By Gonzalo Law (Nouvelle L. Gonzalo, Esq., Kristen Motola, and Farhaan Anjum.)
“Alone we can do so little; together we can do so much.” Helen Keller
As a full-time practicing attorney and a professor of international corporate law, I see the power companies have when they collaborate to expand abroad. As technology continues to advance at a rapid pace, the world is becoming smaller.[i] Modern innovations make it easier to connect with the rest of the world.[ii] In addition, the United States market is substantial, yet not large enough to sustain all United States businesses.[iii] Global expansion offers companies a plethora of opportunities.[iv] Yet, establishing a new business entity or entering a foreign market with an existing business entity is a long-term goal for many companies.[v]
An international expansion strategy requires a strategic focus on
1. Markets: Identifying Target Markets,
2. Customers: Determination of Target Customers,
3. Resources: Allocate resources and position of the brand, and
4. Operating Model: Identify or create an operating model. This includes researching international and local law, and local cultural customs.[vi] A successful market penetration strategy should use corporate resources efficiently. Calculating the cost for lawyers and a team skilled in international work is imperative as part of this process.[vii] The team must include legal counsel that will complete the legal due diligence on international legal restrictions, cross-border experts in tax and accounting, industry experts, trade organizations, and strategists to consider creative ways to break into a new market to serve client needs. The strategists will identify target markets and clients. Lawyers and business people can assist with resource allocation, work from a solid operating model, and set the proper structure. For example, if owners in Canada have a Canadian corporation, then the corresponding operating model in the U.S. is a U.S. corporation. They must decide if a c-corporation of s-corporation will be the most effective. The Canadian owners will not want to open a U.S. branch that is an LLC if the U.S. company is to be a continuation of the Canadian structure. Knowing this in advance is key.
When a business decides to expand into international markets, there are several considerations to make. Not all international markets are the same and every country will have varying laws. However, once a demonstrated client base and need is identified in the target country, legal counsel must examine the business legal structure in the target country and work accordingly. Then there must be an analysis of the implications of that selection in the U.S. For example, European employment laws offer significant and distinct protection to employees in which U.S. employers should be well familiar.[viii] In many civil countries the idea of an offer letter of employment is very different than in the U.S.[ix] In some countries an offer letter is considered a binding and enforceable contract. [x]
In the US, few employers have included enough of the legal rights and responsibilities in an offer letter to want it to be binding, yet it would be. This is often why it is not recommended that US employers even send an offer letter, rather the full contract once they are ready to engage a foreign candidate. Legal counsel must consider such areas as local employment requirements, taxes, imports exports, intellectual property, contracts, real estate, data protection, and dispute resolution.
Understanding Local Law and Customs
Apart from the legal considerations in which a business must be aware, the cultural norms of the target country are also a significant factor in the business’ international expansion strategy. This is because not adhering to a country’s cultural norms could lead the failure in the international expansion. For example, in Saudi Arabia and in several parts of the middle east, women are not permitted to be in public with a man who is not their husband.[xi] This is even true if they are conducting business because except for limited circumstances women are not allowed to freely mix with members of the opposite sex.[xii] Women conducting business in these regions must plan to account for their strict requirements or risk severe challenges.
In short, a U.S. employer, large or small, that simply duplicates its U.S. processes without accounting for local law and custom, can face difficulties and costly mistakes. Working with local experts is an invaluable resource abroad. This also extends to the intellectual property of the company. It is important to register the trademarks, patents, and copyrights of a business prior to entering the target market when possible.[xiii] If a company is operating under a United States filing, the business will not automatically be protected in a foreign market.[xiv] This is why it is important to review the intellectual property restrictions of each country.[xv]
Internal Business Procedures
To be successful in any international business expansion, a company must ensure the internal procedures of the business will fit the new market it is entering. Identifying the strengths and weaknesses of the business’s internal processes will help the business improve its performance in the new market.[xvi] Further, having efficient internal procedures that are a culture fit for the local culture is important and gives a competitive edge in the new market.[xvii]
Conducting Market Research
Before entering any new international market, businesses must conduct market research on potential target countries for the expansion to increase the success of the endeavor.[xviii] For example, if a coffee business is performing exceptionally well in the United States, Latin America, and France, that does not necessarily mean the coffee business will succeed in China and Greece. There are many reasons why a business will do well in one market and not another. Knowing the market motivations and the type of customer when picking a new country to expand into is key.[xix]
When expanding abroad, cultural differences must also be considered.[i] Cultural factors to be considered range from language, time zone, limitations on business practices, gender roles, dietary restrictions, religious and business attributes that can be considered offensive or rude when engaging local customers.[ii] If the business practices or product does not fit within the culture of the country it will likely not succeed. For example, Fanta soda is orange-flavored in the United States market, but Coca-Cola, which produces Fanta, has adapted the flavor for certain markets to take cultural taste preferences into account.[iii] Fanta is peach flavored in Botswana, tastes of passion fruit in France, and is flavored to taste like flowers in Japan.[iv] Speaking to local experts on the culture and market of the area is vital when deciding if a country is the appropriate one to expand in to. Another example is if a multi-national construction company that operates through extensive reporting up the chain of command to ensure compliance at each level must closely review its decision to open an office in a new market. If it opens in a location where the corporate culture is more decentralized, less rigid, and more relaxed, it may be a very difficult fit for the company and for any local employees it hires. Advising clients of these considerations are as much a part of structuring their deal as the legal and financial considerations. This is because of the direct impact it has on the project.
