National Regulatory Agencies Essay

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Anyone doing business in countries outside the United States can safely assume that they will encounter  government agencies regulating every direct and indirect aspect of commerce. Just as is the case in the United States, these agencies enforce regulations  governing establishing a business, taxes, costs, prices, financial transactions,  pollution, wages, workplace safety, and import  and export duties. What the business person cannot assume is that working with regulatory agencies overseas will be the same as it is in the United States. Nor can the person  assume that  regulations and  regulatory  agencies  will be similar  even when nations  have a common  membership  in an organization  such as the European  Union  (EU), Southern Common  Market  (Mercado  Común  del Sur  [Mercosur/Mercosul]), or Association of Southeast Asian Nations  (ASEAN). Each  nation’s  regulations  are  a product  of its history, culture, and politics as well as attitudes toward the conduct of business.

The nation’s openness or hostility toward business, and  foreigners,  its current  economic  situation,  and even the nature  of its civil service all have a bearing. A European nation with a long history of equal trade will have regulatory agencies that operate differently from those with a colonial background.  In the latter case, an assumption  of exploitation  by more  highly developed nations may create a basic distrust of outside business interests.  A nation  that, until recently, possessed a state-run,  centralized economy may also present  challenges to Western  business interests.  In addition to these factors, one may find regulatory bodies that may require special handling in either intangible or concrete  ways to ensure  their  cooperation. Another  factor, one that will apply mostly to nations with a long history of commercial law and regulation, is deregulation.  The decrease in regulations  governing business can also affect the attitudes of regulatory agencies and their representatives  in the interpretation of the remaining rules.

While businesspeople  have always had to contend with the regulatory agencies of their own country  as well as the nation with which they are doing business, it will not be unusual in the future to incorporate planning for how the business enterprise will contend with international regulatory agencies. Organizations  such as the EU, International Monetary Fund (IMF), World Trade  Organization  (WTO),  or the World  Bank will increasingly affect international business in the future. One example of national regulation moving to an international basis has been the European Aviation Safety Agency, an EU agency that  came into being in 2003 with the aim of replacing the national  aviation safety agencies in Europe that  have functioned  similarly to the  U.S. Federal  Aviation  Administration (FAA). In the gap between national rules and agencies and those international rules and agencies that  supplant  them, U.S. businesses will have to become familiar with the rules and workings of both levels of agency.

International treaties, the Kyoto Protocols governing emissions is but one example, while not binding on U.S. companies  in the  United  States, can affect overseas subsidiaries. These agreements would be enforced  by the  regulating  agencies in the  country where the American concern will do business.

Globalization  has accelerated  this factor in some part because it creates new situations that were never covered by law and that were never dealt with by regulatory agencies. There can be a regulatory vacuum in these instances, an area where businesses must tread cautiously.  The result  of new legislation, especially where there appears to be a sacrifice of either national self-interest or an unfair or illegal advantage, can create a backlash. A possibility of that kind of reaction can arise in situations  such as occurred  in Germany in 2005. In that year, the Wall Street Journal reported that  lobbying members  of Germany’s parliament  by commercial  interests  was growing. Along with  the growing awareness of this activity was the awareness that it was not adequately regulated. Legislation was subsequently  introduced to begin to prevent  potential abuse. In a different country  with a different set of assumptions and tradition, the effect on regulation and the government  agencies charged with carrying them  out  could  have been  different,  introducing  a new complexity for international businesses working in that country.

Regulation does more than impose restrictions and rules on foreign investors  and businesses that  enter a country  to do business. It should also provide the guarantee  that  the foreign investments  will be safeguarded, that investors will receive their returns  in a fair way, and that the intellectual property, financial, and other rights will be protected.  However, the regulating agencies themselves and the way they function are also important. While regulations may seem clear, how regulatory agencies enforce them  may be less clear. The transparency  of the process and what is required by the business, what the agency does and how long and complicated  its process are critical. In addition to wide latitude given to regulatory agencies in some nations,  other  organizations  that  are independent  of financial or commercial agencies will also come into play. For example, in Brazil, which is hardly a unique  case, there  is the  law and  the  regulating agency, but there are also courts at several levels that may provide a third, and often binding, interpretation of the regulations.

