4.8.2 Managing contractual, property and regulatory risks
Three broad types of legal risk are likely to influence decisions to invest
in advanced environmental technologies by foreign and domestic actors. Contract
risk refers to the likelihood and costs of enforcing legal obligations with suppliers,
partners, distributors, managers, labour forces, construction organisations or
licensors (Lubman, 1998)]. Property risks refer both to more familiar risks associated
with expropriation or other interference with asset ownership and to less visible,
but essential questions of corporate governance including public shareholder rights
that determine how decision making within the firm is divided or competition law
which determines whether companies will be able to operate in open markets (Black
et al., 1999; Black, 1999). Clear property rights permit the evaluation
of local companies, ownership of essential project assets including land, and
outstanding or potential liabilities that determine the ability of firms to raise
capital from banks and securities markets. Also essential are bankruptcy and commercial
laws concerning security interests that allow creditors to know with relative
certainty their rights versus other classes of creditors. Regulatory risk arises
from the behaviour of public administrations which influence economic returns
through licensing, tariff setting, taxation, and foreign exchange and trade controls
(Corne, 1997). Well developed administrative law assures private actors relatively
prompt and articulated regulatory decisions, an absence of excessive corruption,
and coordination between multiple agencies with regulatory responsibilities. In
addition, administrative processes can enhance investment by ensuring inclusive
participation in regulatory policy making, transparent rules, and accessible independent
review of regulations. Regulatory reform can also reduce impediments to the development
of service sector organisations in law, accounting, business consulting, market
evaluation, or investment rating that are important complements to foreign direct
investments.
Different nations have used their laws to select the mechanisms through which
private technology transfers have occurred. During its high growth years, Japan
limited foreign direct investment by regulation and constrained equipment imports
through foreign exchange controls. Technology licensing was encouraged by strong
domestic IPR and contract enforcement. Taiwan made greater use of equipment imports
through special processing zones and tax reductions. More recently, the People's
Republic of China has favoured foreign direct investment of advanced technology
industry with special economic incentives, while its technology licensing market
is weakened by poor enforcement of the law (Oksenberg et. al., 1996). While there
are no agreed propositions that the legal privileging of any particular mechanisms
of private technology transfer is superior, there is coincidental evidence that
the failure of a national system to manage legal risk can have unexpected consequences
for technology development. Where capital assets are not secure, it is possible
to discern concentrations of labour intensive production facilities that minimise
risks of gradual expropriation (Huang, 1998). When the law does not afford certainty
through the courts, there are incentives to engage in corruption to substitute
personal and regulatory influence for contracts (Rose-Ackerman, 1996). When open
and competitive markets are not assured, it is more likely firms will seek joint
venture partners who retain monopoly power, and whose value they will then strive
to protect. When IPRs are weak, obsolescing technologies will be more prevalent.
In sum, to the extent that domestic legal institutions are deficient in managing
contractual, property and regulatory risks, there will be incentives to distort
technology choices and supporting financial flows in ways that discourage rapid
international diffusion of ESTs.
