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Legal Factors
Hello everyone, I welcome you all to the course of International Business. I am sure youmust be going through a very nice time and a good health. In the last lecture we hadstarted with political factors. So, we have been continuing on the various factors thataffects international business. So, some of them being for example, the cultural factorthen we talked about the political factor right.So, what are the political factors and how do they affect the business internationalbusiness so we discussed it. So, we discussed about for example, the political ideologiesfor example, some countries are communist in nature, some are socialist in nature, someare a capitalist in nature right. So, how these ideologies affect the business entirebusiness spectrum right.Then we talked about the you know types of democracy and then we talked about thepolitical risks involved when you go for business in a different country. We talked aboutyou know issues like expropriation, right confiscation and domestication andnationalization. So, which happens during you know in different situations in differentcountries.So, we gave the example of Iran so we talked about the case of India also right. So, allthese are helpful to understand how the political risk at one place can affect the entirebusiness you know condition of a firm right. So, today we will continue from there andwe will talk about a new issue that affects the international business which is the legalfactors right.So, although political and legal they both come hand in hand right. So, when you talkabout the political which makes you know the all these rules and regulations and all.Then comes the legal factors to abide by the rules and regulations right.So, what it does and how it does let us talk about it today.(Refer Slide Time: 02:18)So, the legal system is the mechanism for creating interpreting and enforcing the laws ina specified jurisdiction right. So, what it says? You have to create laws and then ensurethat people follow these laws right. So, Plato says that law is a form of social control. So,Plato says that law is a form of social control, Aristotle says it is a rule of conduct acontract an ideal of reason right.So, these are the two basic you know understandings that helps us to understand thatlegal frameworks or legal environment is something that every citizen in a country orevery person in a country who stays in a country has to follow some social norms right.So, that the things are in order ok.All countries legislate a broad range of laws to regulate business activities such as; theinvestment of capital payment of dividends to foreign investors and decision aboutinternal structure and operations. So, these you know rules and regulations are veryimportant that the managers need to understand.The quality of legal governance is important for investment and growth. For example, ifthere is a fear that you know there are no proper laws for in a country. For example,today we talk about cyber laws right. So, in some countries cyber laws are still yet to bedeveloped right. Then there are laws governing for example, about labour laws right.So, all these are different laws that one needs to understand if somebody does notindustrial relations for example. And if one does not understand it then he would or shewould that company would come into trouble maybe. A countries law regulates businesspractices, defines the manner in which business transactions are to be executed. And setdown the rights and obligations of parties engaged in the business transactions right so inbusiness transactions.(Refer Slide Time: 04:18)So, this is very important for any firm to understand and you know do their business in anew place right.So, let us talk about some of the dimensions of the legal environment. So, the legalenvironment has three frameworks for example, three important conditions the nationallegal systems, the regional legal frameworks and international law. These three are thesethree decide the legal environment.Now, what factors affect this legal environment? Some of them being like for example,the intellectual property; how intellectual property has been defined? How clearly it hasbeen defined? What are the company formation and governance rules and regulations ina particular country or place?So, whatis this earlier we had in 1969 the MRTP act right. So, Monopolies and Restrictive TradePractices act but this was not enough. So, with the change in time the governmentthought now there has to be new amendments into it and they brought in 2002 thecompetition act right.So, under this legislation the competition commission of India was established to preventthe activities that have an adverse effect on the competition in India. Now anydemocracy any market for that today we talk about open market mechanisms; socompetition has to be fair right.If let us say there is a monopoly or there is let say cartel formation where companies aretying hands and trying to create strategies and policies which are harmful for the youknow consumer. So, in that case the governments have to protect their consumers theirpeople.So, for one there is consumer protection bill; for the if companies form cartel or in sellinferior goods or something then they can go for this. If the for example, if one firm isvery large and is trying to monopolise or kill the smaller players in that condition thethere is a this new act the competition act comes into play and then