Deals in emerging markets: the Challenge of Operating in a Different Legal Culture

Deals in emerging markets the Challenge of Operating in a Different Legal Culture
A core element of globalization is the expansion of world trade. One of the biggest challenges of dealing in the emerging economies is the often changing and unpredictable legal environment. Local laws and regulations can change drastically over a short period of time.

The attitude towards foreign investment might oscillate almost overnight from encouragement to hostility, with the elections and the change in the government. There is nonetheless a trend in emerging economies of modernizing and improving their legal institutions. In recent years, many developing economies underwent significant reforms and changes in their legislation. China, for example, embarked on an extremely ambitious process of reforming its laws in order to fulfil the conditions it accepted in order to become part of the World Trade Organisation (WTO) system.

Despite this trend of modernization and harmonization of laws, some core factors, which determine the stability and predictability of the legal environment, remain problematic in many countries. First of all, most emerging economies lack strong and independent judiciary system. Politics often play a significant role in the decision-making process and corruption is endemic in many of those countries. Also, nationalist feelings can be strong and local officials or judges might favour heavily locals in their disputes with foreigners. Understanding the history of a given nation might be important in order to understand this attitude as many emerging countries feel that they experienced at some point in their past injustice or exploitation by foreigners.

Given that the underlying legal institutions are often weak in emerging markets, we should not expect that the laws, even those that look almost identical to ours, would be applied in the same way. A piece of legislation which provides for a broad judicial discretion, can be easily misapplied by a judge or public official who was trained during the communist era and lacks genuine understanding of the market economy. Things are changing, but it will take many years for some countries to overcome those hurdles.

Also, enforcement of laws is often deficient in emerging markets due to the lack of resources or political will. In China, for example, there is a huge gap between the laws, as they exist on paper, and the laws, as they are applied. Enforcement is a major challenge over there, notably in the area of intellectual property or environmental protection.


The way of doing business in emerging countries is very different from what we are used to in Western economies. For example, in China personal connections (guanxi) play a key role in securing business contracts. It is a system deeply rooted in the local culture and traditions. However, it is extremely important for Western businesses to understand the line between what is permissible and what is not from the point of view of the anti-bribery and anti-corruption laws of their home country.

When it comes to resolving disputes in emerging markets, Western companies tend to heavily favour arbitration to litigation in local courts. Because of the lack of independence of the judiciary in many countries and perceived bias in favour of locals, arbitration in fact has become the preferred way of solving disputes in an international environment. In addition to its main virtue of neutrality, arbitration has other key advantages, notably from the point of view of enforcement and recognition of arbitral awards, which is considerably simplified by the New York Convention.

In China, however, the practice of arbitration is very different from the way it exists in the West. First, only institutional arbitration is allowed for disputes involving Chinese entities (and Chinese laws mandate for the local incorporation of foreign businesses). Also, there are limitations on the use of foreign counsel to advise on Chinese law or to appear in front of local courts. Enforcement of arbitral awards in China can be very challenging as well, especially when state entities are concerned. Finally, Chinese millennial traditions express themselves in another way. Chinese culture is based on conflict avoidance and going to court can be extremely damaging in terms of relations between the parties. This explains the success of mediation and of med-arb in China.

Understanding local culture, its various nuances and implications for doing business in a given country is extremely important. Thus, perhaps the best advice which can be given to a Western lawyer working on a dispute or transactions involving an emerging economy is to seek advice or work in cooperation with local counsel who is not only familiar with local laws and regulations, but understands the fine nuances of doing business in the region. The same applies to the doing of business in emerging countries. It might be a very good idea to work jointly with local partner in order to navigate the murky waters in the emerging markets.

The term “emerging market” was coined by the economists at the International Finance Corporation (IFC) in 1981. The IFC defines an emerging market as one that is “in transition or increasing in size, activity or level of sophistication”.

Emerging markets provide investors with very unique opportunities and prospects of high returns on their investments. However, doing business in those countries involves significantly greater risks and challenges than investing in developed countries. Emerging economies account today for nearly 40% of the global GDP. Countries such as Brazil, Russia, India and China (BRICs) represent a significant part of international trade.