9789041198532

Legal Systems As a Determinant of Foreign Direct Investment: Lessons from Sri Lanka

by
  • ISBN13:

    9789041198532

  • ISBN10:

    9041198539

  • Format: Hardcover
  • Copyright: 2001-09-01
  • Publisher: Aspen Pub

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Summary

Amanda Perry poses a formidable challenge To The current consensus on the best way to reform legal systems in order to attract and support foreign direct investment (FDI) in developing countries. Using detailed examples from Sri Lanka, she shows that the 'ideal paradigm' approach to legal reform espoused by multilateral development organisations and bilateral aid donors is not only fundamentally flawed, but misconceived for reasons that we may not fully understand. She recommends a shift in emphasis from the 'global' legal reform agenda to a country-specific approach, based on a rigorous formulation of the common ground where the expectations of investors And The countries in question meet. The crux of this 'ideal paradigm' approach resides in the generally accepted belief that a Western-style market-oriented, rule-bound legal system is the sine qua non of successfully attracting and supporting FDI. However, through a wide-ranging survey of Sri Lankan and foreign business people, lawyers, non-legal advisers, NGO workers, diplomats, development workers, and government officials, Perry shows that this is far from the case. Investors are generally insensitive To The nature of the host state legal system when making the decision to invest, and their perceptions and expectations of the host state legal system may be significantly affected by such factors as their nationality, export orientation and size. Perry suggests that the conclusions drawn from this detailed analysis from Sri Lanka, applied on a global scale, have the potential to greatly improve the quality of many developing countries' participation in the world economy.

Author Biography

Amanda Perry is lecturer in law at Queen Mary, University of London.

