Beuth University of Applied Sciences Berlin

MBA Renewables

WRITTEN ASSIGNMENT

INTERNATIONAL BUSINESS LAW

Lecturer: Maximilian Feustel, LL.M.

Student: Mario Maras, Dipl. Ing.

Berlin, 21st July 2013

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Table of contents

Task 1. Market Entry Methods................................................................................................. .3

Task 2. Overview of general risks in international business, how do these risks differ from

general risks of national business?...........................................................................................5

Task 3. Relationship between public international law, national law and private international

law............................................................................................................. ...............................7

Task 4. Four freedoms of European Union. Examples how can business be conducted

between countries which have and have not implemented these four freedoms.....................8

Task 5. GATT/WTO trade law..................................................................................................9

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Task 1. Market Entry Methods

First category describing entering foreign market is trade. Trade represents import and

export of goods between different countries. Goods exporting can be done in two different

ways, depending on the control that company wants to have when exporting their products to

foreign market, i.e. can be done directly or indirectly. Direct exporting means that company

should take own care of whole process between delivering of a product from a factory to a

customer. Company should have its own international sales and marketing departments,

logistics department, should find customers in target country on its own, prepare all

marketing activities, do negotiations with potential customers alone, take care of differences

of legal systems between the countries to make sure that whole trade can be done smoothly.

Indirect trading or exporting in our case would assume a third party that serves as a

interconnection between producer in home country and a customer in a target country.

These companies usually find their own customers, plan marketing activities on their own, do

all the negotiations with customers on their own and of course, take provision for this

business which could take part of the profit from the producer to the company representing

producer in target country. These models are different - in first, the producer has to take care

of everything besides production, meaning they have more control over their product, its

lifecycle, they plan all the activities, budgets, etc. and in second, producer has less work

because there is another company present that does most of distribution, sales and

marketing work for the producer in target country. Level of control that producer wants to

have in second case for example, depends entirely on the producer. Producer can also plan

all the activities in the target country and pay their distribution company for example to do

their work according the strict instructions which need to be signed in a contract, or can

choose some export management company (EMC) for example which will take care of

everything. This type of exporting is useful if export is being done between countries that lie

for example on the same continent as logistics expenses would not be as high as if products

would be shipped from Europe to East Asia for example.

Second category describing entering foreign market is licensing. In licensing agreements, the

licensor, holder of intellectual property in home country, i.e. electronic company holds its

patents, production process etc. grants permission to licensee in target country, company

who can use licensor´s intellectual property for some time to produce electronic equipment

for wind turbines and sell them in their country. This type of building business in foreign

country saves a lot of energy and time for a producer for shipping products on very long

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distances. In this scenario, electronics company should also implement its production

process, branding, i.e. marketing plans to build its product in new market and have strong

control over the licensee by signing very detailed contract and protecting its intellectual

rights. Licensor should also check the regulations regarding the property of intellectual rights

in its target country to prevent privacy, intellectual theft. This type of doing international

business is good if a producer wishes to build some money in foreign market without doing

much of "field work", i.e. letting this part to licensee and letting the licensee to live from the

provision which could be earned by licensor if another model was used.

Third category describing entering foreign market is foreign direct investment. Foreign direct

investment means physical presence of producer in the target country, meaning opening a

production facility in the country, building huge warehouses for building new distribution

channels in the country. This is a good model if a company wishes to penetrate its business

to another continent for example. If the producer decides to build its own production facilities,

then all needed capital will be invested and 100% of the shares in that country will be owned

by the producer. If the producer decides for example to buy some existing facility, or the

company in a target country, than managing shares will be targeted. In that scenario it is

better to buy at least 51% of shares to be sure that whole process can be implemented.

When everything is built, producer´s own sales and marketing force will do their best to find

new customers, build new distribution channels, build brand out of the product on the new

market etc.

Conclusion - which model is the best for the specialized electronic producer for wind turbines

if wishes to penetrate foreign market? There is no right or wrong answer because it all

depends on the company´s vision and money that can be invested in new business. Having

more control is always better than having less control. From that perspective, if the company

wishes to do international business in the small distances, i.e. between few countries, then

direct export as a trade would be the best option. If there are bigger distances like from on

side of a continent to another side of a continent, or between continents, and on top of it if

business is growing, foreign direct investment is the best scenario to reduce shipping

expenses and troubles looking long term and building assets, i.e. production and building of

a product in local community. Indirect export might be good option for small producers who

don´t have enough money and know-how for building international business, but again, with

internal control and collecting know-how, in time position of a company can be much stronger

with direct than with indirect exporting. Licensing is the least favorable option comparing to

other options, but is also good as there are no significant foreign trade expenses, most of

that part of the work is given to another company and it is being controlled by international

sales and marketing managers. This is also a good option for product which has very low

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production costs and low company´s core business share because value for money

increases.