Additionally, there if there is overlap between cultural beliefs and the operation of law that businesses need to be wary about. In some countries, women are not allowed to work or are required to dress a certain way. These cultural considerations flow over into how businesses in the United States hire employees abroad and the person the business chooses to lead the expansion is chosen. For example, if a business expands into a country where the men refuse to speak to a woman in leadership, the business must structure the deal with this in mind. Dietary restrictions should also be considered. If a restaurant is expanding into a new country, its menu may need to be altered before opening because some countries do not eat certain types of meat. For example, in India, it is illegal to kill a cow per the Indian Constitution.[v] This is very important to know for restaurants planning on using beef in its menu because it is considered a sacred animal and killing it is illegal. There are much more intricate cultural, ethical, and legal overlaps in countries around the world that can impact a business when trying to expand globally.
Financing Business Expansion
As with any global growth plan, expanding internationally requires financing, and growing globally requires special capabilities when it comes to financing. Financing for the business should be secured before any expansion begins. Also, businesses need to be wary of any potential hidden fees, unforeseen costs, and banking regulations when opening a new business.[vi] Luckily there are multiple resources for businesses when trying to secure financing for an international expansion. These resources include but are not limited to traditional loans from financial institutions, crowdfunding, working with investors, the Overseas Private Investment Corporation (OPIC), and the Small Business Administration (SBA).[vii]
Considerations for Lawyers
Building a Team
Entering international markets requires a variety of skillsets and legal counsel should focus their strengths and add experts to the team in other necessary areas.[viii] Lawyers may seek to engage linguistic experts if there is a different language used in the target country for two reasons.[ix] A linguistic expert can translate the language, yet also identify how terms or phrases common within the United States hold a different meaning in the target country and vice versa.[x] We can learn from the cautionary tale of an international car manufacturer, NOVA that had great success with its vehicles selling in various countries, yet that success came to a halt in Spanish-speaking countries. This was because NOVA in Spanish translated to No Va, which means “Doesn’t Go.”[xi] Spanish speaking countries did not want to buy a car called Doesn’t Go.[xii] Employing a linguistic expert to understand the translation of the name in each market would have avoided a costly mistake.
In addition, lawyers should always seek the help of local counsel in the country the business owner is to enter.[xiii] Even if U.S. legal counsel retains a focus on a particular region, local counsel will be the most up to date on new changes to the law. This also helps minimize any concerns of misrepresentation or even malpractice.[xiv] Further, attorneys should also make sure that local and U.S. accountants familiar with cross border deals are engaged.[xv]
Legal counsel should be very clear on the treaties implicated when researching a foreign market.[xvi] It should be identified if a foreign country has signed any tax treaties with the United States.[xvii] Doing business in a country with a tax treaty prevents double taxation from occurring.[xviii] Double taxation in the international context refers to a taxpayer being taxed twice due to the application of tax laws of both the domestic and foreign country.[xix] The United States alone has tax treaties with over fifty different nations with varying provisions, so legal counsel knowing this before going abroad is key to reducing tax liability of clients.[xx]
Next, it should be determined if the foreign country is a signatory on any international trade agreements with the U.S.[xxi] This will allow business owners to send goods, employees, and protect intellectual property with greater ease than it could in a country in which the U.S. is not part of a trade agreement.[xxii] Similar to whether the foreign country is a signatory on any international trade agreements, an additional consideration is whether that foreign country has adopted the Convention on Contracts for the International Sale of Goods, commonly known as the CISG, in
full or part.[xxiii] The CISG is ratified by eighty-nine parties across the globe with the notable exceptions of the United Kingdom, India, and South Africa.[xxiv] It is important to note that the CISG applies to contracts for the sale of goods only and not services.[xxv]
The corresponding U.S. legislation is seen in the Uniform Commercial Code (UCC). Parties to an international contract for the sale of goods can determine which one will apply. A few noteworthy differences between the UCC and the CISG is that unlike the UCC, the CISG does not include a statute of frauds, which requires that certain contracts be in writing, signed by the party to be charged, and demonstrate sufficient evidence.[xxvi] The CISG also does not contain a parol evidence rule that determines the type of evidence that can be introduced in a dispute.[xxvii] Lastly, the CISG closely follows the mirror image rule compared to the UCC which allows an acceptance to be adequate despite altering the terms of the offer.[xxviii]
While there are many additional distinctions between the UCC and the CISG in which lawyers should be aware, perhaps the most important aspect of the CISG is that a contract may be written to expressly state that the CISG will not apply in that transaction.[xxix] It is key for lawyers to know this because there are times when the CISG can take precedence over the UCC.[xxx] A lawyer that fails to keep the CISG in mind when helping to write a contract for the sale of goods may face an undesirable outcome for clients.
