“Introduction Facebook, Google, and Amazon, technology giants in the West, have all

“Introduction
Facebook, Google, and Amazon, technology giants in the West, have all been daunted by the complex and ever-changing regulations imposed on tech companies by the Chinese government. Each has finally given up the attempt to do business in China, and the ride-sharing service Uber recently did too, opting instead to allow its Chinese rival to buy its operations there. A practical result of China’s challenging legal system seems to be the creation of two separate Internets: one in China, and another in the rest of the world.1
Companies must pay careful attention to the legal and ethical environments in which they operate and also must comply with international as well as national and local laws. For instance, bribes are illegal in many countries, though at the same time they may be considered customary in some of the same countries—or laws prohibiting them may not be strictly enforced.
LEARNING OBJECTIVES
After you explore this chapter you will be able to:
Describe different types of legal systems
Explain the ways in which crime and corruption affect international business
Describe the difference between illegal and unethical conduct
Identify key laws that govern international business
4.1 Differing Legal Systems
LEARNING OBJECTIVE
Describe different types of legal systems.
In ancient Egypt, from about 3000 BCE to 30 BCE, the pharaoh was considered a living god, the supreme judge and lawmaker whose decrees, coupled with decisions in prior cases, determined legal outcomes.2 In ancient Mesopotamia, around 1750 BC, the dynastic ruler Hammurabi outlined more than 275 specific laws, mostly dealing with contracts, trade, and property rights, and the punishments associated with breaking them.3 Partial copies of the Code of Hammurabi still exist today.
Ancient Egyptian law and the Code of Hammurabi are examples of the rule of the individual. Under such rule, one individual is the ultimate authority and has discretion to set and enforce laws. Today, some countries continue to operate under the rule of the individual. In North Korea, Kim Jong-un has acted as the “supreme leader” since the 2011 death of his father, who held the title before him. Using his absolute power, Kim has replaced the advisors appointed by his father with his own.
rule of the individual rule of governing whereby one individual is the ultimate authority and has discretion to set and enforce laws
In some cases the removal of a leader has been public and violent. For example, in 2015 Kim had his defense minister Hyon Yong-chol executed by antiaircraft fire in front of an audience of hundreds because Kim was upset at Hyon for falling asleep in his presence, talking back to him, and failing to carry out his instructions.4 How could Kim do this? He is the “First Secretary of the Worker’s Party of Korea,” the “Marshal of the Democratic People’s Republic of Korea,” the “First Chairman of the National Defense Commission,” and the “Supreme Commander of the Korean People’s Army.”5 In other words, he is the giver and the enforcer of law in North Korea.
The Rule of Law
In contrast to the rule of the individual, the rule of law suggests that all individuals—regardless of rank, status, or office—are subject to the law. Nations that operate under the rule of law create laws and enforce them publicly and transparently. These laws govern politics and commercial transactions, and punish crime; they are based on fairness and justice as these concepts are understood by the people being governed. A key principle of the rule of law is that justice is blind (Figure 4.1), meaning that it is indifferent to the status of any who violate the law.
rule of law rule of governing whereby all individuals are accountable to well-defined and established laws that are fairly enforced
Under the rule of law, celebrities such as actor Bill Cosby,6 business leaders such as Nissan’s former CEO, Carlos Ghosn,7 and political leaders such as four of the last seven governors of Illinois (Rob Blagojeich, impeached for selling a U.S. Senate seat; George Ryan, convicted of racketeering; Dan Walker, jailed for bank fraud; and Otto Kerner, jailed for bribery8) all must abide by the same laws or face the same consequences as the rest of the population.
The rule of law typically supports individual liberties, democracy, and economic prosperity.9 It also promotes international business in three ways. First, it reduces transactional risks, such as fraud, negligence, and bad debts, associated with international transactions. The 2019–2021 G20 Anti-Corruption Action Plan encourages all G20 member countries to ensure that their national legal systems strictly enforce international transaction contracts. The plan also calls for mutual legal assistance among countries to ensure fraud, negligence, and bad debts are pursued by all countries involved.10 For instance, if a Tanzanian construction company did not deliver on a contract it made with the British company Vodafone, then according to the G20 Action Plan, both the Tanzanian legal system and the British legal system should work together to ensure that Vodafone is able to recover its losses.
Second, the rule of law puts a check on governmental power. A classic World Bank report established a clear link between strong legal regimes and economic development. It stated that “the judiciary [is] in a unique position to support sustainable development by holding the other two branches accountable for their decisions and underpinning the credibility of the overall business and political environment.”11 For example, Brazilian courts are holding lawmakers accountable and digging through a far-reaching scandal implicating Petrobras, the state-owned oil company that accounts for roughly 10 percent of the nation’s economic output, and many of Brazil’s top political officials. The courts are investigating allegations that politicians and government workers embezzled about $3 billion from the company. The scandal involves at least 50 politicians from six different political parties and hundreds of people from 16 different companies. While painful, the court’s holding the state oil company and politicians accountable for their actions also holds the government accountable, and the outcome of the case will likely influence the Brazilian business environment for years to come.12 To date, prosecutors have recovered nearly $2 billion of bribe money from bank accounts of officials and politicians in 36 countries.13
FIGURE 4.1 Justice Justice, portrayed here before the Court of Final Appeal in Hong Kong, is blindfolded and holds the sword of truth in one hand and the balance of scales in the other.
FIGURE 4.2 The Rule of Law Index 2019 This index scores countries based on the rule of law.
Source: Modified from World Justice Project, “Rule of Law Index 2019.” http://data.worldjusticeproject.org/ (accessed June 3, 2019).
Third, the rule of law codifies and clarifies business property rights and builds institutions such as courts, public records offices, and patent offices that protect those rights. In countries where such legal safeguards are lacking, international businesses face the risk of having their overseas property and goods confiscated at the whim of a politician, making them reluctant to invest there.14
The World Justice Project surveys over 2,500 judicial experts globally and compiles a report that indicates to what extent each country follows the rule of law. The report measures legal aspects such as regulatory enforcement, civil justice, and criminal justice, as well as measures of corruption, governmental restraint, and fundamental rights. In 2019 Denmark, Norway, and Finland received the highest scores, whereas the Democratic Republic of Congo, Cambodia, and Venezuela received the lowest scores, as shown in Figure 4.2.
