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

This study examines whether the adoption of International Financial Reporting Standards (IFRS) helps developing countries attract more foreign direct investment (FDI). It also examines the relationship between the variation in accounting standards and the inflow of investment by foreign firms using data from 74 developing countries during the period 2005–2024. According to the findings, countries that adopt IFRS are likely to have greater foreign investment, especially in countries with good governance and political stability. The findings highlight the importance of transparent financial reporting systems in building investor confidence and stimulating economic growth. The research may be useful for policymakers seeking to enhance investment climates in developing countries.

The growing globalization of financial markets has increased the need for financial transparency, comparability, and reliability of financial information across countries. The International Accounting Standards Board (IASB) introduced the International Financial Reporting Standards (IFRS) to overcome the differences brought about by different national accounting systems. IFRS adoption is likely to improve the transparency of the financial reporting system, reduce information asymmetry, and enhance investor confidence, factors that may be critical in attracting foreign direct investment (FDI) in developing countries. A substantial body of literature supports this relationship. To illustrate, Gordon et al. (2012) established that IFRS adoption had a prominent effect on FDI inflows in developing nations, in comparison to developed countries. On the same note, Lungu et al. (2017) and Pricope (2017) indicated positive impacts of IFRS adoption on FDI in emerging and Central and Eastern European (CEE) economies, while also finding that governance enhances this impact. A similar positive and statistically significant association between IFRS adoption and FDI inflows was documented by Akpomi and Nnadi (2017) and Musah et al. (2020) in the African context, which is attributed to harmonized reporting standards that enhance financial credibility and attract investors. Recent evidence also supports this relationship. Al-Tuwaijari et al. (2025) reported that IFRS adoption contributes to higher foreign direct investment and economic growth in Middle East and North Africa (MENA) countries, while Mert (2025) found that the benefits of IFRS adoption are particularly pronounced in emerging economies due to improvements in accounting quality and transparency. At the firm level, Donker et al. (2025) and Kubota and Takeda (2026) further demonstrated that IFRS adoption increases foreign ownership and investment by reducing information asymmetry and enhancing financial comparability. However, results in different regions do not fully coincide. Nnadi and Soobaroyen (2015) found that, in certain African countries with weak institutional structures, IFRS comparability has a negative effect on FDI, whereas Leykun Fisseha (2023) established that IFRS adoption alone does not translate into increased FDI inflows unless accompanied by strong institutional quality. Similarly, Cieślik and Hamza (2022) found that although adoption of the IFRS has increased FDI inflows in MENA countries, the impact was significantly moderated by governance quality and political stability. These conflicting results indicate that the institutional environment of a country, regulatory implementation, and macroeconomic stability play vital roles in determining the effectiveness of IFRS adoption in attracting FDI (see also Akisik, 2013; Drabek and Payne, 2002; Peres et al., 2018). More recent evidence further suggests that the benefits of IFRS adoption are conditional rather than automatic. For example, Elhamma (2025) found that mandatory IFRS adoption significantly promotes foreign direct investment only when supported by strong institutional safeguards, particularly conflict-of-interest regulations. Likewise, Procházka et al. (2026), through a systematic review of IFRS adoption in MENA countries, concluded that political, cultural, and institutional factors largely determine whether IFRS adoption generates the expected economic benefits.

The motivation for conducting this study is derived from two major observations in the literature. First, there are conflicting empirical findings on whether IFRS adoption is positively related to FDI inflows. While studies such as Gordon et al. (2012) and Lungu et al. (2017) demonstrated a positive impact of IFRS adoption on FDI inflows, other authors such as Nnadi and Soobaroyen (2015) and Leykun Fisseha (2023) argued that IFRS adoption may not generate substantial benefits without effective institutions. This inconsistency requires broader empirical investigation that takes into account the diverse institutional and economic conditions of developing countries. Second, although recent studies (e.g. Kubota and Takeda, 2026; Donker et al., 2025; Mert, 2025; Elhamma, 2025) provide valuable evidence, they primarily focus on firm-level analyses, individual regions, or specific institutional mechanisms. Consequently, comprehensive cross-country evidence focusing exclusively on developing countries remains limited. Hence, this study seeks to provide updated evidence on whether IFRS adoption has been an effective tool for attracting FDI in developing countries over the period 2005–2024.

