfers. In
some countries, private licensing agreements must be registered and approved by the government.
Pro-licensor clauses involving rovalty payments, termination, and training may be rewritten to be
more favorable to the licensee. These types of specialized host country laws need to be analysed to
determine their impact on a potential foreign investment, export transaction, or intellectual prop erty
transfer. Chapter Fourteen will explore these types of laws in more detail.

Political Risk
Political or country risk broadly refers to the negative consequences that stem from a change in
government policies. In the area of import-export, trade barriers represent the most common risk.
The U.S. trade representative classifies trade barriers into seven general categories.

22.

Import policies, including tariffs and other import charges, quantitative restrictions,2- and
import licensing
Standards, labeling, testing, and certification

V quota -, <m example of a t]u,nilinli\t icsti icnon.

26

http:/
World Trade
Organi7ation:
http://www.wto.org.
Proudes links to all
WTO Agreements.

http:/

Political Risk
Information:
http://www.politicalrisk.net. Provides data
and information on
political risk.

Part 1

Legal and Ethical Environment of International Business

Government procurement restrictions

Export subsidies
Lack of intellectual property protection
Service barriers
Investment barriers

A number of international agreements address trade barriers. The Uruguay Round of

the GATT addressed all of these trade barriers in some fashion. GATT negotiations
traditionally targeted tariff barriers and quantitative restrictions. The original 1947 GATT
contained provisions aimed at "reducing fees and formalities connected with importation
and exportation" (Aiticle VIII), "general elimination of quantitative restrictions" (Article
XI), and the "publication of trade regulations" (Article X). The WTO Agreements that
followed the Uruguay Round of GATT committed the newly formed WTO to a reduction
and elimination of all categories of trade barriers. Non-tariff barriers include import
quotas and other quantitative restrictions, non-automatic import licensing, customs
charges and fees, customs procedures, export subsidies, unreasonable standards,
discriminatory labeling, and discriminatory government procurement policies.
The 1994 WTO Agreements included a separate Agreement on Import Licensing.
Technical barriers to trade are addressed by a number of the WTO Agreements,
including the Agreement on Technical Barriers, Agreement on the Application of Sanitary
and Phytosanitary Measures, Agreement on Customs Valuation, and the Agreement on
Preshipment Inspection. Restrictions on foreign government procurement are the subject
of the Agreement on Government Procurement. Export subsidies were addressed in the
1947 Agreement in Article VI (Antidumping and Countervailing Duties) and Article
XXIII (Nullification and Impairment). The 1994 Agreements also included an
Antidumping Agreement and an Agreement on Subsidies and Countervailing Measures.
Intellectual property protection, barriers to trade in service, and barriers to investment
are dealt with directly in separate agreements: the Agreement on Trade-Related
Investment Measures (TRIMs), General Agreement on Trade in Services (GATS), and the
TRIPS agreement. The Investment Agreement prohibits countries from requiring the
purchase of domestically produced products, from conditioning the importation of
products on a company's agreement to export products, and from restricting access to
foreign exchange. The Agreement on Services prohibits the use of qualification and
licensing requirements as barriers to the establishment of a business or the practicing of a
profession by a foreign party. Any such requirements are to be based upon "objective and
transparent criteria" and must include "adequate procedures to verify the competence of
professionals" from foreign countries. The TRIPS Agreement is a comprehensive
framework that covers all areas of intellectual property, including copyright, trademark,
country of origin indicators, patent, industrial designs, and trade secrets. This agreement
will be reviewed in Chapter Thirteen.
A prevalent form of political risk involves changes in government regulation of
foreign business activity, sometimes referred to as creeping expropriation. This includes
changes in formal regulations, licensing procedures, and the enactment of price controls.
Creeping expropriation can also be a less legitimate form of interference, such as the
extortion of bribes, arbitrary changes in standards and inspection requirements, and the
non-enforcement of intellectual property laws. Another major form of political risk is tax
calculation and enforcement. A change in

Chapter 1

Introduction to International Business Transactions

27

the rates, a denial of a tax credit, or a change in accounting rules can be used to
manipulate corporate income taxes. Other forms of taxes, such as revenue taxes, can also
be manipulated. These taxes are associated with the importation and exportation of goods
and include the value-added tax,24 sales tax, excise tax, and tariffs.

