Factors in Foreign Business Cultures: Rule of Law, Protecting Investors

Editor’s note: “International Business Corner” is a weekly column written by Joan Keston that provides information for people involved in or considering international operations. Keston is an international business consultant. Over the next several months she will be writing about important issues that international businesses face as they compete in the 21st century global business environment. This article addresses several factors that impact the ease of doing business in a particular economy.

RALEIGH – Two categories addressed by Doing Business (see Web link with this story) in ranking economies on the ease of doing business are “protecting investors” and “contract enforcement.” The concept of Rule of Law and its presence in a business culture impact both of these topics.

Rule of Law

The basic premise of Rule of Law is that no one is above the law. This applies to government as well as the mob, and is contrary to authoritarian governments and arbitrary rules or processes of law. In order for business to succeed, Rule of Law is vital. It requires the equitable application and enforcement of legislation, and safeguards the rights of individuals. It is also a concept that is not strongly embedded in the business culture of developing countries.

Protecting Investors

As businesses enter countries an investment is usually made. Whether it is a direct investment of funds or an investment of time and commercialization efforts, financial commitments or rewards are the result. Protecting investors is a key risk factor analysis that impacts decisions of how and where to do business. For example, if investments can be confiscated by the government, or if economic instability is high, investors will be less likely to invest or do business in a particular country. If the Rule of Law is not a strong concept in a country, investors would be subject to the arbitrariness of government or oligarchic interests, driving policy decisions in their favor.

Contract Enforcement

The agreement between two parties is based on a strong element of trust that the parties will honor their commitment. In the industrialized world, most business dealings are realized through contracts, backed by the trust of the parties and a judicial system that regulates terms, provides for enforcement and applies general commercial principals. If the judicial system of a particular country does not respect the agreement between the parties to the contract, and allows for the breach by one party, then trust is not generated and business suffers. It is the application of commercial principals along with the concept of Rule of Law that safeguards business agreements by enforcing contracts.

Risk Mitigation

The political and economic past of a country will influence the concepts of Rule of Law, contract enforcement and protection of investors. Most developing countries are behind the industrialized world in these areas, and can be placed on a spectrum of development for each topic. In order to succeed in doing business in countries where these concepts are not well established, companies must mitigate the risks by doing several things, including the following:

Develop a relationship with associations or organizations in your industry globally and in the country where you do business.

1. Develop a strong presence in the country where you do business that contributes to local employment and the local tax base.

2. Hire or contract with locals that can assist you with the necessary relationships in government and industry. Get to know the professionals you hire or contract with.

3. Try to create as much direct and indirect leverage in your transactions and relationships.

4. Create an image that you are investing in and caring about the country where you do business; not just taking advantage of a developing country for your own benefit.

Joan Keston has experience with mature as well as entrepreneurial companies, domestically and internationally, and with an executive managerial and legal background. She has a deep understanding of the business culture and issues involved in doing business in developing countries as well as Europe. She is the Managing Principal at Keston & Associates, Ltd., an international business consulting firm located in Raleigh, NC, and a Partner at Paladin and Associates, Inc. Her firm assists companies establish business operations throughout the world. She can be reached at (919) 881-7764 and jkeston@kestonassociates.com.