The primary objective of this study is to examine the impact of IFRS adoption on FDI inflows in developing countries. More specifically, the study investigates whether the impact of IFRS adoption remains significant after controlling for important macroeconomic and institutional variables such as Gross Domestic Product (GDP) growth, inflation, trade openness, financial market development, political stability, and governance. The study also compares FDI inflows between IFRS-adopting and non-adopting countries during the 2005–2024 period while providing policy recommendations to developing countries on the possible benefits of accounting harmonization by IFRS adoption as a means of enhancing their attractiveness to foreign investors.

This research contributes to the existing literature in several ways. First, it supplements the cross-country evidence on the IFRS-FDI relationship by examining a large panel dataset of 74 developing countries over a 20-year period (2005–2024), including both the pre-adoption and post-adoption stages. This study offers a broader comparative perspective by incorporating countries with diverse economic and institutional backgrounds, unlike prior studies that focused mainly on specific regions (Akpomi and Nnadi, 2017; Lungu et al., 2017). Second, it combines both economic and institutional variables into a single empirical model, addressing the limitation identified by Peres et al. (2018) that the effectiveness of IFRS adoption depends on governance quality. Third, the study employs a robust methodology by utilizing both Ordinary Least Squares (OLS) and Random Effects panel regression models, enabling comparison with prior approaches such as Difference-in-Differences (DID) and the Generalized Method of Moments (GMM) methodologies applied in prior studies (Gordon et al., 2012; Leykun Fisseha, 2023). Lastly, the study offers policy implications by providing empirical evidence on whether harmonization through IFRS adoption leads to tangible improvements in the investment climate of these countries. The findings may assist regulators, policymakers, and international organizations in formulating policies aimed at enhancing financial transparency and institutional governance, thereby attracting sustainable foreign investment.

The remainder of the paper is organized as follows. Section 2 reviews the relevant literature and develops the study hypotheses. Section 3 explains the research methodology, including data sources, variable measurement, and econometric models. Section 4 discusses the empirical findings. Finally, Section 5 concludes the study, discusses policy implications, acknowledges limitations, and suggests directions for future research.

The impact of International Financial Reporting Standards (IFRS) adoption on foreign direct investment inflows has been widely examined in the accounting and international finance literature. Several theoretical perspectives explain why IFRS adoption may influence multinational investors' decisions, particularly through its effects on transparency, institutional credibility, and information asymmetry.

From a signaling perspective, IFRS adoption is often interpreted as a credible commitment by countries to enhance financial transparency and align reporting practices with global standards. This signaling effect reduces perceived information risk and increases investor confidence (Gordon et al., 2012; Lungu et al., 2017; Okpala, 2012). Similarly, institutional theory suggests that adopting IFRS enhances a country's legitimacy in international markets by demonstrating adherence to globally accepted regulatory frameworks, thereby strengthening investor trust (Cieślik and Hamza, 2022; Leykun Fisseha, 2023; Nnadi and Soobaroyen, 2015). This perspective is reinforced by the recent systematic review of Procházka et al. (2026), which concluded that institutional quality, political conditions, and regulatory enforcement largely determine whether IFRS adoption translates into meaningful economic outcomes across MENA countries.

In addition, the theory of information asymmetry emphasizes that IFRS contributes to improving the quality, comparability, and reliability of financial information, which reduces the uncertainty of foreign investors (Beneish et al., 2012; Donker et al., 2025; Li, 2010; Manawadu et al., 2019; Márquez-Ramos, 2008). This reduction in information asymmetry is expected to facilitate cross-border investment decisions. Furthermore, capital market integration theory highlights that harmonized accounting standards lower transaction costs and reduce informational barriers, facilitating more efficient allocation of international capital (Akisik, 2013; Li, 2010; Musah et al., 2020).

Empirical evidence generally supports these theoretical arguments, although findings remain mixed. Several studies report a positive impact of IFRS adoption on foreign investment. For instance, recent firm-level evidence by Donker et al. (2025) showed that IFRS adoption increases foreign shareholdings and encourages long-term corporate investments by reducing information asymmetry and enhancing comparability. Similarly, Al-Tuwaijari et al. (2025) found that IFRS adoption contributes to higher levels of foreign direct investment and economic growth in MENA countries. Mert (2025) also reported that IFRS improves accounting quality and foreign investment, especially in emerging economies where transparency gains are higher. Extending this evidence to a developed economy, Kubota and Takeda (2026) demonstrated that voluntary IFRS adoption significantly increased foreign investment in the Japanese equity market after controlling for structural market changes and endogeneity using a difference-in-differences approach.

