Review of Finance (2008) 12: 221–251doi: 10.1093/rof/rfl005Advance Access publication: 31 January 2007Czech Mate: Expropriation and Investor Protec-tion in a Converging World∗MIHIR A. DESAI1and ALBERTO MOEL21Harvard University and NBER;2Monitor GroupAbstract.This paper examines the expropriation of a foreign investor by a local partner andthe subsequent resolution of the case through international arbitration in favor of the investor.Despite the investor’s 99% interest in the joint venture, the local partner managed to divert theentire value of the underlying entity for his personal benefit. This clinical examination of anexpropriation and its aftermath illustrates the interaction of property and contract rights in aglobal setting, how corporate control is shaped by geography, and how multinational firms maybe advantaged by availing themselves of stronger investor protections than local firms.JEL Classification: F21, F23, F36, F42, G151. IntroductionAnalyses of the role of institutions typically consider local laws to be theprimary measure of legal protections for investors. Similarly, these analysesdo not discriminate between types of investors, other than on the basis of theirownership shares or control rights. In contrast to these emphases, multinationalfirms constitute large fractions of investment in most economies, particularlyin developing and transition economies, and these firms have legal meansavailable to them beyond local laws as well as unique control problems.Studying the experience of multinational firms and their legal protectionsthrough a clinical examination promises to illuminate the unique aspects*Kathleen Luchs, Stephen Marks and Hardy Tey provided excellent research assistance. Theauthors thank Sasha Greenawalt and Michael Ostrove of Debevoise & Plimpton, Petr Panek ofWhite & Case, and Milan Smid of Charles University for help in understanding the Czech legaland regulatory environment; and Dan Bergstresser, John Coffee, Tom Copeland, BenjaminEsty, Josh Lerner, Kathleen Luchs, John Owen, James Zeitler, various seminar and conferenceparticipants, the editor (Colin Mayer) and an anonymous referee for very helpful comments onearlier drafts. Desai thanks the Division of Research at Harvard Business School for financialsupport.The Author 2007. Published by Oxford University Press on behalf of the European Finance Association.All rights reserved. For Permissions, please email: [email protected]at York University Libraries on March 8, 2012Downloaded from
222MIHIR A. DESAI AND ALBERTO MOELof their control problems, the transnational protections they can accessand the interactions between different types of institutional protections ininstitutionally fragile settings.