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Corporate Governance and Foreign Direct Investment

Joseph Alba, Donghyun Park () and Peiming Wang
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Peiming Wang: Auckland University of Technology

No 202, ADB Economics Working Paper Series from Asian Development Bank

Abstract: Merger and acquisition (M&A) activity is motivated by increasing shareholder value through improved corporate governance. Therefore, stronger corporate governance can reduce the returns from M&A activity, including M&A foreign direct investment (FDI). This, in turn, can reduce the returns from non-M&A FDI in light of the complementary relationship between M&A and non-M&A FDI. We use firm-level evidence to empirically examine the effect of corporate governance in the United States (US) on Japanese M&A and non-M&A FDI inflows. In doing so, we expand upon Alba, Park, and Wang (2009), which looked only at the M&A FDI inflows. We find that two landmark US corporate governance regulations help explain the sharp drop in both Japanese M&A and non-M&A FDI into the US during the 1990s. The regulations apparently encouraged US firms to improve their corporate governance. Our evidence thus suggests that corporate governance may affect both M&A and non-M&A FDI.

Keywords: Corporate governance; FDI; merger and acquisition (search for similar items in EconPapers)
JEL-codes: F21 F23 G30 G34 (search for similar items in EconPapers)
Date: 2010-05
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