EXPROPRIATION AND NATIONALIZATION

The most extreme forms of political risk are expropriation and nationalization.
Expropriation is a government seizure of individual foreign businesses and assets.
Nationalization refers to the seizure of all businesses, foreign and domestic, in a
particular industry. Both include some form of compensation, but in the past die
compensation has not equaled the value of the lost investments. Fortunately, the threats
of a foreign government nationalizing an industry or expropriating a foreign company's
assets have severely diminished. The free trade era has made it clear that countries need
to attract foreign investment and trade in order to continue to develop. In fact, the
opposite of nationalization and expropriation, the privatization of government-owned
industries, has been the dominant trend over the past few decades.
To encourage foreign investments, many developing countries and former communist
countries have passed laws protecting them. In May 1993, for example, Russia enacted
Foreign Economic Activity legislation that states that foreign investments on its territory
"shall enjoy full and unconditional legal protection." More specifically, it states that
foreign investments "shall not be subject to nationalization or confiscation except when
such measures are adopted in the social interests." In case of nationalization or
confiscation, Russia states it will give prompt, adequate, and effective compensation to
the foreign investor.
In the past, the key area of dispute was not whether a country had the legal right to
nationalize or expropriate, but the amount of compensation to be paid. Often, the foreign
government was willing to pay only the cost paid by the foreign investor. Russia's foreign
investment protection law commits it to pay "the real value of the investments being
nationalized." It further requires the government to pay in hard currency and to pay
interest in the event of any delay in the making of the payment.
Bilateral investment treaties (BITs) are another avenue by which countries safeguard
foreign investment from expropriation and other investment risks. BITs provide that a
host country must not discriminate against foreign investors and must agree to pay
prompt, adequate, and effective compensation in case of expropriation. They also provide
for alternative dispute resolution by way of arbitration with the International Center for
Settlement of Investment Disputes (ICSID).

Risk Assessment and Management

Before entering a foreign market, a business should measure die degree and likelihood of
political risk by performing a formal risk assessment. This may be done internally
through research with materials obtained through the U.S. State Department and the
OPIC. Some businesses enlist private companies that specialize in risk
23. Value-added tax \ AT is a popular method ot taxation in Europe. It imposes a Lax on goods and services aL each stage of
the prorluition process equal to the \ahie added to the product at each stage It is similar, hut nut identical, to a sales tax

http://
Information on
privatization issues:
http://www.
privatization.org.
Privatization.org is a private
think tank that provides
information on domestic and
foreign privatization issues.

Part 1

Lethal and Ethical Enviionmcnl of International Business

assessment. If a project is verv large, however, then management should meet with government
officials of the foreign country to discuss the company's goals. If possible, a formal concession
agreement should outline the duties of the foieign government and the rights of the company It
should specify the level of tariffs to be charged, the light of the companv to repatriate profits, the
host counhVs commitment to intellectual property protection, the applicable le\el of taxation, and
the government's transfer pricing policy-1 It is also prudent to require the use of mediation and
arbi-tiation in case ol a dispute.

