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The Mulnaonal Enterprise
4
I. Text Materials
Introduction
Any business wishing to globalize has a number of choices, ranging from relatively little presence
in foreign nations (licensing intellectual property, exporting, importing, franchising) to more
intense involvement in legal entities formed in foreign nations (joint ventures, general
partnerships, limited partnerships, corporations, and limited liability companies). Multinational
enterprises (MNEs) can take on a variety of operational structures, but common to all is the
linking of two legal business entities in ways that go beyond contracting and licensing.
The regulation of multinationals is principally a matter of municipal law. As a general rule, home
states regulate the parent firms and host states regulate the subordinate firms. At times, however,
home states are able to regulate foreign subordinates with extraterritorial laws, and host states
may regulate the parents by piercing the fictional veil that separates the subordinates from their
parents.
Strategies for Doing Business Globally
Exporting and Importing – One way for a business to operate internationally is to export its
goods (or services) to another nation. Firms may also operate internationally by importing goods
or services from another country.
Exporting raises issues of a different order from domestic sales: transportation, financing, and
contracting must be carefully considered, along with obtaining the proper export licenses.
Constraints on exports and imports may also exist at a policy level: National laws may prohibit
imports from or exports to certain countries.
A business that routinely exports may need full-time export managers who deal with foreign
buyers and understand the complexities of compliance with various import and export
regulations, transportation/shipping issues, and financing. For businesses that do not have
full-time export managers, foreign sales agents or foreign distributors are available.
A business that exports, imports, or grants licenses to a foreign national or foreign business entity
is not a multinational enterprise.
Branches and Subsidiaries – A branch is usually considered to be just an extension of the
corporation, which is generally liable for any debts of the branch. Short of establishing a branch,
a business entity may simply engage a foreign agent to serve as a representative of the business.
The agent may do market analysis and product promotion or may also serve as an import
representative. Host country laws will determine what the agent may or may not do.
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The Multinational Enterprise
Licensing Intellectual Property and Franchising – A license is a contractual grant of a legally
recognized right; it becomes an international marketing tool whereby the license of a business
entity in one nation is extended to a party in a different nation. Franchising from one nation to
another involves substantial elements of intellectual property: trade secrets and trademarks are
both integral parts of franchising.
A foreign market sometimes has national laws that restrict the import of finished goods; licensing
a foreign entity to produce the product allows the owner to collect royalties through contract with
the foreign entity, and allows the foreign entity the chance to capitalize on the brand name and
goodwill of the product’s owner. Restrictions on franchising can be found in many municipal
legal systems.
The Business Form
The company laws in various countries may have many unique features. Businesses attempting to
go beyond branch offices to create subsidiaries or partnerships must look closely at the particular
laws of a host country.
The Importance of the Separate Legal Identity of Juridical Entities – Corporations and
certain other companies are juridical entities that have legal identities separate from those of their
owners.
This separate legal identity has several important consequences. First, it means that the liability of
the owners is limited to their investment in their company. Second, it means that rights and
benefits accruing to the company belong to the company, not to its owners.
Case 4-1: Case Concerning Barcelona Traction, Light and Power Co. (Second Phase)
Facts: Barcelona Traction (BT) was incorporated in 1911 in Canada to supply electricity in Spain.
Issue: Did the shareholders suffer an injury for which they had the legal right to seek redress?
Holding: The shareholders are not entitled to redress.
Law: So long as a company is in existence, it is an entity that is independent from its
Explanation: Although the relationship between a company and its shareholders can be described
Order: Case dismissed.
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The Multinational Enterprise
The Multinational Organization
The Parent Company – To carry out operations internationally, large business firms have
adapted their organizational structures to share risks and to take advantage of economies of scale.
The Nonmultinational Enterprise
It is the simplest operating structure in which a firm organized in one country contracts with an
independent foreign firm to carry out sales or purchasing abroad.
The agent, who may be a private individual or an independent firm, acts on behalf of the domestic
firm or principal to either sell the principal’s goods or services abroad or to buy goods or procure
services for the principal. Neither the principal nor the agent is truly a multinational enterprise.
