International collaboration of law firms: modes, motives and advantages.

INTRODUCTION

Access to quality international and local legal services has long been considered an important factor in enabling multinationals to do businesses in international markets. As the trend toward globalization continues, multinationals have found more and more business opportunities in the global market. However, different local legal systems may restrict entrepreneurial activities and affect the ability of multinationals to expand business into foreign markets. McDonald's, for instance, would not have been able to launch its business successfully in Taiwan in 1983 without the assistance of a local law firm. In fact, the characteristics of the legal services such as location bound, customization, local adaptation and government restrictions make it essential for multinationals to rely on local (indigenous) law firms for market penetration. Multinationals also need international legal services in order to deal with issues such as project finance, mergers and acquisitions, intellectual property rights and product liability, each of which may have serious impact on business in international markets. Consequently, the collaboration between law firms in host and home countries has become increasingly important in providing better services to multinationals. In spite of this importance, however, the international collaboration between foreign and local law firms has not been studied in the literature.

International scholars have recognized that the difficulties of conducting both conceptual and empirical research pertaining to the internationalization of service industries result from construct development, categorization, operationalization and data collection (Boddewyn, Halbrich, & Perry, 1986; Dunning, 1993; Enderwick, 1989). Because of the above-mentioned difficulties, the major focus of service-related studies has been placed on banking and financial services (Casson, 1989; Gray & Gray, 1981; Grubel, 1977, 1989), and trading companies such as the Japanese Soga Shosha and Korean Chaebol companies (Ozawa, 1987). Recently, the methods of international technology transfer in services (Grosse, 1996) and the internationalization of other service industries were also studied, particularly in the construction industry (Enderwick, 1989), the hotel industry (Dunning & McQueen, 1981), multinational news agencies (Boyd-Barret, 1989), the advertising industry (Terpstra & Yu, 1988) and the accounting industry (Chuang & Ko, 1993; Daniels, Thrift, & Leyshon, 1989). Nevertheless, the legal service industry remains a missing link in the literature.

The internationalization of legal service has become increasingly important because of the fast development of international business activities (Galanter & Palay, 1990). In recent years, international commercial activities such as trade and finance could not be pursued without knowledge of local and international laws acquired with the assistance of legal services from both international and local law firms. Given that dramatic national differences of cultures and legal systems do commonly exist, such a bartier of conducting international legal services could not be overcome without the collaboration between international and local law firms (Leontiades, 1985). Previous studies pertaining to other international service industries have centered on explaining the global environment, economic impacts and public policy (Boyd-Barrett, 1989; Daniels et al., 1989; Grubel, 1989), the determinants of foreign direct investment (Terpstra & Yu, 1988), and the advantages, motives, and delivery modes (Dunning & McQueen, 1981; Enderwick, 1989) of those firms in servicing foreign markets. However, no research has been conducted from the perspective of the host country.

Taiwan is a good case for such a study. Taiwan's economy underwent a successful transition from an agricultural to an industrial, modern economy. Since the early 1980s, firms in Taiwan's traditional labor-intensive industries such as textiles, footwear and toys have gradually gone offshore to Southeast Asia and China. In the 1990s, many industries such as electronics, computer peripherals and motorcycles also went offshore for both resource and market seeking purposes. The pace of Taiwanese multinationals' global expansion has been evidenced by dramatic increase of outward foreign direct investment (FDI) from Taiwan. An investigation conducted by the Chung-hua Institution for Economic Research estimates that Taiwan's total FDI in Southeast Asia was about $20 billion in the early 1990s (San, 1992). In 1995, Taiwan became 14th among the world's trading nations by attaining $215.2 billion (81.7% of GNP; including $111.7 billion exports and $103.5 billion imports) in international trade. Such great numbers in international trade resulted in a strong demand for international and local legal services that would help foreign multinationals to do business effectively in Taiwan. In addition, as more Taiwanese companies have become involved in globalizing their businesses, these firms have had a critical need for international legal advice (Chang, 1995; Shih & Lin, 1996). In the world market, British and American law firms have been very aggressive in globalizing their legal services (The Economist, 1996). Local law firms in a small and open economy, therefore, face increasing global competition (Marks, 1995). How can Taiwanese law firms capitalize on such a globalization trend in order to survive and grow? The answer lies in how well they can obtain and develop competitive skills through international collaboration with experienced international law firms.

The purpose of this paper is to examine the emergence of the global legal service industry, and to study exploratively the internationalization pattern of Taiwanese law firms. In the following sections, we first present the recent development in international legal services and explanations of the increasing collaborations between foreign and local law firms by using Dunning's eclectic paradigm (1988, 1993). We then focus on Taiwanese law firms and conduct exploratory research to understand: (1) The major characteristics of the legal service industry in Taiwan; (2) the major modes and motives of both foreign and Taiwanese law firms to engage in international collaborations in Taiwan, and (3) the major determinants that affect Taiwanese law firms in selecting their internationalization modes. In addition, we address managerial implications of the research findings, including: (1) the nature of collaborations between international and local law firms; (2) the bargaining position/power of international and local law firms, and (3) the transnational strategy of international law firms.

THE EMERGENCE OF THE GLOBAL LEGAL SERVICE INDUSTRY

Recent Developments in International Legal Services

International legal services have become increasingly crucial for multinationals to conduct business successfully in the global marketplace. Competent international law firms should be able to provide legal services that cope with market conditions in any of the international markets. In order to develop and grow in foreign markets, international law firms should be able to handle both international and local legal practices. In general, international law firms need to provide: (1) local legal services to clients doing business in the host country; and/or (2) a mix of international and local legal services to clients involved in international business. Consequently, international law firms should develop a competitive edge in order to deal with the various cultures and languages of international clients.

The internationalization of the legal service industry is still far behind other service industries. In addition to international collaboration, many international law firms have established foreign branch offices for leveraging their competitive position. However, as compared to that of other service industries such as accounting and management consultancy, the number of foreign branches established is still low. According to The American Lawyer (1993), among the top forty law firms in the world, only eleven have foreign branch offices as of 1993. With 39 foreign branch offices, Baker & McKenzie, the largest law firm in the world, generated foreign revenues that accounted for more than 60% of its total sales, while foreign revenues of the other ten international law firms were less than 20% of their total sales. Low foreign revenues indicate that the internationalization of the legal service industry is still far behind other service industries. For example, the foreign revenue of KPMG, the world's largest accounting firm, was about $6 billion in 1992, while Baker & McKenzie had only $500 million in the same year. Such a slow pace of internationalization has resulted from national differences in legal systems and business practices, which have made international commercial legal services less desired in the global market.

In Taiwan, the legal system is based on codified laws that are similar to Western laws. Taiwan's rapid industrialization has created a strong need for highly developed commercial laws. Currently, Taiwan is reforming its business laws, particularly as they relate to the activities of foreign businesses. Foreign law firms are allowed to open branch offices in Taiwan. However, because foreign …