Start Here: 5 Things You MUST Know
Civil law = written codes, no binding precedent. Common law = judge-made law, binding precedent
Comparative advantage means BOTH countries benefit from trade, even if one is better at everything
Public international law = between nations. Private international law = between individuals/companies across borders
Comity of nations = courtesy of recognizing other countries' laws and courts (not a legal requirement)
A fully owned subsidiary gives the most control but carries the most risk. Joint ventures share risk and local expertise
1. How Companies Enter International Markets
Absolute vs. Comparative Advantage
Absolute advantage: A country produces a good more efficiently than anyone else — "We make it better and cheaper."
Comparative advantage: Even if Country A is better at making BOTH products, both countries benefit by specializing and trading. This is the foundation of international trade.
Real-World Scenario: Comparative Advantage
The Setup: Japan is extremely efficient at making both electronics and rice. Thailand is less efficient at both, but relatively much better at growing rice than making electronics.
What Happens: Japan focuses on electronics, Thailand focuses on rice, and they trade.
The Result: Both countries benefit — Japan gets cheaper rice, Thailand gets better electronics. This is comparative advantage in action, even though Japan could do both better alone.
Methods of Market Entry
Product Licensing
A company grants permission to a foreign company to make or sell its product. Low risk, low control.
Example: A U.S. insurance training company licenses a Brazilian firm to use its curriculum and brand. The Brazilian firm handles local regulations and marketing. The U.S. company earns fees without direct operations.
Franchising
One company assigns another the right to supply its products within a market using the franchisor's brand, systems, and processes.
Example: Think McDonald's opening in Moscow — a local operator runs the restaurant using McDonald's brand, recipes, and systems under a franchise agreement.
Fully Owned Subsidiary
Highest control over operations, but also highest risk, capital commitment, and managerial burden. Best for companies experienced in international operations.
Joint Venture
Two or more companies team up in a foreign market. Shared ownership, control, and risk. Gains local expertise and distribution channels.
Real-World Scenario: Subsidiary vs. Joint Venture
The Setup: A U.S. insurer wants to enter the Indian market.
What Happens (Subsidiary): It creates a wholly-owned subsidiary. Full control, but must navigate Indian regulations alone, invest heavily, and bear all risk.
What Happens (Joint Venture): It partners with an established Indian insurer. Shared profits, but gains local expertise, regulatory knowledge, and existing distribution.
The Result: Subsidiary = more control, higher risk. Joint venture = local expertise, shared profits, potential partner conflicts.
Types of International Companies
Resource Seekers
Enter foreign markets to access resources (natural resources, cheap labor).
Market Seekers
Seek new customers outside their home country's boundaries.
Market Followers
Follow existing customers abroad (e.g., insurer expands because its commercial clients expanded).
2. Challenges and Barriers to International Business
Language Barrier
Misunderstandings in contracts, regulations, and negotiations across languages.
Cultural Differences
Business practices, negotiation styles, and relationship norms vary widely.
Time Differences
Coordinating across time zones creates delays and communication challenges.
Physical Distance
Geographic distance creates logistical and supply chain challenges.
Government Types
Different political systems create different regulatory environments and risk levels.
Types of Governments (Important for Risk Assessment)
| Government Type | Description | Example |
|---|---|---|
| Parliamentary Democracy | Legislature selects the executive | UK, Canada |
| Presidential Democracy | Separate election of executive | United States |
| Constitutional Monarchy | Monarch's power limited by constitution | UK, Japan |
| Absolute Monarchy | Monarch has unlimited power | Saudi Arabia |
| Single-Party | One party controls everything | China, Cuba |
| Theocratic | Religious leaders control government | Iran |
| Junta / Martial Law | Military government or military emergency rule | Myanmar |
Why Government Type Matters for Insurance
The type of government directly affects: whether foreign insurers can operate there, how contracts are enforced, risk of expropriation (government seizure of assets), regulatory stability, and whether you can get your profits out (repatriation of earnings).
3. The World's Major Legal Systems
Civil Law System
Based on comprehensive written legal codes (statutes). Judges apply the code to facts — they do NOT create law through decisions. No binding precedent from prior cases.
Three stages of a civil-law case:
Common Law System
Judges interpret facts, examine precedent (prior court decisions), and make decisions. Prior decisions are binding on lower courts. Judges effectively "make law" through their decisions.
Used in:
U.S., UK, Canada, Australia, India, and many former British colonies.
Real-World Scenario: Civil Law vs. Common Law
The Setup: A contract dispute arises in France (civil law) and a similar dispute arises in England (common law).
