Accounting standards, corporate governance, and foreign direct investments: the experience of emerging market economies

Abstract

Purpose: The purpose of this paper is to examine the relationship between the inflow of foreign direct investment (FDI) into emerging market economies and its determinants between 1997 and 2005 from a new perspective emphasizing the role of accounting standards and corporate governance. Methodology: The study covers 27 emerging market and transition economies that are classified into three groups: Asian, Central and Eastern European, and Latin American. Considering the possible endogeneity in studies on corporate governance, Generalized Two-Stage Least Squares (G2SLS) and Generalized Method of Moments (GMM) estimation techniques are used in this study. Findings: Results indicate that the adoption of high quality accounting standards and effective corporate governance lead to an increase in FDI. I conclude that, in order to attract more FDI, emerging market countries should improve the quality of financial reporting and corporate governance in addition to improving their macroeconomic indicators. Originality: This is, to my knowledge, the first study that aims to explore the association of FDI with accounting standards and corporate governance. Research limitations: Difficulty in obtaining data constitutes the major limitation in international accounting research, in general, and in this study, in particular. Therefore, some emerging market countries are necessarily excluded from the study.