Country Risk Importance on Investment Decision Making

Elena Iliescu and Felicia Alina Dinu ()
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Felicia Alina Dinu: The Bucharest Academy of Economic Studies, Romania

Economia. Seria Management, 2011, vol. 14, issue 2, 371-379

Abstract: Given the controversies, especially from the last period, in terms of credibility of the major international rating agencies, this article aims to assess the correlation between country risk ratings and the evolution of FDI flows in the receiving economies. In this regard, we chose to analyze the degree of these influences manifestation in Romania. The study, based on statistical information on the rating granted to Romania and the value of foreign direct investments during the period between 2000 and 2010, confirms the indirect natural connection of the two indicators. Thus, the results show that, when the rating falls in an immediate lower class, foreign direct investments are reduced by 1173.76 billion Euros, which represents 27.2% of the investments average mean made within the 11 analyzed years. Conversely, we can observe an influence of 0.05% of FDI on Romania's rating. The data obtained demonstrates the interdependence between the two indicators, however, a low correlation can be observed. The qualitative analysis performed, showed arguments that support the decrease in importance of rating, such as: reducing the credibility of rating agencies as a result of exposing the weak points from the methodologies applied, granting of incorrect ratings, the inability to foresee the financial crisis or increasing the transparency of governments which makes more and more information available to investors. This doesn’t mean that the role of country rating is denied. It remains an important decision making criterion in guiding the flows within the global economy space, but it is not sufficient and it is not indispensable.

Keywords: country risk; foreign direct investments; interdependence. (search for similar items in EconPapers)
JEL-codes: F21 F41 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:rom:econmn:v:14:y:2011:i:2:p:371-379

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