Unpredictable risks and planning uncertainties are barriers to foreign investment in transformation economies, minimizing the chances for sustainable development. Providing a reliable legal environment and transparent regulations could stimulate competition and investment, foster entrepreneurship and innovation, and contribute to better living conditions for all.
This all sounds logical. However, investing in a country for the first time is a challenging decision, not only because the investor is unfamiliar with the country’s legal system. This is especially true when investing in a region that is struggling with governance issues and the implementation of rule of law – like the Western Balkans which include Albania, Bosnia and Herzegovina, Macedonia, Montenegro, Serbia, and Kosovo.
Here are some ideas every investor should take into consideration.
1. Find out if the law favors local investors.
In order to make an informed decision, an investor needs to know, for example, if the laws favor local investors over foreign investors. He or she needs to know if the tax burden is high, if there are many legal or bureaucratic hurdles to establishing and running a business, and if there are guarantees in place to protect the investment if problems arise. There are also other logistical issues like visa and residency requirements for employees relocating to the host country.
It is, therefore, very common for investors to conduct a due diligence of sorts to inform themselves of how the legal system works. But while this may be a standard exercise for multinationals or large companies, it may be inefficient or even unfeasible for some investors, such as small and medium enterprises, which do not have the requisite resources. This does not mean that these investors have to forgo obtaining the information and take a bigger risk than others.
8th BMW Foundation Global Table
The idea to create a “legal toolbox” for companies intending to set up business in the Western Balkans emerged during the 8th BMW Foundation Global Table, “Building Rule of Law in Southeast Europe,” which took place in Bosnia and Herzegovina. Participants agreed that a well-functioning judicial system is the basis for every just society. Rule of law is a must-have criterion for most investors, who need a certain degree of reliability and predictability. The legal toolbox will be introduced at the Berlin Global Forum as a basis for discussion.
2. This is where the concept of the legal toolbox comes into play.
It is essentially an online platform describing the most important laws and regulations affecting investment in the different countries. The beauty about it is that the idea was adopted by all chambers of commerce in the Western Balkans, so it is envisioned to be one shared platform for the region. It was developed by the people in the region, not imposed from the outside. This has the added benefit of positioning the region to investors as one economic area and also potentially connecting investors with interest in the region. The project is intended to be launched in 2018.
3. It includes information on laws and regulations.
The envisioned legal toolbox will include information on various laws and regulations that are of interest to investors. For example, the portal for each country will describe in some detail the public procurement law of that country, its capital markets laws, corporate tax regimes, banking and finance laws, trademark laws, employment laws, and laws regulating agents and distributors.
It will also provide information on the most important legal aspects of incorporating a business in that country, such as the different corporate structures that exist under the law, incorporation requirements (registration, capital and management requirements), and the permitted activities.
4. It will also cover compliance issues and legal do’s and don’ts.
This includes registration and licensing requirements for key business activities, liability of local managers, social insurance and similar issues. As regards dispute resolution, the legal toolbox will provide information on choice of law and dispute resolution forum possibilities and enforcement issues. Finally, the legal toolbox will address administrative issues such as visa and residency requirements in the host country.
5. Of course, you still need to get legal advice.
Clearly, this platform is not a substitute for legal advice needed by investors on certain issues of concern. But it is an excellent starting point for investors to obtain information on the most important aspects of the host country’s legal system as a first step in forming a decision about the investment. This is crucial for small and medium enterprises who may not have the resources to invest in conducting a legal due diligence on a host country of interest.
It is, however, also beneficial for multinationals or big companies where the different departments often face the same questions about a host country’s legal system that could be answered (or partially answered) by the information in the legal toolbox. In this case, the legal toolbox would serve to reduce inefficiencies and help the company narrow down and specify the questions on which it needs advice from outside counsel.