The Influence of Foreign Direct Investment on the Corporate Governance Environment

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1 The Influence of Foreign Direct Investment on the Corporate Governance Environment Conceptual Analyses and Empirical Evidence vorgelegt von Diplom-Ingenieur Christoph Bernhard Nedopil aus München von der Fakultät VII Wirtschaft und Management der Technischen Universität Berlin zur Erlangung des akademischen Grades Doktor der Wirtschaftswissenschaften Dr.rer.oec. genehmigte Dissertation Promotionsausschuss: Vorsitzender: Prof. Dr. Axel Hunscha Berichter: Prof. Dr. Ulrich Steger Berichter: Prof. Dr. Jonas Schreyögg Tag der wissenschaftlichen Aussprache: Berlin 2008 D 83

2 Abstract (english) It has often been conceptually and empirically shown that corporate governance impacts firm finance and the development of the country s financial markets. Consequently it has been suggested to improve corporate governance in order to support not only stock markets development but also economic development. This idea though has two major shortcomings: (i) an unclear definition of good corporate governance and (ii) insufficient knowledge of how corporate governance develops and changes. While the first question can probably never be answered due to differing interests of various stakeholders, this study aims at answering the second question conceptually and empirically. In a first step the concept of the corporate governance environment is developed, which explicates how corporate governance is embedded in legal and sublegal standards as well as in behaviors and norms of the society. In a second step a conceptual framework of a changing corporate governance environment is developed by employing new institutional economics and institutional theory. As can be shown conceptually, international factor flows including foreign investments influence the development of the corporate governance environment the very variable corporate governance is often trying to affect, which leads to a reverse causality. This finding is tested empirically with a novel dataset compiled from the IMD World Competitiveness Center, the World Bank, PRS Group, UNSTATS and EUROSTATS including data from The empirical part employs econometrical analyzes to study the influence of foreign direct investments from developed countries on the evolution of corporate governance environments in developing countries. It can be found that under certain circumstances an improvement can be registered accordingly with the source country s CGE, supporting the developed conceptual framework. The findings of this study on the one hand help the academic debate on corporate governance, and on the other they advance the economic and political discussion whether foreign investors influence various institutions relevant for doing business. Hence, the results of this research can help policy makers and advisors as well as other institutions interested in economic development both in developing and developed economies - to better understand institutional evolution and with that the effects of globalization.

3 Abstract (deutsch) In der Wissenschaft konnte schon mehrmals konzeptionell und empirisch nachgewiesen warden, dass Corporate Governance einen Einfluss auf Unternehmensfinanzierung oder auch die Entwicklung von Finanzmärkten hat. Demnach wurde des öfteren vorgeschlagen Corporate Governance in einem Land oder einer Firma zu verbessern um nicht nur die Entwicklung von Aktienmärkten zu fördern, sondern auch die allgemeine ökonomische Entwicklung. Dieser Gedanke hat jedoch zwei wesentliche Schwächen: (i) ein unklares Verständnis über gute Corporate Governance und (ii) unzureichendes Wissen über die Entwicklung und Veränderung der Corporate Governance. Während die erste Frage wahrscheinlich niemals abschliessend beantwortet werden kann, unter anderem wegen unterschiedlichen Interessen der verschiedenen Stakeholder der Corporate Governance, versucht diese Studie die zweite Thematik konzeptionell und empirisch zu bearbeiten. In einem ersten Schritt wird hierfür die Corporate Governance Environmnent entwickelt, welche beschreibt wie Corporate Governance sowohl in legalen und sub-legalen Standards als auch Normen und Verhaltensweisen der Gesellschaft eingebettet ist. In einem zweiten Schritt wird ein konzeptioneller Rahmen einer sich verändernden Corporate Governance Environment geschaffen, indem relevante Theorien untersucht werden (z.b. Neue Institutionenökonomie, Institutionentheorie). Konzeptionell kann gezeigt werden, dass internationale Faktorenflüsse wie Auslandsdirektinvestitionen auf die Entwicklung der Corporate Governance einwirken. Somit wird eine umgekehrte Kausalität festgestellt, da konventionell Investitionen von der Corporate Governance beeinflusst werden. Diese konzeptionelle Erkenntnis wird im Folgenden mit einem neuartigen Datensatz kompiliert aus Quellen wie dem IMD World Competitiveness Center, der Weltbank, der PRS Gruppe, UNSTATS und EUROSTATS über den Zeitraum von 1991 bis 2005 getestet. Die Empirie untersucht mit Hilfe ökonometrischer Analysen die Auswirkungen von Auslandsdirektinvestitionen aus entwickelten Ländern auf die Evolution der Corporate Governance Environment in Entwicklungs- und Schwellenländern. Bei den Untersuchungen kann gezeigt werden, dass unter bestimmten Umständen eine Verbesserung der Corporate Governance Environment in Übereinstimmung mit der Corproate Governance Environment des Quellenlandes der Investitionen eintritt und somit das entwickelte konzeptionelle Modell in Teilen bestätigt werden kann. Die Ergebnisse der Studie erweitern einerseits die akademische Diskussion um Corporate Governance und andererseits fördern sie die politische und ökonomische Diskussion über den Einfluss von Auslandsdirektinvestitionen auf die heimischen Institutionen. Das Resultat