Another factor that business people must be aware of  is  that  agencies  in  various  countries   will have changing sets of responsibilities  and reporting  relationships. Unlike the U.S. government in which organizations  are relatively stable, a minister’s portfolio (that is, his or her set of responsibilities) can change with some frequency. An example of this has been recent  changes in the responsibilities  of the finance minister in Germany and France. In many instances, there will be a title change accompanied by a shifting of subordinate   departments (e.g., workplace  safety or ensuring a percentage of native employees). Thus, with a new organizational identity, new reporting relationships,  and  perhaps  new agendas  set by the new  minister,  the  manner  in  which  the  regulating agency can change can be dramatic.  Of course, certain  areas such  as environmental regulation  would be outside the purview of finance ministers and must also be considered.

Prior  to contacting  and  working with regulatory agencies, the  businesspeople  must  have done  their homework. Success depends  on exhaustive research with legal and business experts, especially when both the regulations and the character  of the agencies can change. Illustrative examples, however, can provide an idea of the complexity as well as an idea of the general attitude toward business, especially U.S. business.

France

As an example, many regulatory  agencies in France report  to the minister of the economy, industry, and employment, who answers directly to the prime minister. While not directing  all agencies, this ministry governs most aspects of employment,  business, consumer issues, and industry. The U.S. businessperson coming to France must remember  that while a great deal of direction  comes from agencies at the federal level (i.e., national-level  agencies),  there  are  other entities. There are regulatory agencies that  function on the state, provincial, or geographical department level. Localized agencies will be encountered not only in France  but  everywhere. The differences in complexity will vary. The manner  in which a company conducts  business with all of the agencies in France differs greatly from Germany or, more especially, nations such as China or Russia.

In France, and once again this will be the case in several countries,  regulatory  agencies  have a great deal of leeway in how they enforce the regulations. In France, whether the agency will administer regulations in the spirit or the letter of the law may depend on the ministry or agency policy. In other countries, this will be true  as well. Further,  in some countries such as Russia or China, an individual government employee can and may choose to exercise a very personal reading of a regulation.

Another consideration for those working with French agencies (as well as those conducting business in other  countries)  is the degree to which the business person can understand and see the processes the agency conducts. That means understanding process and having the ability to petition when there are differences of opinion. In France, the degree of transparency for international business  operations  has improved from where it was a few years ago. Further, the standards by which the French  will allow U.S. products to enter  the country  has become more  defined and clear. However, and this is common  throughout the EU, EU-level standards  are in force. In France, as is the case throughout the EU, where there are no EU standards,  the national standards  as enforced by the nation’s appropriate  regulatory agency will apply.

Germany

Regulation  in  Germany  can  also be  quite  complicated. As is the case in France, the minister of finance will manage several regulatory agencies. In this case, however, there are several German  ministries,  all of whom report  to the federal chancellor,  that  contain regulatory agencies. These would include the federal ministries for environment,  nature conservation, and nuclear safety; economics and technology; food, agriculture, and consumer protection; labor and social affairs; and economic cooperation  and development.

The German  business regulatory  context  is complex. The basis for Germany’s  economy  for a long time has been the export of its products  and so the nation  has a highly developed sense of international business. Admittedly, this outlook and its history are more developed in what was West Germany than in the  former  German  Democratic  Republic, but  the gap has decreased.  In addition,  especially since the arrival of Angela Merkel as chancellor, there has been a movement  in Germany to reduce regulations, and as a consequence,  the effects of regulatory  agencies on international business.

