Law, Contract & Reputation in International Business: What works?

The paper by Manfred Perlitz discusses the managerial challenges posed by the absence of a stable legal system ("rule of law" - "Rechtssicherheit").  He uses as main criteria the "enforceability" and written character of law.   In his view - reflecting probably the consensus of management sciences - the absence of a stable and suitable legal system is a disincentive for trade and investment.  Such disincentives can be overcome (only) in countries presenting very attractive business opportunities, but requires the application of a number of risk management techniques, many of them related to the "political risk" management approach.  This - standard and conventional - approach has its virtues.  It highlights the difficulties international companies (in particular from Western countries) have in dealing with unfamiliar, non-existent, unenforced and sometimes ineffective legal framework conditions in international investment and trade. Their preference is to operate in countries with a "good" system of law.  These countries are similar to their home states, and the various practices to deal with the legal and political risk of operating in unfamiliar environments with very different systems of law, or countries which have a low intensity of law as compared to, for example, the US.  US cultural and societal characteristics are very important for the assessment of foreign legal systems as, firstly, most international companies originate from the US and, second, management science has been deeply imbued by US concepts.  These have a way of generalizing specific US characteristics in general theory so that mere difference becomes a problematic deviation.  In other words, there are elements of cultural projection in the theory of management science: It views economies which are legally and culturally different as pathological cases ("sick") which require a particular risk management approach ("therapy").

What this comment intends to do is to add differentiation to the conventional, and in our view too simplistic, model of the role of law in international trade and investment.  We do not wish to reject the concept that a Western model of law (written - comprehensive - predictable - enforceable) is a supportive, perhaps even essential pre-condition for advanced capitalist economic development nor that its existence facilitates commercial transactions, and in particular long-term investment. But it is necessary to differentiate this quite simplistic model, to incorporate contradictory evidence and modern and more complex understanding of the role of law and contract in international business.  In a way, management sciences uses a concept of law imported much earlier from the discipline of legal science and seems to ignore that such earlier and more simple concept has been undergoing a significant evolution over the last 25 years.  The outcome should be a more realistic, and sophisticated understanding of the role of law and contract in international investment and trade.