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

Authors : Huseyin Ozturk

Pages : 4-24

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Publication Date : 2012-12-01

Article Type : Research

Abstract :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