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Does Foreign Direct Investment Really Improve Corporate Governance? Evidence from Thailand

  • Nasha Ananchotikul

    (Bank of Thailand)

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    It is widely argued that foreign investment is a mechanism for improving corporate governance in emerging markets. The results of this paper, which uses firm-level data on 365 Thai firms, challenge this conventional wisdom. A firm-specific index of the quality of corporate governance is constructed and used to test the hypothesis that foreign investment has a positive effect on corporate governance. Endogeneity problems are addressed by using long-standing statutory limits on foreign ownership as an instrument for foreign investment. The results show that the form of foreign investment matters. When foreign industrial companies hold large stakes, there is no improvement in corporate governance. If anything the opposite is true; it appears that foreign industrial investors act as insiders: they favor weak corporate governance because it allows them to exploit minority shareholders. In contrast, purchases of minority stakes by foreign institutional investors lead to improvements in corporate governance. I also find that corporate governance is poorer for firms whose major foreign owner comes from a country with relatively weak governance institutions.

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    Paper provided by Economic Research Department, Bank of Thailand in its series Working Papers with number 2008-09.

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    Length: 44 pages
    Date of creation: Sep 2008
    Date of revision:
    Handle: RePEc:bth:wpaper:2008-09
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