We investigate the interactions between foreign direct investment, international accounting standards, ownership diffusion and country-level individual governance indicators for a sample of 173 countries. We find a positive and significant interrelation between most of the individual governance indicators and lagged FDI inflows even after controlling for time and region effects. These results are consistent with the hypothesis that governance is a function of FDI inflows and vice-versa. We also find a significant positive impact of international accounting standards on individual governance indicators though their effect is yet to be felt on FDI inflows. Similarly we find that legal origin has no significant influence on FDI inflows though it has significant influence on some individual governance indicators. The study also finds that ownership diffusion has significant positive influence on individual governance indicators. The overall interpretation of the results is that FDI inflows, international accounting standards, ownership diffusion and legal framework of a country 'matter' for governance in a competitive global business environment while FDI inflows are dependent on individual governance indicators to a large extent.

This paper investigates the interactions between foreign direct investment (FDI) and country-level individual governance indicators for a sample of 173 countries from 1996 to 2007, and also the effect of legal origin, international financial reporting standards (IFRS) and ownership diffusion on them. We find evidence of positively significant two-way relationships between each of the six individual governance indicators and lagged FDI inflows scaled by lagged GDP to confirm that governance is a function of FDI inflows and vice-versa. The overall interpretation of the results is that FDI inflows, IFRS, ownership diffusion and legal framework of a country 'matter' for macro-level governance in a competitive global business environment while FDI inflows are dependent on individual governance indicators and other macro-economic variables to a large extent. Both IFRS and legal origin have no direct link to FDI inflow. These findings have policy implications for individual governments and international donor organizations to undertake tenable actions for the improvement of country-level individual governance indicators to attract more FDI inflow.