Managing Risk Through Insurance

Once the potential risk is assessed, a business can insure against a loss by obtaining political risk
insurance. An imestoi ma\ obtain insurance to protect imesliiients in foreign countries. To
encourage U.S. companies to imest in developing countries, the L.S. government established the
Overseas Private Investment Corporation (OPIC). The OPIC is a government corporation that
assists U.S. piivate investments in developing commies bv providing loans, loan guarantees,
investment services, and insuiance against political risks. The OPIC provides low-cost
expropriation insurance to U.S. companies. The Export-Import Bank of the United States
(Eximbank) provides financing assistance to L.S. exporters and through the Foreign Credit
Insurance Association (FCIA) provides different tvpes of insurance coverage. The FCIA works
with the Eximbank to piovide political and commercial risk insurance to U.S. exporters. Political
risk insuiance protects against the expropriation ol goods, the nonconvertibility of currency, and the
inability of a foreign pmchasei to obtain an import license, as well as losses arising from political
insta-bilitv and resultant civil stiife.
OPIC offeis four tvpes of insuiance coveiage. 2' First, it insures against icstric-tions on the
repatiiation of profits. Second, it insures against expiopriation and nationalization. Third, it insures
against damage to assets due to war or civil strife. Fourth, it provides business interruption
insurance for losses of income resulting from political disturbances. The OPIC will also insure
banks willing to finance export transactions, enabling a bank to confirm a letter ol credit from a
liskv impoitei and its bank. OPIC insurance is available onlv to American investors or exporters
undertaking business in a foreign country with which the United States has enteied into a BIT. In
addition, OPIC; is allowed to sue a foreign country because BITs requite the foieign country to
waive sovereign immunity piotection.
An internationally based investment insurance company is the Multilateral Investment
Guarantee Agency (MIGA). Established in 1988 as pait of the World Bank, MIGA encourages
investment in developing countries through the mitigation of noncommercial investment barriers. It
provides insurance against expropriation, v\at, and other noncommercial risks and offeis
investment guarantees for direct loi-eign investments, as well as licensing, franchising, and
transfeis of technology
The detei initiation of whether political or commercial risk insurance will be needed should be
made when the underlying contract is negotiated, and the cost and tvpc of insurance to be procured
should be stated in the contract. Insurance

li imtfl p i t t i n g is 1' pike lhat an iHihau rl mmpam !l as a subsKtiai \. t ^ anotlx i athhaleri tompam
VI.imputation ol uamtc 1 puefs cm b< list [I Hi mi At p i o f i l s and <_osts h 0111 .1 hi"h-la\ to a km Tax : <>uiUl\ 2")

2 1 ' 4 < ] < 1 U)i [ > { ) ) )

24 I S(

Chapter 1 Introduction to International Business Transactions

procurement may be subject to loreign government regulation. In China, for example,

insurance in conjunction with a joint venture must be obtained through a Chinese
insurance rompam.
The decision to obtain commercial insurance ma; be dictated by the commercial
lender. Pro\isions in the undcihing contract should also be reviewed for their potential
impact on subsequent insurance claims. For example, choice of law clauses should be
re\iewed to determine if there are laws that preclude the insured from making laim
under its insurance polic\.
The application for insurance, like the application for a letter of credit, is contractual
in nature. The applicant should read the form carefully and answer it as honestly and
comprehensively as possible. The general rule is that the applicant must disclose any
information that would "materially" influence the insurance company's decision to grant
the requested insurance.1'6 In the related area of marine insurance, a court stated that "an
applicant foi a marine insurance policy is bound to reveal every fact within his
knowledge that is material to the risk."27 In that case, an owner of a compam failed to
disclose that he had previously filed claims for more than two dozen losses at sea. The
court found that there wa.s sufficient evidence for fraud in intentionally concealing
material facts and allowed rescission of the insurance policy
Typical precisions found in most insurance contracts include a description of the
insured properu, a definition of an expropriatory act, a waiting period, notice, warranties,
recoveries, duty to minimize loss,28 and definition and computation of loss. 21' The
definition of what expropriatory acts are covered by the expropriation insurance polic\
should be closeh scrutinized. Does the policy cover both partial and total loss or
expropriation? A "waiting period" is often required between the expropriatory loss and
collecting on the insurance policy. In large projects, the waiting period can be as long as a
year. The duties of the insured regarding the preservation of the investment and anv
claims pertaining to the loss should be clearly defined. A warrant) provision often
requires the insured to take steps in order to preser\e its anerage. For example, the insured
may have to certify that it will comply with relexant host country laws and that the
uninsured portion of the investment will remain uninsured. Also, rights to recoveries
made after payment on the claim should be defined.

