Extraterritoriality
Extraterritoriality
When governments extend the application of their laws to the foreign operations of companies, the term used to describe the situation is extraterritoriality. Host countries generally abhor these situations, since they weaken the host country's sovereignty over local business practices. Companies likewise fear situations in which the home and foreign laws conflict, since settlement inevitably must be between governmental offices, with companies caught in the middle. Laws need not be in complete conflict for extraterritoriality to exist. Laws requiring companies to remit earnings or to pay taxes at home on foreign earnings certainly have affected foreign expansion and local governments' control over the expansion. French firms (such as Moet-Hennessy, Piper-Heidsieck, Tattinger, and Mouton-Rothschild) are prevented by French law from using the term champagne for the sparkling wine they produce in California.16
Although extraterritoriality may result from legal differences between any two countries, the United States has been most criticized for attempting to control its firms abroad. The criticism toward U.S. policies is due largely to U.S. firms' ownership of more direct investment than firms from any other country. But the U.S. government has probably gone to further lengths than governments in any other industrial country to control the actions of its firms abroad.
Trade Restrictions At the forefront of criticism has been the U.S. government's attempt to apply its Trading with the Enemy Act to the foreign affiliates of U.S. firms to keep them from selling to certain unfriendly countries. This puts subsidiaries in such countries as France and Canada in a dilemma because the laws in those countries require that the sales be made.17 More recently, a number of countries have agreed to prohibit shipments of certain goods to South Africa because of its racial policies. The same racial policies have led many states and institutions within the United States to hold only "South Africa-free" stocks within their portfolios, which has contributed directly to divestment of South African investments by U.S. MNEs. Through a series of presidential orders, foreign affiliates of U.S. firms have been prevented from making sales to such countries as South Africa, Libya, and Nicaragua, even though the orders violate the laws of some of the countries where the affiliates are operating. The Cuban situation has been a particularly thorny issue between Canada and the United States. Throughout most of the 1980s, the United States permitted foreign subsidiaries to sell to Cuba; however, legislation in 1990 changed this. The result was adverse Canadian opinion, which led to discussions on whether FDI from the U.S. should be limited and whether the free-trade agreement with the U.S. should be rethought. U.S. firms'"subsidiaries also are restricted from participating in the Arab boycott of Israel, even though the boycott is a foreign policy instrument of the countries where the subsidiaries are located.18
Antitrust A second area of criticism has been the case of antitrust action. The United States has at various times delayed its companies from acquiring facilities in foreign countries (e.g., Gillette's purchase of Braun in Germany), prevented its firms from acquiring facilities in the United States when taking over a company abroad (e.g., Gillette's purchase of a division of Sweden's Stora Kopparbergs Bergslags could not include that division's Wilkinson Sword subsidiary in the U.S.), forced firms to sell their interest in foreign operations (e.g., Alcoa's spin-off of Alcan), and restricted entry of goods produced by foreign combines in which U.S. firms participated (e.g., Swiss watches and parts).19 The policies for which firms have been restrained have been legal in the countries where the actions took place. The Canadian cabinet, the British House of Lords, and the Australian parliament even enacted laws that forbade Gulf Oil, Rio Tinto Zinc, and Westinghouse from supplying information to the U.S. Justice Department about their participation in a uranium cartel outside the United States. The Canadian government was particularly outraged because it had been one of the principal organizers of the cartel.20 From a reverse standpoint, the United States objected to the European Community's (EC) antitrust prosecution of IBM because it felt the EC did not have jurisdiction.
One of the cumbersome problems for U.S. firms has been the U.S. Justice Department's ambiguity regarding their associations abroad. This has been partially mitigated with publications on foreign merger guidelines, including case situations on how antitrust enforcement principles would be applied.21 Included in the associations that might be subject to challenge are the participation in cartels to set prices or production quotas, the granting of exclusive distributorships abroad, and the forming of joint research and/or manufacturing operations in foreign countries. The United States also has signed a number of bilateral treaties with other industrialized countries so that they consult with each other on restrictive business practices.
