IFRS Harmonization and Foreign Direct Investment

IFRS Harmonization and Foreign Direct Investment

Javier Vidal-García (University of Valladolid, Spain) and Marta Vidal (Complutense University of Madrid, Spain)
DOI: 10.4018/978-1-5225-0305-7.ch004
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Abstract

IFRS refers to International Financial Reporting Standards, which are the guidelines that provide the framework for accounting works. The principles are also known as the International Accounting Standards (IAS). This global financial concept was first introduced in 2001 to equip investors with analyzed accounting statements. In this Chapter we review the relation between IFRS and Foreign Direct Investments (FDIs). We review the relevant literature that analyses the effects on IFRS on FDIs and cross-border acquisitions. The economic literature states that the introduction of IFRS has presented an important increase in FDIs. The evidence shows that IFRS adopting countries attract investments from countries that implemented IFRS and non-IFRS implementing countries.
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Background And Literature Review

The notion of unifying accounting principles dates back to the early 19th century. It is at this time that the concept of international financial standards originated, specifically during the first Global Congress of Accountants held at St. Louis in 1904 (Fritz & Lammle, 2003, p. 3). At the conference, the need for harmonization and cooperation in the accounting field was emphasized. Despite the initiative, differences in the accounting principles still abound, mainly because the dissimilarities in legal systems, the manner in which providers of capital operate, taxation systems, national cultures, and general accounting practices. The differences hindered investors from obtaining clear financial information, which is vital for strategic planning. Thus, international trade was constrained; countries experienced unequal opportunities as a result of the dissimilarities. In this regard, the inequalities and unclear financial statements were the main reasons behind the call for financial standardization.

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