However, the literature also reveals important inconsistencies and conditional effects. For example, Mameche and Masood (2021) found that while IFRS adoption positively affects foreign direct investment in the short run, it has a negative impact in the long run in Gulf Cooperation Council (GCC) countries. Similarly, Sanjar et al. (2022) reported conflicting results depending on estimation methods, with positive effects under OLS but negative effects under alternative estimators, indicating sensitivity to model specification. Moreover, Elhamma (2025) showed that IFRS adoption alone does not significantly influence foreign direct investment unless supported by strong institutional frameworks, such as effective conflict-of-interest regulations. In the same way, Penela et al. (2022) emphasized that the benefits of IFRS adoption depend on broader economic conditions, including business climate and institutional quality.

These mixed findings indicate that the impact of IFRS adoption on foreign direct investment is not uniform across countries and may depend on contextual factors such as institutional development, governance quality, and macroeconomic conditions. Despite these recent contributions, important research gaps remain. First, many recent studies focus on individual countries (e.g. Japan), specific regions such as MENA and GCC, firm-level analyses, or samples that include both developed and developing countries (Kubota and Takeda, 2026; Donker et al., 2025; Al-Tuwaijari et al., 2025; Elhamma, 2025; Mameche and Masood, 2021). Consequently, evidence based exclusively on a broad sample of developing countries remains limited, reducing the generalizability of existing findings. Second, while systematic reviews (Procházka et al., 2026) emphasize that institutional and political factors shape IFRS outcomes, relatively few empirical studies simultaneously incorporate macroeconomic and institutional determinants within a unified cross-country framework. Third, conflicting empirical results across different methodologies highlight the need for more comprehensive cross-country analysis.

This study addresses these gaps by examining the impact of IFRS adoption on foreign direct investment using a large panel dataset of developing countries over an extended period. By incorporating both macroeconomic and institutional variables within a single empirical framework, this study provides a more comprehensive understanding of how IFRS adoption influences investment flows. In doing so, it contributes to the literature by offering updated cross-country evidence and by clarifying the conditions under which IFRS adoption enhances foreign investment in developing countries where this investment is most needed.

A substantial body of literature suggests that IFRS adoption enhances financial transparency, comparability, and investor confidence, which in turn facilitates cross-border capital flows. According to Gordon et al. (2012), Manawadu et al. (2019), and Márquez-Ramos (2008), the adoption of IFRS improves reporting quality by reducing information asymmetry and enhancing the credibility of financial statements, thereby attracting foreign direct investment. In addition, the harmonization of accounting standards lowers the cost of evaluating foreign investments and makes emerging markets more attractive to international investors (Musah et al., 2020; Okpala, 2012; Lungu et al., 2017; Pricope, 2017). Evidence from developing countries suggests that the positive effect of IFRS adoption is more pronounced where institutional structures are relatively weaker (Aprian and Irawan, 2019; Peres et al., 2018). Based on these arguments, the following hypothesis is proposed:

Prior research further suggests that the positive impact of IFRS adoption on foreign direct investment remains robust even after controlling for macroeconomic and institutional factors. Economic variables such as GDP growth, inflation, and trade openness, along with institutional characteristics including governance quality and political stability, are known to influence investment decisions. However, IFRS adoption continues to provide additional credibility and transparency that enhance investor confidence (Leykun Fisseha, 2023; Musah et al., 2020; Peres et al., 2018; Manawadu et al., 2019). Accordingly, the following hypothesis is proposed:

Furthermore, prior studies indicate that countries adopting IFRS tend to attract higher levels of foreign investment compared to non-adopting countries. Lungu et al. (2017) and Márquez-Ramos (2008) concluded that foreign investment inflows are higher in IFRS-adopting countries because of global comparability and reduced information processing costs for investors. According to Ugwu and Okoye (2018), IFRS-adopting countries tend to exhibit higher levels of transparency and investor trust compared to non-adopting countries. Evidence from developing countries also suggests that IFRS adoption promotes long-term investment by increasing investor confidence in standardized reporting practices (Manawadu et al., 2019; Pricope, 2017). Based on this reasoning, the following hypothesis is proposed:

This study examines the impact of International Financial Reporting Standards (IFRS) adoption on foreign direct investment (FDI) inflows in developing countries. It initially compiled panel data for 74 developing countries covering the period 2005–2024. Descriptive statistics are reported using all available observations for each variable. For the regression analysis, observations with missing values in any of the variables were excluded, resulting in an estimation sample of 953 observations. The data are compiled from multiple secondary sources, including the World Bank's World Development Indicators (WDI), the Worldwide Governance Indicators (WGI), and the IFRS Foundation's jurisdictional profiles on the use of IFRS Standards.

