The Unwanted Effects of International Financial Reporting Standards (IFRS) Adoption on International Trade and Investments in Developing Countries

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Recently, 123 countries has either required or permitted the use of International Financial Reporting Standards (IFRS) in their jurisdictions, indicating that the acceptance of IFRS has been growing substantially (IASPlus, 2010). It appears that the global convergence of national accounting standards and International Accounting Standards (IAS, superseded by IFRS) has been successfully achieved (IASB, 2007). The International Accounting Standards Board (IASB) itself maintains that IFRS is perceived as "a single set of high-quality, understandable and enforceable accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions" (IASB, 2007, p. 4). As a result of this rapid diffusion of IFRS, it is expected that countries adopting IFRS would have higher degree of transparency and comparability of financial reporting, would decrease asymmetric information and at the end would attract more investment and foster higher international trade.

Japanese FDI provides a perfect example on how international investment, and to some extent international trade are always searching for the best place where it is valued the most. In 1980s it was mainly allocated to North America and Europe, and shifted to East Asia in the late 1980s, then distributed to ASEAN in 1990s, and finally poured to China. The movement of Japanese FDI suggests that international trade and investment are always looking for trade and investment friendly factors, such as pro-globalization policies, robust economic growth, lower business costs, political and social stability, and sufficient infrastructure. However, after countries' efforts of creating trade and FDI-friendly features are entwined each other and saturated with no direct significant positive outcome, these features eventually become only prerequisites instead of advantages of having more investment and trade. In other words, possessing these factors does not necessarily result in better international trade and investment performances. Consequently, countries need to find additional factors that could significantly attract investment and trade and it might be the adoption of IFRS.

The IASB contends that the acceptance of IFRS represents unification of business language and institutions, which increase the quality of economic information that could help investors, firms, and governments to make better economic decisions. Reasonably, countries turn to IFRS to attract more international investment and trade. Unfortunately, not only adopting IFRS requires high costs of newly established institutions, regulations, infrastructure, and the acceptance that national standards are usurped by international standards, but also although the arguments of adoption of IFRS results in economic benefits are strong and reasonable, little supporting empirical evidence has been found. Botswana, Haiti, Nepal, Panama, Papua New Guinea, Tajikistan, and Venezuela are among countries that substantially adopt IFRS yet have not able to obtain desirable economic benefits from the adoption (Lasmin, 2011). This phenomenon raises an important question: Do countries adopting IFRS experience higher value of international trade and attract higher value of investment? Therefore, it is important to examine whether IFRS adoption has been playing catalytic roles in promoting international investments and trade in developing countries.

The significance of this study is that it is expected to be able to confirm the importance IFRS adoption on Foreign Direct Investments (FDI) inflows and International trade. In this regard, this study could clarify whether single set of accounting standards fits all countries. In addition, it will add depth to current literature because bringing IFRS into FDI and international trade's country-level analysis is a relatively new approach to understand the impact of standardization and globalization of international accounting standards and so far, to the best of our knowledge, there is no study on the effects of IFRS adoption in developing countries from macroeconomic perspective. …