Ch 18 - International Business Law and Its Environment

currency swaps

A broad assortment of financial contracts that may be purchased from financial intermediaries to hedge against fluctuation risk

unitary index adjustment

A contractual provision in which the investor and the government agree on payment through a commonly accepted measure of relative currency value or national inflation

tax haven

A country where the effective tax rate on a relevant item of income is very low or zero

value-added tax (VAT)

A tax on increased value of the product at each stage of production and distribution rather than just at the point of sale

political risk insurance

A type of insurance that provides coverage to investors, financial institutions, and businesses that face financial loss due to political events

inconvertibility insurance

A type of political risk insurance

passive investment

Can involve either a passive debt investment - making a loan to a foreign business - or a passive equity investment - purchasing an equity interest in the foreign business as a portfolio investment that does not allow for control of the business. These tend to be the least regulated type of foreign investment

reinsurance treaty

An agreement among insurance companies that spreads the risk among its members

import substitution rights

Available when the new venture will manufacture a product in the soft-currency country that the nation had previously imported

soft blockages

Delays in processing conversion requests by the local authorities

trade creditors

Entities that sell supplies or services to the venture

comity

Good relations (among nations)

active investment

If a US investor makes ______ in a host country, it ultimately will result in the investor having an ownership interest in the foreign business as either a foreign branch or subsidiary

inconvertibility, or nontransfer insurance policy

Investors can purchase such policies to insure against hard blockages

counterpurchase agreement

Involves the sale of goods to a buyer, often a foreign government, which requires as a condition of the sale that the seller buy other goods produced in that country

hard blockages

Occur when the foreign government passes a law that prevents conversion or transfer

soft currency

One that is not freely exchangeable for currencies of other nations

modern-traditional theory

Permits takings of foreign property but imposes certain requirements on the nation exercising its taking power. Must be for a public purpose, nondiscriminatory, and accompanied by prompt, adequate, and effective compensation

insurance syndicates

Pools of money provided by investors to insure specific projects

private political risk insurance

Private has less regulation but is more expensive

traditional theory

Prohibits all takings of foreign property

export credit agencies

Promote investment from their own countries

currency inconvertibility

Reciprocal arrangement between buyer and seller for the sale of goods or services intended to minimize the flow of foreign exchange from buyer's country

net book value

Reflects the tax-related depreciated cost of assets (calculated using accounting conventions) without regard to whether there has in fact been true depreciation in value

transfer pricing

Shifting income from high-tax jurisdictions to low-tax jurisdictions

expropriation

Taking of an isolated item of property

repatriated

Tax on this income earned by foreign corporations a US person owns will be deferred until it is _______ - paid out to the US person, typically in the form of a dividend

barter

The direct exchange of goods for goods (or services). Can involve a wide range of items

creeping expropriation

The effect of laws and regulations that subject the investor to discriminatory laws and regulations that subject the investor to discriminatory taxes, legislative controls over management of the firm, price controls, forced employment of nationals, license cancellation, and restrictions on currency convertibility

political risk analysis

The enterprise retains a form or its own personnel to analyze a host country's risk of nationalization/expropriation, as it would study any other business problem

foreign direct investment (FDI)

The investor owns and actively controls the productive assets of ongoing business concerns in a foreign country

parallel exchange

The investors - all committed to the local incontrovertibility risk - spread that risk over a larger group, with the hoping of reducing the vagaries of local bureaucracy

privatization

The national sovereign transfers a government-owned asset to private parties. The opposite of nationalization

fluctuation risk

The possibility that the currency of the country in which the US investor has put its money will devalue against the US dollar

profit margin preservation

The price or payment to the foreign investor will be adjusted periodically to maintain the same profit margin

buy-back agreement

The provider of the equipment or technology used in manufacturing will receive, as its payment, a portion of the goods manufactured by the supplier's equipment or the factory in which the equipment is installed

currency risk

The risk that profits in the foreign host country's currency will not translate into equivalent profits in the investor's home country

inconvertibility risk

The risk that the government of a country with "soft currency" will hinder the US entrepreneur from trading the foreign currency back into US dollars

nationalization

The taking of an entire industry or a natural resource as part of a plan to restructure the nation's economic system

currency exchange rights

When a company negotiates with a foreign government in advance for preferential access to hard currency

double taxation

Where the same item of income is taxed by two different tax authorities

political risk

the risk that profits will be affected by changes in the host country's political structure or instability