Role of Rule of Law in Attracting Foreign Investment

Andrew Skipper

Andrew Skipper

The strength of the rule of law in a country ranks among the top three considerations when multinationals make decisions about where to locate foreign direct investment – above considerations such as the cost of doing business and access to national and regional markets.

In its simplest form, the rule of law means that, “no one is above the law”. It is the foundation for the development of peaceful, equitable and prosperous societies.

For the rule of law to be effective, there must be: Equality under the law; transparency of law; an independent judiciary; and access to legal remedy*.

Where investors experience rule of law challenges – particularly political instability, arbitrary or discriminatory treatment and intellectual property violations – it also revealed that they are liable to reduce or even withdraw investment.

These are some of the findings of “Risk and Return: Foreign Direct Investment and the Rule of Law”, based on a survey of over 300 senior decision makers at Forbes 2000 companies with global annual revenues of at least US$1 billion.

Hogan Lovells alongside the Bingham Centre for the Rule of Law and the Investment Treaty Forum at BICIL, the Economist Intelligence Unit and the British Institute of International Comparative Law published Risk and Return in 2015.

The foundational values of South Africa’s constitutional democracy include human dignity, equality, freedom, transparency and accountability, and the rule of law.

However, the latest Rule of Law Index, released by The World Justice Project (WJP), which measures rule of law adherence, shows that over the last year South Africa dropped three positions for overall rule of law performance to 44 out of 126 countries.

The new WJP Rule of Law Index scores show that more countries declined than improved in overall rule of law performance for the second year in a row, continuing a negative slide toward weaker rule of law around the world.

The top three overall performers were Denmark, Norway, and Finland; the bottom three were the Democratic Republic of the Congo, Cambodia, and Venezuela. These top performing countries are generally prosperous and peaceful, in stark contrast to the bottom performers.

The Business for the Rule of Law Framework from the UN Global Compact seeks to engage businesses to support the building and strengthening of legal frameworks and accountable institutions. It acknowledges that all stakeholders, including government and business, must recognise that there is a compelling business case for respecting and supporting the rule of law.

Rule of Law 2030 builds on the empirical research presented in Risk and Return and takes on the challenge set out in the Sustainable Development Goals (SDGs) and UN Global Compact in the Business for Rule of Law Framework by forming strategic, sustainable partnerships with business and government to strengthen the rule of law.

The Framework quotes the Risk and Return in support of its conclusion that: “For businesses, an operating environment which is governed by the rule of law, provides the basis for commercial certainty and creates the foundation for long term investment and growth, and sustainable development for all”.

Skipper, is a partner and head of Africa at Hogan Lovells