International Financial Reporting Standards For Transition Economies Fdi Economic Consequences Research

Foreign Direct Investment has been receiving much attention due to its beneficial impact on host country’s economic growth, especially for emerging economies. Extant literature has studied motives of investment behavior of Multinationals and what conditions should entail for host countries to attract more foreign direct investments. Besides traditional determinants of FDIs, institutional determinants have been increasingly focused on in recent years.As an important component of institutional infrastructure, accounting standards in host countries have their economic consequences. It is widely accepted that high quality financial information could affect foreign investors’ investment decisions positively. And high quality financial reporting standards, e.g. IFRS, are conducive to conveying financial information reliably to foreign investors, thus promoting investments. However, well-shaped reporting incentives of management and strict enforcement of those standards are also vital to the production of high quality financial information.This paper focuses on macroeconomic consequences of International Financial Reporting Standards, namely IFRS. After controlling traditional determinants of FDIs,such as market size, macroeconomic stability, I studied how adoption or convergence of IFRS, transition performance, institutional environment and their interactions affect FDI inflows. And it is empirically shown that combined with better transition performance and institutional environment, adoption or convergence of IFRS has positive and significant impact on FDI inflows. But when I split the whole pool of transition economies into CIS and CEEC, results turn out differently. For CIS countries, traditional determinants like market size and abundance of natural resources dominate while adoption of IFRS and other institutional factors play no significant role. For CEEC transition economies, in addition to traditional determinants, adoption or convergence of IFRS per se doesn’t have a significant impact on FDI inflows. But its interactions with government effectiveness and rule of law have also impact FDI inflows. it is concluded in this paper that IFRS perse may not be able to promote FDI inflows. Its macroeconomic consequences are shown once it is combined with sound institutions and deepening transition in transition economies.