Legal Stability Contracts in Colombia: An Appropriate Incentive for Investments?

Abstract

Current global economic order is openly dependent on foreign direct investment (FDI). At least since the 1990s, developing countries have competed to attract FDI because it is considered the best source of technology, employment, and financial resources. Colombian Law 963 of 2005, which is a response to said competition, allows the signature of Legal Stability Contracts (LSCs) between the State and investors for the purpose of stabilizing the rules guiding investment decisions, for up to 20 years. Legal stabilization has successfully proven to increase FDI inflows. Nevertheless, incentives for FDI have been subject to several critiques that stress the excess of benefits for foreign investors in exchange for weak commitments.

Wanting to examine the suitability of Law 963 in attracting FDI to Colombia and in increasing its positive impact, I studied the “state of the art” of FDI and legal stabilization, the historical causes of incentives in Colombia, and the LSCs signed in light of said Law. The results of my study reveal that the law successfully met the expectations of increasing investments. However, there is also evidence that early reforms and a deficient application of the law prevented it from increasing the positive social impact of investments.

Keywords: Legal Stability Contracts, Foreign Direct Investment, Investment Incentives, Stabilization Clauses, Colombia, Latin America.

JEL Classification: 010, E62, F21