Journal of Applied Finance & Banking

Effects of Sovereign Credit Ratings on Foreign Direct Investment Inflows: Evidence from Turkey

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  • Abstract

    Foreign direct investment flows began to increase in the world since 1980s in parallel with the technological progress especially in transportation and communication, global competition and financial liberalization. Foreign direct investment inflows began to increase belatedly in Turkey in 2001 due to frequent economic and financial crises and political instability. This study examines the relationship between the sovereign credit ratings of Turkey and foreign direct investment inflows during the period from January 1995 to July 2013 in Turkey by using cointegration, VAR Granger causality, vector error correction model, vector autoregression and impulse-response analyses. We find that there is a positive relationship between foreign direct investment inflows and sovereign credit ratings and the sovereign credit rating by S&P is the predominant one on the foreign direct investment inflows. Moreover this study reveals that there is a two-way causality between sovereign credit ratings by S&P and Fitch and foreign direct investment inflows and a one way causality between sovereign credit ratings by Moody’s and foreign direct investment inflows and a no causality between dummy variable which represents crises and the foreign direct investment inflows.