Managing Risk Through Intermediaries

Exporting, licensing, and direct foreign invesuncnt risks can be reduced by using professional consultants and agents. International specialists such as freight forwarders,
customs brokers, political risk analysts, international lawyers, and commercial insurance
companies all offer expertise and services.
Customs brokers assist importers with the entry and admissibility of goods, their
classification and valuation, and the payment of duties. In the United States, customhouses are licensed pursuant to Title Nineteen of the Code of Federal Regulations in
order to transact business with the Customs Ser\ice. Thev can be

2fi
27.

Sec No* ^ Insurance La^ t; 1.10"(h) (_\.\

(igna Piopeit\ Cr Cmuall\ insiuamt ( i i'tilmn Putins ( . I9'W WL IWil (4th t 1)

28
28

See Vti\ Nmi'hauuHir ( om[>tm\ Jut .r * [}nu>am<> (.0 471 t 2d 1!^> 1 (.Stli ( n 1473)

S I inn Williams Tohlual and Oil in Risk Insuiance OPIC

m? KrviewY* 10(>-11J ( 1 -

\1K.\. 1- \IMRV\K, and Othei Pioudeis " }'me Iitlritiatimiul I

30

Pari 1 Legal and Ethical Lmironment of International Business

hired to provide the necessary import and customs documents. Generally, the seller or exporter
hires the freight forwarder, while the customs broker is the agent for an importer or purchaser. An
"export" freight forwarder must be certified by the Federal Maritime Commission to handle ocean
freight.
The freight forwarder often arranges all documentation needed to move a shipment from
origin to destination and assembles documents for presentation to the bank in the exporter's name.
The forwarder arranges for cargo insurance, notifies the buyer of the shipment, and ad\ises the
shipper of marking and labeling requirements. In exchange, the forwarder is paid a fee by the
exporter and may receive a percentage of the freight charge fiom the common carrier. The
international banker offers financing assistance, provides guarantees of pa\ment, and facilitates the
movement of documents between the parties.

Countertrade

ii Lt |_/ a
tinted Nations:
http://www.un.org/law.
Provides links to United
Nations initiaU\es in the area
of prhate international
business.

Countertrade is used to overcome turrencv convertibility and repatriation problems or the capital
shortcomings of a foreign parry.30 This section will discuss some of the common forms of
countertrade, including barter, buy-back, and counter-purchase. A barter transaction involves an
exchange of goods or ser\ices, but barter agreements are not always simple, cashless, singledocument arrangements. They sometimes involve two separate documentary sales, often with
separate letters of credit. A form of countertrade known as counterpurchase is an economic
transaction in which one party sells goods to the other party and, in return, the first party agrees to
purchase goods from the second part)- or another party in that country so as to achieve an agreed
ratio between the reciprocal performances. 5" This is often done to fulfill a government's
requirement that hard currencies being repatriated be offset by an incoming hard currency flow. A
variant is the offset agreement. "Offsets constitute an agreement by the foreign seller to include as
part of the sale in the foreign nation the use of parts or services from local suppliers." 32 An offset
satisfies local content requirements where the host country mandates that a certain percentage of a
good be a product of local materials and labor. In buy-back or compensation transactions,
exporters of heavy equipment, technology, or entire manufacturing facilities arc allowed to
purchase a certain percentage of the output of the facility at a below market price. Many variations
of countertrade are described in McVey's "Countertrade: Commercial Practices, Legal Issues, and
Policy Dilemmas." The Department of Commerce can advise and assist U.S. exporters faced with
countertrade requirements. The Finance Services and Countertrade Division of the International
Trade Administration's Office of Finance monitors countertrade trends, disseminates information,
and provides general assistance to enterprises seeking barter and countertrade opportunities.
Another source for information and contiact clauses dealing with countertrade is the United

Nations Commission
on
International

Trade Law (UNCITRAL). It publishes the Legal Guide on International Countertrade TrnnsfK
lions, which provides information on how best to

