Additional Evidence on Foreign Direct Investment, International Accounting Standards and Governance Interactions

Abstract

We investigate the interactions between foreign direct investment, international accounting standards, ownership diffusion and country-level individual governance indicators for a sample of 173 countries. We find a positive and significant interrelation between most of the individual governance indicators and lagged FDI inflows even after controlling for time and region effects. These results are consistent with the hypothesis that governance is a function of FDI inflows and vice-versa. We also find a significant positive impact of international accounting standards on individual governance indicators though their effect is yet to be felt on FDI inflows. Similarly we find that legal origin has no significant influence on FDI inflows though it has significant influence on some individual governance indicators. The study also finds that ownership diffusion has significant positive influence on individual governance indicators. The overall interpretation of the results is that FDI inflows, international accounting standards, ownership diffusion and legal framework of a country 'matter' for governance in a competitive global business environment while FDI inflows are dependent on individual governance indicators to a large extent.