What are the most important legal issues that multinational companies should be aware of when establishing in a foreign jurisdiction?

One of the key challenges for multinationals arises when they have successfully established internal policies and ethical codes for employees in their home jurisdiction. When expanding overseas, these companies often try to implement these codes in the new country. However, unless they consider local factors, the implementation of these codes could fail.  Some of the problems with implementation may be due to the legal framework of the country they are entering, while others will be caused by cultural differences between the two countries.

Are there any particular issues in companies’ ethical codes that tend to cause problems when entering a new country?

I do a lot of work advising Canadian companies who are investing in Mexico. When advising clients, I have found that local labour laws in Mexico tend to cause particular problems for company-wide ethical codes. In Mexico, employees have very strong labour law protection compared with those in Canada.

I’ve advised on a situation where a company fired an employee who breached the company’s code of ethics - but not Mexican labour laws. Because the company had not harmonised its code with the local law, it was forced to pay the employee compensation for their dismissal.

How to deal with “corruption” is another challenge. Practices that may be considered corrupt in North America may not be considered so in other cultures. For example, entertaining clients or government officials may not be an offence in Latin America, but may be regarded as bribery in other jurisdictions.

How can companies overcome these problems?

Companies have to keep an open mind on how their policies will operate in new jurisdictions. They must be willing to be flexible in relation to their ethical codes.

To some extent, the problems they encounter will depend on which approach they take to enter a country. If a company establishes its own independent operation in Mexico, staffed by personnel from the home jurisdiction, this can cause particular problems. Where a company decides to enter a country by itself, it may be better to employ a significant number of local nationals. These local nationals can help the company to successfully integrate into the local business culture. 

If a multinational chooses to partner with an existing local company, the challenges of implementing global policies may be reduced. Here, the key factor is how sophisticated your local partner is in terms of its own corporate culture. If the local partner is sophisticated, the challenges of integration will be low. 

What other issues typically cause problems for multinational companies investing in other jurisdictions?

Creating the correct tax structure often causes problems for entrepreneurial companies who invest in other countries. When they see an opportunity to establish in another jurisdiction, they often do so without considering what they will do with the company’s profits. Unless they put in place the correct tax structure from the very beginning, this can cause problems.

By planning ahead, companies can limit their exposure to double taxation.