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Doing Business in the Global Village: Legal and Strategic Aspects

Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP

Many small and growing companies -- pioneers of business in the global village -- have discovered lucrative new markets abroad. Even developing countries are receptive to franchising, licensing and distribution. Not only are they enthusiastic importers of products and services, they are also eager to acquire the technological know-how and system support that comes from working with their international trading partners.

If your small company is initiating an international expansion program, especially through franchising, licensing, joint ventures or technology transfer, you should be aware of and give serious consideration to the following factors:

  • Language Barriers. Translating your marketing and operational materials into the local language may seem simple, but if the idioms that characterize your concept or marketing approach aren't easily expressed in the host language, you could find yourself in serious trouble. More than a few companies have had unexpected surprises, like the oft-told story of the Chevy Nova. When Chevrolet named that model, nobody thought to ask, "What does Nova sound like to people who speak Spanish?" "Does not go" is hardly an ideal name for an automobile.
  • Marketing Barriers. Many American companies have been disappointed to find that their winning marketing approaches fall flat in other cultures. While many overseas populations have developed a taste for so-called fast food, the speed-of-delivery component does not count for much in certain markets. Many Europeans expect to eat their meals at a leisurely pace, and they have little interest in having meals "to go." McDonald's responded to cultural pressures in France, adding beer and wine to its menus. And in countries like Singapore and Japan, expensive real estate, scant availability of retail space and elevated pricing structures have required American companies to redefine their marketing approach.
  • Legal Barriers. Certain types of distributorship arrangements may be hard to set up in a particular country. Before you set foot in any new market, you'd better check its tax laws, customs regulations, import restrictions, corporate organization requirements and agency/liability laws. In such countries as Korea, Taiwan and Brazil, for example, technology transfer and foreign investment laws can turn the business relationship you had intended to be a master-franchise or license agreement into, in effect, a joint venture.
  • Access to Raw Materials and Human Resources. If your company requires highly trained computer technicians, you should make sure that adequately skilled labor is available in the market you intend to enter. And you'll have to make sure you'll have ready access to all the critical materials, equipment, and supplies your business will need to sustain efficient operations.
  • Government Barriers. Some governments are not receptive to foreign investment or to certain types of distribution relationships. Before you make business commitments in any foreign country, check out its history of expropriation, government restrictions, tariffs and limitations on currency repatriation. Any one of those factors may prove decisive in determining whether your proposed venture can prosper. Ask legal advisors who have experience in international matters to determine which tax treaties will affect your plans. Your lawyer may recommend establishing a liaison with legal counsel in the country where you want to do business. You may need to seek assistance from the U.S. Trade Representative or the International Trade Administration.

In spite of these potential stumbling blocks, you need not give up on overseas expansion. If after a thorough review, you identify a market with real potential, you're on your way. Just pay attention to what I consider the commandments of successful international expansion.

  • Establish a Strong Domestic Foundation. To support your overseas venture, make sure you have in place adequate capital, technical expertise, resources, (multilingual) personnel, support systems and training programs.
  • Secure the Right Strategic Partner. A critical component of any international venture, according to experienced international executives, is having an effective relationship with the right partner. No matter which legal structure you choose for your expansion into a foreign market, you should view the lead developer in that local market as your philosophical and strategic partner. And, just as courtship precedes a marriage and due diligence precedes an acquisition, you should plan for some serious dating before you wed any international partner.

    Look for candidates among the target country's successful business builders who have proven financial resources. Then, engage promising candidates in face-to-face negotiations. What systems do you have in place for recruiting and selecting the right candidate? Consider hiring a local agent who can help you screen and select job candidates. When you are choosing the agent, you may want to look for someone in your industry with whom you may have had business dealings. The U.S. Foreign Commercial Service, a division of the International Trade Administration (ITA), can help you identify agents and resources. What procedures will you employ for reviewing candidates' qualifications? Do you have a fallback plan if, despite all your care, it turns out you've selected the wrong person or company? Before you set forth, you should have substantive answers to those questions. In the end, of course, you'll need careful negotiating and contract preparation.
  • Set a Reasonable Pricing Structure. When young businesses first venture into international markets, many have overblown expectations about the prices overseas partners ought to pay for the right to distribute their goods and services, license their technologies or serve as franchisers. Reality and patience are key. If you overprice, you'll discourage qualified candidates and/or leave your new partner with insufficient capital to develop the market. If you set your prices too low, you'll forfeit your ability to provide adequate resources and incentives for quality training and ongoing support. Your fee structure should be a fair and realistic reflection of how you and your partner divide responsibilities, and it should account for such issues as currency exchange, taxes, pricing strategies, market trends and who provides the necessary human and other resources.

    Don't be surprised if you need more patience than a domestic venture demands. An overseas expansion takes time to yield a satisfying return on investment and profits. In addition to the normal economic cycles to which all businesses are subject, certain countries dictate legal structures that are, in effect, forced joint ventures, and they impose restrictions that make it difficult to take capital beyond national borders. When you are ready to make an agreement, carefully consider the structure, term and scope of your relationship and any non-disclosure and noncompete clauses. Such provisions and their enforceability are extremely important, especially in relationships complicated by distance and divergent legal systems. When you define the financial provisions of your agreement, you may find it tempting to mitigate potential losses by elevating the initial fee, but you'd be better advised to consider a more balanced approach to fees and ongoing royalties.
  • Extend Your Trademark Protection. For the most part, trademark laws and rights are based on actual or intended use within a given country. Unlike international copyright laws, your registered domestic trademark does not automatically confer trademark rights in other countries. Be sure to take steps to ensure the availability and registration of your trademarks within all your markets. And while you're at it, make sure that in your markets, your trademark translates properly. Many businesses have been obliged to modify their names, designs and slogans as a result of translation or pirating problems. A number of U.S. automotive franchisers that offer oil changes and tune-ups had to retool their trademarks and brand identities because their emphasis on speed and efficiency had no impact on their European markets, where automobile owners value quality over fast service.
  • Tailor Your Products and Services. Products or services that have been successful in the United States and Canada may elicit less interest in another country. Check out differences in national tastes, cultures, norms, traditions, trends and habits before you finalize prices, sizes or other characteristics of your products or services. Nevertheless, be careful not to change your product or service so much that you risk quality, integrity, uniformity or consistency.
    Avoid becoming an amusing story in the annals of international trade. Numerous restaurants that have opened in other countries have had to modify serving sizes to accommodate different eating habits. American restaurateurs discovered the hard way that some consumers will not patronize an establishment where servings are so big that they will be obliged to leave food uneaten. In certain cultures, people equate leftovers to wastefulness. Rather than line up for SuperMax Big Gulps or Triple-Huge Sundaes, they prefer to pay competitive prices for reasonable portions.
  • Choose Your Markets Carefully. Take care when you are selecting or targeting a country or market. Don't depend on the enthusiasm of an interested prospect who has fallen in love with your concept. See for yourself just how big a market you can expect.

Over the past decade, U.S. exports have in fact been growing impressively. The ITA has created Export Assistance Centers (EAC), which act as one-stop clearinghouses. In addition to information about Small Business Administration and Export-Import Bank loans, EAC provides links to such governmental bodies as the Environmental Protection Agency and the Overseas Private Investment Corporation. To find one of the 20 EAC or 80 domestic offices of ITA, call the trade information hotline at 800-872-8723, or visit the Web site of the Trade Information Center (www.doc.gov), and check out its links to numerous other trade-related sites.

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