4 dieser Untersuchung kann somit Entscheidungsträgern und Beratern von Institutionen sowohl in Industrieländern als auch in Entwicklungsländern, welche an ökonomischer Entwicklung arbeiten, helfen, die institutionelle Evolution und auch die Effekte der Globalisierung besser zu verstehen.

5 Acknowledgements This dissertation would not have been possible without the support of a number of people, who have stimulated me intellectually and backed me personally throughout the whole period and whom I would like to thank. First and foremost I want to thank my supervisor, Prof. Ulrich Steger. He has not only given me guidance, encouragement and trust from the very first day as a PhD student, but he also shared his personal experiences and introduced me to the real world of business academia. I am also very grateful to my secondary supervisor Prof. Jonas Schreyögg, who not only read the final product, but who also gave sound advice on various occasions and especially during the econometric studies. I would also like to thank the IMD-team in Lausanne, where part of the dissertation was written, for providing me such a fantastic learning and working environment. Too many people at IMD have contributed to this positive experience to mention all. Yet, I would like to especially thank Augusto Rupérez Micola, Karsten Jonsen, Willem Smit, Jochen Brellochs, Albert André Diversé and Prof. Arturo Bris for countless insightful discussions. Another large part of the dissertation was written in Berlin, where the team of the department for strategic management of the TU Berlin and especially Alexander Schwandt as well as Ingmar Geiger provided me shelter and academic spirit. Thanks a lot! Special thanks go to my colleagues and friends Oliver Tiemann, Sebastian Glende, Johanna Tachler and Syahiza Radzi, whose patience, moral support, intellectual stimulus and intellectual distraction were always highly appreciated. My final thoughts go to my family and especially to my parents! They have made my journey to here possible and have provided help and guidance whenever needed or necessary also during this dissertation. I will always be grateful for all they have done for me!

6 I Outline Outline... I List of Figures...VII List of Tables...IX List of Abbreviations...XI 1 Introduction The Relevance of the Corporate Governance Environment and Its Constitution Motivation Intended Contribution and Focus of the Research Structure Methodology...5 Part I: Conceptual Framework Theoretical Foundation and Concepts of the Corporate Governance Environment Delimitation of Corporate Governance, Governance and the Corporate Governance Environment Corporate Governance Definition Relevant Theories Members of Corporate Governance Corporate Governance Mechanisms Internal Corporate Governance Mechanisms External Corporate Governance Mechanisms Summary of Corporate Governance Mechanisms Internal versus External Corporate Governance Governance Macro-level Governance Micro-level Governance Corporate Governance in Relation to Governance Theoretical Consequences for the Corporate Governance Environment Institutional Economics as Basis for the Corporate Governance Environment Definition of Institutions and Assumptions Classification of Institutions Formal and Informal Institutional Constraints Hierarchy-based Classification of Institutions...32

