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

Article excerpt


The year 2010 witnessed two major business phenomena in the world. First, an unprecedented degree of consensus among more than 120 countries to require or permit the use of International Financial Reporting Standards (IFRS) in their jurisdictions and; second, for the first time in history Foreign Direct Investment (FDI)inflows to developing countries reached a half of that of global investment, and are further expected to lift up to over $2 trillion in 2012. When the International Organization of Securities Exchange Commissions (IOSCO) ratified International Financial Reporting Standards (IFRS) in 2002, FDI inflows started to grow from $0.6 trillion to $1 trillion in 2005. Furthermore, when the European Union (EU) required its member to use IFRS in 2005, FDI inflows has doubled and reached its peak in 2007 at more than $2 trillion. The global trade also experienced the same increasing trend. Assuming that adopting IFRS promotes higher comparability and transparency of accounting information, the bigger question is that does IFRS adoption affect developing countries' FDI inflows and values of international trade?

To answer this question, we examine the effects of IFRS adoption on international trade and FDI inflows in developing countries. After controlling generally accepted determinants of FDI inflows and international trade, we find a contradictory fact that developing countries adopting IFRS are unlikely to experience higher FDI inflows and international trade.


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 It appears that the global convergence of national accounting standards and International Accounting Standards (IAS, superseded by IFRS) has been successfully achieved (IASB, 2007).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 LASB 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. …


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