Risk and Return: Foreign Direct Investment and the Rule of Law

This massive flow of money reflects the strong interest on the part of enterprises worldwide in establishing a lasting presence in foreign markets. It is an important factor in political and cultural as well as economic globalisation. For host countries, the inflows are important sources of capital, job creation, and know-how, all of which contribute to their economic growth and development. For corporate investors, the investments represent opportunities to expand markets and increase profits. As is the case with all business ventures, FDI presents risks as well as opportunities.

The research looks at host-countries from the perspective of “rule of law”—that is, whether they are governed by laws which apply equally and fairly to all, rather than by the caprice of individual officials. The paper examines the degree to which multinational corporations weigh rule of law considerations when they decide where to invest. We look at this issue from several perspectives:

  • Where do rule-of-law issues figure in the hierarchy of factors that multinationals consider when choosing a host country for investment
  • Which specific elements of the rule of law are most important to multinationals considering a foreign direct investment
  • What is the nature of multinationals’ experience with rule of law issues affecting their foreign direct investments
  • How important are bilateral investment protection agreements, compared to other legal instruments, in encouraging multinationals to invest in specific host countries?
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