Three Different Levels of Law
Many types of legal systems exist; these comprise the procedures, institutions, and routines used to interpret and enforce the law. Most include laws at three different levels. Constitutional law sets the bounds of government and governmental procedures, including creating the authorities that establish laws. Criminal law describes laws and punishments that regulate social conduct, including personal protections from actions such as assault, battery, kidnapping, murder, and robbery; property protections from actions such as arson, blackmail, burglary, fraud, and theft; and basic human rights protections against crimes like slavery, human trafficking, torture, and massacre. Commercial law—with which we are most concerned in this chapter—specifies the rights and duties of individuals in their business dealings, the way in which businesses are created and organized, and the manner in which business is transacted, including governance of contracts, property rights, and trade.
constitutional law laws that set the bounds of government and governmental procedures
criminal law laws and punishments that regulate social conduct and provide personal, property, and human rights protections
commercial law laws specifying the rights and duties of individuals in their business dealings, how businesses are created and organized, and how business is transacted
Types of Legal Systems
Legal systems vary across countries but often take one of five distinct types, depending on whether they are governed mostly by customary, theocratic, common, or civil law, or a combination of these (see Figure 4.3).
FIGURE 4.3 Legal Systems of the World North America, the United Kingdom and Australia operate under common law; South America, Europe, and North Asia operate under civil law; India, China, and much of Africa mix customary law with civil law or common law; and the Middle East and North Africa mix religious law with other forms of law.
Source: Modified from JuriGlobe: World Legal Systems Research Group, University of Ottowa. www.juriglobe.ca/eng/ (accessed May 31, 2017).
Customary law is derived from long-standing experience and practice, based on collective wisdom and shared philosophy. It is the form of law used in developing countries such as Mongolia, Mozambique, Somalia, and Indonesia, and in many indigenous communities. Customary law sets the boundaries and rights that define community members’ relationships to each other. For instance, government has little presence in Somalia. Instead, Xeer, a form of tribal law that developed over 1,400 years ago, serves as the primary source of law.15
customary law laws derived from experience, practice, collective wisdom, and shared philosophy to set the boundaries and rights that define relationships between community members
Under Xeer, tribal elders representing the accused and the accuser act together to administer the law. If a case cannot be solved by the two elders, it is escalated to include others. If multiple tribes are involved in a crime, multiple elders engage in mediation to seek a satisfactory decision. A clan acts as a buffer, protecting members against harmful acts by other clans. The clan of the offending individual ensures that he or she makes restitution; otherwise, the clan will step in and right the wrong.16 If someone becomes a repeat offender, the clan will cast the person out.17
Theocratic law is a system of law that relies on religious doctrine and belief. This type of system dominates countries in the Middle East and North Africa. Countries such as Saudi Arabia operate fully under theocratic law, whereas Turkey, Algeria, and Iran offer a mix of theocratic law and other forms. Theocratic law is adjudicated by religious leaders. Islamic law—or Shari’a—is based on the Qur’an, the religious text of Islam; the “Hadiths,” or the opinions of Muhammad; and the writings of other Islamic scholars. Shari’a is a broad set of laws that govern crime, politics, contracts, and religious observances.
theocratic law a system of law that relies on religious doctrine and belief
For instance, the law forbids charging interest, calling it an exploitive practice. Instead, Shari’a offers two alternatives. In the first, those financing a business can act as a capital partner, taking a stock in the business venture and earning a return or loss based on the results of the venture. In the second, lenders can purchase goods a business needs to buy and then can sell those goods to the business at an agreed-upon markup. Beehive, a novel loan maker based in Dubai, offers peer-to-peer lending that is Shari’a-compliant.18 Beehive uses contracts to buy commodities at the Dubai Multi-Commodities Center and then resells these at specified prices. In this way, Beehive has financed more than $4 billion in Shari’a-compliant loans.
Common law is a legal system in which judges interpret law and set precedent for subsequent interpretation and usage. The United Kingdom, United States, and Australia are examples of countries that rely on common law. Judges in this system rule on cases by relying on the legal code and stare decisis—the idea that they “stand on decided cases” and are bound by these earlier precedents. For instance, in the United States, Marvel Entertainment licensed from inventor Stephen Kimble the right to produce and sell a Spider-Man toy that can shoot foam string to simulate spider webs. The license had no end date, but Marvel later discovered a 1964 Supreme Court ruling that licensing payments need not be made after a product’s patent had expired.19 Kimble’s patent expired in 2010, Marvel stopped making payments to him, and he sued. In 2015, the Supreme Court upheld the 1964 ruling. As Justice Elena Kagan noted, “What we decide, we can undecide. But stare decisis teaches that we should exercise that authority sparingly.”20
common law a legal system in which judges interpret law and set precedent for subsequent interpretation and usage
Civil law is a system of law with ancient Roman origins and is found across continental Europe, South America, and the former USSR. It provides a comprehensive code of written law, and judges translate the law into legal principles and regulatory statues. In civil law, judges are bound not by earlier rulings as in common law, but by a written constitution and detailed statutory code that is always binding (earlier judicial decisions are not binding).21 By relying on rules that are known in advance, civil law aims to prevent litigation and promote confidence in transactions.
civil law a system of law that provides a comprehensive code of written law that judges translate into legal principles and regulatory statutes
Mixed legal systems combine two or more of the frameworks described above. For instance, India unites common law with customary law. Canada and South Africa blend civil law and common law.
mixed legal systems a legal system that combines two or more of the following types of law: customary, theocratic, common, or civil law
International Law
Not only do international companies face differences in national legal systems, they must also understand applicable international laws. International laws are agreed on by and bind groups of nations, superseding their national laws. Three types of international laws are public, private, and supranational law.
international laws laws agreed on by nations; these laws are binding on nations and supersede their national laws
Public international law governs the interactions of nation-states, including war, criminal law, law of the sea, refugee law, and human rights law. For instance, laws of war govern the declaration of war, acts of surrender, treatment of prisoners, and prohibition of weapons that cause unnecessary suffering, such as chemical weapons. Modern international laws of war stem from a series of international treaties called the Geneva Convention, established in 1864 and revised in 1906, 1929, 1949, and 1977.22 More than 145 states are party to most of the provisions. Some of the Geneva Convention laws are that civilians should not be targeted in war; sick or wounded soldiers should be humanely treated and not be tortured, injured, or experimented on; and a record of the dead and wounded should be kept and shared with the other side of the conflict (log in to WileyPLUS to watch a video outlining the Geneva Convention). The Convention also established the International Committee of the Red Cross and the Red Crescent as the agency enforcing the laws it established.