The dependent variable is FDI inflows, measured as a percentage of GDP and obtained from the World Bank. The independent variable, IFRS adoption, is represented by a dummy variable that takes the value of 1 for years in which a country has adopted IFRS and 0 otherwise. To control for macroeconomic and institutional influences on FDI inflows, the model includes GDP growth, inflation, trade openness, financial market development, political stability, and governance as control variables. Table 1 presents the list of sampled countries and indicates those in which IFRS is required for domestic public companies:

This study employs panel data regression models to examine the impact of IFRS adoption on FDI inflows. The study employs both Ordinary Least Squares (OLS) and Random Effects (RE) estimation techniques. The OLS regression model serves as the baseline estimator, whereas the Random Effects model is selected as the primary estimation method based on the results of the Hausman specification test, which indicated that the Random Effects estimator is more appropriate for the dataset than the Fixed Effects estimator. Panel data estimation techniques are appropriate for this study because they allow the analysis to capture both cross-country and time-series variations across developing countries over the sample period. In particular, the Random Effects model is suitable for examining country-level heterogeneity while accounting for variations across countries and over time.

The Ordinary Least Squares (OLS) model is as follows:

The OLS model provides an initial estimation of the impact of IFRS adoption on FDI inflows before accounting for unobserved country-specific heterogeneity through panel data techniques. The Random Effects model is specified as follows:

Where:

• FDI_it = Foreign Direct Investment inflows (% of GDP) for country i in year t;

• IFRSDummy_it = IFRS adoption dummy (1 = adopted; 0 = not adopted);

• GDPGrowth_it = GDP growth rate (%);

• INF_it = Inflation rate (annual %);

• TOP_it = Trade openness (% of GDP);

• FINDEV_it = Indicator of financial market development;

• POLSTAB_it = Political stability index;

• GOV_it = Governance indicator;

• Β₀ = Constant term;

• β₁ to β₇ = Coefficients of the explanatory variables;

• ε_it​ (in OLS) = Error term capturing unobserved factors;

• μ_i = Unobserved country-specific effect;

• ε_it (in RE)​ = Random error term.

The coefficient β₁ captures the impact of IFRS adoption on FDI inflows. A positive and statistically significant β₁ would indicate that the adoption of IFRS enhances FDI inflows in developing countries.

To improve the robustness of the findings, the study includes relevant macroeconomic and institutional control variables alongside panel data estimation techniques. The Random Effects model accounts for unobserved heterogeneity across the sampled countries, while OLS estimation is also employed to examine the robustness of the estimated results. Although additional estimation techniques such as Fixed Effects estimation or Generalized Method of Moments (GMM) were not employed, the inclusion of relevant control variables and panel estimation techniques helps mitigate potential omitted variable bias.

Table 2 presents the definitions, measurement units, and data sources of all variables used in the analysis, including the macroeconomic and institutional indicators employed in the empirical model. The dependent and macroeconomic variables are derived from the World Development Indicators (WDI), while the institutional variables are obtained from the Worldwide Governance Indicators (WGI) database published by the World Bank. The IFRS adoption variable is derived from the IFRS Foundation's jurisdictional profiles on the use of IFRS Standards.

The descriptive statistics of the variables that were used in this study are provided in Table 3. This table reports descriptive statistics based on all available observations for each variable. Accordingly, the number of observations varies across variables because of data availability constraints. FDI has 1,372 observations, whereas the control variables contain between 1,213 and 1,480 observations. The mean of the foreign direct investment (FDI) inflow is 3.88% of GDP with a minimum of −0.29% and a maximum of 103.34%, suggesting that FDI inflows differ considerably across developing countries and over time, supporting the suitability of panel data analysis.

The mean value of the IFRS dummy variable is 0.44, indicating that 44% of the country-year observations correspond to the post-adoption period of IFRS. The mean GDP growth rate is 3.90%, with values ranging from −36.39% to 21.39%, indicating substantial variation in economic performance across the sampled countries. The inflation rate has a mean value of 8.92 and a high standard deviation (SD = 23.65), indicating the presence of periods of macroeconomic instability in certain countries. The average value of trade openness is 55.92% with a range of 2.46%–152.14%, indicating varying degrees of integration into international trade across the sampled countries. The mean value of financial market development is 32.80%, with a high standard deviation (SD = 28.69), indicating substantial variation in the level of financial market development across the sampled countries. The institutional variables, political stability and governance, have mean values of −0.62 and −0.62, respectively, indicating that, on average, the sampled countries experienced relatively weak institutional quality during the sample period. However, the maximum values of 1.33 for political stability and 1.09 for governance indicate that certain countries experienced relatively stronger institutional quality during specific years.

