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Economic freedom and foreign direct investment: Are they related?

Mehmet Nasih Tag and Suleyman Degirmen

Economic Analysis and Policy, 2022, vol. 73, issue C, 737-752

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.

Keywords: Foreign direct investment; Property rights protection; Economic freedom; Institutions; Market regulation (search for similar items in EconPapers)
JEL-codes: B27 E14 F21 F23 P14 P16 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.eap.2021.12.020

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