Finding and Facing Facts About Legal Systems and Foreign Direct Investment in South Asia
Legal Studies, Vol. 23, No. 4, pp. 649-689, 2003
Posted: 9 Feb 2005
It has become commonplace to argue that foreign direct investment (FDI) flows are to some extent determined by the effectiveness of host state legal systems - that is, the institutions and officials involved in the creation and implementation of law, including courts and judges; bureaucrats; and politicians, in their capacity as makers and implementers of law. The primary concern of the paper is how this dominant theory can be testedthat is, what methods can we use to test the extent to which the effectiveness of legal systems affects success in attracting FDI? The analysis focuses in particular on South Asia, the US and the UK. The paper considers what data on FDI and legal systems are necessary and available for conducting a statistical regression test of the theory. It establishes that the data available until recently were inadequate. The paper then considers the extent to which recent empirical studies, conducted under the auspices of the World Bank, produce useful facts for the purpose of testing the relationship between FDI and legal systems. These new data sets are recommended by the World Bank Group's Foreign Investment Advisory Service (FIAS), and thus provide a useful insight into the type of information assumed by theorists to be available, and useful, to investors. The paper therefore also considers how the theory that legal systems are determinants of FDI can be implemented by investors - that is, what information exists upon which they can base their location decisions? It is concluded that many points, fundamental and finer, about the relationship between legal systems and FDI remain to be explored. We have a neat, intellectually appealing theory. Sadly, we still do not have the facts to test it, nor for investors to implement it.
Keywords: foreign direct investment, World Bank, legal indicators
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