Overseas Business Operations and the Government's Role: What companies should expect from the government when they suffer damages in a foreign country

Faculty Fellow, RIETI

It is widely known that Japanese companies experience various sorts of hardships in the course of conducting business overseas. Needless to say that such is the case for companies operating in developing countries - Japanese companies have many stories to tell about broken promises and how actual conditions under which they operate differ from those promised beforehand - but being in a developed country does not necessarily provide complete reassurance. For instance, in recent years a series of Japanese companies operating in the European Union were assessed penalties amounting to some 100 billion yen for noncompliance with EU competition law (see "Interim report by the Study Group on International Enforcement of Competition Law" [PDF: 64.4KB], Ministry of Economy, Trade and Industry). Japanese companies that are violating the rules deserve such penalties, but there seem to be quite a few cases where it is not clear whether the conduct in question really constitutes a violation. When confronted with such situations, Japanese companies tend to seek a resolution on their own.

Although things have been quiet in recent years, many people probably remember that from time to time up until the 1990s, the U.S. government made demands urging the Japanese government to address issues affecting their companies. In making these demands, the U.S. government was basically acting on behalf of specific companies. For instance, the U.S.-Japan film dispute in the mid-1990s was a blatant attempt by Eastman Kodak Co. to increase its share of the Japanese market. Incidents like this show that when a complaint is filed by government acting on behalf of a private-sector company, the responding government has no choice but to hear the complaint, even those so unreasonable that they would have been dismissed out of hand had they not been filed by the government. That is, if the Japanese government speaks out for companies that may be facing unreasonable accusations, the responding authorities' attitude may change. But then, in what ways can the government be involved in difficulties confronting specific companies? And what sort of government involvement should we expect?

Diplomatic protection by the state of nationality

Let me first explain cases in which the injured party is a natural person; cases in which the injured party is a corporation can then be better explained by applying the theory behind such cases affecting natural persons.

When a home country (state of nationality) seeks remedy for its national who suffers injury in a foreign country for reasons attributable to that foreign country, this act by the home country is called "diplomatic protection." Diplomatic protection is a right of the state of nationality that has long been recognized in the international community. Here, "injury" refers to any pecuniary or physical injury (typical examples include asset forfeiture and death by unlawful cause, respectively). Meanwhile, "remedy" is the offending government's act to redress the injury, for instance, by restoring the original state prior to the injury, paying compensation, and/or issuing an apology.

It is important to establish the exact meaning of "attributable to" before proceeding any further. Years ago at the site of one of Egypt's most popular tourist attractions, a number of foreign tourists, including Japanese couples on honeymoon, were killed when terrorists attacked them. In this case, whether the incident was "attributable to" the Egyptian government was determined by whether the Egyptian government was at any fault. Here, the existence of "fault" was judged relative to the state of public safety in Egypt at the time of the incident. Although the Japanese media do not provide much coverage, incidents of attacks by anti-government guerrillas are not rare in Egypt and the local police authorities are not necessarily well-equipped to provide security against such activities. With all due respect to the victims of this crime, but based on the situation in which the said casualty took place, the terrorist attack cannot be regarded as attributable to the Egyptian government.

Meanwhile, in another foreign incident involving Japanese tourists, two Waseda University students were killed by Peruvian soldiers while journeying down the Amazon River. A comment in a newspaper issued shortly after the incident was critical of the victims, saying that the two young men brought the tragedy upon themselves by making a dangerous trip deep into the Peruvian jungle where security is unwarranted. Indeed, security conditions in Peru are no better than those in Egypt. However, what should be noted here is that the killers of the two students in Peru were soldiers. If a soldier of one country kills an innocent foreigner, the soldier's country is responsible for the death. In this situation the state of the victim's nationality may command diplomatic protection, and the Peruvian incident is a case in which we may expect such action by the government of Japan.

This may be getting off the point, but please recall last year's incident in which a Japanese journalist was shot to death by security forces in Myanmar. After the incident, a group of protesters made a statement denouncing the Myanmar government and called for the case to be brought before the International Criminal Court. Had they been armed with the aforementioned knowledge of international law, the first thing they should have done was to call on the Japanese government to demand that the Myanmar government recognize its responsibility (having the dead journalist's video camera returned to his family is not all that matters!). The Act for Establishment of the Ministry of Foreign Affairs lists "protecting and enhancing the legal, economic, and other interests of Japanese nationals in foreign countries" and "protecting the lives, physical security, and safety of any other form of Japanese nationals in foreign countries" among the duties of the ministry (Article 4).

