INTRODUCTION TO

INTERNATIONAL BUSINESS

CHAPTER 1:

BY: AHMAD SHAHRIMAN BIN AHAMAD TEKMEZI, LLB (Hons.) IIUM

OBJECTIVES

Discuss the factors that have facilitated the growth in international business transactions.

Understand how international business is conducted generally.

Discuss the sources of international business.Discuss the laws that affect exports and

imports.Understand the risks of international

business transactions.

DEVELOPMENT IN INTERNATIONAL BUSINESS

The relaxation of international trade barriers started after the World War II.

Resulted in a dramatic increase in world trade in goods, services and technology licensing.

Created a world of opportunities for the international entrepreneur.

GROWTH FACTORS

FACTORS BEHIND THE EXPANSION

1. The establishment of the World Bank. Created at Bretton Wood;s Conference in 1944. Based in Washington D.C and headed by US citizen. An international financial institution that provides loans

to developing countries for capital programs. Official goal / mission = reduction of poverty. All of its decision must be guided by a commitment to

promote foreign investment, international trade and facilitate capital investment.

First recipient = France (US$250 million)

Reference: http://www.worldbank.org/

2. The Establishment of the International Monetary Fund (IMF). Created in 1944 at Bretton Wood’s Conference and came

into existence in 27th December 1945. Working to foster global monetary cooperation, secure

financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms.

http://www.imf.org/

3. The Establishment of the United Nations. An international organization whose stated aims are

facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace.

founded in 1945 after World War II to stop wars between countries, and to provide a platform for dialogue.

http://www.un.org

4. The establishment of the World Trade Organization (WTO).

an organization that intends to supervise and liberalize international trade.

officially commenced on January 1, 1995, replacing the General Agreement on Tariff and Trade (GATT) 1948.

Deals with regulation of trade between participating countries.

Provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process.

www.wto.org

5. Dramatic advances in ICT and intellectual property.

information and communication technology (ICT) an important enabler for economic and social development and for enhancing the competitiveness of domestic businesses.

ICT use by the business sector translates into greater economic efficiency.

ICTs provide a wide range of advantages for doing business, such as faster and better access to information, reductions in costs and time and improved business operations

6. The entry of China in the WTO. In 2000 China was the 7th leading exporter and 8th

largest importer of merchandise trade - exports: 249.2 billion dollars (3.9% share), imports: 225.1 billion dollars (3.4% share). For commercial services China was the 12th leading exporter and the 10th largest importer - exports: 29.7 billion dollars (2.1% share), imports: 34.8 billion dollars (2.5% share).

http://www.wto.org/english/news_e/pres01_e/pr243_e.htm

HOW INTERNATIONAL BUSINESS IS CONDUCTED?

1. International Trade Exportation / Importation of goods or services from one

country to another country. Divided into two categories:

contract for the Sale of Goods = exporter selling goods directly to an importer

Supply of services = construction works ad installation (transfer of technology).

2. International investment. Direct investment such as joint venture, by two or more

firms, branch offices or subsidiaries companies in other countries.

Indirect investment includes agency arrangements, distribution agreements, marketing representatives or licensing and franchising abroad.

LAWS OF INTERNATIONAL BUSINESS

International law generally regulates three primary relationships:1. The relationship between two nations;2. The relationship between a nation and individual;

and3. The relationship between persons or entities from

different countries.

This course (LAW 2033) is primarily concerned with the last type of relationship.

WHAT IS LAW?

An obligatory rule of conduct.The commands of him or them that have

coercive power (Hobbes).A rule of conduct imposed and enforced by

the Sovereign (Austin).

SOURCES OF INTERNATIONAL BUSINESS LAW

Primary Source of Law The contract entered into between the business

parties. The first source to be referred in resolving a contract

dispute. May fail to provide solution if the parties interpret the

contract differently.

Secondary sources of law In order of superiority:

1. International conventions and treaties2. International customs or general practice3. General principle of law recognized by civilised nations4. Judicial decisions and scholarly writings.

International Conventions and Treaties or Regional Initiatives Aim = harmonizing rules – cross border transactions Conventions are legally binding agreements between the

states sponsored by international organizations such as United Nations, OIC, etc…

Treaties are legally binding agreements between two or more states. Example: The Agreement on Trade – Related Aspects of Intellectual Property Rights (TRIPS).

Regional Initiatives are the regional efforts generally revolve around major free trade areas such as AFTA, EU, etc…

International Customs and General Practice Customary international law results from a general and

consistent practice of states followed by them from a sense of legal obligation.

Simply been around for such a long time or are so generally accepted that they are described as customary laws.

Two elements: General Practice: means official government conduct.

Inaction can also be deemed a form of practice. Begins as a result of States economic, political and social interests.

Opinio Juris: General belief that the such practice amounts to law and is binding. May be inferred from the fact that a rule has generally and consistently been followed over a period of time.

Example: INCORTERMS 2000 (trade terms), UCP 600 (Uniform Customs and Practice for Documentary Credits)

General Principles of Laws recognized by civilized nations. The existence of a body of legal principles and rules that

are common to all, or almost all legal systems. The common law and the civil law, which by themselves

share common principles of law, provide the basic framework that many general principles of law can be derived and used to “fill the gap” when there is no general principle of international law available for application in the resolution of a particular case.

When courts are required to decide international disputes, they frequently rely on the general principles of law that are common to the legal system of the world.