7 II Enforcement (of) Institutions Establishment of Institutions The Role of Institutions Organizations and Institutions Definition of Corporate Governance Environment Characteristics of Corporate Governance Environments Classifying Characteristics in the Literature Distinguishing Characteristics of the Corporate Governance Systems Corporate Governance Systems Classifications Board Structure-Based Corporate Governance Systems Ownership-Based Corporate Governance Environment Legal Origin Based Corporate Governance Environments Discussion of Corporate Governance Systems Institutions of the Corporate Governance Environment Legislative and Other Regulatory Institutions in the Corporate Governance Environment Moral Institutions in the Corporate Governance Environment Executive Institutions in the Corporate Governance Environment Summary The Influence of the Corporate Governance Environment on Corporate Governance Summary of Characteristics of the Corporate Governance Environment Theory of Institutional Change and Its Application to the Corporate Governance Environment Theory of Institutional Change Definition and Classification of Institutional Change Drivers for and Barriers for Institutional Change Functional Drivers for Institutional Change Political Drivers for Institutional Change Social Drivers for Institutional Change Barriers to Institutional Change Summary of Change Drivers and Barriers Agents in Institutional Change Individuals as Change Agent Entrepreneurs and Firms as Change Agent Intermediary Groups as Change Agent Supra-national Institutions as Change Agent Outsiders as Change Agent...62

8 III Process of Institutional Change Institutionalization Deinstitutionalization Levels of Institutional Change Speed of Institutional Change Analysis of Institutional Change A Model for Change of the Corporate Governance Environment Internationalization of Corporate Governance Drivers for Change of the Corporate Governance Environment Functional Drivers Political Drivers Social Drivers Summary of Change Drivers Moderating Factors for Change of the Corporate Governance Environment Agents for Change of the Corporate Governance Environment Process of Change of the Corporate Governance Environment The Special Role of International Capital Flows for the Corporate Governance Environment Motives for International Investments and Equity Flows The Need and Possibility to Control Investments The Influence of FDI on the Corporate Governance Environment Summary of the Model for Change of the Corporate Governance Environment...87 Part II: Empirical Research Review of Empirical Literature on the Relationship between the Corporate Governance Environment and Capital Flows Existing Empirical Research on Institutions, Corporate Governance and Equity Flows Institutions as Independent Variable Institutions as Dependent Variable Factors Influencing Institutions Factors Influencing Institutions of Corporate Governance Empirical Research Gap and Empirical Research Question Development of Hypotheses to Test the Influence of Foreign Direct Investment on the Corporate Governance Environment Hypothesis 1: General Influence of Foreign Agents on the Corporate Governance Environment Hypothesis 2: Influence of Dependency on FDI...103

9 IV 5.3 Hypothesis 3: Influence of High Bilateral FDI Dependency Hypothesis 4: Influence of Legal Origin Hypothesis 5: Influence of Size of Economies Research Model Research Strategy Research Methodology Selection of Data Type Quantitative and Qualitative Data Panel Data Advantages of Panel Data Limitations of Panel Data Observation Evidence Collection Summary Statistical Model Structural Equation Justification for Mono-Causality Data Data Sources United Nations The World Bank PRS Group World Competitiveness Center EUROSTAT Data Selection Dependent Variables Transparency (WCC) Bribing and Corruption (WCC), Corruption (PRS), Control of Corruption (World Bank) Labor Relations (WCC), Employee Training (WCC), Social Responsibility (WCC) and Ethical Practices (WCC) Competent Senior Management (WCC) Shareholder Rights (WCC), Shareholder Value (WCC) Corporate Boards Credibility of Managers Remuneration of Management/CEO (WCC) Independent Variables...125

10 V FDI Gross Domestic Product Source Country s Corporate Governance Environment Instrumental Variables Instrumental Variable for Bilateral FDI Instrumental Variable for Total FDI Countries Source Countries Target Countries Eastern Europe Asia Latin America Others Summary of Countries in Dataset Data Description Development of FDI Development of the Corporate Governance Environment Data Tests Comparability with Anti-Director Rights Index Difference between Source and Target Country Corporate Governance Environments Outliers and Leverage Serial Correlation Stationarity Multicollinearity Linearity Heteroskedasticity Test of Breakpoint after the Sarbanes-Oxley Act Summary of Data Tests Shortcomings of Data Shortcomings of FDI Data Shortcomings of Corporate Governance Environment Data Advanced Statistics Selection of Statistical Estimator Fixed and Random Effects Estimator Arellano-Bond Linear Dynamic Panel-Data Estimator GLS Estimator...152

