Maximising international returns: Impact of IFRS on foreign direct investments

Abstract

This study investigates whether the adoption of International Financial Reporting Standards (IFRS) by a country increases Foreign Direct Investments (FDIs) and impacts the profitability of investments conducted by Multi-National Enterprises (MNEs). The proposed regression models are tested on a data set containing 493 observations of Swedish companies’ FDIs in 73 countries made during 2007–2014. Empirical evidence is provided for a significant impact of IFRS adoption on FDIs and earnings generated by foreign investments, depending upon the extent of IFRS implementation and the level of convergence. This study also suggests that IFRS adoption is significant both for FDIs and reported profits obtained through FDIs for developed countries, contrasting with emerging markets. Finally, this is one of the first papers to empirically test and confirm that several significant underlying variables (including IFRS), which can explain both FDIs and profits reported by MNEs, are identical.