The Effect of Corporate Governance on Foreign Direct Investment in Southwest Asia

Many experts believe that foreign direct investment (FDI) can provide substantial benefits to developing countries and help to speed up the economic development process. National accounts data also shows that FDI constitutes the considerable component of capital inflows to these countries. Thus, it is crucial to determine the drivers and determinants of inwards FDI flows to such countries. The conventional studies focus on market size and human capital factors as main determinants of FDI, however most of them neglect role played by corporate governance at a national level. This is mainly due to the lack of high quality data on corporate governance measures and indicators. The computation and provision of governance indicators by the World Bank (1999) has made rigorous studies connecting corporate governance to FDI possible. This paper uses the world governance indicators for 21 Southwest Asian countries to empirically test the relationship between macro-level corporate governance and inwards FDI during 2002-2014. Findings show that macroeconomic corporate governance has positive and significant effect on inwards FDI flows.