Their relationship is governed by an agency contract and by the agency laws of the home and host
countries.
The National Multinational Enterprise
Slightly complex than the nonmultinational enterprise, the national multinational enterprise is an
organizational structure in which a parent firm established in one country establishes wholly
owned branches and subsidiaries in other countries.
A branch is a unit or a part of the parent, whereas a subsidiary is a company organized as a
separate legal entity that is owned by the parent. The parents of national multinationals are most
likely to be found in the United States, Europe, China, India, Brazil, and Japan.
The International Multinational Enterprise
The most complex international operating structure is the international multinational enterprise
made up of two or more parent firms from different countries that co-own operating businesses in
two or more countries. It is like a national multinational in that it operates through subsidiaries.
The difference lies in its having two or more parent companies located in different states.
The Subordinate Structure – To do business internationally, companies must establish a foreign
presence. This requires the creation of subordinate entities, such as representative offices,
agencies, branches, subsidiaries, joint ventures, and holding companies.
A representative office does not actually conduct business; rather, it functions as a foreign contact
point where interested parties can obtain information about a particular firm.
An agent is an individual who is employed as an independent representative of a firm. Agents are
subject to the supervision of the parent firm.
A branch is a unit of the parent company that involves not only the placement of individuals in a
particular locale but also the establishment of a facility, such as an assembly plant, mining
operation, or service office.
Establishing representative offices, agencies, and branches is advantageous because these entities
allow the parent to maintain direct control of the foreign operation. The practice can be
disadvantageous, however, because:
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(1) The parent has to assume all of the risk of investing abroad.
(2) A foreign firm (or its agent or its branch) is often taxed at higher rates than local firms.
(3) Many developing states require local participation in order for a foreign firm to either invest
or expand its local investment.
A subsidiary is an independently organized and incorporated company. Setting up one can benefit
a multinational firm because:
(1) The subsidiary’s company status insulates the parent from unlimited liability.
(2) Locally organized companies are commonly entitled to certain tax benefits that foreign
branches are not.
A joint venture is an association of persons or companies that are involved in a collaboration for
more than a transitory period. It can assume any type of business form, including that of an
association, a partnership, a limited partnership, a secret partnership, or an LLC. Multinational
enterprises use joint ventures as a way to share risk and to facilitate entry into foreign markets.
A holding company is a subsidiary company that in turn owns other subsidiaries. Holding
companies are created primarily (1) to establish a consolidated management team for a group of
subsidiaries or subsidiaries owned by different parents or (2) for tax advantages. Commonly, a
holding company is an LLC whose shares are held by its parent or parents.
International Regulation of Multinational Enterprises
Rules of ethical behavior for multinational enterprises have been promulgated by several
international organizations, including the Organization for Economic Cooperation and
Development (OECD), the International Labor Organization (ILO), and the World Bank. Until
recently, these were only suggested rules that multinationals were asked to comply with
voluntarily, and most international rules continue to be voluntary.
Bribery and Corruption Rules – The main exception to the rule that international guidelines for
ethical behavior should be voluntary is the OECD-sponsored Convention on Combating Bribery
of Foreign Public Officials in International Business Transactions, and also the implementing
legislation of some 38 states that have ratified it. The convention requires states parties to outlaw
the “active bribery” of foreign officials. They are not required, however, to outlaw the acceptance
of bribes.
As a general rule, home states regulate the parent companies and host states regulate the
subordinates. Sometimes, however, home states are able to regulate foreign subordinates with
extraterritorial laws, and host states are able to regulate parent firms by piercing the fictional veil
that separates the subordinates from their parents.
Home State Regulation of Multinational Enterprises
The most important forms of national regulation include (1) the regulation of competition, (2) the
regulation of injuries caused by defective products, (3) the prohibition of sharp sales practices, (4)
the regulation of securities, (5) the regulation of labor and employment, (6) the establishment of
accounting standards, and (7) taxation.
