Comparison of the experience of international business operating in liberal democracies and in authoritarian regimes
International business or cross cultural business is growing rapidly at present because of the increasing awareness among countries that internal resources alone may not help a country to develop properly. Even if a country does possess enormous resources, it is not necessary that the country has enough capabilities to exploit those resources. Such countries require the services from external countries for the proper mobilization of their internal resources. In other words, foreign direct investment is inevitable for a country to streamline its economic progress in the direct direction. Globalization helped countries to liberalize many of their existing laws and norms related to international business and foreign direct investment. As a result of that, the readiness of multinational companies or MNCs in investing in foreign countries has increased a lot in the recent past.
Politics is one of the major factors that come into the consideration of MNCs, when they decide about investing in a foreign country. This is because of the fact that politics and business interlinked each other in many respects. For example, American companies may face a lot of problems while investing in an autocratic country like China or Saudi Arabia. It is not necessary that the problems faced by the American companies in China may be the same as that they faced in India. It should be noted that India is a democratic country whereas China is an autocratic (Communist) country. The business laws and business culture existing in autocratic countries need not be the same as that existing in democratic countries. This paper compares and contrasts the experience of international business operating in liberal democracies and in authoritarian regimes.
Comparison of the experience of international business operating in democratic and autocratic countries
International business usually faces much lesser constraints while operating in liberal democratic countries compared to the obstacles they face while operating in autocratic countries. For example, an American company may face fewer troubles while operating in a democratic country like India and bigger troubles while operating in autocratic country like China. For example, Google is not facing any problems in its operations in India whereas it forced to stop its operations in China recently. Google decided to withdraw from China, citing reasons related to Beijing’s controversial censorship policy and human right violations in China (Shi, 2010). Google is engaged in search engine business and it is the duty of the company to provide real information and facts to its customers or users. However, China is not ready to allow Google to spread information which are going against their interests. For example, China does not allow the spreading of news about the Tian Men Square incident as this incident has caused a lot of damages to China’s political interests. If Google China allowed spreading news about this incident, more people in China will get information about this incident and possible riot against the present autocratic administration cannot be ruled out. No company will be ready to give up the opportunities in the China, unless they face severe problems. Google faced severe problems in the China and they decided to withdraw from China, even though China is one among the most rapidly emerging economies and a biggest market in the world at present.
On the other hand, Google is not facing such difficulties in India like liberal democratic countries. It is possible for Google to spread any news against the present Indian administration and still able to operate smoothly in India. For example, India’s current prime minister has faced a lot of criticisms from Google like foreign media for his alleged role in the Gujarat massacre against the Muslims. In fact, America and many other countries have denied visa for the present Indian Prime Minister Narendra Modi when he was the chief minister of Gujarat. It should be noted that none of the foreign media which spread news against the Narendra Modi faces any problems in their operations in India at present. It is possible for foreign companies to get a fair trial if they have a case against the administration in India like liberal democracies. This is because of the fact that judiciary is functioning independently in all democratic countries. On the other hand, getting a fair trial is almost impossible for MNCs operating in an autocratic country. The judiciary in an autocratic country is not free from the influence of politics in such countries.
If politics is limiting the activities of Google in China, religion is the entity which prevents the free operations of Google in Saudi Arabia. It should be noted that Saudi Arabia is an Islamic state and any news against Islam and the Islamic administration in KSA will not tolerated in the KSA. All companies operating in the KSA should make sure that none of their activities go against the interest of the religion or the administration. Judiciary in the KSA is not free from the influence of religion or politics. In fact, international laws with respect to business and trade have less importance in the KSA. Sharia laws are instrumental in controlling the business activities in the KSA like Islamic countries.
On the other hand, imagine a case in which a Chinese company operating in America or India. Even though America and India are not in good political terms with China, none of the Chinese companies are facing any issues either in America or in India. In fact they are getting a lot of freedom in their operations when they operate in India or America like liberal democratic economies. It is a new knowledge for those companies that they can seek help from the judiciary if they face any troubles from the government.
The business laws in autocratic countries need not be the same as that in a democratic country. For example, it is possible for international companies to establish independent business units in countries such as India or America. On the other hand, international companies operating in China like autocratic countries need a local partner for its operations in China. In other words, only joint venture is allowed as the mode of entry in China like countries. At the same time, it is not necessary that the foreign partner in a joint venture operating in China may get fair treatment from its local partner. It is possible for the local partner to establish multiple joint ventures (JV) in China. For example, Volkswagen (VW) and Shanghai Automotive Industry Corporation (SAIC) have established a JV in China recently. The Shanghai Volkswagen was established in 1984, as JV between Volkswagen and SAIC (Harwit, 2001). Instead of importing car parts from Europe, VW is making it locally in China in order to avoid the technology transfer to SAIC. SAIC has asked VW to transfer its critical technologies related to automobile manufacturing to them. VW was not ready to do so. As a result of that, SAIC has established another JV with General Motors (GM) in 1997,(1995, GM Links with SAIC, n.d.) in order to challenge VW. In other words, the partner of VW in China became a competitor for them later.
