Abstract
We analyse the role of sovereign credit ratings as determinants of FDI outflows from 17 emerging market donor countries to 71 recipient countries. Sovereign ratings of donor countries have a positive influence on FDI outflows, suggesting that better rated donors are more likely to send FDIs. Moreover, recipient country ratings matter only for emerging market recipients in aggregate, where higher rated recipients receive more FDIs. However, there is a negative impact of the sovereign ratings of advanced country recipients with above average ratings, whereas below average rated countries show a significant positive influence. This suggests that emerging market donors consider higher rated advanced recipient countries only when there are “bargain hunting” opportunities (i.e. downgrades), whereas better ratings attract FDIs in other cases. Furthermore, we find that the emerging market donors (recipients) with better institution quality are more likely to invest (receive) FDIs. This does not apply to developed market recipients.
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