The impact of credit rating on FDI attraction into Africa

As one of the tools that have been used to measure a country’s investment environment to inform potential investors, credit rating given by a third party is very important to cross-border investors. It serves as a base for shaping the perceptions of investors about countries and has a substantial impact on inward investment flows. Foreign investors consider credit rating critically when planning to invest in a different country particularly countries in Africa where investments are perceived as risky. Understanding whether credit ratings has various explanatory powers on foreign direct investment attraction in Africa is worthy of attention, hence, the main purpose of this study. Accordingly, the study used a 10-year (2007-2016) data and conducted a panel regression model to answer the research question “To what extent does credit rating change affect the flow of inward FDI into Africa?” A total of 136 countries (Asia 35, Europe 41, Africa 26, Latin America and the Caribbean 26, North America 3 and Oceania/Australia 5) are taken as samples for this study. From the results of the study, it was found out that credit rating has a positive significant effect on the attraction of FDI at the global level and continentally in Asia and Europe however not in Latin America & the Caribbean. In the case of Africa however, credit rating does not have a significant impact on FDI but natural resource availability came out as significant for inward investment into the continent. Indeed, many theoretical and empirical literature has shown that the main motivation of multinational companies (MNCs) driving to Africa is that to get a secure access to those natural resources.