IFRS adoption and its impact on foreign direct investment in developing countries

Abstract

This study examines the impact of International Financial Reporting Standards (IFRS) adoption on foreign direct investment (FDI) inflows in developing countries to assess whether IFRS adoption enhances the attractiveness of these countries to foreign investors. The study uses a balanced panel dataset of 74 developing countries covering the period from 2005 to 2024. The analysis employs both Random Effects and Ordinary Least Squares (OLS) regression models while controlling for key macroeconomic and institutional variables. The findings indicate that IFRS adoption has a positive and statistically significant impact on FDI inflows across both estimation methods. The Random Effects model demonstrates a stronger effect than the OLS model, suggesting that cross-country heterogeneity plays an important role in explaining FDI patterns. The findings have significant implications for policymakers who want to encourage foreign investment. They should focus not only on the formal adoption of IFRS but also on effective implementation, enforcement, and institutional strengthening. This research utilizes a recent large cross-country dataset covering a 20-year period, combines macroeconomic and institutional controls, and, unlike many previous studies that focused on specific regions or included both developed and developing countries, focuses exclusively on developing countries where the potential benefits of IFRS implementation are expected to be greater.