Experts have found that the rule of law (RoL) remains a crucial aspect in business decision-making across the globe. Global law firm Hogan Lovells recently published a report detailing the countries and sectors in which most investors experienced issues with the RoL, concluding that its absence is a major handicap to economic development and growth.  

Findings revealed that China is home to the most difficult legal issues, while the US presents few RoL issues in the areas of corruption and independence of the judiciary, problems still heavily associated with the the Middle East, Africa, and parts of Asia. Respondents to the firm’s survey did note, however, significant RoL challenges in the US, as “regulatory hurdles in the US continue to increase in their severity and complexity,” according to Hogan Lovells' International Arbitration partner, Julianne Hughes-Jennett.

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Nearly half – 46% – of US investors that responded to the survey claimed to have experienced issues with RoL in the past five years.

And, while legal issues abound in China, this still did not deter most investors, as “there is a certain element of 'expect the unexpected' when multinationals are investing in China,” Ms Hughes-Jennett noted. “They are well-versed in what issues may arise and how to overcome some of those hurdles.”

Meanwhile, more than 70% of respondents claimed not to have experienced legal issues pertaining to RoL in Europe. Sectors with the most frequent instances of legal challenges, according to the report, are energy, financial services, and healthcare, where 100%, 94%, and 93% of respondents cited problems when making investments, respectively.

RoL issues most often encountered by multinationals were “lack of transparency of regulatory and rule-making processes, arbitrary or discriminatory treatment, and lack of recognition of intellectual property rights and contractual rights,” according to the study. Additionally, legal problems involving physical security or intellectual property rights “lead to the withdrawal or reduction of investment in more than 50% of these cases,” the study said.

Bilateral investment protection treaties (BITs) were also found to be of less importance than local adherence to the RoL. 

The firm’s study, published in correlation with the 800th anniversary of the Magna Carta, drew attention to the continued importance of the rule of law in international business and investment decision-making across countries and sectors. N Jansen Calamita, director of the Investor Treaty Forum, a partner in the research, concluded, “Although investors seem to be taking BITs into account, it seems clear that domestic rule of law institutions remain the most important touchstones for investors making FDI decisions.”