The protest group could have done many things to move the Japanese government, more specifically the Ministry of Foreign Affairs, for instance having a like-minded legislator address the matter with relevant questions in the Diet. When the government of Japan, a major provider of foreign aid, condemns the Myanmar government, the impact would be far greater than staging a massive protest rally in front of Myanmar's Embassy in Tokyo. However, as far as I know, not a single media report pointed this out. Risking being misunderstood, I will dare to say that even if a solider had shot a civilian to death, it would not be considered a "case of sufficient gravity" to warrant referral to the International Criminal Court (ICC). Although the ICC has received high marks for its role, cases directly involving Japan or its nationals are rarely subject to action by the ICC.

The case of corporations

Understandably, the doctrine of diplomatic protection is applicable to corporate entities. If a company suffers damages in a foreign country for reasons attributable to that country, it may seek diplomatic protection from the state of its nationality. Here, let me add some explanatory notes that are specific to cases involving corporations. Some people, not only those within government but also those in the private sector, have the perception that the government should not act or speak for a specific private-sector company. Indeed, in Japan the government is supposed to work for the benefit of the public and should not, except in very special cases, act on behalf of specific company interests. However, when a Japanese company suffers damages in a foreign country for reasons attributable to that country, it is the rightful duty of the Japanese government, as the state of nationality, to address the responsibility of the foreign country to seek remedy for the company. For any country, protecting the lives and property of its people is a core national interest. It is another story to recommend for the government to promote the sale of specific products in foreign countries (even though top government officials of other countries, such as France, have engaged in such activities).

A typical case where a foreign country is considered to be responsible for an injury occurs when a government agency has direct involvement in inflicting the injury. (Here, "government" means any government, including both central and local governments. Also, "agency" is not limited to administrative agencies and also includes other branches such as the courts.) However, even without such direct involvement, for instance, when injury has been caused by the act of an individual, the country is still held responsible provided that the relevant government authorities condoned such an act or were negligent in their duty to protect foreign nationals.

In the course of the massive anti-Japan protests two years ago in China, demonstrators hurled rocks at the Japanese Embassy and commercial buildings housing Japanese businesses. Had it been the case that the Chinese police were condoning such acts of violence, China as a State could have been held responsible for the resulting damage. Meanwhile, whether or not a State is responsible for certain injury can be determined in accordance with the relevant treaty between that country and the country of nationality, provided that such a treaty had actually been concluded between the two countries. But even if no such treaty exists, an unwritten customary international law exists in the international community to provide the standard for judgment governing all countries in the world.

Many people seem to have difficulty getting a clear picture of this unwritten customary international law and it may be helpful to define it as a set of legal norms shared by countries. (What specifically constitutes such legal norms can be figured out by using common sense in most cases, but if this does not work, consult a specialist in international law.) Also, in cases where the injured party is a corporation, the country in which the company has been founded falls under the definition of "state of nationality." In addition, if the injured party is a subsidiary of another company, as a general rule, the country in which the parent company was founded is also considered as the state of nationality.

It is common sense for a nation state to seek remedy on behalf of its national

Companies engaging in business activities in a foreign country must follow the laws and regulations of that country, and any dispute arising from such activities should be, in principle, referred to a court in that country. However, there is no denying that some foreign governments, including their judicial branches, behave irrationally from time to time. Thus, it is a legitimate obligation of a government to protect the legal status of its nationals in foreign countries by concluding the relevant treaties. At the same time, it is only natural for the government to stand up and seek remedy for individual nationals who suffer injury in a foreign country; taxpayers expect this from their government.

It is hard to imagine a diplomat who would hesitate to pursue the responsibility of a foreign government for the sake of maintaining a friendly relationship with that country, because a country that fails to act in accordance with its principles would lose credibility in the international community. We must resolutely eliminate "ostrich" policy. In the event that a foreign government acts unreasonably, we should consider such an act in light of international law and, where appropriate, seek support from the government, or we must adopt such a behavioral pattern. It should be kept firmly in mind that when we sign an investment treaty or include an investment chapter in an Economic Partnership Agreement (EPA), we are raising the level of responsibility of the counterparty government. When this is fully understood, there should arise specific requests identifying with which countries Japan should conclude such treaties. In order to survive fierce competition in the international community, the government and the private sector need to work together hand in hand. If the government provides no such support, Japanese companies may as well change their state of nationality.

September 16, 2008

>> Original text in Japanese

September 16, 2008

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