Due Diligence and Foreign Direct Investment in Developing Countries: Unexpected challenges and opportunities

There is a growing trend for corporate due diligence legislation across the Global North. However, its impact on foreign direct investment (FDI) in developing countries remains underexplored. For the emerging due diligence initiatives to deliver on their potential for the environment and human rights, it is crucial that policy-makers understand their impact on local communities and small businesses across value chains.

In IISD's webinar, leading international experts began to tackle this knowledge gap—unpacking the central tenets of these regulations and the challenges and opportunities they create in developing countries.

Due diligence legislation, such as the EU's Corporate Sustainability Due Diligence Directive, France's Duty of Vigilance Law, or Germany's Supply Chain Law, requires companies to respect human rights and the environment throughout their supply chains with legal and financial consequences if they do not comply.

The proliferation of due diligence legislation could reshape the business responsibility landscape and influence the dynamics of international investments, particularly in developing countries. This entails both opportunities and challenges.

Due diligence legislation has the potential to attract responsible investments, promote sustainable development, and foster better business practices. It can also create an impetus to reform regulatory frameworks, ensuring compliance with international standards and promoting transparency, which can stimulate investment.

However, these new regulations present challenges that need to be adequately addressed. Due diligence legislation could conflict with pre-existing laws within developing countries, creating legal ambiguity and generating additional barriers to successful implementation. Local suppliers may also struggle to meet the stringent requirements of these laws—particularly in high-risk sectors such as textiles, agriculture, food, metals, and minerals—potentially hindering their participation in global supply chains, which could lead to reduced investments and job losses.

The webinar will feature expert insights into the origins and motivations of business due diligence legislation, potential incentives for regulatory reforms in developing countries, and the difficulties faced by local suppliers and small and medium-sized enterprises. The panelists will explore strategies to mitigate potential adverse effects, with a focus on promoting sustainable and inclusive growth.

The discussion aims to provide a holistic understanding of the potential impacts of due diligence legislation on FDI in developing countries to inform policy and decision making.