What Happens in France: The judge finds the relevant articles in the French Civil Code and applies them. Previous court decisions are persuasive but NOT binding.
What Happens in England: The judge looks at prior court decisions involving similar disputes (precedent). If no precedent exists, the judge creates new law.
The Result: The same dispute could be resolved differently depending on which legal system applies.
Three Sub-Types of Civil Law
Roman-French Law
Based on the Napoleonic Code. The most widespread civil law system.
France, Belgium, Spain, Latin America, parts of Africa
German Law
Based on the German Civil Code (BGB). More systematic and academic.
Germany, Austria, Switzerland, Japan (partly), South Korea
Scandinavian (Nordic) Law
A blend — not purely Roman or German, with some customary law elements.
Denmark, Finland, Iceland, Norway, Sweden
Other Legal Systems
Far Eastern Law
Emphasizes mediation and social harmony over adversarial litigation. Formal law is a last resort. Used in China, Japan (blended), Southeast Asia.
Hindu Law
Based on religious texts. Applies to personal matters (marriage, inheritance) in India and Nepal. India's commercial law follows common-law tradition.
Islamic Law (Sharia)
Based on the Quran. Traditional insurance may be haram (forbidden). Takaful is the Islamic alternative (cooperative risk-sharing). Prohibits riba (interest).
Socialist-Communist Law
State owns means of production. Private insurance may be limited or nonexistent. Used in Cuba, North Korea. Note: China has significantly liberalized its insurance market.
4. International Law: Public vs. Private
Public International Law
Concerns relationships between nation states. Governed by treaties and international agreements. Deals with sovereignty, territorial disputes, war, and trade between nations.
Private International Law
Also called "conflict of laws." Involves disputes between individuals or corporations in different countries. Key questions: Which country's law applies? Which courts have jurisdiction?
Comity of Nations
The courtesy by which one country recognizes, within its own territory or courts, another country's institutions, laws, and court decisions. Plain English: "I'll respect your laws and court decisions as a matter of courtesy, not because I'm legally required to."
Real-World Scenario: Comity of Nations
The Setup: A French insurance company sues a German reinsurer in a French court and wins a judgment.
What Happens: The French company needs to collect money from the German company's assets in Germany.
The Result: Under comity of nations, the German courts would generally recognize and enforce the French judgment, even though it was not made in Germany. This is courtesy between nations, not a binding legal requirement.
Cheat Sheet
Print this page for quick referenceMarket Entry Methods
- Licensing = low risk, low control
- Franchising = brand/system replication abroad
- Joint Venture = shared risk + local expertise
- Subsidiary = max control, max risk
Legal Systems
- Civil law = codes, no precedent (France, Germany)
- Common law = precedent, judge-made law (US, UK)
- Islamic = Sharia, Takaful replaces traditional insurance
- Far Eastern = mediation over litigation
International Law
- Public = between nations (treaties)
- Private = between individuals/companies across borders
- Comity = courtesy, not legal requirement
Key Distinctions
- Absolute advantage = "we make it better"
- Comparative advantage = both benefit by specializing
- Civil law 3 stages: preliminary, evidence, decision
Exam Trap Alerts
1. Absolute vs. Comparative Advantage
Comparative advantage means BOTH countries benefit even when one is better at everything. The exam loves testing whether you confuse these two concepts.
2. Civil Law Has NO Binding Precedent
In civil law, prior court decisions are persuasive but NOT binding. Only common law systems have binding precedent. Do not mix these up.
3. Public vs. Private International Law
Public = between NATIONS (treaties, sovereignty). Private = between INDIVIDUALS or CORPORATIONS across borders (conflict of laws). The names can be misleading.
4. Comity Is Courtesy, NOT a Legal Requirement
Comity of nations is voluntary recognition of another country's laws. A country is not legally obligated to respect foreign court decisions under comity — it does so as a courtesy.
5. Subsidiary = Most Control AND Most Risk
A fully owned subsidiary gives the highest control but also the highest business risk and capital commitment. Joint ventures share both control AND risk.
Quick Reference Summary
Comparative Advantage
Both countries benefit from specializing and trading, even if one is better at everything.
Civil Law System
Written codes, no binding precedent. Three stages: preliminary, evidence, decision.
Common Law System
Judge-made law, binding precedent. Used in US, UK, Canada, Australia, India.
Public International Law
Between nations. Treaties, sovereignty, trade agreements.
Private International Law
Between individuals/companies across borders. Conflict of laws.
Comity of Nations
Courtesy recognition of foreign laws/courts. Not a legal obligation.