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The Multinational Enterprise
Many of these rules have been applied to activities that take place outside the territorial
boundaries of a particular state, most notably: regulation of competition, regulation of injuries
caused by defective products, and prohibition of fraudulent sales practices.
The country that has been most willing to apply its laws extraterritorially has been the United
States. The European Union, to a lesser extent, has also begun to apply its internal regulations
extraterritorially.
Unfair Competition Laws – In the United States, the principal law regulating anticompetitive
activity is the Sherman Antitrust Act of 1890.
Section 1 of the act prohibits contracts, agreements, and conspiracies that restrain interstate or
international trade. In determining whether a particular activity violates §1, the courts ordinarily
do so on a case-by-case basis using a so-called rule of reason.
Section 2 of the Sherman Antitrust Act forbids monopolies and attempts to monopolize commerce
or trade either between the states of the United States or in international commerce affecting the
United States.
The Clayton Act of 1914 was enacted to give more teeth to the Sherman Antitrust Act, both by
expanding its enforcement provisions and by defining certain specific acts that constitute unfair
business competition. These include exclusive dealing and tying clauses, mergers that result in a
monopoly, and interlocking directorates.
The Robinson-Patman Act of 1936 was added to the panoply of American anti-trust law to make
price discrimination illegal.
Enforcement Provisions of U.S. Anti-trust Laws
The enforcement provisions of the American anti-trust acts are one of their two most
controversial aspects. The U.S. Justice Department may bring criminal suits for egregious
violations, and the U.S. Federal Trade Commission may bring civil actions (notably for
injunctions) to ensure full compliance. More important, private persons are given the right to sue
and recover treble damages for injuries they have suffered.
Treble damages is a term in some statutes that permits a court to triple the amount of the
actual/compensatory damages to be awarded to a prevailing plaintiff, generally in order to punish
the losing party for willful conduct.
Extraterritorial Application of U.S. Antitrust Laws
The other controversial feature of American antitrust law is the willingness of American courts to
apply it extraterritorially. The statutory provision in the Sherman Antitrust Act declares that it
applies to conduct affecting “trade or commerce among the several states, or with foreign
nations.” The courts have imposed several jurisdictional tests that limit the legislative rule.
Personal Jurisdiction Requirements of U.S. Antitrust Laws
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The American antitrust laws authorize a court to assume personal jurisdiction if a defendant has
the contacts specified either by (1) Section 12 of the Clayton Act or (2) an applicable state long
arm statute.
Section 12 of the Clayton Act allows a court to assume personal jurisdiction over an antitrust
defendant who “transacts business” in the forum jurisdiction. State long arm statutes are
applicable to antitrust proceedings because of a provision in the U.S. Federal Rules of Civil
Procedure that looks upon state law as an independent basis for exercising personal jurisdiction in
federal cases.
The principal limitation of the assumption of personal jurisdiction by U.S. courts is the federal
constitutional requirement of due process. This forbids the court from assuming personal
jurisdiction unless a defendant has minimum contacts with the forum. In essence, a court has
jurisdiction only if (1) the defendant purposefully did business in the forum and (2) the defendant
reasonably could have anticipated that it would have to defend itself there.
Subject-Matter Jurisdiction Requirement of U.S. Antitrust Laws
Two tests are used to determine whether a court has subject-matter jurisdiction in an American
antitrust case: (1) the effects test and (2) the jurisdiction rule of reason test.
Under the effects test, companies carrying on business outside the United States will come within
the subject-matter jurisdiction of an American court if their business activity is intended to affect
U.S. commerce and is not de minimis.
A court will ask the following three questions before assuming jurisdiction over a foreign
business for violation of U.S. antitrust laws:
(a) Was the alleged conduct intended to affect the foreign commerce of the U.S.?
(b) Was the conduct of such a type and magnitude to violate the Sherman Act?
(c) As a matter of international comity and fairness, should a court assume extraterritorial
jurisdiction?
The last of these three prongs requires courts to balance the interests of the United States in
assuming jurisdiction against various competing interests. The factors the courts balance include:
(a) The degree of conflict with foreign law or policy.
(b) The nationality of the parties involved.
