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Foreign Direct Investment: Does the Rule of Law Matter?

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Abstract:

In this paper, John Hewko analyzes the relationship of foreign direct investment and the rule of law. He takes a hard look at what has become a familiar article of common wisdom in international aid circles: the proposition that developing and transitional countries must establish a well-functioning rule of law to attract foreign direct investment. Hewko argues that the philosophical framework the international development community has traditionally used to carry out its legislative and institutional reform efforts in the post-communist countries of Eastern Europe and the former Soviet Union is incomplete and has failed to take into account several critical concepts and factors. He also explores the other, less-accepted side of the causal chain: the ways in which foreign investment can stimulate positive change in the rule of law.

The paper is the first in a new series commissioned by the Endowment's Democracy and Rule of Law Project to provide thoughtful, practical and challenging analyses of some of the key questions in the field of rule-of-law and foreign investment.