Task 2. Overview of general risks in international business, how do these risks differfrom general risks of national business?

When a company does international business meaning doing business in another countries,

it is faced with different risks. It must be taken into consideration that another country means

another political system, another economical system, another law system, another and

possibly unknown culture and language which could be the greatest obstacle in finishing

business deal. There are many small factors needed to consider to make both parties happy.

Language and culture risks is a very slippery category as there are no pre-defined protocols

or patterns to follow that emerged in local culture where business parties come from.

Language can be a very difficult problem in doing international business. There are parties

who wish to negotiate business deal and have problems with communication because they

don´t understand each other. For companies working international, it is very helpful to be

fluent in English language and it would be much better to also be able to communicate with

foreign business partners on their own language. If not possible, fluency in English can be

very helpful for both parties. Therefore, after finishing the negotiations, it is very helpful to

sign contracts on few languages - local language and English language, just to be sure that

all parties know what they signed, that they understood what was written in the contract prior

starting the mutual business. If problems with language occur, i.e. one party didn´t fully

understand the content of the contract, this can evolve to major legal problem leading to law

suits and destroying potential beneficial partnership just because one or more parties didn´t

try to understand the agreement in full. Another problem that can occur is inability or no will

for understanding social sphere of the other party if comes from another and unknown

culture. It is very important to be aware that someone from another culture can have different

or opposite customs and if no attention is paid to these details, situation can lead to major

misunderstandings and/or potential insults even if there were no intention prior doing it.

Therefore, it is very beneficial to learn something about the culture where business is going

to be negotiated, and showing the will to learn the culture provides potential opportunities. If

different parties negotiate business on a national level, these problems are minimized as all

parties speak the same language they understand and share cultural similarities, so these

problems that can occur in international level are minimized on a national level.

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Currency risks is another major category of risks in international business. The most

common option is that countries have they own currencies and therefore during the export

when receipts need to be paid, i.e. bank transactions need to be made, currency needs to be

converted. It is very important to note that there are only few strong world´s currencies like

European euro, Swiss franc, British pound, American dollar and Japanese Yen. Most of other

currencies fluctuate and depend on above currencies very much. First risk that occurs in

these transactions in convertibility, i.e. is it possible to convert the currency when bank

transaction needs to be done? There are currencies like mentioned above that can be

converted in the most countries in the world and they are call hard currencies, and there are

currencies that cannot be converted in most of the countries and are therefore called soft

currencies. There are problems when companies from different countries wish to do a

business together and cannot directly convert their currencies because it is not possible due

to legal situation in the country etc. These companies need to use a third, stable currency to

convert their money from home to target country. Another risk is called repatriation,

presenting the situation when foreign parties try to move hard currency outside of home

country. Therefore, some countries have strict laws preventing purchasing private goods with

hard currency as their reserves are minimum. Third risk with currency is devaluation of the

currency of payment meaning that relative values of seller´s currency and buyer´s currency

change between the time when the deal was made and the time when the payment is

received. If exporter has agreed to receive money in foreign currency, can potentially lose

money in this period and it would be better for him to insist on payment on his local currency.

Third major group of risks would be legal risks. When company starts a business in a foreign

country it should be conscious that country has its own legal system that might be slight or

totally different from the country it comes from. The laws that should be examined prior

penetrating new country would be: labelling, marketing and advertising laws, income and

sales tax laws, environmental laws, product and consumer liability laws, antitrust and

competition laws. In renewable energy projects, feed in tariff and planning laws are very

important.

Political risks mainly refer to changes of political parties in government which include

changes in laws and administration in the country meaning that company might change its

approach towards doing business in the target country due to administration changes.

Problems like nationalization or expropriation might occur which was seen in non democratic

countries through the history.

All these mentioned risks occur due to differences between countries as each country has its

own characteristics from the point of culture, language, political and legal system that draws

roots from the culture itself. When doing business in local country, the businesspeople

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already know the language, are familiar with culture and therefore know how to communicate

with different parties and this is very important when parties sit together and wish to

negotiate a deal. Native language or at least fluency is very important in understanding local

legal system and to some point political system. National business is different from

international business from very different points of view as businesspeople are already

familiar with many details that are crucial to communicate properly and to build something in

the environment.

