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Economic Quarterly

Second Quarter 2011

Legal Protection to Foreign Investors

Juan Carlos Hatchondo and Leonardo Martinez

Foreign investment is typically considered an important source of growth for developing countries. This article describes the legal protection granted to foreign investors and its enforcement mechanisms. Governments have signed international investment agreements intended to protect foreign investors from the risk of expropriation and have increasingly chosen to issue sovereign debt in international financial centers, which expose defaulting governments to litigations in foreign national courts. In most cases, governments have complied with unfavorable rulings of international arbitration courts, and many recent sovereign default episodes were followed by relatively friendly debt restructuring agreements. But there have been cases in which expropriated investors or holders of sovereign debt in default have not been compensated, which suggests that the actual legal protection granted to foreign investors is limited.

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