HOW to do BUSINESS

HOW to do BUSINESS

In order to be successful in international business, you must understand the foreign business environment of the country or region where you intend to do business. This concept includes:

v General Social Culture

This encompasses all of the characteristics or ways of living of a particular group of people that are transmitted from one generation to another, i.e., religion, familial relationships, customs, significance of friendships, social norms, traditions, dress, etiquette, etc.

v Legal Tradition and Legal Concepts

The type of legal system and its historical development differ greatly among countries and regions. Basic legal concepts also vary. Examples: The significance of a contract and its scope are very different from that in the US. The concept of “grandfathering” your position or rights may not be an accepted legal concept in other legal traditions. Litigation and discovery are generally not as widely used or respected elsewhere as in the US.

Enforcement of legislation is frequently an issue. There are two concepts involved here. One being that developing countries often do not have adequate resources to enforce legislation, and the available resources are dispersed among numerous important and vital areas of development. Secondly, in many countries enforcement of legislation is inequitably applied.

v Business Structures

The type of entity depends on the local legislation. Foreign ownership may be restricted or limited; corporations may not protect against responsibility or liability; relationships may be controlled by legislation.

v Risk and Liability

The allocation of risk and liability is very subjective and cultural. Behind our legislation and juridical decisions lies a cultural determination of who should be responsible or liable for certain types of activities, personal or corporate. In addition criminality and punishment, personal and corporate, are cultural and may vary from the US principles.

v Government Involvement / Historical Role of Government

The direct or indirect involvement of government in business varies among cultures. Authoritarian regimes and governments in developing countries tend to be more involved in business, and can often change the business environment completely and drastically without protecting the status of business transactions or the ability of businesses to survive. Some governments facilitate, others impede business processes and growth. The historical role and type of government is important to consider.

v Attitude Towards Foreign Involvement and Investment

There is often a negative attitude to foreign investment and involvement, and nationalistic rhetoric when dealing with natural resources and access to domestic markets. This is a reaction to past colonial history, and the resulting control of the country by foreign governments, dependence of domestic economies on few commodities priced in the international markets, and the control of vital industries and natural resources by multi-national corporations.

v Taxing Principles

Basic tax structures for sales, income and inheritance might be entirely different from the US. For example, some income tax systems require reporting of all possessions as opposed to actual income realized.

v Employer-employee Philosophy

The relationship between employers and employees is very much based upon the culture of the country and the legislative protection afforded employees. The type of governmental regime will directly affect this relationship, i.e., socialist or communist regimes, as well as a governmental paternalistic attitude.

v Lobbying / Legislative or Political Advocacy

A formalized lobbying industry may not exist in other countries as in the US style, however influencing legislation or political outcomes still occurs as an industry in most countries.

v Ethics

Every culture has business ethics that must be understood.

v Business Processes

This addresses the general business processes and reporting requirements, as well as quality control concepts. In developing countries quality control is often not as developed a concept as it is in the industrialized world, and government agencies directing quality control severely lag behind global standards.


v Negotiating Manners and Style

Negotiating manners and style are very connected to social relationships and norms, as well as the character profile of the society.

v Education

The importance of and availability of education to the overall population is an indicator of development and a cultural characteristic as well.

The list is all inclusive and an adequate understanding is essential in order to know how to do business in a particular country or region.

Direct or Indirect?

Business in foreign countries is either done in a direct or indirect manner. In a direct approach, the American company would form a strategic alliance with a foreign entity or become a 100% owner of a foreign subsidiary. The strategic alliance could be in some form of a partnership or division of ownership of a foreign entity with the American company owning less than 100% of that entity. The determination of the percentage of American ownership is sometimes directly controlled by foreign regulatory prohibition, or by beneficial treatment available to entities with a certain percentage of foreign ownership.

In an indirect approach, the American company would enter into a contractual relationship with a foreign business or person(s). The role of the foreign entity or person could be one of the following: representative, distributor, agent, support provider. The most difficult issue in this relationship is exclusivity. The American company will be reluctant to enter into an exclusive relationship with an entity over which it has no control or which has no proven track record of performance. On the other hand the foreign entity will be reluctant to invest time and resources without the assurance that it will reap the benefits of its efforts. Getting the foreign entity to maintain focus on your company’s products and services is a major challenge. An important side comment here is the necessity of providing adequate support for your products in the foreign country, even if you are entering into an indirect approach of doing business.

Cost / Benefit Analysis

DIRECT

Benefits
v Growth Opportunities
v Higher Profit Potential/ Market Penetration
v Greater Control
v Cultural Understanding

Costs
v Higher Up-Front Costs
v Fiscal and Legal
v Management Issues
v Higher Risk
v Complicated Exit
v Financial / Repatriation

INDIRECT

Benefits
v Limited Investment
v Less Risk
v Quicker Entry
v Easy Exit

Costs
v Limited Growth Opportunities
v Restricted Profit Potential / Market Penetration
v No Control
v Branding
v Collections and Receivables
v Restrictions / Tariffs


Although some if not most of these factors are present in all international transactions, they take on a different and more intense perspective in developing countries. Additionally, the direct presence is often very important in developing countries. Historically due to colonial exploitation, developing countries value the commitment and investment that a foreign company will make by establishing some aspect of their business in that country. In addition by establishing a presence, that entity can assist in the enforcement of legal protections for its business. For several reasons, the eventual costs of an indirect approach might far outweigh the benefits, making the direct approach less costly in the long-run in a developing country.

International Law

When working internationally there are three legal areas to consider. First are the US laws which will be applied domestically and also follow a US person or entity throughout the world. Therefore their reach includes your activities in a foreign country. Second are the international laws usual set forth in treaties or conventions. International law is law by consensus. Thus for international law to apply in a particular country, that country must expressly adopt and apply that law. Third are the laws of the country where you intend to do business. Legal concepts and traditions are different in every country. Therefore, when doing business in a foreign country, no assumptions should be made as to the enforceability of contractual terms or international laws.

“Who” Once Again

A very significant determinant of how you will do business in a foreign country goes back to who you have employed to fulfill your international goals and objectives. Whether your presence in a foreign country is direct or indirect, you must attain a certain level of trust and maintain communication with the entity and individuals. Those individuals must have an adequate understanding of the foreign business environment. The involvement of professionals that can bridge business cultures, integrate your corporate culture and recognize all of the complexities, nuances and differences is essential for success internationally.