it restricts this largeplayers to do it.Maybe it is important because of in India for example, India is being a still a developingeconomy; if we do not have such policies then it is very likely possible that companiesfrom large economies can easily come into and they can completely destroy the Indianfirms.So, that because of that fear the company the government has started this competitionact. And in India itself there should not be so much of unhealthy competition, there themarket should be rather you know accepting more healthy competition.So, how this healthy competition would be maintained and all to look into this thealways the there is a competition act the government does it. Then there was anEnvironmental Protection Act which came in you know came in 1986 and this came afterthis Bhopal gas tragedy which happened right.So, this after this Bhopal gas tragedy which had happened in India the union carbidecase; lot of people lost their lives and generation after generation people were stillaffected right. So, the government understood and initiated a new act to control to enact acomprehensive environmental legislation including; rules relating to storing handling anduse of hazardous waste. On the basis of these rules this act came into place.So, this is an umbrella legislation that consolidated the provisions for the of the wateract. Now water prevention and you cannot pollute right against pollution and allsimilarly, Air Pollution and Prevention Act of 1981 74 and 81. So, within this frameworkthe government established many PCB’s right central Pollution Control Boards, statepollution control boards; in order to prevent control and reduce the environmentalpollution right.(Refer Slide Time: 10:52)The companies act 2013 right came which was a replacement of the companies act 1956.And is an act of the parliament which regulates incorporation of a company,responsibilities of a company, directors, dissolution of a company. And even a oneperson company was included in this set there were many more you know acts whichcame into this. So, this a companies act 2013 made some major changes and it replacedthe 1956 act ok.Till date there are improvements going on for example, there are lot of controversies inIndia. For example, the international business firms or the international firms are notclear about solvency; how what happens during bankruptcy? How to file bankruptcy inIndian condition? How do you go for solvency? Right.So, what happens to the shareholders take his power what happens to that? So, these arestill not clear. And in India there is a yet to make lot and lot of improvements in makingthe stakeholders rights and making it understand and exercising the stakeholders right.Similarly in you know 2018 a new bill was introduced called the for the protection ofhuman rights right. It was introduced in the Lok Sabha by the minister of state at thattime. The bill amends the protection of human rights act. The act provides for a NationalHuman Rights Commission, State Human Rights Commission, as well as Human RightsCourt.Now this was also important because there were lot of controversy in India regardinghuman rights; so this bill was introduced and it looks after this how the rights of thepeople would be managed.(Refer Slide Time: 12:31)What are legal systems? So, whenever international business comes into India right andIndia being a very attractive market, very large market, very potential, young man’smarket, right and with high purchasing power; so with all this and it is constantlygrowing economy.A manager must understand a country’s legal system that specifies the methods used toregulate the business practices. So, how would you form a business? How would youstart? So, what are the guidelines that has to be followed? What are your export policies?What are your import policies? How what things what are your human resource youknow labour policies? Right, anything.Define acceptable practices for conducting the business transaction. And specify theright and obligations of the parties engaged in the business transaction. Supposesomebody there are you know wants to close down; there are two partners and one wantsto close down it is operations; in that condition what should be done many things are stillnot clear right.So, when we talk about types of legal system for the first one is called the common lawright. So, there are three basic types; so we will go one by one. The common law nowwhat it says followed largely in all those countries were which were you know thecolonies of the Britain and so countries like India UK the obviously, the US Canada,Australia, New Zealand, all these countries they follow this common law.What does it say? It says that based on traditions precedent and customs. So, thecommon law originated from England it is as I said; so this law says we if there is a wehave to follow the norm which has been done which has been followed in the earlier pastright. So, it sets a precedent and then others try to follow it.The second is the civil law civil law came from the Roman culture the and here whathappened is it is based on a detailed set of laws right organized into codes and have veryless flexibility. Here in the common law there is a lot of flexibility for the judge to take adecision.But here because it depends on you know situation also. But here there is a very littleflexibility because this codes have been built on the specific cases right. More than, butmore than eighty countries including Gemany France Japan Russia they operate with acivil system.