Task 3. Relationship between public international law, national law and privateinternational law.

Assumption would be that a company from a host country A is opening to the market in the

target country B. Company was build in the host country, meaning it is submitted to the laws

of that country. It has to be structured according to these laws, if any problems occur with

other parties in the host country, local courts and laws have jurisdiction over these problems.

All aspects concerning law like employing and releasing work force, paying taxes, following

various standards written in the law, types of contracts, etc. are under supervision of national

law. As the company decided to open its services in the target country, it has to consider

national laws in the target country. As the company has signed the contract in the target

country, it has to check the standards of the contracts in that country, has to understand tax

rules in the target country and all other jurist aspects concerning its industry and aspects

concerning type of contract. It has to check whether this electronic equipment is allowed to

export in the target country, under what conditions, etc. Both aspects described, from the

point of view of host country and the point of view of target country are concerned to national

law. There are other mechanisms that were concluded between different countries like

international treaties as part of public international law. These bilateral or multilateral treaties

are used in order to provide smoother doing of business in the international level from the

legal point of view. Company has to check whether exists the treaty between host country

and target country which might help with exporting the electronic equipment, maybe there

are some incentives concerning taxes, what rules should be applied in order to conduct

business in more efficient way. One problem that might occur when relying on public

international law is there are no specific rules how to treat the nation if it doesn´t oblige to

follow these laws except the force that can be used. Third type is private international law

which is part of the national law. This type of law is the most important type of law if some

problems occur between parties in host and target countries. If one party does not follow

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what was signed in the contract and violates the agreement and the other party wishes to

settle down this problem on the court, this is when private international law is applied. As two

companies from two countries are involved in the process, it is a great question which part of

the contract was violated and which court and in which country should decide who is right in

this process. Private international law should help to decide which national laws have to be

applied, will the national courts have jurisdiction to decide over foreign questions, which

judgments, legal issues and decisions that have been issued by external forum should be

recognized and enforced in national courts. Even this law has international in its name, it is

still subjected to national laws, i.e. it is different from country to country. It is used to help with

settling down the questions concerning conflicts between different parties on international

level in one country (national part) and therefore is also called Conflict of law.

Task 4. Four freedoms of European Union. Examples how can business be conductedbetween countries which have and have not implemented these four freedoms.

In European Union law, the Four Freedoms is a common term for a set of Treaty provision,

secondary legislation and court decisions, protecting the ability of goods, services, capital,

and labour to move freely within internal market of the European Union. These four freedoms

are The free movement of goods, The free movement of services and freedom of

establishment, The free movement of persons (and citizenship), including free movement of

workers, and The free movement of capital. The four freedoms are fundamental to the

common market. For example, there is an international corporation which sets a region in

few countries from which some are in European Union and some are not. The factories and

headquarters of the region is in one country of European Union. The free movement of

goods refers to European Union as Customs Union, meaning that custom barriers had been

removed between member states. The goods are allowed to move freely between borders of

European Union, i.e. there is to taxation when goods are being transported from one country

to another. This is forbidden in the Article 90 of the European Commission Treaty: "No

Member State shall impose, directly or indirectly, on the products of other Member States

any internal taxation of any kind of that imposed directly or indirectly on similar domestic

products. Furthermore, no Member State shall impose on the products of other Member

States any internal taxation of such a nature as to afford indirect protection to other

products.". In case of our corporation, if goods need to be transported from one country to

another between borders of European Union, there will be no custom controls, nor taxation

will be applied when goods enter the target country to be sold there. On the other hand,

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when these goods wish to be exported to country in the region which is outside the borders

of European Union, customs have to check the goods and charge taxes as written in the law.

