Sovereign ratings, foreign direct investment and contagion in emerging markets: Does being a BRICS country matter?

Abstract

Using dynamic panel System GMM for 24 EMs over the period 1990-2018, we analyze how changes in sovereign ratings affect FDI inflows to EMs. The study also estimates the contagion effect of a ratings change among any of the BRICS countries on three regions, Europe, the Middle East, and Africa (EMEA) and Latin America and Asia. Third, we estimate the impact of a ratings change on FDI inflows in the presence of two types of crises, the 2007-2009 global financial crisis as well as country-specific crises. The results suggest that sovereign ratings have a statistically significant impact on the flow of FDI to EMs and that the BRICS countries as a bloc exert a statistically significant contagion impact on the FDI inflows into the three regions examined. We also find that the impact of sovereign ratings change on FDI inflows increases in crisis times, both country-specific, as well as the global financial crisis.