(Refer Slide Time: 14:57)The third is the theocratic law; which says the legal system is based on religious doctrineprecepts and beliefs. So, what is the religious doctrine? For instance the Hebrew law andthe Islamic law are derived from religious doctrines and their scholarly interpretations.Unlike other countries dominated by you know like; Christianity, Hinduism andBuddhism where either common or civil law is followed a large number of Islamiccountries integrate their legal system based on the Sharia.What are mixed system? When a country engages two or more legal systems out of thesethree right. Majority of mixed system can be found in Africa and Asia where more thanone type of system is followed.(Refer Slide Time: 15:41)So, you can see through this map.Now, which are the places where lot of you know where the civil law is followed, wherethe common law is followed, where Muslim law is followed, where customary law andmixed system right. So, you can understand by the you know colours for example, all thered ones are the civil law right. The for example, North America is common law right,South America is civil law right, now the green ones here you can see Middle East andall the Islamic law right.So, then you have so these are some of the colours for example, right. So, here you knowthis is one belt where there is a customer and mixed is also there in some places likeIndia. Now India is a case of mixed law right. So, these are the different systems aredivided.What is the basis of rule in a country? How do you rule? When you talk about legalsystems; that means, to follow the social norm right.(Refer Slide Time: 16:39)So, there are two ways; the rule of man which says the man is more important thaneverybody right. So, then individual becomes more important he commands the powerand associated with a totalitarian system right. Kim Jong of North Korea so example,Hitler in Germany we would say right.Another is the rule of law where every individual comes under the rule of law whoever itis. Maybe is the president of a country or whoever it is he has to follow the law and thelaw is above everybody. So, institutes a just political and social environment guaranteesthe enforceability of commercial contracts and business transactions and safeguards thebusiness personal property and freedom.So, when in you see when a man becomes more powerful for example, we talk aboutIran for example, and when where their religious leaders head. So, in such a conditionone cannot be sure because it is like a you know one man rule. So, anytime the rules canchange if he does not like. But when it comes to the law does not change so frequentlybecause it is after all a wish of large number of peoples take care people taken togetherand then only a law is built.So, law cannot be so you know cannot change very fast. So, at least when the businessforms come into a new country new place they understand; if there is a rule of law in thiscountry then at means they can have some you know kind of a belief that they cansustain and continue their business without any fear. But if there is a rule of man thenthis fear always continues with them persist with them. So, this is a democratic systemright.(Refer Slide Time: 18:18)Effective rule of law reduces corruption combats poverty and disease largely andprotects people from injustice. It is the foundation of communities of peace, opportunityand equity right. So, it majorly the rule of law is not just the rule of lawyers and judges itis all the members as I said of the society right.The world justice project rule of law index which is the world’s most comprehensivedata set of it is kind. So, it gives us some perspective.(Refer Slide Time: 18:49)So, what it says? Let us look at it. So, this table represents the scores and rankings of therule of law being followed in an alphabetical order.Now, if you look at the score right 0.34, 0.51 and if you look at Belgium 0.77 here. So,as you as use the score tends to move towards 1 from 0 to 1 with 1 indicating thestrongest adherence to the rule of law. So, it means it is a better system right.So, you can see here for example, Denmark is 1 right and the ranks are also given; whatwas the rank earlier and now what is the present rank. Denmark global rank was 1, butthe score was 0.89. So, which is the highest we can find out still now it is 0.89 Denmarkand here also we can see 0.81 Australia right.Similarly, you can see the scores here the highest maybe is Norway again 0.89. So, theseare the some of the ones and we will look at the ranks also you can find. And the lowestones you can see maybe somewhere like 0.34 Afghanistan right, 0.38 Bolivia right. Thenyou come to this side and you find out 0.39 comes for Pakistan so no wonder right.So, just about the total details that you find right; and the lowest maybe somewhere; youcan you can go through it right?(Refer Slide Time: 20:19)So, the legal issues in international business. So, when we talk about internationalbusiness what how the legal issues are there.So, new forms of business activity often coupled with the changing pattern of trade andinvestment may put firms in situations with no clear legal standards apply. In situation towhich no clear standards apply right.Two areas of importance; operational concern and strategy concern. Operational concernsays which involves the way in which a business works on a day to day basis. How doesthe business you know run you know day to day basis. Strategic is whereas which refersto a company’s competitive position and long term performance right.