Legal Systems As a Determinant of Foreign Direct Investment

by Perry, Amanda

• ISBN13: 9789041198532
• ISBN10: 9041198539
• Format: Hardcover
• Copyright: 2001-09-01
• Publisher: Kluwer Law Intl

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