Recent global trends have only heightened the competitive pressure on law firms to expand their operations overseas. Two sources of this impetus have been recent spurts in cross-border M&A and joint venture activity and the emergence of aggressively expanding companies headquartered in — and increasingly affluent private customers hailing from — leading emerging markets such as Brazil, Russia and China. Unprecedented high commodity prices, and the movements they catalyse of firms into previously off-limits geographical regions, are also stoking law firms’ adventurism abroad. The growing regulatory and compliance burden governing the activities of corporations operating internationally, and the need for reliable, locally nuanced legal advice that accompanies it, is a further contributing element.
Most law firms will be comfortable in ensuring they comply fully with local legislation governing their establishment in a new jurisdiction and day-to-day operations once their doors have opened — typically among the first headaches to confront an organisation that is less familiar with such subject matter. A law firm that is used to operating in only the most established locations may need to pay attention to wider political risk issues. Not only can an unpredictable or unstable government yield confusingly regular and sometimes contradictory alterations to a country’s body of law, swings in political mood can materially alter the entire investment climate for a law firm’s investing or aspiring client base. Politics and the law are intertwined, with an understanding of the nuances and future trajectory of local political dynamics a critical prerequisite for the provision of solid legal advice on issues such as nationalisation and contract enforcement.
Other specific political risks, notably currency convertibility issues such as exchange controls, continue even in countries with outwardly ‘first world’ business infrastructure such as
Corruption is a huge issue for law firms and their clients in many markets. Patterns of undue influence and systemic perversion of outcomes within a country’s law enforcement and judiciary will soon become obvious. Grand corruption in large tenders and public procurement processes will similarly manifest themselves.
Harder to evaluate is the often-considerable grey area between what is simply illegal and immoral and what might instead fall into the category of cultural differences over what is and is not acceptable in contexts such as corporate hospitality and the wielding of personal or tribal connections to achieve business success. Understanding such dynamics is particularly important when entering into partnership agreements with local law firms, and underlines the value of a comprehensive due diligence process which delves beyond the purely legalistic and financial — especially in locations when the public record may be less than forthcoming.
Less dramatic than elite kleptocracy, but usually equally pernicious and far more frequently encountered, is the constant, grinding impact of corruption among mid-level government officials. Typically estimated by the United Nations Global Compact to add upwards of 10% to the cost of doing business in many countries, this can and does manifest at almost any stage of setting up a new operation in a country: obtaining licences and work permits; acquiring property; gaining access to utilities; and importing essential materials through customs and paying taxes.
Hand in hand with levels of bureaucratic graft and incoherence of relevant legislation are the range of operational difficulties facing law firms opening offices in new locations. The availability, professional quality and ease of retention of local skilled labour varies widely between locations; a serious ‘brain drain’ of qualified professionals to more established markets can undermine efforts to establish a local presence in countries as otherwise diverse as Mexico, Thailand and large parts of Eastern Europe.
Standards in the provision of physical infrastructure for the establishment of a new operation also diverge widely and move beyond Chinese cities’ notorious pollution problems or the availability of affordable office space in Moscow: reflecting demographic pressures as well as inadequacies on the part of usually state-run providers, power-cuts and load-shedding are an increasingly regular and frustrating feature of attempting to do business in markets like Peru and South Africa. Water shortages are a looming issue in many of the world’s more arid zones, most especially the
Inadequacies in the local infrastructure also impact on the general quality of life for employees, an important but sometimes overlooked aspect in establishing a new office when the relocation of staff from other, more developed markets is involved. The availability or otherwise of quality housing, schools and hospitals will sway many minds; a breadth or absence of cultural, sporting and family-oriented leisure amenities is a further important consideration if staff are to remain content and motivated.
Particularly important in this respect is a sense of personal security, especially in cities notorious for their entrenched problems with criminality, extremism and instability such as
Combining the security issue with levels of political risk in a country, a final area to consider is a law firm’s critical ability to ensure the absolute protection of its own information, as well as that of its clients. State-imposed restrictions on internet and other media usage, including permissible levels of computer encryption in countries including
The risks to law firms contemplating international expansion, then, are as diverse and complex as the enticing target markets themselves. But they are not insuperable. Identifying, anticipating and understanding the threats and building into the expansion strategy an appropriate and proportionate risk management framework to address them fully and continuously throughout the lifespan of the investment is the best way to ensure prospects for commercial success are maximised. Within the business risk context, prevention is both better and very definitely cheaper than cure.
In some countries such as
As long as the pioneers of international commerce continue to move decisively into new regions and markets, the onus will remain on their legal firms not only to follow them — but to do so safely and securely.
James Smither is associate director at Control Risks.LawFirmNetworksMay2008
