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Economic freedom and foreign direct investment: Are they related?

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  • Tag, Mehmet Nasih
  • Degirmen, Suleyman

Abstract

Drawing on the institutional economics perspective, several scholars have argued that economic institutions and policies that facilitate the efficient exercise of private property rights are instrumental in attracting higher levels of foreign direct investment. In this paper, we empirically examine this argument by exploiting country-level data on the institutions of economic freedom. Using the system-GMM estimation approach and a large sample of panel data that spans 19 years of observations from 127 countries, we find evidence suggesting that foreign direct investment increases in countries with institutions that ensure the rule of law, expand trade freedoms, and reduce regulatory barriers to investing and doing business. However, these effects appear to be weaker in the presence of controls for alternative means of property rights protection.

Suggested Citation

  • Tag, Mehmet Nasih & Degirmen, Suleyman, 2022. "Economic freedom and foreign direct investment: Are they related?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 737-752.
    • Handle: RePEc:eee:ecanpo:v:73:y:2022:i:c:p:737-752
    DOI: 10.1016/j.eap.2021.12.020
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    More about this item

    Keywords

    Foreign direct investment; Property rights protection; Economic freedom; Institutions; Market regulation;
    All these keywords.

    JEL classification:

    • B27 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - International Trade and Finance
    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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