Foreign Direct Investment — Joint Ventures, Licensing, and New Joint Venture Companies
There may be times when investing in existing companies in the target market is more effective to minimize potential risks. One solution for companies is to embark on an international joint venture.[xxxi] If a market is particularly volatile or has a high barrier to entry, a company can utilize the goodwill of a local company as a means of kick-starting growth.[xxxii] For example, Sony partnered with Shanghai Oriental Pearl to sell PlayStation Consoles and games in China.[xxxiii] Sony and Shanghai Oriental Pearl were collaborating in response to the suspension of the ban on game consoles within Shanghai’s free trade zone.[xxxiv] Sony utilized the connections and goodwill of Shanghai Oriental Pearl, a local company, to help infiltrate a market that had very restrictive barriers previously.
Second, companies can license their intellectual property to a partner in the foreign market as part of a joint venture.[xxxv] Even if this is not the largest revenue stream for companies, this strategy allows companies to diversify their revenue streams and invest less of their own capital. It also capitalizes on the good will of a joint venture partner in the target market who can sell the goods of the company in the target market.[xxxvi] Depending on how the licensing arrangement is structured, once the joint venture expires, companies can expand into foreign markets more easily by building on the goodwill and brand recognition generated by the joint venture.[xxxvii]
Lastly, companies can utilize their respective resources such as a manufacturing plant, human capital, or through the services it provides to offer collectively excellent outcome for the market.[xxxviii] For example, Mazda and Toyota established a joint-venture company entitled “Mazda Toyota Manufacturing, U.S.A, Inc.[xxxix] Mazda and Toyota are both Japanese multinational auto manufacturers and their new joint-venture company plant will be located in Huntsville, Alabama.[xl] The companies believe by combining the best of their technologies and corporate culture, Mazda and Toyota will not only produce high-quality cars but also create a plant employees will be proud to work at and contribute to the further development of the local economy and the automotive industry.[xli] In short, partners for either type of joint venture must be selected carefully and with appropriate due diligence.[xlii]
Expanding a business globally requires an immense amount of research, preparation, strategy, and financing. As we have discussed, companies must identify the need in the market it will fill to expand abroad, the financing required, any legal restrictions, how the business will perform in the market, and the cultural considerations. We recall that while the U.S. is home to many successful companies, a company can reduce its dependence on one market. In the event of an economic decline, a company can improve its overall growth potential by considering additional markets. Legal counsel is imperative in completing due diligence, building a capable team, and identifying the most effective structure for the expansion. Once more, we see how alone we can do so little, yet together we can do so much.
Any questions for the authors can be directed to Atty. Nouvelle L. Gonzalo at email@example.com.
[i] Melina Kolb, What is Globalization? And how has the Global Economy Shaped the United States?, Peterson Institute for International Economics, (Feb. 4, 2019) https://piie.com/microsites/globalization/what-is-globalization.html.
[iii]How to take your Company Global, Entrepreneur, https://www.entrepreneur.com/article/159252, (last visited Mar. 29, 2019).
[vi] International Expansion Strategy, Deloitte, https://www2.deloitte.com/tr/en/pages/strategy/solutions/customer-and-market-strategy-services/international-expansion-strategy-services.html
[vii] Salli A. Swartz, Inside secrets from an international lawyer, ABA Before the Bar Blog, (Jan. 1, 2016), https://abaforlawstudents.com/2016/01/01/inside-secrets-from-an-international-lawyer/.
[xi] Jamie Tarabay, Women in Saudi Arabia still can’t do these things, CNN, (Dec. 6, 2017), https://www.cnn.com/2017/09/27/middleeast/saudi-women-still-cant-do-this/index.html
[xiii] Do I need to File for Intellectual Property Protection Overseas?, International Trade Administration, (Nov. 27, 2018), https://www.export.gov/article?id=Do-I-Need-to-File-for-Intellectual-Property-Protection-Overseas.
