Developing Trust, Developing Economies: The Role of ESG Disclosure in Attracting Foreign Investment

Legitimacy theory posits that organizations strive to align with societal expectations to gain advantages, yet its focus has primarily been at the company level. The purpose of the study is to investigate the global applicability of legitimacy theory by examining the relationship between Environmental, Social, and Governance (ESG) disclosures and Foreign Direct Investment (FDI). In particular, the study sets the task: analyze the impact of ESG disclosures on FDI across twenty-eight countries; compare the ESG performance of different nations; and explore the role of regional ESG standards in influencing ESG performance and FDI. The application of the Kruskal-Wallis test revealed the dominant position of Western nations with developed ESG standards. The Bonferroni adjustment post hoc test on World Bank data indicated that countries with well-developed ESG standards act as global investors, trusting the high standards of rapidly improving Western regions. Statistical tests confirmed that countries in the developing stage, with values somewhat similar to the most developed areas, present attractive alternatives for foreign investors. However, the lack of standardized norms hinders the establishment of trustworthy economic relationships. These findings suggest that just as businesses use Corporate Social Responsibility (CSR) to gain legitimacy, countries can adopt ESG practices to align with global norms and attract FDI. Although this transition may be time-consuming, developing regional ESG disclosure norms could serve as an effective stepping stone.

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