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Sovereign Ratings, Foreign Direct Investment, and Financial Contagion: The Case of Emerging Markets

Emara, Noha and El Said, Aya (2019): Sovereign Ratings, Foreign Direct Investment, and Financial Contagion: The Case of Emerging Markets.

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Abstract

Using dynamic panel System GMM for 24 EMs over the period 1990-2014, 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 a sovereign ratings change on FDI inflows increases in crisis times, both country-specific, as well as the global financial crisis.

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