SO

See. ^. John C. Gtabow and Di.ilrm^ Contiact;, m Intel national Rartrt and ountei hade
Tlan-sactions 0 \'<><th (.aiohmi Journal ofInlmmliuual 1 <u< \sr (_ nmmrutal Regulation 25 ( 9 4 ) . ' See t XCITR-.
Trelimnur\ Siud\ of Legal Ksui s in International Counterti.ide' 98) 32 Ralph H Folsom. \lii hael Wallace- doidon & ]nlm \
Spagnou . Ji.. Intmia/ionnl Buvtms Tit>nsachon\ S7) > at ' ^~
(2ded. 2001).

Chapter 1 Introduction to International Business Transactions

31

Thomas B. McVey, "Countertrade: Commercial Practices, Legal Issues,

and Policy Dilemmas"
16 Low & Policy int'l Bus. I (1984)

Countertrade frequently is confused with the

concept of barter. Barter is an exchange of
goods effectuated without the use of currency.
Countertrade is most frequently used to refer to
two reciprocal sales transactions in which each
party is paid in currency. Despite this technical
distinction, most observers view barter
transactions as a subcategory of countertrade.
The two most common types of countertrade
are
known
as
counterpurchase
and
compensation (buy-back) trade.
Counterpurchase
In a counterpurchase arrangement, a private
firm agrees to sell products to a sovereign
nation and to purchase from the nation goods
which are unrelated to the items which it is
selling. For example, in a series of transactions
between a major U.S. manufacturer of commercial aircraft and the government of
Yugoslavia, the U.S. firm sold jet aircraft to
Yugoslavia and agreed to purchase substantial
quantities of Yugoslav crystal glassware, cutring tools, leather coats, and canned hams.
In a counterpurchase transaction, each party
is paid in currency upon the delivery of its
products to the other party. It is common in
such transactions for a private Firm to be
allowed a period of time following the delivery
of the goods that it is selling in which to fulfill
its purchase obligation. Periods of from three to
five years, for example, were not uncommon in
counterpurchase obligations imposed by the
Soviet Union and Eastern European nations.
Often, the parties agree upon a list of goods
from which the private firm later will be able to
select items to purchase.
Private firms resort to a variety of methods
to dispose of goods which they are forced to
purchase, but most frequently resell these goods
to trading companies or directly to end users,
often at a discount or "disagio." Sometimes the
private firm will resell the countertraded goods
at a price below that which it paid for them,
seeking to offset this loss by larger profits
generated bv the sale of its own product to the
nation.

Compensation
The most common form
of
countertrade
is
referred to as "compensation" or "buy-back." In a compensation
transaction, a private firm will sell equipment,
technology, or even an entire plant to a sovereign nation and agree to purchase a portion of
the output produced from the use of the
equipment or technology. For example, in the
celebrated $20 billion Occidental Petroleum
ammonia countertrade transaction with the
Soviet Union, Occidental assisted the Soviets in
constructing and financing ammonia plants and
agreed to purchase quantities of ammonia
produced in these plants over a twenty-year
period.
Compensation transactions frequently
involve significantly longer periods of time
during which the private firm will be permitted
to fulfill its purchase obligation than in
counterpurchase. In addition, compensation
transactions are generally of larger dollar value
than counterpurchase transactions. Unlike
counterpurchase transactions, the products
which the private firm purchases in
compensation are frequently of marketable
quality and in demand in the international
marketplace. Further, Western firms fre-quendy
are able to negotiate a purchase price for the
output that is below the world market price so
that the firm can earn a profit in reselling the
product which it is forced to buy.
Barter
Barter, swap, and other types of noncurrency
transactions are frequently viewed as forms of
countertrade. In many cases, the sovereign
nation will impose a barter requirement in a
coercive fashion for purposes of disposing of
surplus or low quality goods which it otherwise
cannot sell. Barter transactions are frequently
utilized in crude oil transfers as a means of
conveying crude below official OPEC prices.
Similarly, barter is occasionally used as a
means of "liberating" blocked currencies or
otherwise circumventing foreign exchange
controls.
continued

