Foreign Direct Investments Rely on Economic Freedom: Evidence from Longitudinal Data

Abstract

The research seeks to give an answer whether or not economic freedom matters for the foreign direct investments in initial model. Therefore, longitudinal (panel) data are collected for 111 countries over the period ranging from 2002 to 2016. The findings from linear static panel data estimators indicate a significant positive impact of economic freedom on foreign direct investments in initial model. Extended model supports these results and indicates a significant positive impact of economic growth on foreign direct investments. Granger causality test clearly indicates a unidirectional relationship running form economic freedom to foreign direct investments. However, mixed results are obtained in terms of opposite direction. The results of linear dynamic panel data estimators suggest a positive impact of economic freedom on foreign direct investments in both, initial and extended model. A stronger impact is reported in extended model. The impact of economic growth is found to be significant and positive. The estimation issues assigned with linear static panel data estimators significantly underestimate the impact of economic freedom and overestimate the impact of economic growth. Taking into account the empirical results, policy makers need to do necessary changes to increase economic freedom since it is found to be a significant determinant of foreign direct investments.