11 VI Instrumental Variables 2SLS Estimator Summary Testing of Hypotheses Hypothesis 1: FDI inflows influence the development of the corporate governance environment Results for FGLS Estimator Results for 2SLS Estimator Summary Hypothesis 2: Influence of FDI Dependency Selection of Countries Results for FGLS Estimators Results for 2SLS Estimator Summary Hypothesis 3: Corporate Governance Environment Evolves in Direction of Dominant Source Country Selection of Countries Statistical Relationships Results for FGLS Estimator Hypothesis 4: Influence of Anglo-Saxon Legal Origin Results for FGLS Estimator Results for 2SLS Estimator Summary Hypothesis 5: Inertia of Large Economies Selection of Countries Results for FGLS Estimator Results for 2SLS Estimator Summary Summary of Advanced Statistics and Discussion Summary of the Analyses Discussion of the Results Limitations of the Study Synopsis Summary of Study Further Research Appendix Bibliography

12 VII List of Figures Figure 1-1: Structure of the study...5 Figure 2-1: Structure of chapter Figure 2-2: The levels of corporate governance according to van den Berghe, 2002: p Figure 2-3: Prominent corporate governance regulations (Source: adapted from Steger et al., 2008: p.9)...17 Figure 2-4: Shaping factors of corporate governance (Source: Steger, 2004: p.42)...19 Figure 2-5: The science of choice and contract (Source: Williamson, 2002: p.173)...21 Figure 2-6: Theoretical emergence of governance and corporate governance...26 Figure 2-7: Institutional environment of corporate governance...28 Figure 2-8: Development of institutions...36 Figure 3-1: Structure of chapter Figure 3-2: Drivers and moderating factors to institutional change...58 Figure 3-3: A multistage model of institutionalization adapted from Suchman, 1995: p Figure 3-4: Process of deinstitutionalization (Source: Oliver, 1992: p.567)...65 Figure 3-5: A framework for analyzing institutions and economic development (Source: Jütting, 2003: p.33)...69 Figure 3-6: Analysis of institutional change...70 Figure 3-7: Agents influencing the corporate governance environment...79 Figure 3-8: Process of change of the corporate governance environment...82 Figure 4-1: Structure of chapter Figure 6-1: Structure of chapter Figure 6-2: Model for the analysis of change of the corporate governance environment Figure 7-1: Structure of chapter Figure 7-2: Operationalization of the corporate governance environment Figure 7-3: International equity flows to Eastern Europe and former Soviet Republic (adapted from Lankes, 1999: p.66) Figure 7-4: International equity flows to Asia (Source: adapted from Ito, 1999 Table 3.1).133

13 VIII Figure 7-5: International equity flows to Latin America (Source: adapted from Edwards, 1999: p.12) Figure 7-6: Development of FDI in considered target countries (Source of Data: EUROSTATS) Figure 7-7: Development of FDI depending on target country region (Source of Data: EUROSTATS) Figure 7-8: Comparisons of FDI inflows (in EUR) in target countries by legal origin ( ) (Source of Data: EUROSTATS) Figure 7-9: Distribution of FDI depending on target countries region (Source of Data: EUROSTATS) Figure 7-10: Comparison of mean of cge k of source and target countries (Sources: WCC, PRS, World Bank) Figure 7-11: Comparison of relevant cge k in target countries 1998 and 2005 (Sources: WCC, PRS, World Bank) Figure 7-12: Comparison of relevant cge k in target countries 1998 and 2005 by legal origin (Sources: WCC, PRS, World Bank) Figure 8-1: Structure of chapter Figure 8-2: Target countries highly dependent on FDI Figure 8-3: Bilateral FDI dependency Figure 8-4: Mean of GDP (US-$) in selected target countries Figure 9-1: Structure of chapter

14 IX List of Tables Table 2-1: Examples of definitions of corporate governance in the literature...9 Table 2-2: Economics of institutions (based on Williamson, 2000: p.597 and Jütting, 2003: p.12-13)...33 Table 2-3: Influences affecting the operations of publicly traded firms (Source: adapted from Turnbull, 1997: p.183)...42 Table 2-4: Bank-centered vs. market-centered corporate governance systems (Source: adapted from Cernat, 2004: p.150; cited originally from Rhodes and van Apeldoorn, 1997: p )...44 Table 2-5: Institutions of the corporate governance environment...49 Table 3-1: Drivers for change and their influence on the corporate governance environment...77 Table 4-1: Overview of empirical literature concerned with the development of corporate governance practices Table 7-1: Correlation matrix corruption for source countries Table 7-2: Correlation matrix corruption for target countries Table 7-3: IV regression for bilateral FDI Table 7-4: IV correlation with error term Table 7-5: IV regression for FDI dependency (FDI/GDP) Table 7-6: IV correlation with error term Table 7-7: Countries in dataset Table 7-8: Correlation matrix of cge k in source and target countries Table 7-9: Test for heteroskedasticity Table 7-10: Summary of tests of data Table 8-1: Selection of statistical estimator Table 8-2: Results of FGLS estimator for hypothesis Table 8-3: Results for 2SLS estimator for hypothesis Table 8-4: Comparison of FGLS and 2SLS estimator for hypothesis Table 8-5: Results of FGLS estimator for hypothesis