Table of Contents

List of Abbreviations
xiii
List of Tables
xv
List of Figures
xvii
List of Charts
xix
Acknowledgements xxi
PART I INTRODUCTION: OBJECTIVES, IMPORTANCE AND METHOD OF THE RESEARCH
Selection of Case Study
2(1)
Overview of Research Methods
3(1)
Interviews
4(1)
Questionnaire
4(3)
Sample of the Questionnaire
4(1)
Individuals who Completed Questionnaires
5(1)
Structure of the Questionnaire
6(1)
Research Problems
7(2)
Structure of the Study
9(4)
PART II REVIEW OF THEORETICAL POSITIONS ON LEGAL SYSTEMS AS A DETERMINANT OF FDI
The Determinants of FDI
13(10)
Definition of Terms
13(1)
Host States and FDI
14(2)
Investors and the Determinants of FDI
16(5)
Location Advantages
18(1)
Ownership Advantages
18(2)
Importance of the Decision-making Process
20(1)
Summary
21(2)
Legal Systems as a Factor in Investment Decisions
23(24)
Definition of Terms
24(1)
Empirical Evidence of Legal Systems as a Determinant of FDI
24(4)
Political Risk Studies
25(1)
Studies Indirectly Addressing Legal Systems as a Determinant
26(2)
International Co-ordination of the Treatment of FDI
28(2)
Studies of the Relationship Between Law and Economic Decisions
30(7)
The Chicago School
31(1)
Institutionalist Approaches
32(1)
Transactions Costs Economics
33(3)
Foreign Investors, Hosts State Legal Systems and Transaction Costs
36(1)
Evidence that Legal Systems Might not be a Factor in FDI
37(9)
The Possible Role of Investor and Investment Characteristics
38(1)
Informal Mechanisms Regulating Transactions in the Market
39(4)
`Bounded Rationality' and Perceptions of the Legal System
43(1)
Information and FDI Decision Making
44(2)
Summary
46(1)
An Ideal Institutional Paradigm for FDI?
47(30)
Classification of Legal Systems
47(2)
The Quest for an Ideal Institutional Paradigm
49(6)
The Birth and Death of the Law and Development Movement
49(2)
Rebirth of Law and Development
51(1)
Good Governance
51(1)
Primacy of the Private Sector
52(2)
The Ideal Institutional Paradigm
54(1)
Transaction Costs and the Ideal Paradigm
55(10)
Direct Transaction Costs
56(1)
The Quality of Laws
56(2)
Quality and Efficiency of Institutions
58(2)
Uncertainty and Credibility
60(1)
Credibility as a Measure of Legal Systems
61(2)
Limiting Discretion
63(1)
Accountability and Separation of Powers
64(1)
Problematising the Paradigm
65(8)
Alternative Methods of Improving Credibility?
66(1)
Discretion in Permeable Institutions
66(3)
Transaction Costs, Discretion and Permeability
69(1)
Certainty, Discretion and Permeability
70(1)
Points for Clarification and Exploration
71(1)
Ownership Characteristics Revisited
72(1)
Bounded Rationality Revisited
72(1)
Summary
73(4)
PART III CASE STUDY OF SRI LANKA
Foreign Investment in Sri Lanka
77(8)
The Sri Lankan Economy and Investment Climate
77(2)
Recent Economic History
77(1)
Investment Climate and Levels in 1996-1997
78(1)
Profile of Investments
79(1)
The Legal Framework for FDI
80(2)
Domestic Laws
80(2)
International Agreements
82(1)
Remaining Obstacles to FDI and Agenda for Legal Reform
82(3)
The Legal System as a Factor in the Decision-making Process of Foreign Investors
85(12)
General Observations of Interviewees
85(1)
Pre-investment Investigations
86(7)
Pre-investment Investigations as a Measure
86(2)
Incidence of Pre-investment Investigations
88(1)
Quality of Investigations
89(1)
Methods of Investigation
90(1)
Investor Surprise and Incidence of Pre-investment Investigations
91(2)
Investing in Hindsight of the Legal System
93(2)
Summary
95(2)
The Ideal Paradigm and Attracting FDI to Sri Lanka
97(42)
General Observations from Interviews and Secondary Sources
97(1)
Perceptions of the Sri Lankan Legal System
98(24)
Laws
99(1)
Accessibility, Verification and Clarity of Laws
99(4)
Predictability of Legal Change
103(3)
Courts
106(1)
Consistency and Objectivity of Judicial Decisions
107(3)
Delays in Court Proceedings
110(2)
Bureaucrats
112(1)
Consistency of Bureaucratic Decisions
112(4)
Corruption
116(2)
Bureaucratic Independence
118(1)
Government Credibility
119(1)
Matters of Particular Surprise
119(2)
Summary of Investor Perceptions
121(1)
Measuring the Sri Lankan Legal System against the Ideal Paradigm
122(2)
Reactions to the Sri Lankan Legal System
124(2)
Reactions to a Hypothetical Legal System not of the Ideal Paradigm
126(8)
Meaning of Expected Impacts
126(1)
Overview of Expected Impact of Hypothetical Legal System upon Investments
127(1)
Expected Impact of Individual Hypothetical Characteristics
128(1)
Laws
129(1)
Courts
130(1)
Bureaucracy
131(3)
A Class of Non-conforming Investors?
134(1)
Summary of Findings and Initial Implications for Legal Reform
134(5)
The Possible Role of Investor and Investment Characteristics
139(40)
Nationality of Foreign Investors
141(3)
The Legal System as a Factor and Nationality
141(2)
Appropriate Legal System and Nationality
143(1)
Perceptions of the Legal System and Nationality
144(1)
Intended Duration of the Investment
144(1)
Appropriate Legal System and Duration of Investment
145(1)
Size of the Investment
145(6)
The Legal System as a Factor and Size of Investment
146(2)
Appropriate Legal System and Size of Investment
148(3)
Export-orientation and Location
151(3)
The Legal System as a Factor, Export-orientation and Location
151(2)
Appropriate Legal System, Export-orientation and Location
153(1)
Existence of a Local Partner
154(1)
Proportion of Equity held by Foreigners
155(1)
Age of the Investment
156(1)
Companies with no Foreign Management
157(1)
Summary of Findings
158(3)
PART IV REAPPRAISAL OF THEORY AND CONCLUSIONS
Contrasting Theory with Reality
161(3)
The Legal System as a Factor in Investment Decisions
161(1)
An Appropriate Legal System for Attracting FDI
162(1)
Summary of Findings
163(1)
Reasons for the Disparity between Theory and Reality
164(7)
Vagaries of the Legal-economic Nexus
164(1)
Definition
165(1)
Proof
165(3)
Emphasis on Western Concepts
168(3)
Issues for Future Research
171(4)
Prioritising Legal Reform
171(1)
Understanding Investors
172(1)
Balancing International and Local Legal Needs
172(3)
Implications for Sri Lanka and Other Host States
175(2)
Concluding Remarks
177(2)
Bibliography 179(14)
Appendix 1: Questions Around which Interviews were Conducted 193(2)
Appendix 2: Questionnaire 195(4)
Appendix 3: Ratings Allocated to Questionnaire Responses 199(2)
Appendix 4: Interviewees 201(2)
Appendix 5: Characteristics of Respondent Companies 203(2)
Appendix 6: `Non-Responses' to Questionnaire 205(2)
Index 207

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