public international law laws that govern interactions of nation-states
Similarly, the law of the sea allows countries to seize and prosecute pirates (Figure 4.4) who commit crimes in international waters. However, acting under the law of the sea isn’t always straightforward. Dealing with captured pirates, for example, is difficult. The registry or national flag of the pirated vessel, the nationality of any of the victims or crew, the nationality of the on-scene warship, and, in some cases, the identity of nearby coastal and port states can all be valid bases for assigning jurisdiction. It can take weeks or months to sort out the logistic and legal issues of any prosecution.23 Prosecuting pirates in Western courts is difficult because the costs of organizing and transporting pirates, witnesses, and evidence can be daunting. Moreover, if the prosecution fails, the pirates sometimes claim asylum, which compounds the issue.24
FIGURE 4.4 Pirates Private security professionals on commercial boats do not usually carry guns, but they may have other deterrents such as water cannons to prevent pirates from boarding the ship.
law of the sea law that allows countries to seize and prosecute pirates who commit crimes in international waters
In contrast to public international law, private international law establishes legal jurisdiction and procedures for people and organizations, including businesses. For instance, a law governing international trusts of deceased persons, known as the Hague Convention on the Law Applicable to Trusts and their Recognition, allows trusts to be recognized as separate from individual assets and permits trustees to be appointed and to administer and dispose of trust assets across national boundaries.25
private international law laws that establish international legal jurisdiction and procedures for people and organizations
Several countries have adopted the United Nations Convention on Contracts for the International Sale of Goods (CISG). This convention spells out the four basic elements of contract law for the sale of goods across national borders: jurisdiction, or where to hear a case; which country’s laws will apply in the event of a dispute; what resolution techniques will be used, such as a legal process or arbitration; and what enforcement means are allowed. These contracts thus define both the obligations of buyers and sellers and the rules and remedies not otherwise stipulated by contract.26 While CISG covers many transactions, most multinational companies explicitly state in their contracts which country’s legal jurisdiction and system will apply if a conflict occurs between the parties. For instance, some companies may prefer a country unaffiliated with either party so a neutral judgment can be reached; others may choose arbitration rather than litigation to settle disputes.
Arbitration is the process of reaching a binding decision by an arbitrator (a third party) outside the courts. Arbitration is increasingly popular by companies around the world because it is seen as more predictable, more neutral, more confidential, more final, more expert, and more enforceable (the United States and 137 countries have agreed to uphold the outcomes of arbitration).27
arbitration the process of reaching a binding decision through an arbitrator (a third party) outside the courts
Some business dealings are not covered by a contract, such as purchasing a foreign manufactured good. Suppose the person that bought the good was injured by a poor design or manufacturing defect, in this case, jurisdiction may be established by the law of the place where the injury occurred, the victim’s residence, the principle place of business of the manufacturer, or the place where the product was purchased.28 In Europe, the 1972 Hague Convention prioritized the order in determining jurisdiction: the place of injury, then the residency of the victim, followed by the manufacturer’s principle place of business.29 In the absence of a contract, however, it is not always easy to decide which court and legal code apply. For instance, the U.S. Supreme Court recently decided that 22 residents of Argentina could not sue the German auto maker Daimler in California for actions it took supporting the kidnapping, detaining, torturing, and killing of citizens in Argentina’s civil war of 1976–1983. The reason was that the California court had no jurisdiction over events that took place entirely outside the United States.30
While international law is important for international business, a significant limitation is that international law most often imposes obligations on nations rather than on companies. For instance, the Convention Concerning Forced or Compulsory Labour of 1930 outlaws the use of forced labor. However, the pact is binding only on nations that are members of the International Labour Organization (ILO) and that ratified the Convention; they are obligated to enforce the law against companies inside their borders. So, campaigns to end forced labor in countries that are not members of the ILO, such as Uzbekistan, Thailand, and Myanmar, can focus only on the government and not on the multinational companies that may be using forced labor there.31
The third form of international law is supranational law, which limits the rights of sovereign governments. For instance, when the European Union (EU) ratified the Treaty of Lisbon in 2007, it adopted laws governing the movement of goods, persons, and services; the movement of capital; and the creation of a customs union, a unified industrial policy, and a common currency.32 New laws are enacted by the European Parliament together with the Council (a group that represents the governments of the 28 EU member states). These laws bind the member countries into the world’s largest common market. EU law has the same standing as national law, granting rights to and placing obligations on the authorities in each member country as well as individuals and businesses. Authorities in each country implement EU legislation in national law and are responsible for enforcing it and guaranteeing citizens’ rights under these laws.33
supranational law international law that limits the rights of sovereign governments
Similarly, human rights in Europe are governed by EU laws such as the European Convention on Human Rights and the Charter of Fundamental Rights of the European Union. Laws that protect life, liberty, equity, worker’s rights, suffrage, and justice are addressed in the charter and are common across the European Union. These laws supersede national laws of member states and are enforced by the European Court of Justice. While most members of the European Union have adopted the human rights laws, exceptions exist—Poland, for example, preferred to retain its own domestic laws.