Overall, the descriptive statistics indicate substantial variation across countries in terms of economic conditions, institutional quality, and policy environments, supporting the relevance of examining the impact of IFRS adoption on FDI inflows within a panel data framework.

Table 4 presents the correlation matrix of the variables used in the study. The findings indicate that foreign direct investment (FDI) inflows are positively associated with trade openness (r = 0.4217), political stability (r = 0.2540), and governance (r = 0.0718), with all coefficients being statistically significant. This suggests that internationally integrated economies with stronger institutional quality are more attractive to foreign investors due to lower investment uncertainty and improved market accessibility. The correlation between FDI inflows and IFRS adoption is weak and statistically insignificant (r = −0.0050). This indicates that IFRS adoption does not exhibit a strong direct bivariate association with FDI inflows before controlling for macroeconomic and institutional variables. GDP growth also positively correlates with FDI (r = 0.0364) and negatively with inflation (r = −0.0332), suggesting that macroeconomic stability may contribute to attracting foreign investment. Among the control variables, trade openness is positively correlated with the financial market development (r = 0.2074) and institutional variables (r = 0.2552 with political stability; r = 0.0734 with governance), indicating that countries with greater trade openness tend to exhibit stronger financial systems and institutional quality. A relatively strong positive correlation is also observed between political stability and governance (r = 0.5103), which is not surprising, since both represent dimensions of institutional quality. Overall, all pairwise correlation coefficients are below the commonly accepted threshold of 0.7, indicating that multicollinearity is unlikely to pose a serious concern in the regression analysis. Therefore, the correlation analysis provides preliminary evidence supporting the inclusion of both macroeconomic and institutional variables in the regression model.

Table 5 presents the Variance Inflation Factor (VIF) of each of the explanatory variables that are used in the regression model. The mean VIF is 1.29 which is far below the generally accepted level of 10. This indicates the absence of serious multicollinearity in the dataset. The VIF values range from 1.05 (GDP growth) to 1.79 (governance), which indicates that none of the variables is significantly correlated with the rest. Based on this, the independent and control variables may be incorporated in the regression analysis without the risk of unstable or biased coefficient estimates. Thus, the regression model does not violate the assumption of the absence of severe multicollinearity, supporting the reliability of the estimated coefficients.

As shown in Table 6, this study employs a Random Effects regression model to examine the effect of IFRS adoption on foreign direct investment (FDI). The Hausman specification test (Prob > χ² = 0.5862) indicates that the Random Effects model is more appropriate than the Fixed Effects model, as the null hypothesis of no systematic difference between the estimators could not be rejected. The overall R² value of 0.1578 indicates that approximately 15.78% of the variation in FDI inflows is explained by the independent and control variables included in the model. The model as a whole is statistically significant (p < 0.01), indicating that the explanatory variables jointly explain variations in FDI inflows.

The IFRS adoption dummy variable is found to have a positive and statistically significant coefficient (β = 0.5613, p = 0.006) indicating that the FDI inflows were higher in countries that adopted IFRS than in countries that did not adopt it, other things remaining constant. This finding is consistent with the studies of Gordon et al. (2012), Musah et al. (2020) and Manawadu et al. (2019), which also reported a positive association between IFRS adoption and foreign investment inflows. Therefore, the findings support H1, which proposes that IFRS adoption has a positive and significant impact on FDI inflows in developing countries. The persistence of the positive and statistically significant IFRS coefficient after controlling for macroeconomic and institutional variables further supports H2. Furthermore, the findings also support H3, which proposes that IFRS-adopting developing countries experience higher FDI inflows compared to non-adopting countries.

