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

Author

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  • Nasha Ananchotikul

    (Bank of Thailand)

Abstract

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.

Suggested Citation

  • Nasha Ananchotikul, 2008. "Does Foreign Direct Investment Really Improve Corporate Governance? Evidence from Thailand," Working Papers 2008-09, Monetary Policy Group, Bank of Thailand.
  • Handle: RePEc:bth:wpaper:2008-09
    as

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    File URL: http://www.bot.or.th/Thai/EconomicConditions/Publication/Discussion_2551/dp032008thai_nasha.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:gam:jijfss:v:4:y:2016:i:2:p:8:d:68311 is not listed on IDEAS
    2. Ozsoz, Emre & Gurarda, Sevin & Ates, Abidin, 2014. "Ownership Structure and Corporate Governance in the Case of Turkey," MPRA Paper 58293, University Library of Munich, Germany.
    3. Tran Thi Thanh Tu & Pham Bao Khanh & Phung Duc Quyen, 2014. "Developing Corporate Governance Index for Vietnamese Banking System," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(2), pages 175-188, April.
    4. Sevin Gurarda & Emre Ozsoz & Abidin Ates, 2016. "Corporate Governance Rating and Ownership Structure in the Case of Turkey," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 4(2), pages 1-16, April.

    More about this item

    Keywords

    corporate governance; governance index; foreign investment; Thailand;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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