15 X Table 8-6: Results of 2SLS estimator for hypothesis Table 8-7: Comparison of FGLS and 2SLS estimator for hypothesis Table 8-8: Results for FGLS estimator for hypothesis Table 8-9: Overall results for the bilateral and total FDI dependency estimator Table 8-10: Hypothesis 3 evaluation of influence on country dyads Table 8-11: Results of FGLS estimator for hypothesis Table 8-12: Results for 2SLS estimator for hypothesis Table 8-13: Comparison of FGLS and 2SLS estimator for hypothesis Table 8-14: Results of FGLS estimator for hypothesis Table 8-15: Results of 2SLS estimator for hypothesis Table 8-16: Comparison of FGLS and 2SLS estimator for hypothesis

16 XI List of Abbreviations Abbreviation 2SLS AIC BIC cf. cge CSR e.g. et seqq. EUROSTAT FDI FGLS FII GDP GLS i.a. i.e. IFC IMF IV MNC OECD OLS Explanation 2 stage least squares estimator Akaike s information criterion Bayesian information criterion Confer Corporate governance environment variable Corporate social responsibility For example (abbreviation from Latin: exempli gratia) and the following Statistical Office of the European Union Foreign direct investment Feasible generalized least squares estimator Foreign indirect (institutional) investment Gross domestic product Generalized least squares estimator Amongst others (abbreviation from Latin: inter alia) That is (abbreviation from Latin: id est) International Finance Corporation International Monetary Fund Instrumental variable Multinational company Organization for Economic Co-operation and Development Ordinary least squares estimator p. page PRS SEC SOX UNSTATS vs. Political Risk Services Securities and Exchange Commission Sarbanes-Oxley Act United Nations Statistical Department Versus

17 XII WCC WTO IMD World Competitiveness Center World Trade Organization

18 1 - Introduction Relevance of Corporate Governance Environment 1 1 Introduction The Relevance of the Corporate Governance Environment and Its Constitution 1.1 Motivation Corporate governance and globalization affect each other and economic performance in very complex mutual relationships (cf. Bonaglia et al., 2001: p.11). The research looking at this relationship (i.e. research on law and finance, law and economics, and institutional economics) has concerned itself mainly with the ways in which corporate governance on the firm level and the institutions of corporate governance on the country level have influenced corporate finance, corporate performance, financial markets and economic development since the 1980s (cf. Huizenga, 1983). Yet, with an escalated attention on topics related to corporate governance in the last decade, driven by spreading stock ownership, internationalization of capital markets, corporate scandals and corporate crises at the beginning of the millennium (cf. Steger and Nedopil, 2006), both the general public as well as academic researchers understand that many issues of corporate governance are still to be comprehended. Consequently, while non-academic press has dwelled in the corporate scandals at the beginning of the millennium such as ENRON, WorldCom, Parmalat, Ahold (cf. Hamilton and Micklethwait, 2006) and later Siemens, academia has busied itself with international corporate governance, also in order to identify and learn from a best-practice corporate governance model and to further foster global financial integration (e.g. Theisen, 2002; Fiss and Zajac, 2004; Djankov et al., 2005). However, the growing skepticism from all political camps concerning globalization has also sparked fears of financial integration, international ownership of firms and its possible consequences on business practices including corporate governance. Regulators and politicians have already blocked first investments from foreign investors (e.g. US ports) officially due to national security concerns (e.g. Kleinfeld, 2007), while German politicians discuss the restriction of foreign investments due to fears that investors from Angreiferstaaten (literal translation: aggressor states), namely developing countries such as Russia or China, could induce bad corporate practices including bad corporate governance (e.g. Neue Zürcher Zeitung, 2007). This fear is to an extent justified, since researchers could conceptually and empirically show that corporate governance and its institutions impact firm finance and the development of the country s financial markets (e.g. La Porta et al., 1998; La Porta et al., 1997; Djankov, 2005). Consequently, while good corporate governance practices have been connected to improvements of firm performance, stock market accretion, bad corporate governance

