External investor protection and internal corporate governance: substitutes or complements for motivating foreign portfolio investment?

Institutional theory emphasizes external investor protection (EIP), while corporate governance theory focuses on internal corporate governance (ICG) to explain corporate operation and behavior. However, both mainstream theories explain much less the relationship between EIP and ICG. Examining firm foreign ownership from 30 countries, we show that while EIP and ICG separately foster firm foreign ownership, they are substitutes. Our findings imply that foreign investors have similar view with firms on EIP and ICG and that nations can counterbalance the impact from poor firm-level governance by promoting external investor protection to attract foreign ownership.