The Corporate Governance Paradox: A Comparative Analysis of Multinational and Domestic Manufacturing Firms in Pakistan

Said Shah, SAF Hasnu, Safdar A Butt, Safdar Husain Tahir

Abstract


There are two commonly held views on the quality of corporate governance and profitability of multinational corporations operating in the developing countries. The first view states that the quality of corporate governance practiced by multinational corporations is generally higher than that of domestic companies. The second view postulates that multinational corporations show better financial performance than domestic companies. An inference that can reasonably be drawn from these two views is that there is a positive relationship between the quality of corporate governance and financial performance of firms. The converse side of this coin is that domestic companies have lower profitability due to the poor quality of their corporate governance. But our research into the quality of corporate governance in multinational corporations and domestic companies operating in Pakistan and their respective financial performances divulges an interesting departure from these pervasive inferences. Looking at the issue with a slightly different angle, this paper examines the impact of firms’ location on its corporate governance quality and ultimately their profitability. Our results show a strong positive relationship between firms’ location and financial performance; but they indicate that the quality of corporate governance is better in domestic firms than multinational corporations. Another surprising revelation is a negative and insignificant relationship between corporate governance index and financial performance of domestic firms. We are inclined to deduce that multinational corporations owe their superior financial performance not to the quality of their corporate governance but to other factors not covered by the present research.


Keywords


Corporate governance index, location, multinational firms, ratio analysis



DOI: http://dx.doi.org/10.22555/pbr.v20i2.495

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.