Legal Considerations in Operating in Foreign Markets

[This is the fifth in a series of articles on globalization.]

Legal considerations in operating in foreign markets

There are a number of legal issues that must be taken into account in commencing operations in a foreign market. For example, areas of potential concern under the local laws of the country in which the operations are to occur include the following:

Local laws relating to the relationship between a manufacturer and local agents or distributors, including laws that regulate the duration and termination of the arrangement, require that local law governs the contractual relationship, and restrict post-termination noncompetition covenants on the local party.
Intellectual property laws in the foreign country, which should be examined to determine the protection that will be available for the company’s patents, trademarks and other intellectual property once its products have been sold into the market.
Local laws that give sales representatives who are natural persons the protections available to employees under local labor laws, including employee benefits and rules relating to termination of employment.
Local product liability laws that may expose the company to substantial financial risk or require substantial modifications to the company’s basic product.
Local antitrust or competition laws that might treat an agency or distribution arrangement as creating a restriction on competition.

In addition, the company must always consider the possible application and effects of certain domestic laws, including competition laws and export controls.

Planning for global expansion

Global expansion strategies must be implemented within the context of the company’s overall business plan. Accordingly, management needs to take a careful look at the opportunities that might be available to the company in foreign markets and the risks associated with pursuing those opportunities. In many cases, entry into a foreign market can provide a company with a competitive advantage over current and projected competitors. However, an alliance with a foreign partner may increase the possibilities of misappropriation of the company’s proprietary technology. Moreover, adapting the company’s products and services to the requirements of a foreign market may be difficult and expensive.

In developing a business plan for foreign activities, companies must take into account the goals and objectives for entering a specific foreign market. For example, if the company is seeking to sell products and services in a foreign country, it must develop a comprehensive marketing plan that takes into account the unique cultural and language characteristics of the market. If, on the other hand, the company will be using an alliance with a foreign firm for manufacturing of products, or procurement of raw materials, to be used outside of the foreign market, detailed specifications and performance schedules will be needed. In either case, the company must be mindful of uncertainties that may be created by local regulations or the political environment. As such, planners should build and test various scenarios based on assumptions regarding future events and trends in the foreign market.

In many ways, entry into a new foreign market is similar to launching an entire new business. As such, companies need to consider the capital requirements associated with the move and determine the availability of necessary financial resources to fund the expanding international operations. For example, a budget should be prepared that includes allocations for hiring additional managers and employees, establishing a distribution channel and acquiring the information necessary to prepare a sensible marketing and overall strategic plan for the new market. While funds for these activities may be available from traditional operations, companies often have to look elsewhere to fund new international ventures. One possibility that might be considered is subsidies and other incentive programs for importers that are available from governmental entities in the target market. In addition, the company will need to recruit managers with experience in establishing and managing foreign operations, particularly foreign sales and distribution activities. The company will also need to consider how personnel focusing on international activities will be integrated into the overall organizational structure of the company, including establishment of appropriate lines of authority and guidelines for sharing resources with the traditional domestic units and functions. Finally, the company must identify, and establish relationships with, appropriate business contacts in each foreign market. Locating customers is, of course, the first order of business; however, depending on the circumstances, the company will also need to contact potential distributors, suppliers, financing sources and government officials. If the company is not able to initiate these contacts through its own internal resources, recourse will need to be made to agents in the target market.

Many firms discover that their initial export activities are quite profitable, particularly when the products in question are based on unique proprietary technology controlled by the company and sales are made into niche markets with little competition. In those cases, the company is able to obtain high margins and generally can generate material level of sales with a relatively small outlay of marketing funds. The early successes are often eroded, however, by the additional demands that are placed on the firm as it attempts to grow the export activities beyond the initial limited size. As demand increases and interest builds in entering new markets, firms must decide whether to make substantial investments in adapting the product to new markets and educating the customers in those markets. In order for this step to be successful, companies must be prepared to develop and nurture the organizational structure necessary to support export activities. Elements of this infrastructure include managerial resources, control and information systems and strong relationships with competent local representatives.