Abstract:

This paper examines the relation between the adoption of international financial reporting standards (IFRS) and foreign direct investment. Extant literature has shown that increases in monitoring costs impede investment activity, and that the adoption of IFRS may mitigate some of the informational asymmetries that exist with foreign investment.  Monitoring costs are closely related to Ghemawat’s (2001) construct of administrative distance and have been operationalized as differences in accounting or legal systems, physical distance, language barriers, and cultural differences among others.  In this paper I focus on foreign direct investments in Mexico. I predict and find that the adoption of IFRS is associated with increases in inbound foreign direct investment suggesting the adoption of IFRS reduces monitoring frictions but only when both the home and foreign country are on IFRS. This finding is consistent with prior literature on home bias and prior gravity-model based studies on FDI. The purpose of this paper is to contribute to the literature on IFRS and FDI, specifically with respect to the role of common financial standards in reducing informational asymmetry and increasing foreign investment.