Does economic freedom in host countries lead to increased foreign direct investment?

Abstract

Purpose

This study aims to examine the effect of the various dimensions of economic freedom and political freedom in host countries on the foreign direct investment (FDI) inflows over a six-year period from 1995 to 2000 in 95 countries.

Design/methodology/approach

The sample consists of 95 countries and relates to the time period from 1995 to 2000. The sample is of a longitudinal or panel nature.

Findings

Results indicate that better economic management (monetary policy, fiscal burden and banking and finance), less government participation in the economy, less state intervention (strong property rights, less regulation, low prevalence of informal markets and less corruption), absence of wage and price controls and higher levels of political freedom lead to higher FDI inflows after controlling for FDI stock.

Research limitations/implications

Most empirical studies using indices such as the Index of Economic freedom are subject to certain methodological limitations such as model selection, parameter heterogeneity and outliers and moral hazard.

Practical implications

Empirical findings suggest that the role played by governments in national economies have significant influence over FDI decisions.

Social implications

From a policy perspective, our results imply that to attract FDI, governments will need to improve the institutional environments of their countries. More specifically, improving the levels of economic and political freedoms can greatly facilitate the inflow of FDI.

Originality/value

One of the main contributions of the present study to the international business literature is that it is one of the first that explicitly relates the ten components that constitute “economic freedom” to FDI.

Citation

Sambharya, R.B. and Rasheed, A.A. (2015), "Does economic freedom in host countries lead to increased foreign direct investment?", Competitiveness Review, Vol. 25 No. 1, pp. 2-24. https://doi.org/10.1108/CR-05-2013-0047