(c) The degree to which other countries will obtain compliance.
(d) Relative importance of violations to U.S. commerce as compared to commerce abroad.
(e) Whether the explicit purpose of the alleged conduct was to harm American commerce.
(f) The foreseeability of the anti-competitive effects and the relative importance of the violations
to commerce within the United States as compared with commerce abroad.
Case 4-2: Metro Industries v. Sammi Corp.
Facts: Sammi took advantage of a Korean design registration system to obtain the exclusive right
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The Multinational Enterprise
Issue: (1) Was the conduct a per se violation of §1? (2) Does the per se rule apply to conduct
Holding: (1) No. (2) No. (3) Yes. (4) Unproven.
Law: (1) Conduct which almost always tends to restrict conduct and decrease output is regarded
Explanation: (1) There was no per se violation of §1 as the conduct was authorized by a Korean
Order: Judgment affirmed.
Regulation of Anticompetitive Behavior in the EU
The European Community Treaty contains two articles—Articles 81 and 82—that regulate
business competition.
Article 81 (which is analogous to Section 1 of the U.S. Sherman Antitrust Act) prohibits normal
arm’s-length competitors from entering into agreements or carrying on concerted practices that
either prevent, restrain, or distort trade.
Article 82 (which is analogous to Section 2 of the Sherman Antitrust Act) forbids businesses with
a dominant position in their marketplace to take improper advantage of their position to the
detriment of consumers.
Determining compliance with Articles 81 and 82 is left solely to the European Commission,
which can impose substantial fines in its own right. The European Commission and the European
Court of Justice have applied the rules to foreign firms to the extent that the firms’ activities have
an effect on trade or commerce within the EU. In essence, the commission and the court are using
the American effects test. Thus, a foreign firm that conspires with EU firms to monopolize trade
within the EU would be in breach of the EC Treaty.
Opposition to the Extraterritorial Application of Unfair Competition Laws
The willingness of American and EU courts to apply antitrust laws extraterritorially has been
roundly criticized by many countries, especially Third World states. The British objections to the
American antitrust laws have been twofold. One, they dislike the fact that suits for punitive treble
damages can be brought by private plaintiffs. Two, they dislike the discriminatory application of
U.S. antitrust laws.
These two negative features of the U.S. antitrust laws have led to diplomatic protests and to the
enactment of blocking statutes, not only by Britain but also by many other states.
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Blocking Statutes: These statutes typically have three features: (1) they limit the extent to which a
U.S. plaintiff can obtain evidence or seek production of commercial documents outside of the
United States for use in investigations or proceedings in the United States; (2) they make it
difficult for a successful plaintiff to enforce a U.S. judgment outside the United States; and (3) by
virtue of a clawback provision, they allow defendants to bring suit in their home country to
recover the punitive damages they paid in the United States.
Anti-Suit Injunctions: Foreign courts have sometimes been willing to hand down injunctions
forbidding one of their nationals from initiating an antitrust suit in the United States against
another of their nationals.
Case 4-3: Airbus Industrie G.I.E. v. Patel
Facts: Four U.K. citizens were killed and four injured when an Airbus plane crashed in India.
Issue: Should an anti-suit injunction be granted by the U.K. against U.K. citizens proceeding in a
U.S. court?
Holding: No.
Law: U.S. case law has devised two approaches for granting anti-suit injunctions. The stricter
Explanation: The House of Lords adopts the stricter approach. Because Texas now recognizes
Order: The anti-suit injunction is dismissed.
Tort and Products Liability Laws – Whether plaintiffs make claims based on intentional tort or
negligence, the actions (or inactions) of an MNE in one nation can cause harms to individuals or
business entities in another nation.
Intentional Tort Liability
Certain torts are deemed intentional. That is, a court may find that the defendant did not harm
someone out of neglect or carelessness, but probably acted with an intent to do harm.
Cases of assault, defamation, intentional infliction of emotional distress, interference with
contract, trespass, nuisance, and other causes of action are not torts of negligence but are torts of
intent.