Trade openness is one of the control variables that has a strong positive and statistically significant effect on FDI inflows (β = 0.0485, p = 0.000). This implies that the more open economies are, the more likely they are to receive foreign investment, and this is in line with previous empirical findings that trade liberalization leads to investment inflows. On the other hand, the development of the financial market is observed to have a negative and statistically significant impact on FDI (β = −0.0195, p = 0.001). This may suggest that, in certain developing countries, rapid financial sector expansion without sufficiently strong institutional and regulatory frameworks may increase perceived investment risk among foreign investors. The regression coefficients of GDP growth (β = 0.0076, p = 0.658) and inflation (β = −0.0017, p = 0.543) are statistically insignificant, implying that the short-term macroeconomic variations do not exhibit a statistically significant relationship with FDI inflows in the sampled countries. In the institutional factors, governance has a positive and significant impact on FDI (β = 0.5771, p = 0.043), meaning that countries with stronger governance quality are more likely to attract foreign investment. The positive effect of governance is also consistent with prior studies emphasizing the importance of institutional quality in attracting foreign investment (Nnadi and Soobaroyen, 2015; Pricope, 2017; Lungu et al., 2017; Cieślik and Hamza, 2022). But the effect of political stability is positive and statistically insignificant (β = 0.0854, p = 0.614), which indicates that the changes in political stability of countries do not have a significant impact on FDI in this set of data.

The estimated variance components (σ_u = 1.646, σ_e = 1.883) indicate that 43.31% (ρ = 0.4331) of the total variance in FDI inflows is attributable to differences across countries and therefore the cross-country heterogeneity is important in explaining investment inflows. Additionally, the mean VIF value (1.29) indicates no multicollinearity among the explanatory variables.

Generally, the findings indicate that the adoption of IFRS and the quality of the governance can contribute significantly to increasing the foreign direct investment, and higher trade openness may also signal fewer market barriers, greater integration with global markets, and improved accessibility for multinational investors, thereby increasing FDI attractiveness. The results show that transparent financial reporting standards and high institutional quality both play an important role in attracting international investment into developing countries.

To provide a baseline estimate of the relationship between IFRS adoption and foreign direct investment (FDI), an Ordinary Least Squares (OLS) regression has been estimated. The results of the OLS as shown in Table 7, indicate that the model is significant in general (Prob > F = 0.0000) indicating that the explanatory variables do indeed have substantial influence on FDI inflows jointly. According to the model, the R-squared is 0.1745, this implies that 17.45% of the variation in the inflows of FDI in the sample countries can be attributed to the variables captured in the model. Although the explanatory power is moderate, this is understandable given the presence of multiple unobserved economic, institutional, and country-specific factors influencing FDI inflows. The coefficient of adoption of IFRS (ifrsdummy) is positive (0.3199) and marginally significant at the 10% level (p = 0.058) thus showing that countries that adopt IFRS tend to experience higher FDI inflows as compared to countries that do not adopt IFRS. Trade openness (p < 0.01) and political stability (p < 0.01) are some of the control variables, which have a strong positive and statistically significant impact on FDI, indicating that more liberal and politically stable countries are more appealing to foreign investment however, the political stability was not statistically significant in the earlier Random Effects regression model. On the other hand, FDI has a significant and negative relationship with the financial market development (p < 0.01) in OLS which could be interpreted to mean that higher domestic financial development reduces the reliance on foreign inflows of capital. However, the growth of GDP, inflation, and governance in this model do not exhibit statistically significant effects on FDI inflows. Altogether, the OLS estimation provides preliminary evidence of a positive impact of IFRS adoption on FDI inflows, but the intensity of the correlation is moderate.

The simple impact of IFRS adoption on FDI inflows was also presented by the OLS regression as a baseline (pooled) model to indicate the impact without any country-specific effects or unobserved heterogeneity. The OLS model considers all the observations as one pooled data and presumes that countries are homogenous when it comes to aspects that determine FDI. The OLS results are included to facilitate comparison with the panel data model (Random Effects in the present case). This helps in determining whether the impact found under OLS will still be similar after the issues unique to a particular country have been controlled (e.g. institutional quality, geographical features, or culture).

The results of both the OLS and the Random Effects regression demonstrate that adoption of IFRS has a positive impact on FDI inflows which means that the results are strong regardless of the method of estimation. However, the values and statistical significance of the coefficients are slightly different as the Random Effects model (β = 0.5613, p = 0.006) demonstrates a greater and statistically significant effect than the OLS model (β = 0.3199, p = 0.058). This distinction implies that country-specific unobserved variables have a role to play in the determination of FDI and once these effects are accounted by using the Random Effects model, the positive effect of IFRS adoption on FDI is more evident and statistically stronger. Thus, the inclusion of both outcomes adds more credibility to the analysis that the OLS model gives the preliminary benchmark relationship whereas the panel regression (that considers the heterogeneity in individual countries and years) provides a more reliable estimate of the actual effect.