Other examples of supranational laws include a “Safe Harbor 2.0” agreement and the International Criminal Court. The Safe Harbor agreement establishes laws for consumer-data transfer between the United States and the European Union, outlining what data companies can legally transfer across boundaries.34 The International Criminal Court was established in 1998 when 120 nations adopted the Rome Statute as a legal basis.35 Its responsibility is to try defendants accused of war crimes and crimes against humanity. To date, individuals from the Democratic Republic of the Congo, Uganda, the Central African Republic, Darfur, and Libya have all been tried by the Court. The former vice president of the Democratic Republic of the Congo was found guilty of rape, murder, pillage, and crimes against humanity.36
The Effect of the Enforcement of Laws on International Business
With so many different legal systems and country-specific variants in effect, it can be challenging to understand how international laws will affect specific international businesses. For instance, the ride-hailing company Uber has faced a litany of legal challenges in its global expansion. At one point France banned the company’s operations, the United Kingdom required Uber to pay a minimum wage, and Singapore forced the company to buy cars and rent them out to drivers.37 The company has faced numerous lawsuits by governments, drivers, and customers around the globe.38
Another way global regulations affect international business is through laws governing foreign ownership and operations of businesses. For instance, many emerging-market economies like China and India have strict regulations on foreign ownership of domestic businesses. While China’s emerging middle class is a large and attractive market for many foreign firms, according to the U.S. Department of State, China also has “a legal and regulatory framework that provides the government with discretion to promote investment in specific regions or industries it wishes to develop, and to restrict foreign investment deemed not to be in its national interest or that would compete with state-sanctioned monopolies or other favored domestic firms.”39
China publishes a comprehensive catalogue that outlines which of its industries encourage, restrict, or prohibit foreign investment. The regulations are detailed; for example, according to a U.S. State Department report:
In the oil and natural gas exploration and development industry, foreign investment is required to take the form of equity joint ventures and cooperative joint ventures. In the accounting and auditing sectors, the Chief Partner of a firm must be a Chinese national. In higher education and pre-school, foreign investment is only permitted in the form of cooperative joint ventures led by a Chinese partner. In some sectors, the foreign shareholder’s proportion of the investment may not exceed a certain percentage. For example, foreign stakes are limited to: 50% in value-added telecom services (excepting e-commerce), 49% in basic telecom enterprises, 50% in life insurance firms, 49% in security investment fund management companies.40
Similar laws apply in India. For example, foreign companies can own only up to 49 percent of a company in many industries, such as insurance, and foreign investments in India require approval by the Foreign Investment Promotion Board, along with a host of other local and national approvals. Foreign companies are also prohibited from investing in or owning property other than property directly used in their business. This ensures that companies are majority-owned by an Indian partner.41
While it is difficult for multinational companies to establish businesses in foreign countries, it is also challenging for them to obtain and enforce contracts across borders. For instance, India is the second-slowest country in issuing a construction permit. This means it takes on average 42 separate procedures to obtain a construction permit in India, compared with 12.1 procedures in high-income member countries of the Organisation for Economic Co-operation and Development (OECD). The cost of obtaining permits in India accounts for as much as 25 percent of the total costs of construction, compared with a mere 1.6 percent in OECD high-income countries.42 While accessing electricity, registering property, trading across borders and enforcing contracts improved in India from 2016 to 2017, the country is still ranked near the bottom of the list at 130 of 190 countries (see Figure 4.5).
FIGURE 4.5 Doing Business (DB) report for India, 2020 compared to 2019 India is slowly reforming its legal system to make it easier to start a business and get electricity.
Source: “Doing Business: Ease of Doing Business in India,” World Bank. https://www.doingbusiness.org/en/data/exploreeconomies/india/ (accessed May 12, 2020).
Enforcing a contract in India can be equally difficult. A U.S. State Department report stated that it “takes nearly four years on average to resolve a commercial dispute in India, the third longest average rate in the world.” Indian courts are backlogged with an estimated 30 million cases. The system is so slow that when judgments are reached against an Indian firm, the firm will sometimes just file a lawsuit in domestic courts “to delay paying the arbitral award.” In one instance, a case is still pending after being filed in 1983.43
The World Bank’s “Ease of Doing Business Annual Report” outlines many of the legal difficulties an international firm starting or operating a business may face by ranking the regulatory environment in 189 countries each year. The report compares countries on the challenges of completing 36 tasks, such as obtaining construction permits, getting electricity, registering property, getting credit, paying taxes, and enforcing contracts. For instance, New Zealand is ranked the second-easiest country in which to do business, behind Singapore. In New Zealand it takes just one process to start a business, and that process takes, on average, half a day.44
4.2 Common Legal Issues for International Business
LEARNING OBJECTIVE
Explain the ways in which crime and corruption affect international business.
One of the primary ways in which laws matter for international business is that, in general, there is a high correlation between efficient, effective regulation and the wealth of a nation. Those countries with easy-to-understand, easy-to-enforce regulations tend to be wealthy, whereas countries with complicated rules tend to be poor.
Increasing Wealth through Regulatory Changes
Over the past 12 years, Europe and Central Asia have made the most progress in simplifying their regulatory environments. When countries improve their laws, they likely open up more opportunities for business in the country. For instance, Georgia has introduced 39 regulatory reforms, such as establishing a one-stop shop for obtaining construction permits, reducing fees for electrical connection, and improving its dispute-resolution system.45 Over the same period, the country’s output per capita has grown by 66 percent. In contrast, Eritrea languishes near last place on the Ease of Doing Business Report. It takes 13 procedures and 84 days to start a business there, and on a scale of 1 to 18, the country scores just 3.0 on the quality of its judicial processes, including measures around allocating cases to courts and the efficiency of proceedings, case management, court automation, and alternative dispute resolution. The country’s gross domestic product (GDP) average growth rate of 4.2 percent over the period from 1991 to 2018 came about partly through foreign aid; 50 percent of the population receives food aid and foreign remittances that account for 32 percent of GDP. Eritrea is looking for foreign investment, particularly in its mining operations, but most firms are hesitant to enter because of the difficulty of conducting business there.46
Product Liability
In addition to regulating foreign business ownership and operation, laws may affect international businesses even when the companies are merely engaged in importing and exporting products. For instance, many countries place product safety restrictions on the goods and services of foreign firms.
Genetically modified organisms (GMOs) are plants that have been genetically modified to make them resistant to insects, drought, or herbicides. In the European Union, China, and India, GMOs have historically been banned because of fears that modifications make the food unsafe. These restrictions have eased recently, but strict labeling requirements are in force. In addition, 19 nations have opted to ban or partially ban the growing of GMO crops and continue to keep GMO crops out.47 While Europe mostly remains hostile toward GMOs, other countries, such as Brazil, use them in abundance. According to Reuters, “Corn yields in Brazil, where GMOs are widely planted, have risen 60 percent in the past decade, versus a growth of only 11 percent and 20 percent in China and India that bar the cultivation of GMO food crops.”48
While manufacturers are generally held accountable, even online retailers can face backlash from product defects. For example, several months after the initial surge in the popularity of hover boards, several cases of exploding hover boards were reported. The cause was the use of lithium-ion batteries, especially low-quality batteries, which eventually led the U.S. Consumer Product Safety Commission to classify all hover boards as unsafe. The U.S. government also sent out official notices to retailers, manufacturers, and importers about possible enforcement actions if safety standards were not met. Amazon.com, the Seattle-based online retailer, responded by offering refunds to anyone who purchased hover boards on its site.49 That report effectively ended sales of imported hover boards in the United States.