Judicial Review and scholarly writings The decision of the Court has no binding force except

between the parties and in respect of that particular case. The Court would refer to its past decisions and advisory

opinions to support its explanation of a present case. not as a source of law as such, but as a means of

recognizing the law established in other sources.

The scholarly works of prominent jurists are not sources of international law but are essential in developing the rules that are sourced in treaties, custom and the general principles of law.

Scholarly writing = the teachings of the most highly qualified publicists of the various nations.

Other possible sources of international law United Nations General Assembly Resolution (UNGAR)

The states are not under legal obligations to follow the resolution.

Soft Law Can be found in treaties not yet in force. Guidelines of conduct for international economic law,

human rights law, environmental law, etc… Equity

General principles of fairness and justice. According to what is fair and appropriate to be applied by

the disputing parties.

LAWS AFFECTING EXPORTS & IMPORTS

Encouraging exports Subsidies:

The granting of financial assistance by the government to encourage the export of specified products.

The most common product groups where export subsidies are applied are agricultural and dairy products.

One of the main export subsidy programs in the US is called the Export Enhancement Program (EEP).

Its stated purpose is to help US farmers compete with farm products from other subsidizing countries, especially the European countries, in targeted countries.

Tax Incentives: Special program often give tax assistance to exporters. Example: the turnover or value added taxes (VAT) levied

in many countries is often refunded to the seller if the goods are sold for export.

Preferential Tariff Arrangement Schemes by which the exported goods can enjoy lower

preferential import duties offered by the importing countries.

GSP = Generalized System of Preferences, reduces or duty-free -tariff granted by developed countries to developing countries.

CEPT = Common Effective Preferential Tariff, an agreed tariff to be applied to goods originating from ASEAN member states. Tariffs on all manufactured goods would be reduced to 0 – 5%.

Restricting Imports Prohibition on imports:

Some countries prohibit the importation of certain products or from certain countries.

The local laws may empower the government to restrict all imports from countries which are considered enemies.

For examples: Malaysia do prohibit the importation of goods from Israel, Prohibition on importation of obscene materials.

In March 2001, the United States prohibited all European imports of livestock to protect U.S. livestock herds from foot and mouth disease, which had afflicted large numbers of animals in Europe.

Quotas on imports: Limit the quantity of certain imported products. The effect is to reduce the quantity of imported goods to

be sold in the country and increase domestic production of a good, service, or activity, thus "protect" domestic production by restricting foreign competition.

Tariffs A list of fixed charges that is paid on goods coming into a

country / taxes on imported products. Tariffs are levied to protect infant industries from the

better-developed industries of foreign countries. To increase the price of imported goods for local

consumers. The consumption of imported product will be reduced

and the supply of local goods will be increased.

Non-Tariff barriers: Barriers that restrict imports which consist of

governmental policies and practices but are not in the usual form of a tariff.

In the forms of rigorous safety requirements or performance on imported goods, costly and laborious documentation and procedures for importing the goods.

Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to protect health, safety, sanitation, or depletion of natural resources.

RISKS INVOLVED IN INTERNATIONAL BUSINESS

TRANSACTIONS

Risk in Developing Countries: The transaction in many developing countries is facing

a higher level of risk than in developed countries. Some countries are known by arbitrary government

actions, excessive taxation, ineffective legal and dispute resolution systems and high degree of corruption.

The best way to operate business in these countries is by exportation of goods.

Cross-cultural risk: refers to situation where misinterpretation arises as a

consequence from differences in human value. represented through differences in language, customs and

religions. Difference in language and cultural background is a major

obstacle in international business transaction. language; (for example) ‘suay’ (pronounced as ‘soi’) in Thai

means beautiful but in Malaysia ‘suei’ (pronounced as ‘soi’), originated from Hokkien dialect, means bad luck.

religion; if a country wants to export beef/meat to Islamic country, it must be ‘Halal’.

customs; (example) some countries recognize gift in their transaction.

Currency risk Refers to the risk of convertibility and adverse

fluctuations in exchange rates. Convertibility is the issue of whether one currency is

convertible into another currency. When currencies fluctuate extensively, the value of the

firm’s assets can be reduced and would result in dramatic increase in the cost of importing component if the value in which the imports are denominated rises sharply.

Example, when Toyota exports the automobile components to Bangkok, the currency used for the transaction is Japanese Yen.

Country risk Refers to potentially adverse effects on company

operations and profitability caused by developments in political and legal environment in a foreign country.

Legal: laws and regulations that potentially hinder company operations and performance. Example for critical legal dimensions include property rights, taxation policies and product liabilities.

Political: negative consequences that stem from a change in government policies of foreign business activity. Example, government may control market access to foreign firms.

Geographical Risk: factors such as natural environment , the location

where we live and the resources accessible can influence the way we make a living and many aspects in our life especially if it related to business.

Manufacturers will find their area for business operation which offer more resources such as minerals, water resources, marine resources, forests, soil, oil or other raw materials.

Some countries face natural disaster regularly which can affect the business operation such as earthquake, storm, hurricane, volcanic eruption, flood, etc…

ACTIVITIES

You are the vice president for foreign operation of a local multinational corporation. You have been asked to prepare a report for the board of directors regarding “doing business” in Vietnam. Discuss the following in your report:

a) The different ways of doing business in foreign countries,

b) The way you would recommend for that country,c) The risks of doing business in that country.