32

P.ut 1

Legal and Ethical Enviionmcnl of International Business

A Step-by-Step Approach to Market Research (continued)

Clearing Agreements
Although countertrade is conducted most
frequeitlh between a soveieign nation and a
private fum, countertrade arrangements also
occui between and among so\ereign nations
Nations have histoiicallv enteiedintobilateial or
niultilateial "dealing agieements" undei which
tJie\ agree to pin chase equal values of each
other's pioducts o\ei a specified period o! time.
This is a form of lecipiocal Hading not unlike
the pmate fhm-sovereign nation lelarionships
discussed abo\e. When an imbalance develops
m an account that a nation cannot lectilv private
films known as "switch trading" firms offei to
assist the recalcitrant nation m disposing of the
goods whit h it is required to puichase. usualK
foi a fee.
Framework Agreements
In a countertrade "framework agreement" a
pii\aie film establishes a formal, long-teim
"itediting" mechanism with the host nation
nndei w t.s generated b\ the pi iv ate
firm are toutmeh credited to the countei-uade
commitments of numerous third-pam fii ms on
an ongoing basis. The ke\ to a framework
agicement is that the "crediting" of the
offsetting purchases or the esci owing and
payment of funds is undertaken on a tontine and
ongoing basis undei a preai ranged agieement
lathei than on the moie common case-b\-case
basis.
"Positive" or "Reverse" Countertrade
In certain instances, private firms piefcr
tountertrade aiiangements o\ei conven-tional
transactions. In so-called "positive" or "leverse"
countertrade, the pmate fum views the goods
that it will be required to purchase-as more
valuable than haid cuiienc\ This is most often
the case when a fum seeks to establish a
guaianteed stipph of a valuable cominodilv 01
production component'when it anticipates future
shot cages of these items. Foi example, in one
of the proposed East-West "gas-for-pipes"
tiansactions. a group of pihate funis was
negotiating null the Soviet Union to transtet
equipment and technolog\ foi the tianspoiiation
and production of

natmal gas to the Soviets in leturn foi guaiantees of quantities of naluial gas ptoducecl
thiough the use of this equipment and
technology
Performance Requirements
V perfoimante requirement is a condition
imposed a soveieign government that
requites foieign parties who wish to undei -take
investment in thai nation to agree to take
certain steps to increase exports from the
nation. Such steps include the agreement bv the
foreign in\ estors to expoi t a cei -tain
percentage of the output from the investment
pioject. to emplos a ceitam level of local
inhabitants in the pioject, to use a predetei
mined level of localh produced components in
the manufactured product, and to tiansfei
certain technolog\ to the host nation.
Perfoimance lcquirements aie distinguishable
from other tvpes of countertrade requirements
in that the foimei imohe a private firm's
investment in the imposing nation lathei than its
sale of goods to the nation Roth practices
involve intervention bv the host nation in the
free market ptocess. however, arid in view of
their similarity are fieqtientlv treated as the
same phenomenon.
Collection-Through-Export Transactions
\ major pioblem foi U S. firms doing business
abroad is the collection of overseas funds which
have been icstiicted from -uiation due to
foreign exchange controls. In such instances, a
pi ivate firm might be owed funds bs a foreign
partv as a result of a trade debt 01 have piofits
denominated m local which arc earned
bv a foieign stib-sidiarv. I he pmate fum will
have possession of the local currencv in the host
counti v. but due to foreign exchange shortages
will be unable to convert fins currencv into
dollars.
In
a
colleclion-tlnough-expoit
transaction, the firm will use the local cuiiencv
to puichase localh pioduced goods, expoit the
goods from the host nation, and sell the goods
oveiseas tor dollars or another convertible
currencv.

