Macro-Economic Level Corporate Governance and FDI in Emerging Markets: Is There a Close Relationship?

Abstract

Many experts believe that Foreign Direct Investment (FDI) can provide substantial benefits to emerging market countries and help to speed up the economic development process. National accounts data also shows FDI to be the single largest component of capital inflows to the vast majority of emerging market countries. Thus, it is crucial to determine the drivers and determinants of inwards FDI flows to such markets. There have been several studies on some FDI determinants such as market size and human capital factors, however the role of corporate governance at a national level has been largely neglected. This has mainly been due to the lack of good quality data on corporate governance measures and indicators. The creation of the World Bank Governance Indicators by Kaufmann et al (1999) makes rigorous studies of corporate governance and FDI possible. This study uses the World Bank Governance Indicators to empirically test the relationship between macroeconomic level corporate governance and inwards FDI flows into emerging market countries, using a panel data set of 33 countries between 1997 and 2002. The key finding is that macroeconomic corporate governance has a positive and significant effect on inwards FDI flows, suggesting host country governments and authorities should shape policy in this area to maximize inwards FDI flows.