Many international companies proactively manage product-safety liability concerns. For instance, the Danish toymaker LEGO decided to build factories in Mexico, Hungary, and Denmark, where it had extensive control over operations. Because of its desire to maintain strict quality controls and ensure product excellence, it has only recently warmed to the idea of manufacturing its products in China.50
Property Rights and Intellectual Property
Another reason that laws influence international business is that countries differ in the degree to which they allow companies and individuals to own resources such as land, equipment, and mineral rights. It is incumbent on international businesses to determine their property rights in any given country. For instance, in the United States, land owners control the mineral rights to any resources under their soil. In Botswana, the federal government owns all mineral rights regardless of who owns the land.51 In Zimbabwe, President Robert Mugabe instituted a policy of property-rights redistribution that took land from large farmers and gave it to poorer farmers. The intent was to redistribute wealth across the country, but many studies indicate that it has resulted in lower agricultural yields instead. Some whose property rights were violated have sought restitution, but few have received any compensation, and now the government is taking land from anyone who opposes the ruling party.52 Property rights may be difficult to enforce in some countries that keep poor records. For instance, owners of 17 properties in Tulum, a beautiful beach town in Mexico, were recently driven out by court order. Most of them were foreigners trying to run hotel businesses in Mexico. While all had legally purchased the land, there were conflicting property deeds and ownership records. The government sided with local owners and expropriated the property from the foreign owners.53
Intellectual property rights are a particular type of property rights. Many economies across the globe are shifting away from agriculture and manufacturing and toward the development of Internet businesses and software and service industries. As a result, rights over the creative works of individuals, companies, and countries are often a source of competitive advantage for the company. According to the World Intellectual Property Organization, an organization established in 1990 in Switzerland to help creators obtain legal protection for their work, intellectual property (IP) is any creation of the human mind.54
intellectual property (IP) any creation of the human mind
For example, the Walt Disney Company spent more than 11 years negotiating with China to obtain the necessary permissions to build a new theme park in Shanghai, shown in Figure 4.6. Even as far back as 1999, negotiations stalled while both sides addressed significant complications on many levels, from financial and creative to logistical and technological. One of the notable problems was how Disney and China would determine property rights, including both ownership of the park and protection of Disney’s private property, including IP such as the themes and characters from its animated children’s films.
FIGURE 4.6 Disney Shanghai The park boasts the longest parade route of any Disney park in the world.
Ultimately a joint venture was created between Disney and the state-controlled Shanghai Shendi Group. Disney owns 43 percent of the venture and Shanghai Shendi, 57 percent. To safe-guard its IP in a country notorious for counterfeits and poor enforcement of IP protections, Disney insisted that China improve its IP protection practices before an agreement could be made. In response, China granted special trademark protection to Disney, and Chinese authorities agreed to carry out a year-long campaign to eradicate Disney counterfeits as part of a wider effort to improve its reputation for safeguarding IP.55 The trademark protection agreement also designates a 2.7–square mile area around the Shanghai amusement park as a “Disney trademark key protected area,” with extra enforcement.56 Ultimately, Disney’s biggest bargaining chip in protecting its property rights lies in the fact that both the Shanghai municipal government and the Chinese central government recognize that the park’s success means increased income and tourism for them both.57 The park opened in the summer of 2016 and has been a boom for the economy currently hosting over 10 million visitors a year—it even started driving up property prices in the city of Shanghai.58
4.3 Illegal versus Unethical Conduct
LEARNING OBJECTIVE
Describe the difference between illegal and unethical conduct.
International businesses often face a dilemma: actions they may take may be legal, but also unethical. For instance, in many countries it is legal to employ children as young as 14 years old, but global businesses may consider these actions unethical and create policies that forbid their practice. Understanding this dilemma requires understanding the difference between legality and ethicality.
FIGURE 4.7 The interplay of legality and ethics International business practices can be legal or illegal and unethical or ethical.
Ethics
Ethics are the moral principles of right and wrong that guide personal and organizational decision making. These judgments of right and wrong are independent of what is legal or illegal. Figure 4.7 shows that some actions are illegal and unethical, some are ethical and legal, but others may be legal but not ethical, or unethical but legal. For instance, a country may not have a law prohibiting child labor, long work hours, or low wages, but an international business may determine that such practices are unethical. Other actions may be illegal but deemed ethical. For instance, the protest of Ethiopian runner Feyisa Lilesa during the 2016 Olympics in Brazil against the human rights abuses and discrimination directed at his Oromo tribe were seen by many around the world as an ethical and peaceful resistance to government, but the government, which has allegedly killed more than 1,000 tribespeople, considers such action illegal.59 Some practices, such as criminal actions, may be both unethical and illegal. Ideally, business practices should be both legal and ethical. Common ethical issues facing international businesses arise in the areas of employment practices, environmental practices, and human rights.
ethics the moral principles of right and wrong that guide personal and organizational decision making
International Business and a Reactive Versus Proactive Response to Ethical Dilemmas
International businesses may face social pressures to respond in certain ways to the many ethical dilemmas they face. These social pressures come from stakeholders such as customers, investors, employees, and governments. International businesses can be reactionary to these pressures, or they can take a more proactive approach to social pressures. Firms that are reactive seek to build capabilities that let them quickly respond to social pressures and engage in actions that attempt to minimize the damage to the firm. On the other hand, more proactive firms seek to build capabilities that build a reputation for ethical conduct. Actions by proactive firms seek to maximize their reputation. Some of the tools that proactive firms use to increase their reputation as highly ethical companies include engaging in corporate social responsibility (CSR) initiatives, such as Patagonia’s efforts to “cause no unnecessary [environmental] harm,”60 IKEA’s funding of the Save the Children Foundation in India,61 and Peet’s Coffee’s efforts in establishing and using direct trade coffee, where they work with farmers to ensure high quality and increased productivity.62
Employment Practices.
Though legal in many countries, certain employment practices that expose workers to dangerous work conditions, pay wages below subsistence levels, and treat employees without dignity are considered unethical. Such unethical behaviors, though not illegal, can be detrimental to both employees and to employers alike. Some international businesses are proactive in their approach toward ethical situations, establishing strong guidelines to direct global actions toward employees, communities, and customers. Other organizations focus more on staying within the legal limits and have less concern for ethical issues.
