Corporate governance and foreign direct investment in Latin America

Abstract

Purpose – Hitherto, several Latin American countries have pinned their hopes for growth in international markets through foreign direct investments (FDIs). However, much investor confidence is shaped by perceptions of the country’s corporate governance pillars, such as accountability, board efficacy and investor protection. Thus, this study aims to examine how these corporate governance pillars impact on FDI inflows among the countries in this region. Design/methodology/approach – The research design is a causal longitudinal non-experimental empirical study that uses the gravity model of the FDI bilateral flow from 17 Latin American countries from 10 years before COVID-19, obtained from 272 bilateral flows and 2, 992 observations. The authors factorized and normalized country-level corporate governance measures from the World Bank and generated the dynamic panel data estimates with the Arellano–Bond two-step generalized method of moments system. Findings – The findings of this study are robust concerning previous gravity models, showing that FDI bilateral flows depend significantly on their lagged flows and the economic growth of the reporter countries. This study shows accountability and board efficacy significantly increase FDI bilateral flows in Latin America. Investor protection only positively influences the FDI bilateral flow if it is from the home country. Originality/value – The literature on the relationship between FDI and corporate governance is relatively scarce to justify such pillars of corporate governance in Latin America from the perspective of bilateral investment flows. Thus, this study seeks precisely to deepen the analysis of the relationship between FDI flows and corporate governance. Additionally, the authors present theoretical and policy implications with a future research agenda.