The regulatory framework in which a company must operate is well defined in the United States, but that is not always the case in other countries where US companies do business. That reality makes it crucial that regulatory considerations—and the personnel who deal with them—be part of a company’s strategic decisions.
Compliance can be challenging in emerging markets, not solely because of the requirements themselves, but also because of a lack of uniformity in interpretation of the requirements. That can lead to expensive delays in market entry, inefficient spending on manufacturing facilities, and other undesirable business situations that might otherwise have been avoided.
The consequences can be significant. Writing in Industry Week, Joachim Ebert, Omar Hafez, and Amiya Setu, executives with the global consulting firm A.T. Kearney, cited the case of a medical device company that built a manufacturing operation in China with the intent of supplying both the Chinese market and international markets. A good plan, it seemed—until the company found that entering the Chinese market, even though its manufacturing facilities were located there, was more complicated and time-consuming than it had understood.
Knowledge management becomes critical. Obtaining the knowledge is only one part of the job. The knowledge has to get to the people who need to have it. As the Kearney executives wrote, a company must “process masses of information to identify what is important from a regulatory perspective and to whom it is important.” In addition, as a company expands, its knowledge can become stretched across its operations, keeping it—albeit unintentionally—from being properly and accurately disseminated. “Tribal knowledge,” in which knowledge that should be broadly shared is instead held in the heads of individuals or units, such as engineers or product testers, adds to the difficulty.
Some factors are not negotiable, but simply have to be faced as they are and integrated into business decisions. Tariffs are a prime example. These unilateral trade measures, sometimes enacted for reasons more political than policy-oriented, effectively impose a regulatory cost on transactions.
Given the increased interconnections in the global marketplace, even businesses not specifically targeted by tariffs can still be affected by them. Raw material costs, for example, may rise, and cross-border trading may become more complicated. Political situations that are beyond any business’s ability to control, and often even to influence, create obstacles that have to be addressed and will force changes in business plans. After being imposed and altering the business climate, tariffs may also be lifted as administrations and circumstances change, thus creating another set of challenges and opportunities.
Multinational agreements that bind three or more countries to negotiated regulations and standards also are a significant consideration for a business looking to operate internationally. Although these can be difficult for governments to negotiate, given the varying interests of multiple countries, these arrangements offer decided advantages for business. Typically, they lower tariffs, ease import and export restrictions and, by standardizing commerce regulations for all parties, reduce the legal costs for companies.
Intellectual property regulations are important elements in international business. The IP protections US companies enjoy in their home country are not universal, and a US copyright or trademark does not ensure similar rights and protections in another country. Companies operating in other countries have to understand not only what assurances are or are not made in the regulations of those countries, but also what practical options exist when the intellectual property they own is used improperly or stolen outright.
Although IP issues sometimes are seen as Internet-era, tech-age concerns, they are hardly new. The 1886 Berne Convention, for example, addressed many intellectual property concerns of the time.
The handling of the vast amounts of information companies gather is also regulated to different extents around the globe. Irresponsibly addressing, or even ignoring, critical questions such as what may be collected, how it may be used, and how it is to be maintained can be costly—not merely in terms of reputation, but also in direct costs. For a company operating in the European Union, fines could be staggering under the rules of the General Data Protection Regulation (GDPR).
In January, Google was hit with a fine of nearly $57 million by French regulators enforcing GDPR. That’s an attention-getting number, but fines can go much higher under GDPR, as high as 4 percent of a company’s global revenue. For a company the size of Google, that would be billions of dollars.
GDPR, which went into effect in May 2018, is a powerful example of an international regulatory system. GDPR notes that the regulations apply to businesses within the EU, but apply equally to companies located outside the EU if they offer goods or services, collect data, or monitor the behavior of consumers within the EU. The statement leaves no wiggle room: “[GDPR] applies to all companies processing or holding the personal data of data subjects residing in the European Union, regardless of the company’s location.”
Local regulations can affect business practices as well. Airbnb, for example, was hit with a 30,000 Euro fine—about $34,000 US—in Barcelona when it failed to follow local housing and tourism regulations.
Walt Conn, global chief operating officer for quality, risk and regulatory at KPMG, says businesses must recognize that “different countries have different regulatory setups, different levels of maturity and experience among their regulators, and of course different cultures have different levels of emphasis on compliance.” The uncertainty that can be created—the anticipated impact of Brexit, for example—is generally not good for business. “While there is uncertainty, organizations tend to stay on the sidelines waiting for certainty to come,” says Conn, a 1985 Harbert accounting alumnus. Labor regulations vary among countries, sometimes so significantly as to affect decisions on location, production, and other fundamental components of business. Rules in areas such as employee classification and overtime pay, for example, are not uniform across the global marketplace.
The same is true for maternity or parental leave, for which there is no guarantee in the United States, although most companies do have some type of policy that covers this benefit to some extent. In much of the rest of the world, it is guaranteed. UK workers are entitled to 52 weeks of this leave, with pay for 39 of those weeks. In the Czech Republic, it’s 28 weeks; in New Zealand and Australia, 18 weeks; in France and Austria, 16 weeks.
Regardless of where a company operates facilities, transacts business in its supply chain, or sells its products, environmental impacts occur. Environmental regulations vary from country to country, but the management of waste, hazardous materials, emissions, and other pollutants are significant concerns nonetheless. In addition to potential environmental damage, reputational damage is a consideration as well. With sustainability becoming a greater priority for many major companies, understanding not only the basic regulations of a country, but also the effect a company’s operations can have even if the minimum requirements are scrupulously observed, is an increasingly important factor in business decisions.
Ultimately, adopting sound environmental practices is good business, as a commitment to responsible decisions and sustainability can attract new customers who prefer to spend and invest their money with environmentally conscious companies.