Causal relation between Corporate Governance and Foreign Direct Investment: Cross-sectional International Evidence

The present study examines the interrelationships between FDI inflows and corporate governance in a large number of countries for the year 2004. Building on the new paradigm shift of FDI attractiveness towards host country's existing corporate governance environment, accounting and disclosure standards, property rights, openness of markets to investments and legal and institutional infrastructure etc. as widely recognised by the World Bank and other organizations, this study provides new evidence of bidirectional positive relation between country-level corporate governance and foreign direct investment at international level. We find corporate governance to have significant positive impact on attracting FDI inflows. We also find significant positive impact of lagged FDI on corporate governance though contemporaneous FDI has no significant influence. However, we find no significant effect of adoption of international accounting standards and legal origin on improving corporate governance and FDI inflows in the recipient country. We find significant positive impact of disclosure on FDI inflows. We also find ownership diffusion to have significant positive effect on corporate governance while it has a negative influence on FDI inflows.