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July 31, 2007

Lawsuits Hurt Foreign Direct Investment, Experts Conclude

WASHINGTON, DC-Exposure to class action lawsuits, high punitive damage awards and other uncertainties of the U.S. legal system could make foreign businesses less likely to invest in American companies and factories, according to a new paper released today by the U.S. Chamber Institute for Legal Reform.

“This new essay makes it clear that America’s broken lawsuit system hurts our global competitiveness by raising barriers to our ability to attract foreign investment,” said Lisa Rickard, president of the Institute for Legal Reform (ILR).

Compiled by Robert E. Litan, senior fellow at the Brookings Institution, the paper examines the impact of the American civil litigation system on foreign direct investment.

Class action lawsuits, high punitive damage awards, contingency fees for plaintiffs’ lawyers, liability despite regulatory compliance and the multiplicity of governing laws all serve to increase the complexity of legal compliance, adding an extra element of uncertainty, which tends to discourage foreign direct investment, the research shows.

“When people and firms are uncertain whether their acts violate the law or may trigger liability, they will be reluctant to take even prudent risks,” Litan wrote.

“If we want to stay competitive in a global economy, policymakers clearly need to address some of the abuses of the civil justice system by the plaintiffs’ bar, which tend to heighten the risk of doing business in the United States,” Rickard said.

Foreign direct investment occurs when non-resident firms or individuals commit their capital to a country for the long-run, by purchasing a significant interest in existing domestic companies or assets, or creating new domestic legal entities or assets. More than five million Americans work for companies headquartered overseas, nearly a third of them in the manufacturing sector of the economy. These companies account for more than 15 percent of all American research and development expenditures, and 20 percent of all American exports, the research reports.

Recognizing the importance of additional research on the impact of lawsuits on foreign investment, Litan wrote, “it would be a mistake for any country that currently may be a ‘must destination’ for foreign direct investment to take its privileged position for granted forever.”

Litan released the paper at the ILR-sponsored forum on Lawsuits and Global Competitiveness, which included a number of other topic experts. A webcast of the event is available.

The mission of the Institute for Legal Reform is to promote civil justice reform through legislative, political, judicial and educational activities at the national, state and local levels. The U.S. Chamber of Commerce is the world’s largest business federation representing more than 3 million businesses and organizations of every size, sector and region.

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