Foreign Direct Investment and Private Sector External Financing: Do Credit Ratings Matter?

This study investigates the relationship between inward foreign direct investment (FDI) and private sector external financing over the last decade with regard to 61 developing countries, 30 of them enjoying “investment” ratings and the remainder having “non – investment” ratings. Our analysis employing fixed effect two stage least squares (FE-2SLS) technique with simultaneousequation for panel data show that increasing private sector external financing negatively affects FDI between 1999 and 2010. Yet, private sector external financing is not directly affected by FDI. There is not a statistically significant relationship. Over the last decade, the private sector in developing countries has fulfilled its external financing demands without being greatly affected by any changes in FDI. These two findings verify the increasing credibility of developing countries, regardless of having non – investment credit rating

Keywords:

Foreign direct investment, private sector external financing, fixed effect two stage least squares (FE-2SLS) credit rating,

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Reinhart et al. (2003) presents a brief record of developing countries’ default history.
Investors monitor the recipient country with their previous year’s realizations. So the lag values are influential in their decision – making process. In a similar fashion Reinhart et al. 2003, use the Institutional Investor (IIR) ratings, which are compiled twice a year, as a determinant of debt intolerance. The ratings grade each country on a scale going from zero to 100, with a rating of 100 given to countries which are perceived as having the lowest chance of defaulting on its government debt obligations. Hence, one may construct the variable 100 minus IIR as a proxy for default risk.
See Guillen 2010, for the similar data used in their analysis investigating the determinants of successful re-access of developing countries to international capital markets.
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