Accuracy of Disclosure Environment and Subsidies for Foreign Investments

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Abstract
Countries often offer substantial financial incentives (subsidies) for attracting foreign investments as new ventures, often with mixed results. Discussion to support foreign investment seldom includes improvement of the reporting and disclosure environment. When financial markets get integrated, but the accounting institutions and disclosure environment significantly differ, investment in a market with a relatively lax disclosure requirement may be construed by the investors as an attempt to avoid the due scrutiny of the asset’s performance, leading to a lower valuation. If so, financial incentives would tend to offset such a disincentive in addition to providing other incentives. The results of this study show that an improvement in accuracy of the audit/disclosure regime reduces the demand for subsidy. Therefore, the countries may find it more economical to compete for foreign investments on the basis of a more detailed and rigorous audit/disclosure environment instead of only relying upon the levels of fiscal incentives. Uniform adoption of accounting standards, such as the International Financial Reporting Standards (IFRS), may help accomplish such an objective. Therefore, fiscal incentives, though important, should not be viewed in isolation. A more economical solution may include development of a strong financial disclosure and auditing environment besides offering of a fiscal subsidy.

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