National ESG Performance, Accounting Transparency, and Foreign Direct Investment: Evidence from Dynamic System-GMM and Panel Smooth Transition Regression

<jats:p>Sustainable investing has moved environmental, social, and governance (ESG) criteria toward the center of cross-border capital decisions, yet the country-level evidence on whether these criteria attract foreign direct investment (FDI) rests almost entirely on static models and rarely accounts for the quality of a country’s accounting and reporting environment. This study estimates a dynamic model of FDI for 265 economies observed from 2006 to 2020, combining the three ESG pillars with four accounting and tax variables: mandatory adoption of International Financial Reporting Standards (IFRS), the strength of auditing standards, the extent of business disclosure, and the corporate tax burden. A fixed-effects estimator and a two-step system generalized method of moments (GMM) estimator address persistence and the reverse causality between FDI and national conditions, and a panel smooth transition regression tests whether the relationship is nonlinear. Accounting transparency attracts FDI: audit quality and disclosure carry large positive and significant coefficients under fixed effects and across income groups, while the aggregate governance index enters negatively. The corporate tax burden deters FDI with no evidence of an optimal-tax turning point. The relationship is nonlinear in governance rather than income: a panel smooth transition regression locates a governance threshold near 0.97 on the standardized scale, above which the negative association between IFRS and FDI disappears and the effects of disclosure and sustainability reporting strengthen. The results reframe the ESG–FDI question around the reporting and assurance environment through which investors read a country’s ESG credentials, and around the governance quality that makes that environment credible.</jats:p>