Germany’s economy  and international commerce, however, are still highly regulated. The number of regulatory agencies is not small and dealing with the extensive bureaucracy that administers what many consider to be an excessive set of regulations can be a complex experience. In Germany, as in other countries, regulatory agencies exist at the federal, state, and local levels, so a U.S. business concern  must interact  with a wide variety of agencies. Non-German businesses do have opportunities to petition  to have grievances resolved and German  regulatory  agencies have been effective in handling these procedures  fairly. Foremost  among these has been the Cartel Office, which oversees many aspects of international business.

Despite the heavy degree of regulation  and existence of a large number of agencies in these and other Western  countries,  they  are  relatively minor  compared to the complexity of regulation  and its implementation that businesses encounter  in Russia.

Russia

In 1991 the Union of the Soviet Socialist Republics (USSR) ceased to  exist. Constituent republics  such as Latvia, Lithuania,  Estonia, Belarus, Ukraine, and others  became  independent nations.  The center  of the old USSR, Russia, became what was supposed to be a free-market  state. Initially, it appeared  to be an excellent place for international companies to establish businesses. What these companies have encountered, however, is a complex system of regulation and bureaucracy.  A major  contributing factor  has been Russia’s regulating  agencies. There is an increasing body of laws and  regulations  that  are coming  into being that  are increasingly consistent  with international standards such as those required by the WTO. There is still a substantial  gap between what the law says and how it is implemented  and enforced by the agencies.

The Russian business regulatory  bureaucracy  can be characterized  as having a high degree  of capriciousness, obtuseness, and corruption. Any businessperson  going to Russia could do worse than to read short  stories  of Gogol in the  Tsarist  times,  stories of Bulgakov in Stalinist Russia, and some historical research to understand what could be best described as the care and feeding of apparatchiks (the operators within government agencies).

The U.S. government  reports  that  incidences  of these difficulties have decreased in recent  years, but they still do exist. In 2002 Transparency International placed Russia 21st in a list of 21 nations  in what it called its Bribe Payers Index. Placing the country last on the list indicated that it was where a business was most susceptible to paying bribes. The Transparency International 2007 corruption index placed Russia at 146 out of 180 nations. One year before, it had ranked 121 on the list, the recent survey indicating that corruption is becoming substantially worse.

There have been government  initiatives to reduce corruption in these agencies. It was declared by President Vladimir Putin in 2006 to be a priority and it is assumed  that  his successor,  Dmitry  Medvedev, will continue the effort; the results have not yet shown any substantial improvement.

It ought to be noted that while Russian regulatory agencies  have one  of the  worst  reputations in this regard  and  are presented  here  as an example, they are  not  unique.  The degree  and  effects of corruption within regulatory agencies is a factor that must be researched  by any company wishing to engage in business in another country.

In  the  background   of  Russian  regulatory  agencies, however,  is the  body of regulations  and  laws and how they were introduced as well as the nation’s experience  with free commerce  and its regulations. The Russian Federation  in the few years of its existence has undergone  dramatic  changes. The change from  an entirely  state-directed central  economy  to one in which perhaps 75 percent has been privatized has been rapid and uneven. There have been no real precedents  in Russian history that could be followed. Additionally, much  that  underlies  Western  assumptions of regulation and how it is applied do not exist. Combined with the high degree of politicization that exists in Russia on all levels, from the federal to the local, and a higher degree of local autonomy than one might expect, the application of regulations can vary widely. In addition, there can be what would be illegal or extralegal actions performed  by the regulatory agencies themselves, such as expropriations of property or enterprises on the local level.

China

In  many  ways, the  regulatory  agency  situation  in China is similar. There is much confusion in the body of laws and  regulations.  China’s evolutionary  path has, like Russia’s, been one of transition from a totally state-dominated economy  to an international economy where transparent regulations  are supposed  to be applied uniformly.