Chaplei 1

Introduction to International Business Transactions

structuie a countertrade tiansaction. It also discusses the types of clauses generally found in
countertrade contracts. The clauses discussed in the Guide include type, quality, and quantity of
goods; p r i c i n g of goods; participation of third parties; payment; restrictions on resale; liquidated
damages; security for performance; failure to perform; choice of law: and settlement of disputes.
Because of the difficulty in finding marketable goods in a foreign country to fulfill a
countertrade (counterpurchasc) commitment, certain clauses take on added importance. First, an
extended period of time should be allotted to the exporter to obtain host country goods to satisfy its
counter tr acle obligations. Second, a broad list of countertrade goods should be negotiated to
enhance the exporter's chances of finding marketable goods. Third, because of the poor quality of
some foreign goods, the exportei should negotiate broad inspection rights. Also, the costs and
uncertainty of the countertrade arrangemen t may w ai rant the granting of a disagio (discount) of
the amount of goods needed to be purchased to fulfill the countertrade commitment.
Another provision included in countertrade contracts is a penalty clause for non-performance
of the counteitiadc (counterpurchase) commitment. In some cases, paying a penalty instead of
purchasing unmarketable goods may make better economic sense for the exporter. Of course, the
penalty clause should make clear that payment of the penalty releases the exporter from any further
liability.

Developing an Export Plan

Before attempting to export, a firm should deyelop an export plan that answers the following ten
questions: (1) What countries are targeted for sales development? (2) What products are selected
for export? What modifications, if any, must be made to adapt them for overseas markets? (3) In
each country, what is the basic customer profile? (4) What marketing and distribution channels
should be used to reach customers? (5) What special challenges pertain to each market
(competition, cultural differences, import controls, etc.), and what strategy will be used to address
them? (6) How will the product's export .sales price be determined? (7) What will be the time frame
for implementing each element of the plan? (8) What personnel and company resources will be
dedicated to exporting? (9) What will be the cost in time and money for each element? (10) How
will results be evaluated and used to modify the plan? The next Focus on Transactions feature
provides an outline for a generic export plan.
The way a company chooses to export its products can have a significant effect on its export
plan. One goal of the export plan will be to determine whether the firm should export directly or
indirectly. The basic distinction between these approaches to exporting relates to a company's level
of invohement in the export process. Firms that are new to exporting or are unable to commit staff
and funds to complex export activities ma\ find indirect exporting appropriate. Exporting indirectly
through intermediaries leaves it to the intermediary firm to find foreign markets and buyers for its
products. Expoit management companies (EMCs), export trading companies (ETCs). international
trade consultants, and other intermediaries can give the exporter access to well-established
expertise and trade contacts. A firm contemplating a greater involvement in a foreign market will
need to seek the cxpeitise of a foreign lan\ei.

33 William CM FIUIUI I i s^.il Proit- Vgainst Risks Imuhttl m Doin^ BUSIIK SS HI the Republics of the Formei L SSR.
10 InMntli,iialQttmt<it\V.:, 4".l (144S(

34

Part 1 Legal and Ethical Environment of International Business

Sample Outline for an Export Plan34

Focus on Transactions

Introduction: Why
This Company
Should Export

Distribution Methods
Terms and Conditions
Sales Goals: Profit and Loss Forecasts

Part I. Export Policy Commitment Statement

Part TV. Tactics: Action Steps

Part II. Situation/Background Analysis

Primary Target Countries

Secondary Target Countries

Indirect Marketing Efforts

Product or Service
Operations
Personnel and Export Organization
Resources of the Firm
Industry Structure. Competition, and
Demand

Part III. Marketing Component

Identifying. Evaluating, and Selecting

Target Markets
Product Selection and Pricirm

Part V. Export Budget

Pro Forma Financial Statements Part

VI. Implementation Schedule

Follow-up
Periodic Operational and Management
Review (Measuring Results
Against Plan)

The direct exporting approach is more ambitious and difficult, because the exporter personally
handles every aspect of the exporting process from market research and planning to foreign
distribution and collections. Consequently, a significant commitment of management time and
attention is required to achieve good results. However, this approach may also be the best way to
achieve maximum profits and long-term growth. With appropriate help and guidance from thirdparty experts, including freight forwarders and international banks, even small or medium-sized
firms can export directly if they are able to commit enough staff time to the effort. For those who
cannot make that commitment, the services of an EMC, ETC, trade consultant, or other qualified
intermediary is indispensable,
A U.S. company may take a multifaceted approach to exporting. For example, it may elect to
export directly to nearby markets such as Canada or Mexico, while letting an EMC handle more
ambitious sales to Saudi Arabia or China. An exporter may also choose to gradually increase its
le\el of direct exporting, after it has gained experience and sales volume appears to justify added
investment.

