An international law professor once remarked that at one point in Russian history, as an explanation to the varied aspects of international law, to be a non-communist meant to be illegal. By demonstrating that example, he was proving to the classroom that in any country you could define whatever legality or illegality status. You abide by that rule or suffer the consequences. Imagine that the U.S. made it illegal to be a member of the democratic party. So I like to point out some peculiarities on international corporate development.
When it comes to Internet multimedia broadcasting, it is very simple for a server to direct multimedia files anywhere throughout the world. But lately we see restrictions applied to the content. In mainland China the government always reserves the right to restrict content which the panel feels does not represent the values of the government. In Europe, new laws dictate that at least 10% of the content must be local in origin. These are restrictions that complicate what started as simple broadcasts.
Then there are the foreign ownership restrictions. Again, the Chinese demand that local companies own at least 51% of any joint venture or enterprise in certain industries. However, the U.S. also has foreign ownership restrictions in broadcast and media industries. That is why Rupert Murdoch changed from Australian to U.S. citizenships in order to control TV and print media companies. Besides technology and media, I have noted foreign ownership restrictions in real estate in Chile whenever that property adjoins the international border.
Yet the other minefield is finding reliable local partners in corporate development. In the U.S., one can effect decent due diligence on potential partners easily. One can check a company’s credit with a D&B report, registered entities, etc. Not so easy within other countries. Chinese due diligence means interviewing local bankers and other known businesses to evaluate the potential partner’s reputation. Not doing so can be painful. In a meeting with the EXIM Bank, one lawyer noted that the bank financed certain companies in Mexico and, when it came to collect, they couldn’t find those companies. So it pays to find reliable and effective local partners. A Moscow friend in charge of due diligence remarked that whenever he met an executive, he wasn’t certain whether that person represented the company or whether that was his name. Such frustrating experiences are faced while doing international business.
Other peculiar corporate creation experiences include board membership. In one European country, the company had to find a board member native to that country. I have seen similar requirements in other countries. And in some countries the law is so vague as to warrant reasons why enter that market.
Then there are restrictions that control the behavior (FCPA) or the technology being imported (Technology restrictions discussed in other blogs). Here one discovers various landmines that control corporate development covered by U.S. regulations. In one recent meeting with potential Chinese investors, that became the topic of conversation – technology transfer.
Another critical word in international business is “presence” – a key word in defining whether the company is taxed locally. In the technology world where everything is pushed through fiber and racks through servers that reroute the data stream back to the U.S., that process can be monitored and taxed. Yet, again, that definition can vary. In some countries a server and local salespeople on the ground are enough. In other countries, you only require bodies – not just salespeople. And I am willing to bet that some country will simply define any hardware and traffic that generates revenues.
That loops back to the law professor’s example: the local law is what that country finally decides what it should be.