(Refer Slide Time: 20:57)So, when you talk about operational concerns that manager’s face worldwide right is likestarting a business, entering and enforcing contracts, hiring and firing local workers,closing down the business right. So, how do you close down the business? How you hireand fire people? So, these are some of the issues operational concerns.When you come to strategic concerns for example, that managers face is product safetyand liability example. You see this was an example that in India; Chyawanprash is a veryimportant product and when it comes to like winter and all people would take it to avoidcold and cough right. But the Canadian government banned it is sale in 2005; they claimthat the product has high amounts of lead and mercury which is sure to harm ones health.so this is a very different condition.So, a company which makes Chyawanprash for example, like Dabur, Zandu right this allwill face problem because they this product is a sure shot product in India which has noissues; because Indians love Chyawanprash, but when it comes to Canada it has beenbanned.The US FDA recently reported that wafers, cookies and biscuit from one of India’sbiggest sweet makers Haldiram contains poisonous and adulterated content. They saidthat the products are filthy and decomposed otherwise unfit right. So, these are some ofthe strategy concerns because it has a long term impact.Marketplace behaviour; prohibition of TV, advertising of cigarette, ban on directcomparative ad, and even banning of contraceptives or health products some of thehealth products related to sex and all. Now they are banned in many of the countries ineven India there was a discussion to ban those ads and only run it after the primetime thatis after 10’o clock right.So, these are some of the impacts that can have largely on the business forms; productoriginal local content. Single brand retailers were mandated to source 30 percent locallyevery year; if their FDI 50 cross 51 percent. Even though 100 percent FDI is allowed inthe sector.The new norms also say that foreign retailers export purchases from India would becounted towards the mandatory 30 percent. So, these are some of the issues that canimpact business very seriously ok.In legal jurisdiction a foreign company adjust a home country quote to claim jurisdiction;example Vodafone tax case in India. So, Vodafone suffered through a tax problem whichis a very very big problem you can even Google it out and check what happened in howVodafone had to suffer and how the Indian government tried to keep a control overVodafone.So, these are the issues which are have a strategic impact.(Refer Slide Time: 23:52)Some of the legal risks in overseas locations. So, for example, what are the when youtalk about international business; what are the legal risks? So, degree of respect for therule of law; you might not understand that something is very sensitive at one place andthe foreign company or the their people might take it lightly which may boomerang andbecome a serious issue for them. Possible liability of contractors what are your penaltyclauses and all right.Fair and impartial criminal justice system, efficient and impartial civil courts, liabilitynegligence for faulty products; so, this comes in the consumer protection. Degree ofcorruption tolerated some countries corruption is right bribery is right, but for a someother countries it is not at all right. So, there what is the level of tolerance right.Transparency in corporate governance; transparent corporate governance was a big issueright. And we have seen like many companies were became victim of it and they fellprey although they were the also to be penalised because they created these problems ontheir own. For example, Arthur Andersen one time which is essential today and XeroxEnron were cases where corporate governance was largely hit hard and these companieshad a very bad time right.So, these are some of the how do you protect the intellectual property right andenforceability of contracts so how do you look into it? For example, India has you knowdoes not follow all the patents. Now product patent and process patent we have so we donot follow all of them.So, but some other companies when they come they say we have invested in R&Dbillions of dollars. So, if our patent product is not patented right if we do not have aprotection there will be a problem people would just imitate our product. So, ourextremely large investment that we have made would all go for a waste right.(Refer Slide Time: 25:51)So, another thing that we talk about, when we talk about is the ease of doing businessright. So, how easy it is to do business in a foreign country right. So, what is measured indoing business? So, for example, how to start a business? What is how to get a location?How to assess the finance? How to deal with a day to day operations? And how tooperate in a secure business climate? Right.And what are the other factors that affect it? For example, the label(labour) marketregulation, dealing with construction permits, getting electricity permission, registeringproperty, getting credit, protecting minority investors, trading across borders, payingtaxes. So, you see how to resolve insolvency which I was saying earlier.So, all these things are the different you know points that come in between the legal inthe legal condition right. And if a foreign firm without a proper local knowledge getsinto it and does not understand the impact it can be a serious trouble for them ok.