ABSTRACT
This chapter discusses what one does know about the role of legal systems as determinants of the location of foreign direct investment (FDI). In the international competition to attract FDI, a state with an "effective" legal system will have an absolute advantage over states with ineffective legal systems in attracting those investors who are sensitive to legal systems. By contrast, a state with an ineffective legal system will have no absolute advantage in attracting investors, whether sensitive or insensitive. However, states with "ineffective" legal systems will have an internal comparative advantage in attracting foreign investors who are insensitive to legal systems, rather than in attracting those investors who are sensitive to legal systems. The chapter describes the evidence of the relationship between legal systems and FDI. It also summarises the scope and number of empirical studies which have touched upon the link between legal systems and the location of FDI.