[xvi] Develop a Marketing Strategy, Queensland Government, https://www.business.qld.gov.au/running-business/marketing-sales/marketing-promotion/strategy
[xviii] Supra note 3
[xx] Brian Abner, 4 Considerations Before Taking Your Business International, The Business Journals, (Feb. 12. 2015). https://www.bizjournals.com/bizjournals/how-to/growth-strategies/2015/02/considerations-for-taking-your-business-global.html
[xxii] Pamela Hyatt, 7 Cultural Factors You Need to Consider When Choosing Your Next Export Market, Trade Ready, (April 28, 2017). http://www.tradeready.ca/2017/topics/researchdevelopment/5-cultural-factors-need-consider-choosing-next-export-market/
[xxiv] Nida Najar, Indian State Is Expanding Penalty for Killing a Cow to Life in Prison, The New York Times, (Mar. 31, 2017). https://www.nytimes.com/2017/03/31/world/asia/india-gujarat-cow-slaughter-penalty.html
[xxv] Jared Hecht, Financing for Business Expansion: The 4 Best Steps, Inc. https://www.inc.com/jared-hecht/financing-for-business-expansion-the-4-best-steps.html
[xxvii] 1 International Business Planning: Law and Taxation § 1.06 (2019).
[xxviii] Terena Bell, Lost in Legal Translation, Best Lawyers, (Sep. 14, 2018), https://www.bestlawyers.com/article/how-legal-translation-can-make-or-break-a-cas/2091.
[xxx] David Mikkelson, Did the Chevrolet Nova Fail to Sell in Spanish-Speaking Countries?, Snopes, (April 3, 1999), https://www.snopes.com/fact-check/chevrolet-nova-name-spanish/
[xxxii] Retaining a Foreign Attorney, U.S. Dept. of State — Bureau of Consular Affairs, https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/internl-judicial-asst/Retaining-Foreign-Attorney.html, (last visited at Mar. 29, 2019).
[xxxiii] Lauren R. Frank, Ethical Responsibilities and the International Lawyer: Mind the Gaps, 2000 U. Ill. L. Rev. 958, 959 (2000).
[xxxiv] 1 International Business Planning: Law and Taxation § 1.06 (2019).
[xxxv] Brian Abner, 4 Considerations before taking your business international, Bus. Journals, (Feb. 12, 2015), https://www.bizjournals.com/bizjournals/how-to/growth-strategies/2015/02/considerations-for-taking-your-business-global.html.
[xxxvi] Tax Treaties, IRS, https://www.irs.gov/individuals/international-taxpayers/tax-treaties, (last visited at Mar. 29, 2019).
[xxxix] United States Income Tax Treaties — A to Z, IRS, https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z, (last visited at Mar. 29, 2019).
[xl] Free Trade Agreements, Int’l Trade Admin., https://www.trade.gov/fta/, (last visited at Mar. 29, 2019).
[xlii] CISG: Table of Contracting States, Pace L. School, https://www.cisg.law.pace.edu/cisg/countries/cntries.html, (last visited at Mar. 29, 2019).
[xliv] Leslie Marell, How does the CISG differ from the UCC?, Marell L. Firm., (June 1, 2015), http://marell-lawfirm.com/how-does-the-cisg-differ-from-the-ucc/.
[xlv] Joel E. Engel, CISG v. UCC: Three Noteworthy Differences, Woods Fuller, (Feb. 19, 2015), https://woodsfuller.com/latest/cisg-v-ucc-three-noteworthy-differences#.XJ2gpi2ZNsM/.
[xlviii] Louise Malecot, Opting-Out of the United Nations Convention on Contracts for the International Sale of Goods (CISG) Through Ccnduct in Litigation: What US Courts Need to Know about the CISG, NYU L. Blog, (Jan. 23, 2017), https://blogs.law.nyu.edu/transnational/2017/01/opting-out-of-the-united-nations-convention-on-contracts-for-the-international-sale-of-goods-cisg-through-conduct-in-litigation-what-us-courts-need-to-know-about-the-cisg/.
[xlix] When will the CISG take Precedence Over the UCC?, Gonzalo L., (Dec. 11, 2015), https://www.gonzalolaw.com/when-will-the-cisg-take-precedence-over-the-ucc/.
[l] 1 Business Transactions Solutions § 284:1 (2019).
[li] 1 Business Transactions Solutions § 284:2 (2019)
[lii] Reuters, Sony Forms Joint Ventures in China for PlayStation, The New York Times, (May 26, 2014), https://www.nytimes.com/2014/05/27/business/international/sony-forms-joint-venture-in-china-for-playstation.html
[liv] Supra note 51
[lviii] Mazda and Toyota Establish Joint-Venture Company, Mazda Toyota Manufacturing, U.S.A., Inc., Mazda, https://www2.mazda.com/en/publicity/release/2018/201803/180309a.html
[lxi] Anne Peters & Heike Krieger, Due Diligence in International Law, Max Planck Institute, http://www.mpil.de/en/pub/research/areas/public-international-law/due-diligence-in-international.cfm, (last visited at Mar. 29, 2019).