IN TERNATION AL

Finding and Managing Foreign Lawyers

One of the best ways to find foreign legal counsel is to follow die recommendations of U.S. lawyers
or businesspeople with experience in a given country. Other sources for foreign lawyers are national
or local bar associations or chambers of commerce. Some foreign bar association rules are more
restrictive in the area of advertising. German lawyers, for example, are prohibited from advertising
or actively seeking clients. Also, a number of international bar associations and societies publish
membership lists.

34

Soim-r" Xalional Tiadc .ink. piodua <>[ SIAl-t SA. L .S. Drpariment ot -

Chapter 1

Introduction to International Business Transactions

35

Examples of international law societies include the German-American Lawyers' Association and
the German-British Jurists' Association.
Selecting a foreign legal representative requires considering a number of criteria. Language
skills are vital to an effective dialogue; international law directories often list the language
capabilities of foreign lawyers. Also, it is important to understand the type of assistance that will be
required. In complicated international business transactions, numerous national laws are likely to
be applicable. In addition, the timing of commercial transactions is of great importance to the
businessperson. Therefore, U.S. businesspeople must clearly communicate the time frame of the
transaction to their foreign counsel.

http:/
FindLaw's West Legal
Directory: http://
dictioiiary.lp.fi ndlaw.
com.

KEY TERMS
arbitrage
Article 38
barter transaction
basket of risks
bilateral investment treaty (BIT)
buy-back
buying agent
commission agent
concession agreement
convertibility
counterpurchase
countertrade
creeping expropriation
currency option
currency rate fluctuation
customs broker
direct foreign investment
disagio

evergreen provisions
export agent
Export-Import Bank of the United
States (Eximbank) export
management company
(EMC) export trading company
(ETC)

exporting-importing
expropriation
foreign agent
Foreign Credit Insurance
Association (FCIA) foreign
direct investment (FD1) foreign
distributor foreign sales
representative forward contract
franchise freight forwarder
futures contract General
Agreement on Tariffs
and Trade (GATT) home
country host country indirect
exporting International
Center for
Settlement of Investment
Disputes (ICSID)
International Chamber of
Commerce (ICC) International
Court of Justice joint venture lex

licensing
Multilateral Investment Guarantee
Agency (MICA) nationalization
non-tariff barriers offset agreement
Overseas Private Investment
Corporation (OPIC) privatization
remarketer repatriation sale of
services technical barriers trade
barriers trade in goods transfer
pricing United Nations Commission
on
International Trade Law
(UNCITRAL) United Nations
Convention
on Contracts for the
International Sale of
Goods (CISC)
Uruguay round WTO
Agreements

mercatoria

CHAPTER PROBLEMS
1. You are a manager at a U.S. company that manufactures
moderately priced personal computers. The company is
contemplating expanding overseas with an initial emphasis
on exporting to Latin America. You have been assigned the
task of preparing a preliminary market analysis for the
country of Brazil. Using the sources found in the Focus on
Transactions feature on page 10, conduct market research.
Prepare a report that focuses on the opportunities and pitfalls
of exporting to Brazil and offer recommendations.

2. As rice president for foreign operations of a U.S.

multinational corporation, you have been asked to prepare a
report for the board of directors regarding "doing business"
in Germany and Nigeria. Discuss the following in your
report: (1) the different wavs of "doing business" in foreign
countries, (2) the wav you would recommend for each of the
two countries mentioned, (3) the risks of doing business in
these countries, and (4) ways of minimizing those risks.