By Michael Muth, GlobalBiz columnist
Increasingly, small businesses are targeting a global market. To be successful, it helps to learn from other, experienced firms how to launch an international business, what types of business structures work best for global expansion and how to adapt to local cultures. In GlobalBiz, contributing columnist Michael Muth will shed light on these issues through interviews with seasoned international executives willing to share the lessons they ve learned.
In this interview with attorney David Laverty, a principal of International Counsel, GlobalBiz explores the legal options and challenges associated with moving a small business into the international marketplace.
Laverty has more than 20 years of experience with contracts, investment and market-entry matters. In his work in the United States as well as in Asia, Europe, Latin America and the Middle East, David assists companies to better and more cost-effectively integrate U.S. and foreign law capabilities into their expansion efforts.
Muth: How is the law different from country to country?
David Laverty: There are many companies that assume there’s a more radical difference than there really is. There are common law or civil law countries. Common law started in the UK and we inherited that here in the U.S. Then there are civil law countries that follow the continental European tradition, which work from a code.
But the issues tend to fall into some pretty consistent patterns. How do you get into a country? What forms of entities do you choose? How do you structure a joint venture or an acquisition? There are many nuances from country to country, but countries have a lot in common. You do need to get into a different mindset and get out of a domestic frame of mind.
[However] there are commonalities on whether you can have limitations on equity or can even do an acquisition. The form could be stock versus asset purchases. The tax consequences and employee relations differ. [And] there are different red flags you should look out for.
Civil law jurisdictions decisions are made without [precedent] ¦. Other courts are not bound to follow that.
Muth: What are the biggest issues American firms going abroad encounter?
David Laverty: The problems can include relying too much what they’re used to in the U.S., such as agreements and processes. It’s either that extreme or the other; that each country is going to be a totally different kind of system. They then throw off all their common sense and knowledge they’ve gathered and forget about contracts. Companies that have been at it for a while … have a better balance to serve their interests. Newcomers seem to be at one extreme or the other.
Muth: What are the biggest obstacles foreign firms run into when coming here?
David Laverty: I hear from many foreign companies coming to the U.S. that they worry about litigation, product liability and huge damages. [That] puts some off. There are ways to control that risk. It is a higher level of risk than in many other countries.
For Indian companies coming to the U.S., there is an overwhelming tendency to buy the stock of a target company because there are high taxes or stamps duties on transfers of assets in India. They think if you buy stock you might not inherit all of the downside. ¦ They underestimate the risk that could be inherited [by] the whole company, not realizing that by buying the assets there is not going to be the same level of risk.
Muth: What are the differences in resolving legal issues in developed vs. emerging markets?
David Laverty: I was just putting together a document that ranks countries by ease of doing business and corruption indexes. It tends to be the case that more developed countries with higher GDP (gross domestic product) per capita are going to be more user friendly and look and feel ¦similar to the U.S. The more emerging economies are more of a mixed bag, more cumbersome.
China is example A and India is example B. China has gotten better. There are fewer regulatory hoops to jump through than in the past. India is relatively open but there are bureaucratic issues there. Foreign investment can be good for their economies. There’s no reason to muck it up with too many hoops. It will sort itself [out] in the market. ¦
Muth: How do big companies differ in legal approaches to foreign markets when compared with smaller companies?
David Laverty: I wouldn’t see that many small companies in the old days. They were doing more exporting. Exporting is less cumbersome. In the last 20 to 30 years, smaller ¦ companies are going to other countries, not just exporting, but working through joint ventures, direct investment and acquiring companies. ¦
[But] many small companies ¦ lack the resources to pull it off. CEOs are distracted by international initiatives. They don’t have teams of people who are dedicated to other geographic areas. On the legal side, they may have only general counsel, with no international experience. It’s a challenge and out of reach, cost-wise.
OTHER OPTIONS FOR COUNSEL
The large law firm model, with a global footprint in many countries/branches needs to be fed. It’s also about finding people you can rely on and trust. There are those who will say the big law firms are less able to pay attention to smaller clients and [have] ¦ service issues. My view is that they’re not optimized for small-company problems. ¦
There are so many wonderful local law firms in your favorite countries if you know them and have worked with them. Small companies don’t have the ability to judge that very well. They trust the people they know.
As we go through this recession, there is a willingness among companies to match the capabilities with the need. ¦ There are other resources, like temporary law services, matching services and outsourcing to India. India has lots of well-trained lawyers. For legal process outsourcing, they don’t provide legal advice, but paralegal support. There is a movement to the right pricing and skills for the project versus one firm for all projects.
Listen to the interview here.