For example, in 1997, Nike was stunned as college students across the United States began actively protesting its contractors’ labor practices. Nike, like many companies, outsources its production to suppliers around the world, with the goal of reducing its costs. The strategy is, of course, perfectly legal, but at that time it was increasingly seen as unethical. Thanks to outsourcing, Nike had become the world’s largest athletic shoemaker, but the strategy was beginning to backfire as students and other customers held Nike responsible for the appalling conditions in the factories. Allegations of abuse included low wages (14 cents an hour in Indonesia—less than minimum wage), poor living conditions; and even physical abuse.63 In 1998, a low point for Nike, CEO Phil Knight noted, “The Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse. I truly believe the American consumer doesn’t want to buy products made under abusive conditions.”64 As a result, the company became actively involved with suppliers to improve conditions. By 2005, Nike became the first company in its industry to audit its factories, publish a complete list of its suppliers, and even publish findings of wrongdoing. Through its continued efforts, Nike went from being perceived as an unethical company preying on poor factory workers to a company that is actively engaged in establishing international standards of business ethics. As of 2020, Nike stood as the 13th most admired company in the world, joining the ranks of companies such as Starbucks and Walt Disney.65
Environmental Practices.
Environmental practices can improve the way in which a business consumes resources and disposes of waste. Many organizations are now turning to sustainable methods, meaning practices that reduce waste, such as responsible packaging and eliminating the use of plastic bags; that recycle metal, glass, plastics, and electronics; and that cut greenhouse gas emissions, such as by using solar or wind power instead of fossil fuels.
Some international companies are actively engaged in sustainable business practices that are both legal and ethical. For instance, Google uses power from renewable energy sources, employs 200 goats to keep the grass around its Mountain View, California, campus mowed, and hosts free sustainable-cooking seminars for its employees.66
Volkswagen’s image as an environmentally responsible firm was tarnished when it was shown to have illegally and unethically installed a piece of software code that falsely reported reduced emissions in 11 million of its diesel cars around the world. The direct costs of the scandal, in addition to extra pollution introduced into the air, include fines of as much as $30 billion imposed by governments—such as the Environmental Protection Agency in the United States—and the loss of market share and in the firm’s market value.67 The company was also charged with fixing the problem and bringing the cars into compliance with emission standards. In the meantime, Volkswagen’s reputation had been seriously marred.
Human Rights.
Human rights are rights that belong to every person. In 1948, the United Nations published the Universal Declaration of Human Rights, including the rights of freedom, life, liberty, and security.68 No one shall be held in slavery or tortured, all individuals stand equally before the law and are innocent until proven guilty, and all have the right to education and many other rights. International businesses may face challenges with respect to human rights because many countries deny them to their citizens.
For instance, as the United States now softens the sanctions placed on Cuba, many protesters are concerned that U.S. companies will return to Cuba without holding the Cuban government accountable for its many human rights violations.69 The island state operates under a repressive totalitarian government that denies its citizens the right to protest. In another example, Thai fishing boats—unregistered with any government and operating in the international waters of the South China Sea—have routinely used slave labor to catch fish sold to U.S. companies for pet food and animal feed. Laborers come from poor neighboring countries like Cambodia and Myanmar, lured by the promise of employment, but upon arrival they are enslaved, tortured, and forced to work for years with no payment. They have no chance for escape because the boats stay in international waters, off-loading their catch onto other boats and receiving supplies while at sea.70 In response, many international companies are seeking full transparency by allowing customers to see sourcing details throughout the supply chain. For instance, Walmart requires all suppliers to list all their facilities and designate a company representative to ensure compliance with laws and standards, and provides workers access to anonymous means of reporting abuse directly to Walmart.71
4.4 Important International Laws
LEARNING OBJECTIVE
Identify key laws that govern international business.
International businesses face a number of laws that influence how they can opperate in global markets, affecting everything from the way they finance operations to the way they hire employees and share customer data across country borders. Understanding these laws and their implications for international business is challenging, if not critical. While many laws exist, we introduce here a few that have a substantial impact on international businesses.
The Foreign Corrupt Practices Act
Before 1977, it was common practice for global companies to bribe foreign officials. The intent was to persuade decision makers to purchase the company’s products or help tip the scales in winning a key contract. Companies kept massive amounts of cash in “slush funds” in order to make such payments off the books. In 1973, the United States became embroiled in the Watergate scandal, uncovered in June 1972 when five men hired by the Republican Committee to Re-Elect the President were arrested while breaking into the Washington headquarters of the Democratic National Committee.72 The investigation widened even as the Committee and the Nixon administration attempted to cover up the extent of the conspiracy. Investigators found “massive illegal campaign contributions” had been made to President Nixon’s 1972 campaign. As one consequence of the investigations, the Director of the Securities and Exchange Commission (SEC) began a systematic investigation of company slush funds.
See Whiteboard Video: The Foreign Corrupt Practices Act
These off-the-books accounts were illegal for public U.S. companies, and in return for lighter punishments, companies were asked to disclose any foreign bribes they had paid. According to a report by PBS’s Frontline program, “In total more than 500 companies stepped forward, including more than 100 listed on the Fortune 500. At least $300 million in questionable payments came to light.”73 In 1976 Lockheed Corporation admitted to Congress that it had paid more than $24 million in bribes to officials in at least 15 countries. The company argued that such payments were “consistent with practices engaged in by numerous other companies abroad” and that stopping them would put the company at a competitive disadvantage.74
While these events were unfolding, the SEC was investigating the potential consequences of outlawing such actions. Despite the resistance of many U.S. firms, the SEC concluded that “little if any business would be lost if US firms were to stop these practices.”75 As a result, President Jimmy Carter signed the Foreign Corrupt Practices Act (FCPA) into law on December 19, 1977. This law, the first of its kind, made it illegal to pay foreign government officials for their assistance in obtaining or retaining business. The U.S. Department of Justice details the law, noting
The anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.76
While the FCPA bans payments to win contracts or business, it does not ban facilitation payments. These payments are made to speed up the actions that government officials are already bound to perform. For instance, it is legal for a foreign firm to provide payment to Indian officials to quickly obtain necessary permits or licenses.
facilitation payments payments made to speed up the actions that government officials are already bound to perform
In 1988, the FCPA was expanded to cover foreign companies that operate in or have securities (stocks or bonds) listed in the United States. Since most multinational companies have securities listed in a U.S. stock market, the law now applies to companies in most countries of the world.
One of the biggest cases involving the FCPA was the Siemens bribery scandal, in which it was discovered that Siemens, a German engineering and electronics company, had paid bribes totaling between $40 and $50 million a year to win foreign contracts in Argentina, China, Nigeria, Iraq, and other countries. Siemens agreed to pay fines of $1.6 billion to U.S. and European governments and to stop paying bribes.77 Actions by the U.S. government in 2017–2019 with regard to the FCPA are listed in Figure 4.8.
