International Business & Economics Research Journal – July 2012 Volume 11, Number 7 © 2012 The Clute Institute http://www.cluteinstitute.com/ 785 The Relationship Of Development Status Of Investee Countries And Investor Perceptions Of Foreign Earnings Chen-Lung Chin, National Chengchi University, Taiwan Yu-Ju Chen, National Changhua University of Education, Taiwan Gary Kleinman, Montclair State University, USA Picheng Lee, Pace University, USA ABSTRACT This study investigates the impact of corporate internationalization and the development status of investee countries on the foreign earnings response coefficient (FERC), which is a measure of the value-relevance of foreign earnings. To improve competitiveness, firms worldwide have expanded aggressively into foreign markets, thereby increasing their exposure to external risks and uncertainties on the one hand, and sources of growth and reward on the other. Using a Taiwanese sample, we found that greater corporate internationalization via investments in developed countries was positively related to the foreign ERC. We expected, and found, that companies can enhance the positive effects of internationalization by investing in countries that are relatively better developed than in countries that are less well developed. The public policy implications of these findings are discussed. Keywords: Internationalization; Economic Development; Value Relevance of Foreign Earnings INTRODUCTION usinesses always have the ability to choose whether to devote their investment resources to investing domestically only, or in other countries, or a combination of the two. Businesses that choose to invest outside their national borders further face the choice of investing in more versus lesser developed countries. It is commonly understood that businesses pursue overseas (external) diversification as part of a strategy to take advantage of profit potentials overseas. The international diversification may also result in a more efficient allocation of capital and greater economic growth. The public policy implications of this diversification, however, are less clear cut since diversification may result in capital being allocated to international locales where the investment may be subject to great uncertainty. For example, investments in emerging markets, or lesser developed countries, may cause investors to believe that repatriation of investment profits and investment capital itself may be uncertain. In addition, investing in lesser developed countries may expose the investing firm to political and economic instability that may not exist in more developed economies, economies that are almost axiomatically more integrated with established international economic, financial and investment practices and mores. Further, investing businesses are more likely to be able to acquire greater amounts and quality of information on more (as opposed to lesser) developed countries. Accordingly, investors may be more likely to perceive foreign investments in more developed countries in a better light and therefore see greater value in earnings derived from them. This may lead to a higher value relevance of earnings. Prior research has shown that successful internationalization will lead to higher earnings growth rates and greater earnings persistence (e.g., Duru and Reeb, 2002). While prior accounting studies on internationalization focus primarily on differences in the value relevance of foreign versus domestic earnings (e.g., Bodnar, Hwang and Weintrop, 2003; Bodnar and Weintrop, 1997), little work to date examines whether the market's perception of the value relevance of foreign earnings varies among firms that differentially invest in more (versus lesser) developed countries. Given the widely bruited importance of globalization and cross-national cooperation and investment, this B