Emerging Ethical Standards There are a number of areas in which legal differences among countries enable or even require firms to operate differently among these countries. When home-country constituents hold ethical or moral values that vary greatly from those abroad, there has been a growing debate over whether home-country governments should regulate their MNEs in order to institute those values abroad. As in most ethical and value controversies, the arguments are frequently highly emotional. A number of these issues may lead to future extraterritorial application, such as requiring MNEs either to follow home country racial policies or to terminate operations in South Africa if South Africa does not move more quickly to dismantle its apartheid laws.
Frequently, regulations in a foreign country are less stringent than those at home because (1) the foreign country has not yet faced certain problems, (2) it is less sophisticated at anticipating the adverse effects of certain policies, or (3) it believes that the gains outweigh the adversities. A growing controversy in the United States concerns whether products withdrawn from U.S. sales because of hazardous effects can be exported for sale abroad. On one hand, people argue that the standards are designed for the United States and should not be imposed on other countries, which can freely block the entry of hazardous products. On the other hand, critics maintain that there is no biological or ethical reason for treating people differently on safety issues, and that "Made in America" should be a sign of quality and not a warning.22 Pharmaceutical firms have been criticized for conducting tests on humans abroad that were not allowed in the United States and for selling items abroad that were not yet approved by the U.S. Food and Drug Administration. Closely related to this has been criticism for promoting dangerous products abroad that are, nevertheless, sold legally in the United States. At the forefront has been the controversy over U.S. tobacco exports to LDCs, where it is alleged that uneducated consumers are not aware of the dangers.23
Firms also have been faulted for being too cautious in what they do abroad. For example, the U.S. State Department criticized Eli Lilly & Co.'s refusal to sell its herbicide, tebuthiuron, to the United States government to use for eradication of coca plants in Peru. Lilly was concerned that the product was considered too potent to use on U.S. cropland, had not been tested in Peruvian soil conditions, and was still being tested as to health effects.24 Similarly, the U.S. Defense Department criticized the German firm, Bayer, for refusing to let its U.S. subsidiary sell the U.S. Army chemicals that could be used to make poison gas.25 These situations involve not only the possible problems of extraterritoriality already discussed, but also the question of whether home-country governments or international firms should try to impose their own standards on other countries.
When governments extend the application of their laws to the foreign operations of companies, the term used to describe the situation is extraterritoriality. Host countries generally abhor these situations, since they weaken the host country's sovereignty over local business practices. Companies likewise fear situations in which the home and foreign laws conflict, since settlement inevitably must be between governmental offices, with companies caught in the middle. Laws need not be in complete conflict for extraterritoriality to exist. Laws requiring companies to remit earnings or to pay taxes at home on foreign earnings certainly have affected foreign expansion and local governments' control over the expansion. French firms (such as Moet-Hennessy, Piper-Heidsieck, Tattinger, and Mouton-Rothschild) are prevented by French law from using the term champagne for the sparkling wine they produce in California.16
Although extraterritoriality may result from legal differences between any two countries, the United States has been most criticized for attempting to control its firms abroad. The criticism toward U.S. policies is due largely to U.S. firms' ownership of more direct investment than firms from any other country. But the U.S. government has probably gone to further lengths than governments in any other industrial country to control the actions of its firms abroad.