The free movement of services and freedom of establishment concerns the questions of

establishing the business in another country of European Union without restrictions. For

example, business person from Sweden has the same rights to establish business in Spain

as people holding Spanish citizenship. If a businessperson outside European Union wishes

to establish a business within European Union, might have restrictions depending the country

he comes from as European Union started opening its legislation towards new foreign

business to be conducted within the borders. If there is a country which has very closed

legislation, businesspeople outside the country might have serious problems with starting the

business in that country. The free movement of persons enables the citizens of Member

States to travel to others, alone or with their families, to work in other states (temporarily or

permanently). The main idea is to treat people and workers from other Member States as

domestic ones without discrimination. Article 39 of the European Commission Treaty

prohibits on the basis of nationality, even article 57 of the European Commission Treaty

allows some restrictions to remain. In the case of our corporation, if the workers need to

move between the countries, it is much easier to move between the countries that are

Member States of European Union. For example, if a worker needs to move from one

country that is a Member State to another country that is also a Member State, there would

be no restrictions, no work or resident permits would be needed. If for example a worker

should move from a country that is a Member State to a country that is not a Member State

and vice versa, necessary permits need to be obtained as previously regulated by the

national law in the country. The free of movement of capital regulates the free movement of

goods more deeply concerning custom barriers as described above concerning import and

export through the borders of European Union.

Task 5. GATT/WTO trade law

General Agreement on Tariffs and Trade / World Trade Organization is an organization

emerged in 1947 under initiative of twenty three nations after the Second world war and

Great depression in 1930s. It changed its scope and responsabilities in 1949, 1994, and on

1st January 1995 when WTO replaced GATT. GATT/WTO presents a global structure

composed as an signed agreement of member nations for providing political, economic and

legal climate for trade, investment and development. The primary goal of the organization is

to lower tariffs, and remove artificial barriers and restrictions imposed by self-serving national

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governments. The system includes an international legal system with rules, a mechanism for

interpreting these rules, and a procedure for resolving disputes under them. The WTO

establishes framework for trade policies by setting mentioned rules. Five major trade law

principles are: 1) Multilateral trade negotiations, meaning that nations should meet

periodically to reduce tariffs and non-tariff barriers to trade. 2) Predictability of trade

opportunities, meaning nations should commit themselves to negotiated tariff rates for

providing stability of world´s trading system. 3) Non discrimination and unconditional most

favoured nation trade, meaning that a member country will not give advantage to one

member country to another member country (Most Favoured Nation). 4) National treatment,

meaning that member countries will not discriminate imported goods to domestic produced

goods nor treat two of them differently in the tax laws or any other regulations. 5) Elimination

of quotas and other non-tariff barriers, meaning that member countries should first convert

their non-tariff barriers to tariffs and then engage in negotiations to reduce tariff rates. GATT

1994 aims to prevent one country to take advantage against another country in case of trade

disputes and in those cases to make countries to rely on GATT dispute-settlement

procedures for avoiding trade war. These procedures are being settled on a governmental

levels, i.e. parties should make complaints to their government which should further make a

complaint to GATT to resolve the problem. Today, WTO has more power in resolving the

disputes than GATT before, as WTO provides panel decisions in order to help the countries

to resolve their issues and these decisions can not be blocked as was a possibility in old

GATT system.

If there is a party in one country thinking that a party in another country is working against the

rules written in Articles in WTO, can appeal against with a cooperation with a government as

all disputes in WTO are being settled between countries. Settling disputed is the

responsibility of Dispute Settlement Body (DSB). The whole process can take up to one year

and three months. In first stage, consultation takes place in maximum of 60 days where all

countries are being called for a meeting to try to talk to each other to try to settle the dispute

by themselves. If this doesn´t work, than second stage takes place in maximum of 45 days

for a panel to appointed and a maximum of additional 6 months to panel to conclude. If the

consultations fail, then complaining country appeals for a panel which takes place of 6

months for making a conclusion. Before first hearing countries present the case, and during

the first hearing, complaining country, the responding country and any other country that

joined the consultations present their case to the panel. Then countries involved present their

rebuttals in written and in oral presentation and then the experts gather to gather all

information and to present their report. The first draft is reported to all sides in the dispute

settlement process without final conclusions and two weeks are given to all sides for further

comments. Further, interim report with conclusions and reports are given, to all sides and

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another one week is given for further comments. After that comes the review stage when

another meetings with the parties may be held and which should last around one week. The

final report is then submitted to the disputed parties and in three weeks, the final report is

circulating among all WTO member countries. If the panel decides that some of WTO

agreements were broken, than final conclusion is suggested, as a way how to deal the

problem by following the WTO rules. At the end, final report becomes a ruling, or a

recommendation within 60 days unless the consensus rejects it. Appeals are available to

these reports. Appeals are collected by Appellate Body which in 60 days brings its own final

conclusion which can be accepted or rejected by the Dispute Settlement Body. Rejection can

be made only by consensus. After the case is finished, the country that broke WTO rules

should stop working for what it was appealed against and change its direction, or if continues

working against WTO rules must offer some kind of compensation or pay a penalty.