Magna Carta Anniversary: Hogan Lovells Report Reveals Impact of Rule of law on Investment Decisions
15 June 2015
As the Magna Carta celebrates its 800th anniversary, a unique report by global law firm Hogan Lovells has revealed the significant impact that the rule of law* (RoL) has on foreign direct investment decision-making by multinationals.
Of note, particularly given the influence that the Magna Carta had on the formation of the U.S. constitution, almost half of the U.S. investors that responded to the survey (46%) said that they had experienced issues with RoL in the U.S. in the past five years. Indeed, the US was identified as a RoL weak spot for investors more than any other jurisdiction, including China, and the most common reasons were lack of transparency (experienced by 13%) and unexpected changes in the legal and regulatory framework (12%). This compares with Europe where over 70% of investors did not report experiencing any RoL issues.
Surprisingly, China is the country where investments were apparently least likely to be affected by RoL issues - 87% of those who had invested said that they had not experienced a RoL issue. Commenting on this finding, Hogan Lovells' International Arbitration partner Julianne Hughes-Jennett, who spearheaded the research, said:
“The results are particularly surprising as we naturally expected China to rank highly for rule of law issues. However, it appears that there is a certain element of 'expect the unexpected' when multinationals are investing in China. They are well-versed in what issues may arise and how to overcome some of those hurdles.
“However, regulatory hurdles in the U.S. continue to increase in their severity and complexity and this is clearly having an impact on investors' experiences in the US, albeit that more classic rule of law issues such as concerns about corruption and the independence of the judiciary are much less a concern in the US as compared to other jurisdictions, such as those in MENA and parts of Asia.
“Interestingly, when respondents were asked in which country they had experienced the most significant rule of law issues China came top of the list. So the most difficult legal challenges still appear to remain in China.
"The rule of law problems impacting on businesses can differ significantly from region to region and industry to industry. To mitigate against these risks and guarantee a return on their investment, corporates should tailor their investment strategies carefully based on local legal and regulatory considerations."
The report also reveals that the sectors where RoL issues are most prevalent are energy, financial services and healthcare. 100% of respondents in the energy sector had experienced rule of law issues when making investments; 94% of those in financials services; and 93% in healthcare.
The adoption of stronger national laws for the protection of foreign direct investment was identified by over 50% of respondents as the most important step to improving the RoL globally.
Steve Immelt, CEO of Hogan Lovells, commented:
"The research clearly shows that the rule of law is as important today as it was 800 years ago when the Magna Carta was signed. Rule of law failures are an all-too-common occurrence when multinationals are making investments across the globe."
Hogan Lovells partnered with The Bingham Centre for the Rule of Law and Investment Treaty Forum (both of The British Institute of International and Comparative Law) to commission The Economist Intelligence Unit to conduct the research.
Sir Jeffrey Jowell, Director of the Bingham Centre, commented:
"This survey confirms what has too often been doubted, namely, that the absence of rule of law is a significant deterrent to economic growth and development."
N Jansen Calamita, Director of the Investor Treaty Forum commented:
“Although investors seem to be taking bilateral investment treaties into account it seems clear that domestic rule of law institutions remain the most important touchstones for investors making foreign direct investment decisions.”
Other findings from the research show that:
- The RoL issues most commonly encountered globally were lack of transparency of regulatory and rule-making processes (experienced by 42% of respondents), arbitrary or discriminatory treatment (32%) and lack of recognition of intellectual property rights (30%) and contractual rights (30%).
- RoL problems relating to physical security of staff or intellectual property rights lead to the withdrawal or reduction of investment in over 50% of these cases
- Bilateral investment protection treaties (BITs) are of less importance than domestic adherence to the RoL.
- Having a voluntary corporate code of conduct, including the UN Guiding Principles on Business and Human Rights, plays a key role in improving RoL: 40% of companies say that the code of conduct of a multinational is very effective at improving the host-country legal environment.
To read the full report, please click here.
*In this survey, the term ‘rule of law’ is outlined as: ‘Certain, accessible and prospective laws; equally enforced; with access to justice (i.e., the right to challenge decisions in courts or other equivalent bodies); where rights may be asserted (human rights and rights such as property, contracts, etc.); through fair trials before an independent judiciary’.