Trade Restrictions At the forefront of criticism has been the U.S. government's attempt to apply its Trading with the Enemy Act to the foreign affiliates of U.S. firms to keep them from selling to certain unfriendly countries. This puts subsidiaries in such countries as France and Canada in a dilemma because the laws in those countries require that the sales be made.17 More recently, a number of countries have agreed to prohibit shipments of certain goods to South Africa because of its racial policies. The same racial policies have led many states and institutions within the United States to hold only "South Africa-free" stocks within their portfolios, which has contributed directly to divestment of South African investments by U.S. MNEs. Through a series of presidential orders, foreign affiliates of U.S. firms have been prevented from making sales to such countries as South Africa, Libya, and Nicaragua, even though the orders violate the laws of some of the countries where the affiliates are operating. The Cuban situation has been a particularly thorny issue between Canada and the United States. Throughout most of the 1980s, the United States permitted foreign subsidiaries to sell to Cuba; however, legislation in 1990 changed this. The result was adverse Canadian opinion, which led to discussions on whether FDI from the U.S. should be limited and whether the free-trade agreement with the U.S. should be rethought. U.S. firms'"subsidiaries also are restricted from participating in the Arab boycott of Israel, even though the boycott is a foreign policy instrument of the countries where the subsidiaries are located.18
Antitrust A second area of criticism has been the case of antitrust action. The United States has at various times delayed its companies from acquiring facilities in foreign countries (e.g., Gillette's purchase of Braun in Germany), prevented its firms from acquiring facilities in the United States when taking over a company abroad (e.g., Gillette's purchase of a division of Sweden's Stora Kopparbergs Bergslags could not include that division's Wilkinson Sword subsidiary in the U.S.), forced firms to sell their interest in foreign operations (e.g., Alcoa's spin-off of Alcan), and restricted entry of goods produced by foreign combines in which U.S. firms participated (e.g., Swiss watches and parts).19 The policies for which firms have been restrained have been legal in the countries where the actions took place. The Canadian cabinet, the British House of Lords, and the Australian parliament even enacted laws that forbade Gulf Oil, Rio Tinto Zinc, and Westinghouse from supplying information to the U.S. Justice Department about their participation in a uranium cartel outside the United States. The Canadian government was particularly outraged because it had been one of the principal organizers of the cartel.20 From a reverse standpoint, the United States objected to the European Community's (EC) antitrust prosecution of IBM because it felt the EC did not have jurisdiction.
One of the cumbersome problems for U.S. firms has been the U.S. Justice Department's ambiguity regarding their associations abroad. This has been partially mitigated with publications on foreign merger guidelines, including case situations on how antitrust enforcement principles would be applied.21 Included in the associations that might be subject to challenge are the participation in cartels to set prices or production quotas, the granting of exclusive distributorships abroad, and the forming of joint research and/or manufacturing operations in foreign countries. The United States also has signed a number of bilateral treaties with other industrialized countries so that they consult with each other on restrictive business practices.
Emerging Ethical Standards There are a number of areas in which legal differences among countries enable or even require firms to operate differently among these countries. When home-country constituents hold ethical or moral values that vary greatly from those abroad, there has been a growing debate over whether home-country governments should regulate their MNEs in order to institute those values abroad. As in most ethical and value controversies, the arguments are frequently highly emotional. A number of these issues may lead to future extraterritorial application, such as requiring MNEs either to follow home country racial policies or to terminate operations in South Africa if South Africa does not move more quickly to dismantle its apartheid laws.
Frequently, regulations in a foreign country are less stringent than those at home because (1) the foreign country has not yet faced certain problems, (2) it is less sophisticated at anticipating the adverse effects of certain policies, or (3) it believes that the gains outweigh the adversities. A growing controversy in the United States concerns whether products withdrawn from U.S. sales because of hazardous effects can be exported for sale abroad. On one hand, people argue that the standards are designed for the United States and should not be imposed on other countries, which can freely block the entry of hazardous products. On the other hand, critics maintain that there is no biological or ethical reason for treating people differently on safety issues, and that "Made in America" should be a sign of quality and not a warning.22 Pharmaceutical firms have been criticized for conducting tests on humans abroad that were not allowed in the United States and for selling items abroad that were not yet approved by the U.S. Food and Drug Administration. Closely related to this has been criticism for promoting dangerous products abroad that are, nevertheless, sold legally in the United States. At the forefront has been the controversy over U.S. tobacco exports to LDCs, where it is alleged that uneducated consumers are not aware of the dangers.23
Firms also have been faulted for being too cautious in what they do abroad. For example, the U.S. State Department criticized Eli Lilly & Co.'s refusal to sell its herbicide, tebuthiuron, to the United States government to use for eradication of coca plants in Peru. Lilly was concerned that the product was considered too potent to use on U.S. cropland, had not been tested in Peruvian soil conditions, and was still being tested as to health effects.24 Similarly, the U.S. Defense Department criticized the German firm, Bayer, for refusing to let its U.S. subsidiary sell the U.S. Army chemicals that could be used to make poison gas.25 These situations involve not only the possible problems of extraterritoriality already discussed, but also the question of whether home-country governments or international firms should try to impose their own standards on other countries.
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