The empirical results of this study provide some crucial findings of the impact of International Financial Reporting Standards (IFRS) adoption on the foreign direct investment (FDI) inflows of sampled countries. The findings indicate that IFRS adoption has a positive impact on FDI inflows which is consistent with the argument that the increased financial transparency and comparability under IFRS can attract foreign investors by mitigating the information asymmetry as well as enhancing the reliability of financial reports. Therefore, the findings support H1, which proposes that IFRS adoption has a positive impact on FDI inflows in developing countries. Such an outcome is consistent with the theoretical prediction of the signaling and institutional legitimacy views which are that the better the quality of reporting and global comparability, the more attractive investment destinations become to the providers of international capital.

According to the Random Effects regression, the significant positive effect of IFRS adoption (β = 0.5613, p = 0.006), suggests that internationally comparable financial reporting standards may reduce information asymmetry and improve investor confidence in developing countries. This result is consistent with previous empirical studies that have reported the positive effect of IFRS adoption on the investment environment including Cieślik and Hamza (2022), Gordon et al. (2012) and Okpala (2012), which also reported the increase in the credibility of the financial reporting and investor confidence. It also indicates that the adoption of IFRS by countries can have the advantage of institutional enhancement in terms of encouraging cross-border investments especially those that adapt to the standardized accounting information of multinational corporations. In addition, the importance of the trade openness in both models supports the critical importance of economic liberalization in the attraction of FDI. This is consistent with previous studies, such as Janicki and Wunnava (2004), which showed that open economies provide greater market accessibility and facilitate international trade and investment flows. Governance also emerged as a significant institutional predictor of FDI inflows. This supports the argument that effective governance reduces regulatory uncertainty and transaction costs, thereby encouraging foreign investors to commit long-term capital to developing countries while reducing perceived investment risk. On the contrary, the development of financial markets was determined to be negatively and significantly correlated with the FDI, which might seem somewhat counter-intuitive at first. However, this observation may be explained by the substitution effect between domestic and foreign finance, as countries with more developed domestic financial systems may become less dependent on foreign capital inflows. This is in line with Agbloyor et al. (2013), who proposed that the reliance on the FDI can be minimized through the establishment of an adequate domestic financial system which offers adequate sources of internal funds. There was no statistical significance of macroeconomic variables like the rate of GDP growth and inflation in the explanation of FDI inflows. This suggests that short-term macroeconomic fluctuations may not play a decisive role in long-term investment destination choices of investors which are influenced more by institutional and structural considerations including transparency, governance, and trade policy. These findings support H2, which proposes that the positive effect of IFRS adoption remains significant after controlling for macroeconomic and institutional variables. The findings also support H3, indicating that IFRS-adopting developing countries experience higher FDI inflows compared to non-adopting countries. The validity of the results has also been enhanced by the comparison of the OLS and the Random Effects models. Although the two estimations indicate a positive impact of IFRS adoption on FDI inflows, the stronger statistical significance of the IFRS coefficient under the Random Effects model (p = 0.006 against p = 0.058 with OLS) implies that country-specific unobserved factors like legal origin, cultural environment or stability in long-term policies have a significant role to explain FDI patterns. By accounting for this heterogeneity, the Random Effects estimation provides a more reliable estimate of the relationship. Both OLS and Random Effects estimations suggest that internationally comparable accounting standards may improve investor confidence and reduce information-processing costs for foreign investors, thereby increasing the attractiveness of developing countries to international capital. Altogether, the results indicate that the adoption of IFRS, the quality of governance and the openness of trade are the primary structural variables that promote inflows of FDI. The findings underline the significance of institutional changes and harmonization of international accounting to developing nations who aim at attracting international investors. Hence, policymakers must not necessarily emphasize on the adoption of IFRS in a formal manner only but also the actual implementation and enforcement of the same to realize the desired gains in terms of attracting capital and integrating financial systems.

The primary purpose of this study was to examine whether the implementation of International Financial Reporting Standards (IFRS) has an effect on inflows of foreign direct investment (FDI) in the developing countries. To be more specific, the research questions were as follows: (1) the direct impact of IFRS adoption on FDI; (2) whether the impact of IFRS adoption remains significant after considering major macroeconomic and institutional conditions; and (3) to compare FDI performance between IFRS-adopting and non-adopting countries. The analysis was conducted using a panel dataset of 74 developing countries for a 20-year period, resulting in an initial dataset comprising 1,372 FDI observations, with varying numbers of observations for the remaining variables because of data availability. The dataset included GDP growth, inflation, trade openness, financial market development, governance, and political stability, which served as control variables to provide a comprehensive picture of FDI dynamics.