19 1 - Introduction Relevance of Corporate Governance Environment 2 practices, which could be induced by foreign investors, could adulterate even the status quo for the players of an economy. Yet both theory and empiricism of this reverse causal relationship between foreign investments and corporate governance the change of corporate governance due to foreign investments to the better or the worse - is vague at best, mainly for two reasons: Firstly, the discussion of what constitutes good or bad corporate governance is far from over, also due to an unclear delimitation of the concept of corporate governance. This can be seen, for example, in the fuzzy classification of corporate governance stakeholders: some researchers only include shareholders of the firm (e.g. Shleifer and Vishny, 1997), while others include the society as a whole in the corporate governance discussion (e.g. van den Berghe et al., 2002). Hence, the question of good or bad corporate governance can probably never be answered in full. Secondly, it is unclear how corporate governance actually changes and what influence foreign investors exert 1. As a framework to understand international corporate governance and hence the development of corporate governance, DOIDGE, KAROLYI and STULZ show that a contingency approach is not enough, since the corporate governance of a firm in a specific country mostly depends on the corporate governance environment and not predominantly on the firm characteristics (Doidge et al., 2005: p.6). 2 This means that corporate governance is embedded in and influenced by in laws, regulations and codes of the economy, as well as by behaviors and norms of the society (e.g. Dyck and Zingales, 2004; Roe, 2005b). And, while laws and codes can be changed formally overnight, it is culture which shapes behaviors and norms and to change these soft characteristics of an economy can take years (Williamson, 2000; Jütting, 2003). Despite these cognitions, the environment in which corporate governance is embedded and by which it is influenced has so far not been properly understood and academia has not busied itself in depth to research the development of the institutions relevant for corporate governance. This will be the focus of this research. 1 STEGER and NEDOPIL identified phenomenologically in a previous study about the diffusion of corporate governance regulation that foreign investors could influence corporate governance regulation, despite the conventional wisdom that foreign investments are influenced by corporate governance regulation (Steger and Nedopil, 2006). 2 DOIDGE, KAROLYI and STULZ relativize previous studies (e.g. Coffee, 2002; Reese and Weisach, 2002; Aggarwal et al., 2005; Durnev and Kim, 2005; Klapper and Love, 2004) which have shown that firm level corporate governance matters to investors (Doidge et al., 2005). The authors do not employ the term corporate governance environment.

20 1 - Introduction Relevance of Corporate Governance Environment Intended Contribution and Focus of the Research Some researchers could show that elements of the de facto and de jure corporate governance diffuse or persist (e.g. Cabolis and Bris, 2004; Cernat, 2004; Fiss, 2004; Steger, 2006). Yet both theory and empiricism do not provide a sufficient basis for discussion on what influences the development of institutions relevant to corporate governance the corporate governance environment. This leaves research on the institutions of corporate governance on the same level as research on other institutions and institutional change, which consists of more than its share of speculative and discursive pieces, the argument relying on illustrations, speculations, or stylized facts rather than on empirical work (Scott and Christensen, 1995b: p.xix). To identify what factors drive institutional change is seen as an emerging and challenging research question (Jütting, 2003: p.36). This study tries to help answer this research question relating to the evolution of institutions relevant to corporate governance. In order to do this, three deficits of the literature have to be filled: The first lack in research is the missing delimitation of the corporate governance environment from the concepts of governance and corporate governance as well as the description of idem. Only with such a framework can the institutions which build the foundations of corporate governance on the aggregate level be understood and their changes analyzed. The second lack is a systematic conceptual framework, which explains the development and evolution of the corporate governance environment. This framework needs to identify change drivers and barriers, change agents, the process of change, etc. The third lack is an empirical test of this conceptual framework of a changing corporate governance environment. This test should focus especially on an empirical contribution to the question whether global financing will lead to one single corporate governance model (van den Berghe, 2002: p.4) and hence whether foreign investors factually influence corporate governance. By addressing these three shortcomings of the literature at this point, it can be explained how the institutions of corporate governance on the country level, which strongly influence the firm s corporate governance, conceptually and factually evolve. On the firm level, however, this attempted contribution would not answer any questions regarding, e.g., change management in order to improve corporate governance, since it analyzes neither individual nor firm-level characteristics.

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