In 1997, 20 years after the United States passed the FCPA, the OECD adopted an antibribery convention that made it illegal for any of its member countries to bribe a foreign official. Before the convention, Britain, France, and Germany, among others, had tax laws that not only allowed bribery, but allowed it to be written off as a business expense, reducing the company’s tax bill. With the OECD members on board, the fight against public corruption has been gaining legal muscle. In 2010, the United Kingdom passed the Bribery Act. This act mirrors the FCPA but adds provisions that outlaw facilitation payments, making it the most stringent foreign antibribery law.78
e-Commerce and Data Privacy
While global laws governing e-commerce and data sharing across countries are not established, regulations in the United States, China, and the European Union, among others have a significant impact on global e-businesses and data sharing, particularly regarding customers between global business units spread across the globe. For instance, e-commerce in the United States is governed by the Federal Trade Commission (FTC). The FTC regulates all forms of online advertising, data collection, and sales, and imposes penalties for companies making false claims or violating customers’ rights. For example, in 2016, the FTC imposed a $950,000 fine against the Indian mobile advertising company InMobi for collecting location information on customers without their consent, and required the firm to delete all the data they gathered.79 More recently, the United States Congress introduced legislation that would require companies to share personal Internet activities with third parties. This would allow Internet service providers to track customers’ location, financial, health, and browsing data without consent.80 Similarly, China is putting in place a host of regulations and taxes that aim to govern its citizens many transactions on foreign electronic marketplaces. It is estimated that one in five transactions in China happens on a foreign e-commerce platform.81 The regulations increase inspections of incoming goods and aim to ensure both the health and safety of consumers and that the value-added taxes on foreign goods, which often amount to 70 percent, have been collected.
FIGURE 4.8 SEC enforcement actions: FCPA cases Actions taken by the SEC from 2017 to 2019.
Source: Data from “SEC Enforcement Actions: FCPA Cases,” U.S. Securities and Exchange Commission. www.sec.gov/spotlight/fcpa/fcpa-cases.shtml.
Global companies are also facing increased pressure to ensure that customers’ data privacy is maintained. For instance, in 2016, the European Union established the General Data Protection Regulation. This regulation identifies who is accountable for data security and details what data flows are allowed between EU member states and those outside the zone. The regulation protects an individual’s health, genetic, biometric, racial, political and sexual orientation data as well as an individual’s name, location, IP address, cookie data, and RFID tags. In the crosshairs is WhatsApp and its global parent, Facebook. When Facebook bought WhatsApp in 2014, it asked WhatsApp to share customer information with Facebook. However, EU regulators asked the firm to stop sharing data with Facebook because the approval to share data was not in the original user agreement.82 The regulation requires that personal data remain in the European Union unless the country or territory “ensures an adequate level of protection for the rights and freedoms of data subjects in relation to the processing of personal data.”83 Many countries have similar regulations limiting the flow of information between countries and requiring data about its nationals to be stored within the country.84
Summary and Case
Summary
LEARNING OBJECTIVE 4.1 Describe different types of legal systems.
Both the rule of law and the rule of the individual operate under the framework of a legal system that is divided into three types of law: constitutional law, criminal law, and commercial law. At the national level these three types of law take one of five distinct forms: customary law, theocratic law, common law, civil law, or mixed legal systems. Firms must also be aware of the different standards in countries regarding product liability, property rights, and intellectual property. Last, international companies also need to understand and navigate international laws.
LEARNING OBJECTIVE 4.2 Explain the ways in which crime and corruption affect international business.
The level of crime and corruption in a country can affect an international business. Crime can take two forms: individual crimes and the abuse of public office, or corruption. Corruption generally creates more lasting effects on international businesses than individual criminal activities. Corruption can include acts of bribery, embezzlement, and nepotism, the hiring of family members.
LEARNING OBJECTIVE 4.3 Describe the difference between illegal and unethical conduct.
Unlawful activity is determined by the different legal systems of individual countries. Unethical activity is determined by the moral principles of right and wrong an organization embraces. At times, unlawful activities may be deemed ethical, whereas lawful activities are considered unethical. Decisions about employment, environmental, and human rights practices can create ethical dilemmas that affect the growth and reputation of international companies.
LEARNING OBJECTIVE 4.4 Identify key laws that govern international business.
The Foreign Corrupt Practices Act (FCPA) of 1977 forbids payments to foreign government officials for the purpose of obtaining or retaining business. The FTC regulates all forms of online advertising, data collection, and sales, and imposes penalties for companies making false claims or violating customer’s rights. Governments like the European Union are also passing laws to help ensure accountability for data security.
Case Study
Nestlé—Illegal vs. Unethical
What does the President of the United States, the CEO of Microsoft, a manager at Pizza Hut, or someone in an assembly line job at Polaris all have in common? They all must abide by the same laws. Breaking those laws results in the same consequences for each person, no matter their position. No one is not exempt from punishment if they commit murder. This Rule of Law keeps everyone in check and under control. Internationally, rule of law may not be in force or law may not even be enacted. This gray zone can cause problems for businesses that are not proactive about maintaining consistent ethical policies across different countries.
Who doesn’t buy from Nestlé? Not only does it offer a wide product range, selling everything from bottled water to pet food, but in 2014 it became the largest food company in the world by revenue. Nestlé has not only topped Fortune 500 lists for years, but has a reputation for upholding the law and more. The corporation appears on numerous lists of companies that make big efforts to advocate for human rights, and have released statement after statement against unethical practices. It’s a good company, trying to do good. Even for a corporation known for its proactiveness toward a more ethical world, however, it’s easy to make mistakes. The question on the world’s lips is how much could be done to prevent such slip-ups?
In the 1970s, Nestlé was sued due to its marketing of baby formula to mothers in developing countries. The way the product was marketed made the formula appear crucial to the child’s development. Not only did it get mothers hooked into thinking it was “necessary,” but there was confusion on how to prepare the formula. The water needed to be boiled (especially because many of the developing countries it was being marketed to didn’t have access to clean water) but this was not made clear in Nestlé’s marketing, and when the company realized this was a problem, they seemed to have ignored it. This caused major health problems and even death in infants, as illiterate mothers fed their babies contaminated water. This led to mass protests throughout the United States and Europe, lasting for almost seven years, until Nestlé started following regulations approved by the World Health Organization.
More recently, in 2015, Nestlé was charged for using child labor throughout the Côte D’lvoire on cocoa farms. These allegations included slavery and child trafficking throughout West African plantations. The company had publicly committed to ending child labor over 10 years prior, but 56 underaged youth were found in an inspection by researchers done in late 2014, and 27 of them were under 15. The labor market for cocoa in Africa has been a contentious topic recently, as it is exceedingly common to find child labor and extremely difficult to monitor if farms take advantage of children. It’s estimated that roughly 70 million, or 22 percent of all children aged 5–17, are being used for labor in Africa. For a company sworn against child labor, this is catastrophic.
