Why the Rule of Law is an absolute Necessity for Businesses to Prosper

Difference between the West and the East

Why do businesses in Europe and the United States prosper when compared to the ones in Asia and Africa? Why do businesspersons find it easier to do business in the West when compared to the countries in the East? Apart from natural geographical advantages and availability of resources, is there something else that ensures that businesses find it easier to operate in some countries whereas they fail to do so in other countries?

Rule of Law

The answer to this partly can be found in the way the West operates under the rule of law and contracts whereas the East operates through fixing and gaming the system? in other words, businesspersons need to circumvent laws and regulations in many Asian and African countries whereas in the West they can be assured that contractual obligations would be honored and in case of deficiencies, the courts and the political system apart from the Executive would give them a swift and fair hearing and trail.

Example of a Global Company

To explain this further, consider a global company that operates worldwide and has an extensive network of suppliers, customers, and vendors apart from employees and other stakeholders all over the world. If for instance, a supplier reneges on his or her promise to deliver; this company can sue the supplier and ensure that losses are recovered.

However, if such court cases and legal remedies take years or decades and moreover are fraught with uncertainties, then the company would necessarily have to explore extra judicial methods to recover its losses.

On the other hand, if the courts and the judicial system along with the law enforcement agencies help the company recovers from its setbacks with the suppliers in a speedy and time bound manner, and then the company would in all likelihood operate in a country or a region that guarantees these benefits.

This is the crucial difference between the West and the East in terms of upholding and enforcing the rule of law that ensures smooth operations for businesses.

The Case of India

Indeed, this is the reason why many multinationals are reluctant to enter countries such as India where the sclerotic and the tardy and lethargic judicial and law enforcement system cannot guarantees protection against fraud and malpractice. Moreover, they also need to pay bribes and spend huge amounts of money just to conduct their business that creates additional costs as well as introduces more layers into their already complex mode of operations.

Further, this is also the reason why many multinationals that operate in India prefer to have Singapore as the arbitration center in case of legal and commercial disputes. Indeed, the fact that Singapore offers speedy and time bound disposal of dispute resolution mechanisms has often been cited as one of the reasons why global corporations insist on taking their disputes in Asian countries to the city state.

The Case of China

The case of China is different from India since though it also has an archaic justice and judicial system, nonetheless, the political and the bureaucratic system offers the business protection and guarantees that their cases would be handled and resolved in a quick manner.

In other words, the rule of law is enforced especially where it concerns businesses since China wants more and more multinationals to operate in its country.

Having said that, it must be noted that issues such as Piracy and Copyright Infringement still impose costs on Western businesses when they operate in China and this is something that remains a sticking point. Of course, this is not to say that Western businesses in China do not pay bribes or kickbacks. Just that they stand a better chance in matters pertaining to the rule of the law when compared to India.

Why Rule of Law is Absolutely Necessary

Turning to the point that the rule of law is absolutely necessary for businesses to operate, we can see why this is the case by taking another example of a company that has multiple stakeholders. For instance, if an employee is caught violating the codes of conduct, then the company is well within its rights to fire him or her.

However, if the company does not do so out of fear of offending some section or interests that support the employee, then it can be said that the company is preferring to abstain rather than following the law. In another case, if the company finds that there are frequent strikes and labor unrest wherein even though it has followed the law, it still is being harassed, then definitely it would seek to relocate to another state or country where its interests are protected.

Moreover, the rule of law is also necessary for businesses to guarantee the safety of their employees especially if they have night shifts and transport their employees from their homes to the workplace.

Indeed, in all the cases discussed so far, no business would like to operate in a state or a country where lawlessness prevails and they have to bribe their way at every level just to continue their operations.

Conclusion

To conclude the discussion, there is nothing more important to businesses than countries where the rule of law is enforced and upheld thoroughly and rigorously as otherwise, their operations would be hit and their business would suffer. Indeed, who wants to operate in countries where there are frequent shutdowns and intermittent acts of violence and chaos that lead to disruptions to the business operations?

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.