Case 4-4: Dow Jones & Co. Inc. v. Gutnick
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The Multinational Enterprise
Facts: Dow Jones publishes Barron’s Online, whose October 28, 2000 edition had an article
Issue: Do the Australian courts have personal jurisdiction over Dow Jones & Co.?
Holding: Yes.
Law: Defamation does not occur at the time of publication or where a web server resides, but
Explanation: United States law is friendly to commercial media, and defendant’s position would
Order: Dow Jones’s appeal is dismissed with costs.
Products Liability Theories
Products liability laws attempt to discourage manufacturers from putting defective products into
the marketplace by requiring them to assume liability for the injuries their products cause. Three
theories are commonly relied upon to do this: (1) breach of contract, (2) negligence, and (3) strict
liability. Most states use only the first two of these. The common law countries use all three. The
EU now relies principally on the last.
Japanese Products Liability Laws: The Japanese Civil Code provides two ways to impose liability
for defective products: breach of contract and negligence.
A seller’s obligation with respect to every sales contract is to deliver a product that is fit for the
purpose for which it was sold. Failure to perform by delivering a defective product is a breach of
both the seller’s obligation and the contract. The seller is then responsible for damages for
personal and property losses and for economic losses as well.
This remedy is limited, however, by two familiar rules: privity and burden of proof. Privity only
allows the immediate purchaser to sue. Because contracts are part of the Japanese law of
obligations, the burden of proof is on the plaintiff to show that the seller was at fault. Moreover,
even when this can be done, the seller can avoid liability by showing that the defect was due to
some factor beyond the seller’s control or that the seller took reasonable steps to prevent the
defect. Liability for breach of the implied warranty not to deliver a latent defect is also a very
limited remedy.
The usefulness of contract law to impose liability on a seller for a defective product is minimal.
Negligence is a more likely basis for imposing liability. Even so, the proof requirements are
relatively demanding. A claimant must prove (1) the existence of a defect, (2) that the defect was
the result of the defendant’s conduct, (3) that the plaintiff suffered an injury, (4) that the injury
was caused by the defect, and (5) that the defendant breached a duty of care to the plaintiff.
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Common Law Products Liability Rules: Liability for defective products may be shown in the
common law countries through breach of contract, negligence, or strict liability. Claimants in
these countries most often rely on the theories of negligence and strict liability.
Two doctrines make it somewhat easier for a common law claimant to meet the proof
requirements. One is the doctrine of res ipsa loquitur. This excuses an injured claimant who can
show that a product was defective when it left the hands of the defendant from having to prove
that the defendant caused the defect. The other doctrine is negligence per se. This excuses a
claimant from showing that the defendant breached a duty of care in those cases where the
defendant violated a statutory manufacturing or disclosure requirement.
Under the common law theory of strict liability, defendants can be held liable for acts that are
unreasonably dangerous no matter what their intentions may have been or whether or not they
exercised reasonable care.
The major advantage of strict liability from the claimant’s perspective is that it does not require
the showing of negligence. There is, however, a significant limitation: The defective product must
be “unreasonably dangerous.”
EU Products Liability Rules
An EU directive establishes a common minimum products liabilities standard for all EU member
states. It does not require the claimant to show that a defect is unreasonably dangerous.
Extraterritorial Application of Products Liability Laws
The U.S. courts have been the most willing to apply their domestic products liability laws
extraterritorially. U.S. courts consider two issues when deciding whether they can exercise
jurisdiction in a product liability case: personal jurisdiction and forum non conveniens.
Personal Jurisdiction Requirements of U.S. Products Liability Laws: Products liability is a
creature of the laws of the individual states of the United States rather than federal law. As a
consequence, personal jurisdiction must be found in the individual states’ long arm statutes.
Besides establishing long arm jurisdiction, a claimant must also satisfy the federal constitutional
requirement of due process by showing that the defendant had minimum contacts with the forum.
The minimum contacts test allows a court to assume jurisdiction only if (1) the defendant
purposefully availed itself of doing business in the forum and (2) the defendant reasonably could
have anticipated that it would have to defend itself there.
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