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Corporate Governance and Foreign Direct Investment

Listed author(s):
  • D. Alba, Joseph

    (Nanyang Technological University)

  • Park, Donghyun

    (Asian Development Bank)

  • Wang, Peiming

    (Auckland University of Technology)

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.

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Paper provided by Asian Development Bank in its series ADB Economics Working Paper Series with number 202.

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Length: 21 pages
Date of creation: May 2010
Handle: RePEc:ris:adbewp:0202
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