Democratic Countries are good for business. With China and Russia’s economic growth, the debate was started on if democracy suits well for business. China especially has been showing rapid GDP growth, having reached double digits over the past ten years. Now it’s the second economy on the planet, notwithstanding being an autocracy. This case is being utilized to argue that the democratic system is not required for a prosperous business. However, the majority of the leading states s(the USA, the UK, France, etc.) are democracies. According to Forbes, the majority of nations in terms of attractiveness for business and capitalism are democratic countries such as Denmark and Sweden. These countries operate under democratic political systems which promote free markets and respect for the rule of law. Therefore, democracy is good for business because it encourages stable and transparent political systems based on respect for the rule of law and human rights; hence creating conducive environments for business operations. The purpose of this essay is to explain how democracy is good for business. To achieve this, the paper will use theories and evidence from democratic and non-democratic countries.
Democratic countries allow for free markets to determine prices. In this regard, multinational companies choose to operate in countries that encourage freedom and competition. In such countries, businesses have the freedom to choose their strategies in terms of price, marketing, and operations. Therefore, free markets lead to competition; hence promoting quality and efficiency in production. Efficient and competitive markets are conducive for business operations because they allow businesses to maximize their profits through competitive strategies. The free markets allow businesses to enter new markets and take advantage of new opportunities for growth and expansion. As a result, democracy is good for businesses because it enables them to increase their income and profits in free markets.
On the other hand, non-democratic systems limit the market opportunities for local and foreign businesses. They encourage monopolies that may create inefficiencies in the market. Repucci (2015) suggests that “Not Free” countries which score high on business attractiveness index are far fewer than democratic countries with attractive business environments. Most of the undemocratic countries encourage corruption due to concentration and misuse of power. Autocratic governments also lack checks and balances, so they tend to make arbitrary decisions that cause negative consequences on businesses. They are also prone to political instabilities, industrial action and violence. These activities hurt businesses significantly. Political unrests may lead to vandalism and looting in business premises, leading to significant losses.
Although China is growing economically, its autocratic system hinders foreign direct investment in the country. The country receives massive investments due to its size and low costs of production. Despite the growth of the Chinese economy, its weak political system is likely to inhibit sustainable growth. Stroker (2012) suggests that over 90,000 protests are experienced in China annually as people show their discontent with corruption and poor governance. The police also arrest suspects without following due process of law. Due to these factors coupled with several labor strikes, many businesses may be concerned about their investments in China. Lack of intellectual property rights protection also discourages multinational companies from operating in China because their technologies and innovative ideas are likely to be copied. Intellectual property rights theft may lead to loss of competitiveness and reduced revenues for multinational companies.
Lack of respect for the rule of law in undemocratic countries also affects investments as foreign and domestic investors lose confidence. The system also prevents potential entrepreneurs and growing businesses from investing in China, denying them the opportunity to turn their assets into capital; hence limiting growth and development. In fact, the Chinese economic growth is declining. In 2017, the economic growth has fallen below 7% for the first time since 1990s. Domestic and foreign companies in undemocratic countries shift their investments to more conducive economies because their investments face political risks and regulations implemented by the state. Repucci (2015) also suggests that undemocratic countries impose red tape, obstruct business contracts, and create barriers to trade. These barriers make business and investment in such economies difficult.
Unlike China and other undemocratic nations, democracies have transparent and stable institutions that foster environment that are conducive for private enterprise (Stroker, 2012). In such economies, businesses and citizens are allowed to give their opinions and contribute to the implementation of policies, laws and regulations. When the public and the private sector are allowed to participate in the development process of the country, the economy will grow because the interests of all stakeholders will be considered in the decision making.
According to Rampell (2008), democratic countries encourage transparency and accountability in policy implementation. They also enforce equality, fairness and effective enforcement of the rule of law. Rampell used information from a reliable study carried out between 2000 and 2005, finding out that democracies are good for business, and trying to compare China with the U.S. is erroneous. According to Smith (2015), such economies may suffer in future. The study showed that democracy contributes approximately 0.5% to 1% of GDP growth. One of the reasons for this growth of democratic economies is that their democratic systems create free and fair environments where businesses can carry out their activities effectively. Such environments make democratic countries the best destinations for business.
European countries are good examples of democratic societies that promote business. Badenhausen (2015) argues that European economies, especially the Scandinavian countries, are good environments for business. Badenhusen suggests that the European countries dominate the annual rankings of Forbes on the best countries for capitalism. A third of all the top 25 economies for business were European countries in 2015. Denmark was the leading country for business in 2015, and Sweden was topped the list of 2017. The U.S. is dropping in the rankings due to its increased regulations. Since 2009, the U.S. has enforced over 150 new regulations, leading to a fall from second to twenty-third position on Forbes’ Best Countries for Business in a span of 8 years.
Using data from World Bank, Repucci (2015) provides evidence that free countries are better than non-free economies for doing business. One of the reasons for this finding is that stable and transparent governments provide the best environments for business to thrive. Mature democracies promote democratic institutions that serve the interests of the people and improve the business environment in the long term. World Bank’s ‘Doing Business’ survey indicates that most top 25 countries in terms of the ease of doing business are free economies. The figure below gives a clear evidence of this finding.
Figure 1: Doing Business Survey (Repucci, 2015).
The figure above indicates that free and partly free economies have the highest number of top performers in the Doing Business survey while most bottom performers are not free economies. At least 20 out of 25 top countries in terms of doing business are free economies. In this regard, there is clear evidence that democratic countries that encourage free markets are likely to experience booming businesses like Sweden and Denmark.
In conclusion, democracy is good for doing business because it encourages free markets, respect for the rule of law, public participation, transparency, accountability and fairness in all government institutions. Democratic institutions promote the economic interests of a country by establishing rules and policies that create conducive business environments. On the other hand, non-democratic countries create red-tape, barriers to trade and infringement of property rights; thus limiting businesses from seizing opportunities of trade and marketing in emerging markets. Countries like Sweden and Denmark have established democratic systems which support the private sector unlike autocratic democracies like China and Russia which limit business opportunities through regulations.
Badenhausen, Kurt. The Best Countries for Business 2015. Forbes, Dec 16, 2015.
Rampell, Catherine. Good for Business: Democracy and Economic Growth. The New York Times, October 27, 2008.
Repucci, Sarah. Democracy is Good for Business. Freedom House, August 3, 2015.
Smith, Noah. Democracy Is Good for Business. Bloomberg, January 22, 2015.
Stroker, Frank. Democracy Rules: Why Business Thrives in Democratic Societies. CIPE, 27 June, 2012.