It should be noted that GM is the competitor of VW in global automobile industry. SAIC knows this fact very well. They know that the strategic alliance GM and SAIC would cause many headaches to VW. Yet they had not hesitated to establish a JV with GM in order to challenge VW. It is evident that such deal can be questioned in the courts if it was taken place in a liberal democratic country. However, it is impossible for VW to question such an alliance in Chinese courts since the Chinese business laws allow multiple JVs for a single company in China. VW forced to stay silent and continue its JV with SAIC since Chinese market is extremely important for them.
Intellectual property rules in autocratic countries need not be as good as those in democratic countries. Companies in autocratic countries have no problems in stealing the technology from other companies as the intellectual property laws in such countries are extremely weak. For example, Chinese companies are world famous for the duplication of popular products. The designs and features of Apple’s latest iPhone or Samsung’s latest Galaxy phones are imitated and duplicated by the Chinese companies. In Chinese market, the replica of the above phones is available for much cheaper rates. It is impossible for Apple or Samsung to win a case against the producers of such phones in Chinese courts as the Chinese courts are interested only in safeguarding the interests of the local companies. In fact, VW was hesitant in transferring the car making technologies to SAIC because of the above mentioned concerns.
Legal system in autocratic countries may not be as free as that in liberal democratic countries. In autocratic countries, the legal system is keen on protecting the interests of the local companies even if the local companies committed some mistakes. For example, a lot of expatriate entrepreneurs are currently doing business in the KSA. As per the existing business laws in the KSA, an expatriate needs the sponsorship of a local in order to start a business there. There are many instances in which the local sponsor causes many troubles to the expatriate entrepreneurs in the KSA. However, the judicial system in the KSA will mostly safeguard the interests of the local even if the expatriate has a genuine case.
In theory, business climate even in China like autocratic countries is favourable for international companies, but in practice, international companies face more problems while operating in autocratic countries compared to the problems they may face in democratic countries(The Economist, 2007). The challenges faced by international companies in the democratic and autocratic countries can be further analysed with the help of Uppsala model of internationalization and Dunning’sEclectic paradigm. The Uppsala model of internationalization can be illustrated as follows
The Uppsala model of internationalization
(Carneiro et al., 2008)
As per the principles of Uppsala model of internationalization, firms will tend to internationalize first to psychically close countries and then to more psychically distant markets (Carneiro et al., 2008). For example, an American company will look for opportunities in India first and then only it will look for opportunities in China. This is because of the fact that America and India are secular democratic countries and they are psychologically closer countries. On the other hand, China is communist country and communist principles are entirely different from that of democracy. Moreover, China is the number one competitor for America in global politics and economics. Therefore, America and China can be considered as psychologically distant countries. As a result of that, American companies operating in China may not be as comfortable as the American companies operating in India. As per the arguments of the Uppsala model, the cooperation among firms will take place initially between firms of psychically similar countries and then gradually move towards psychically distant markets. For example, the British supermarket giant Tesco has established business units in all major European and Asian democratic countries first before moving to psychologically distant markets such as China.
Dunning’s eclectic paradigm can also explain various challenges and opportunities related to the international business in autocratic and democratic countries.
Dunning’s eclectic paradigm (Dunning 1988, p. 12)
Dunning has pointed out that a company operating in a foreign country may face several problems such as lack of information, poor or no access to distribution channels and so on (Stuting et al., n.d.). He has pointed out that a company operating in a foreign soil may face a lot of spatial, cultural and linguistic problems. The work culture in an autocratic country need not be the same as that in a democratic country. For example, trade union rights are allowed in all major democratic countries. However, such rights are not allowed for workers in the autocratic countries. Therefore, international companies operating in democratic countries may face more demands from the workers than the workers from an autocratic country. In other words, it is possible for international companies to exploit the workers in an autocratic country more easily than the workers in a democratic country.
International companies face more challenges than opportunities while doing business in autocratic countries. The business principles, business climate and the legal system in autocratic countries are more interested in safeguarding the interest of the country at the expense of the interests of the foreign investor. On the other hand international companies can expect a fair treatment from liberal democratic countries as the judicial system and business laws in such countries are functioning neutrally
The issues related to censoring, intellectual property rights and human right violations are more in autocratic countries than in democratic countries. Therefore an MNC from a democratic country, investing in an autocratic country may face a lot of challenges. On the other hand the same MNC will face smaller challenges while investing in a democratic country. At the same time it is impossible for MNCs to keep a blind eye towards the opportunities in the autocratic countries, especially considering the fact that the current market is heavily globalized.
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