The study reveals several significant empirical findings. The adoption of IFRS has a positive and statistically significant effect on FDI inflows in developing countries. This result is consistent across both Random Effects and OLS estimations, indicating that IFRS enhances the transparency and comparability of financial statements, thereby attracting foreign investors. The positive impact of IFRS adoption remains significant even after accounting for macroeconomic and institutional variables, indicating that the relationship is robust. Among the control variables, trade openness and governance quality significantly predict FDI inflows, highlighting the importance of an open economy and a strong institutional environment in attracting foreign capital. There is a negative and significant relationship between financial market development and FDI inflows, which may indicate a substitution effect between domestic financing capacity and reliance on foreign capital. GDP growth and inflation are the macroeconomic variables that are statistically non-significant, implying that long-run institutional and structural variables play a more important role in influencing FDI. The findings also indicate that IFRS-adopting countries receive higher FDI inflows compared to non-adopting countries, underscoring the importance of internationally harmonized accounting standards.

The findings of this study provide several policy implications for developing countries seeking to attract higher levels of foreign direct investment. First, policymakers should not only adopt IFRS formally but also ensure effective implementation, monitoring, and enforcement of the standards. There is a need for regulatory authorities and accounting standard-setting bodies to strengthen compliance systems, improve disclosure requirements, and provide regular monitoring to ensure the quality and comparability of financial reporting. In addition, governments should also provide professional training programs for accountants, auditors, and corporate managers to improve technical expertise related to IFRS implementation.

Second, improving institutional quality and governance is essential for attracting foreign investors. Governments should strengthen regulatory institutions, reduce bureaucratic inefficiencies, improve transparency, and ensure greater accountability in public administration. Investor confidence can be strengthened through the effective enforcement of these measures.

Third, the positive impact of trade openness on FDI inflows suggests that policymakers should continue promoting trade liberalization policies. Reducing trade barriers, improving customs efficiency, investing in transport and logistics infrastructure, and facilitating cross-border business operations may increase the attractiveness of developing countries to multinational investors.

Fourth, while financial market development is important for economic growth, the negative relationship between financial market development and FDI indicates that rapid expansion of domestic financial markets without strong regulatory oversight may increase perceived uncertainty for foreign investors. Therefore, policymakers should strengthen financial supervision, improve market transparency, and ensure the stability of financial institutions alongside financial market development.

Overall, the study suggests that developing countries should adopt an integrated investment strategy which includes effective IFRS implementation, strong governance quality, openness to trade and sound financial regulation, in order to establish a stable and attractive investment climate for long-term foreign investment.

Regardless of the contributions made by this study, several limitations should be acknowledged. First, the study faced data availability constraints because observations with missing values were excluded from the regression analysis, reducing the estimation sample. This may have affected the consistency and overall reliability of the regression estimates. Second, the findings are limited to developing countries and therefore may not be fully generalizable to developed countries, where institutional frameworks and financial markets differ substantially. Third, although the study considered some of the macroeconomic and institutional variables, some important factors such as exchange rate stability, corruption control and political ideology, were not included due to data limitations. Fourth, IFRS adoption was measured using a dummy variable which does not capture variations in enforcement quality or partial adoption across countries. Finally, although this study employed conventional panel regression techniques, recent studies have raised concerns regarding the limitations of traditional frequentist approaches and highlighted the potential advantages of Bayesian methods in improving inference reliability (Briggs, 2023).

Future research may extend this study in several ways. First, future studies may examine whether governance quality, political stability, or regulatory effectiveness moderate the impact of IFRS adoption on FDI inflows by incorporating interaction effects in the empirical model. Second, researchers may differentiate between full IFRS adopters and partial adopters or incorporate measures of IFRS enforcement quality rather than relying solely on a binary adoption indicator. Third, future studies may include additional explanatory variables such as exchange rate stability, corruption indices, market size, innovation capacity, or human capital indicators to provide a more comprehensive explanation of FDI inflows. Moreover, country-specific case studies may provide deeper insights into the institutional, cultural, and legal factors affecting the effectiveness of IFRS implementation. Finally, future research may employ advanced econometric techniques such as Generalized Method of Moments (GMM), difference-in-differences, Bayesian methods, or dynamic panel models to address endogeneity concerns and strengthen causal inference regarding the impact of IFRS adoption on foreign direct investment.

This study is based exclusively on secondary data obtained from publicly available sources. It does not involve human participants, personal data, or animals. Therefore, ethical approval was not required.