The cocoa industry is extremely lucrative throughout the world, but success comes at a terrible price. Some 30 percent of children under the age of 15 in Sub-Saharan Africa are child laborers. It is estimated that over 1.8 million children in West Africa work for the cocoa industries.
Nestlé announced that they could not guarantee that their products, specifically chocolate, were not handled by child slave labor. In fact, despite extensive efforts, many experts believe that eliminating slave labor from the cocoa supply chain will not likely be achieved in 2020.
Nestlé, along with many other multinational companies, have been sued and criticized for intentional and unintentional unethical practices time and time again. Vacuous water extraction from their aquifers internationally in California during a drought, falsely labeled (brand and production date) imported powdered milk in Columbia (2002), contaminated cookie dough (2009), milk contaminated with melamine in China (2008), water pollution in Asia (2013), and deals for milk in Zimbabwe at farms seized from the people (2014) consist of some of Nestlé’s biggest “scandals.” However, although accusations are still being made against Nestlé today, the company has shifted from a reactionary stance to a proactive effort being made to prioritize human rights. A committee called the International Nestlé Boycott Committee monitors their practices, and their code of conduct includes warnings against child labor and advocates human rights. Although some of these situations are very obviously illegal, others lie within the law but are deemed highly unethical by the company. So what’s the difference? And what can be done to help companies keep to the highest ethical and legal standards?
Case Discussion Questions
Big companies often struggle to maintain ethics or legality in business. Is this due to a lack of attentiveness or intentional neglect of human rights issues within their company, or are they honest mistakes?
Is it OK for global companies to merely follow the law or do they need higher standards?
Nestlé has taken a stand against child labor, toward health awareness, and for zero environmental impact. It’s striving to do better and be better, but is it enough?
When something is legal, it obviously means that something aligns with the law. Ethical, on the other hand, means that something follows a moral compass or code of conduct. Unfortunately, a moral compass is not a universal standard. What’s acceptable in one society may not be ethical in another. One must know that sometimes something ethical is not legal, and vice versa. What are some things that you would consider unethical but not illegal?
Sources: Tibi Puiu, “Why Nestlé Is One of the Most Hated Companies in the World.” ZME Science, January 28, 2020. https://www.zmescience.com/science/nestle-company-pollution-children/; David Dee, “10 Outrageous Nestlé Scandals.” Listverse, October 22, 2019. https://listverse.com/2018/01/03/10-outrageous-nestle-scandals/; Arthur Neslen, “Nestlé under Fire for Marketing Claims on Baby Milk Formulas.” The Guardian. Guardian News & Media Limited, February 1, 2018. https://www.theguardian.com/business/2018/feb/01/nestleunder-fire-for-marketing-claims-on-baby-milk-formulas; “Ethical Business.” Nestlé Global. Nestlé. https://www.nestle.com/csv/what-is-csv/ethical-business (accessed March 4, 2020); Jaqueline E., “Nestlé Ethics and Social Responsibility – Report on Issues.” Free Essays. IvyPanda.com, September 18, 2019. https://ivypanda.com/essays/ethics-of-nestle/.
Case Study
Can Korean Entertainment Content Companies Compete with Pirates?
In the past 15 years the popularity of South Korean culture, especially its TV dramas, has been increasing so rapidly that it is often called Hallyu, or the “Korean Wave.”1 Korean dramas have become a global product. People from Saudi Arabia are watching the South Korean TV show “Person who gives happiness” from their living room couches, and U.S. viewers get excited for each new episode of the South Korean show “Boys over flowers.” The show “Descendants of the Sun,” which debuted in 2016, has been viewed more than 2 billion times in China. The speed and scope of South Korea’s ascent was so rapid it was unimaginable just a few years ago. Yet, now the world’s entertainment eye is often squarely focused on South Korea. A recent article in the Financial Times reported that exports of South Korean cultural products exceeded a record of $5.3 billion in 2014 and has grown at a rate in excess of 13 percent since 2010.2
However, the majority of international viewers who watch South Korean content online are assumed to be watching free of charge, through illegal online distributors. Websites such as mysoju.in and a host of others provide an easy way to find and view illegally acquired South Korean content. These sites do not host the content directly, but rather link international online viewers to illegally provided and often low-quality media, while enjoying advertising profits on the back of this stolen content.
Although the major South Korean network content producers and providers such as MBC, KBS, SBS work feverishly to eliminate sources of illegal online content, these efforts are like fighting the famed Hydra with its many heads.3 When a link to a show is broken or a website is taken down, a host of others emerge in its place. Content producers have struggled to monetize their content abroad, working against significant roadblocks including online viewers’ ease of accessing free content and the difficulty in taking legal actions against elusive illegal websites, often housed in foreign countries.
The strategic question for South Korean content providers is, Is there a way to successfully compete with free?
Learning Lessons from History
History often demonstrates that once a product has become available free, it is difficult to return to a direct-payment business model. In other words, a pay-per-view solution is unlikely to successfully compete with free content. To leverage their assets, South Korean content providers are likely to embrace the concept of free. In doing so, rather than selling content to users, they need to adopt a different business model. Ironically, it is one they are already very familiar with: an advertising-based business model.
Here, however, content providers have struggled to realize that free means not only providing free advertising-supported viewing but also providing a delivery mechanism that is at least as good as that used by the free competitors, including providing all South Korean content rather than only content produced by one network. Since illegal competitors like mysoju.in do not need to be bothered with the content licensing process, they are able to provide viewers full and diversified content, regardless of its producer.
South Korean content providers are striving for an unbiased third party to distribute content online that will share advertising profits. In response, OnDemandKorea has entered the market to fill this role. OnDemandKorea works just like Hulu, Amazon, or Roku, streaming original, high-quality dramas and providing revenue back to the content producers. However, it remains to be seen whether consumers of online content will be willing to watch advertisements or subscribe to the streaming service to watch high-quality content, or if they will be more likely to continue consuming content from pirate websites.
Case Discussion Questions
What might make consumers willing to pay for content (by watching ads or buying subscriptions) when free options are available?
If OnDemandKorea is going to be successful in competing with content pirates, what kind of relationships does it need to foster with South Korean content producers?
What is the biggest threat to OnDemandKorea?”

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