(Refer Slide Time: 26:51)So, this is a some of the ranks for ease of doing business. So, you can see that the scoresand this is the score change what has happened. So, higher score is better right forexample, New Zealand has 86.59; that means, the ease of doing business is very high.So, you can see India is somewhere here for example, India is on the 77th rank. And thattoo it has been a is a severe jump so that has been a serious jump for India; India jumpedby I think 23 positions and it has reached the 77. Yes, it was in 100 and then it moved to77 from there.(Refer Slide Time: 27:29)So, these are some of the things which are very important. Another important is pointthat you talk about when you talk about you know the Intellectual Property Rights thelegal system is a IPR. How your IPR is protected?So, what it says intellectual property refers to the; creative ideas, expertise or intangibleinsights that grants his owner a competitive advantage right. So, intellectual propertywhether in the form of; books, music, you know designs, brand names or software istough to conceive, but easy to copy.So, what are these rights? It refers to the right to control and derive the benefits fromwriting, inventions, processes and identifiers. So, how you know you can see these arethe intellectual property what things are connected; patents, trademarks, designs,copyrights, plant varieties, geographical locations.So, how do you protect the how much protection can be given? So, that is very this is abig discussion that goes on when it comes to patent and all. That many a times Indiangovernment does not allow because it says that Indian people are poor still; the largenumber of people are poor.So, until unless we and when you have a product patent or something; then what happensis you can charge a very high cost to the for the product, but then the cost the people inthe country may not be able to pay.So, this is an argument that the Indian courts and the Indian you know the critics in Indiathey give; that Indian public will not be ready to pay. So, we have imitation to someextent is acceptable in India because we have to make a product which is economicallyviable for our people.(Refer Slide Time: 29:09)So, these are some of the examples; Apple and Samsung had one major patent battle so itwas a 7 year legal battle. Ending the most prominent cases series of law suits overSmartphone patents which had happened right. The companies did not disclose thesettlement amount a jury in may ordered Samsung to pay Apple 539 million forinfringing it is patents. So, these are some examples.(Refer Slide Time: 29:30)So, what are the four types of majorly intellectual property? We will see; trade secretsright so new invention, the coke formula, trademarks, protects brands for example. Applefor cell phones, copyrights protects works of the authorship we I have written a book.Now, there has to be a copyright, otherwise somebody would verbatim copy it and makeit his own. So, books, movies, drawings, and finally, it comes to the protecting thefunctional or ornamental features; swipe feature or iPhone design. So, these are some ofthe different conditions which are important and one needs to understand.So, this case of intellectual property rights has been discussed in several forums right.(Refer Slide Time: 30:17)So, and you can see many countries have pushed for a better protection. In IPR a legalenforceable, but limited monopoly granted by a country is to an innovator.So, monopoly is not allowed; because if you do that then we cannot control the pricemaybe right. And problem arises because not all countries formally support the variousagreement developed to protect IPR’s India also is one of them. The TRIPS the traderelated aspects of intellectual property rights code of the world trade organizationprovides for sticker protection of intellectual.They say; you have to give protection, but then the conditions are different in differentcountries. Everybody is not a developed country; so this is the negative side of we cansay globalization also right. You want an access to a country and on other side you wantto also to charge the premium that you expect.So, then it is not the same condition with the other country; maybe, the country is anAfrican country which cannot pay right. Countries that observe the rule of man asopposed to the rule of law less aggressively protect intellectual property rights.Generally poorer countries provide weaker legal protection of intellectual property thanricher countries right. So, finally, cultural attitudes influence the protection of intellectualproperty rights notably. Individually societies are more vigilant than the collectivesociety right. So, individual societies are more let say capitalistic in nature andcollectivist are the more socialist like India.(Refer Slide Time: 31:46)This is a case which I would leave it for you to study; this is how star bucks wins thetrademark case in China. So, this is a very interesting case I have brought for you; youcan go through it and you can enjoy it, you can read it. And learn that how star buckswon a case in China.And this tells you what how important it is to take you know cognizance of the legalenvironment and the legal factors. And every business firm needs to understand it deeplybefore they get into a new country right. So, that is all for we have that is all we have fortoday.Thank you, very much.