National governance and foreign direct investment interactions: international evidence

Abstract

The purpose of this study is to investigate the interactions between foreign direct investment (FDI) inflows and national governance indicators on international data. It also examines the impact of international financial reporting standards (IFRS) and the legal systems of sample countries on national governance and FDI. Building on extant literature and applying both OLS and 2SLS approaches on a sample of 173 countries, the empirical evidence confirms two-way interdependence between national governance and FDI in determining each other, which remains valid after controlling for per capita income, regional and country status groups of sample countries. In addition, IFRS and the type of legal system find a significant impact on national governance, but not on FDI. These findings of the study are valuable for individual governments, policy makers and international donor organisations to strengthen national governance indicators in order to attract FDI and improve the accountability and transparency of macro-economic measures.