The relations between sovereign credit rating and inflows of foreign direct investments

Abstract

This article attempts to answer the question whether ratings are a reference point for investors making foreign direct investments in the event of a financial crisis. The research refers to the Asian financial crisis of the late twentieth century, verifying the linkage between the sovereign credit rating and direct foreign investment share in GDP before and after the crisis. The introduction presents the main goal of this article and the main research hypothesis. In the first part of the article, a review of the literature devoted to relations between direct foreign investments and rating assessments is performed. In the second part, the basics of the methodology of three major rating agencies in the world – Moody’s, S&P and Fitch – are presented. The third part contains the results of the research on the verification of the relation between the rating and direct foreign investments. In the concluding part the authors respond to the main goal and the research hypothesis, and identify the prompts for further research. The conducted research, using the one-way ANOVA analysis and Tukey’s complementary method, enabled to complete the main research objective presented in the article. The results confirm the main hypothesis that after the Asian crisis countries with a high sovereign credit rating were characterised by relatively higher inflows of foreign direct investment.