Do Sovereign Credit Ratings Matter for Foreign Direct Investments?

Abstract

This paper examines the relationship between sovereign credit ratings and FDI flows from 31 OECD donor countries to 72 recipient (OECD and non-OECD) countries over the period of 1985-2012. There are three main findings in the paper. First, sovereign credit ratings of donor and recipient are important drivers of bilateral FDI flows. FDIs in general flow from low-rated donor countries to high-rated recipient countries. Second, an OECD recipient receives high FDI inflows when its credit rating is high, whereas a non-OECD recipient receives high FDI inflow when its credit rating is low. Third, countries have more FDI inflows when their geographic region has higher average credit rating compared to other regions.