Chinese  regulatory  agencies all ultimately  report to  the  executive  branch  of the  government  of the Peoples’ Republic of China. The main executive organization,  under  the premier,  is the State Council. It comprises  vice premiers  and  ministers  who  direct the  nation’s  affairs. Within  the  State Council, there is the Ministry of Commerce, which contains several departments (both specialized and general) that regulate international trade. Its departments are responsible for areas such as foreign investment,  importing and exporting, and WTO affairs. Specialized departments include those dedicated to working in the areas of West Asian and African affairs, international trade and economic affairs, and foreign trade. There is one department that handles only issues relating to Hong Kong, Macao, and Taiwan.

Additionally, the State Administration for Industry and Commerce governs many aspects of market regulation. According to the Chinese government, its current (2008) functions include developing and implementing  the  laws and  regulations  for industry  and commerce,  registration  and licensing of businesses, quality of goods, intellectual property, contracts, and investigating illegal activities such as pirating goods.

While  the  degree  of corruption existing in Chinese regulatory  agencies may not  be as great  as is the case in Russia, there is a great deal of variation in how agencies can interpret  laws and regulations. This last factor has become a serious matter to some companies looking to do business in China. In addition, the  Chinese  business  environment is so large that the  Chinese  government  cannot  enforce  all regulations to include those regarding intellectual property rights. The recall of Chinese toys in 2007 because of lead paint is another example of regulations not being enforced by China’s regulatory agencies.

Finally, there  is the  complexity  of  dealing  with many agencies that  further  complicates  the process of working with regulatory  agencies. In a situation that exists in some other nations as well, not only do these agencies govern companies coming into China but also domestic Chinese companies looking for international investors. As an example, in 2000, the Chinese government decreed that any Chinese Internet company that wished to sell its shares abroad had to receive approval from three different agencies: the China  Securities Regulatory Commission,  the Ministry of Information  Industries,  and direct  approval from the State Council itself.

In  addition  to  government   regulatory  agencies, there  are trade  associations  that  either  have a voice in regulation  and  its enforcement  or at least some degree of influence. Government  regulatory agencies can be assumed to govern every aspect of commerce to include banking and securities as well as manufacturing, providing services, or export and import.

States may claim that they are governed by laws and not people, but the fact will remain for businesspeople that a body of laws and regulations can be interpreted quite differently at different levels and locations. Assuming that business and commercial laws and regulations are enforced  uniformly  within  a country  or that  all agencies at the federal level will have the same amount of scope for interpretation will be a serious mistake. To understand the nature of these organizations  requires extensive research, but there is assistance on a number of different fronts. Organizations such as Transparency International regularly report on the degree of corruption that exists in a nation’s governmental agencies that regulate business. Both the U.S. State Department and Commercial Service provide information not only on a nation’s commercial laws, but also its regulatory agencies. The World Bank provides an extensive collection of documentation from the perspective of ease of doing business in a country, an index that can provide background on the ease of dealing with a particular nation’s regulatory agencies.

Bibliography:  

  1. John Braithwaite, Global Business Regulation (Cambridge University Press, 2000);
  2. Alena V. Ledeneva, How Russia Really Works: The Informal Practices That  Shaped  Post-Soviet Politics and  Business (Cornell University Press, 2006);
  3. Glenn Morgan and Lars Engwall, eds., Regulation and  Organizations: International  Perspectives (Routledge, 1999);
  4. Ito  Takatoshi  and  Anne  Krueger, eds., Deregulation and  Interdependence  in the Asia-Pacific Region (University of Chicago Press, 2000);
  5. Transparency    International,   transparency.org (cited March  2009);
  6. Gunnar Trumbull,  Contested Ideas of the Consumer: National  Strategies of Product Market Regulation in France and Germany (European University Institute,  2000);
  7. United States Congress, Commission on Security and Cooperation in Europe. The Yukos Affair and Its Implications for Politics and Business in Russia (U.S. Government  Printing  Office, 2007);
  8. United  States Government  International Trade Administration, www.ita. doc.gov (cited  March  2009);
  9. World Bank, www.doingbusiness.org (cited March 2009).

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